Securities and Exchange Commission Orders Hearing on Registration Revocation or Suspension Against Seven Public Companies for Failure to Make Required Periodic Filings
The Commission today instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registration of each class of the securities of seven companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the seven issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 or 13a-16 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-61396; File No. 3-13759)
SEC Charges Assurant, Inc. With Improper Reinsurance Accounting
Company Agrees to Permanent Injunction and Civil Penalty
On Jan. 21, 2010, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Assurant, Inc., a publicly-traded insurance company, with violating corporate reporting, books and records and internal controls provisions of the Securities Exchange Act of 1934 (Exchange Act). Assurant has offered to settle the charges by consenting, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining Assurant from violating these Exchange Act provisions and imposing a civil penalty in the amount of $3.5 million.
The Commission's complaint alleges that Assurant improperly accounted for a $10 million recovery it obtained under a reinsurance policy in the aftermath of the 2004 Florida hurricane season. The complaint alleges that Assurant booked the $10 million payment as a bona fide reinsurance recovery when, in fact, the payment was, and should have been booked as, the return of a deposit under Generally Accepted Accounting Principles (GAAP). As a result, Assurant materially overstated the net income that it reported for the quarter ended September 30, 2004 to the public and in Commission filings.
The Commission's complaint specifically alleges as follows: Assurant failed to properly account for $10 million that one of its business segments (Assurant Solutions) obtained from American Re-Insurance Company (Am Re), a private reinsurer, in the third quarter of 2004 under a reinsurance policy that originated in 1992 and was renewed annually through 2004. The arrangement between Assurant (through its subsidiaries that comprise Assurant Solutions) and Am Re consisted of the formal reinsurance treaty documents (i.e., the written policy contract) and an oral side-agreement, which the parties referred to as their "handshake" agreement.
Although the terms of the written treaty transferred the risk of certain losses from Assurant Solutions to Am Re under certain conditions, the terms of the so-called "handshake" agreement negated the transfer of risk. Pursuant to this handshake agreement, Assurant Solutions agreed that if the total amount of claims paid by Am Re exceeded the total amount of premiums paid by Assurant Solutions over the life of the treaty, Assurant Solutions would reimburse Am Re for the difference. In return, Am Re agreed that if the total amount of premiums paid by Assurant Solutions exceeded the total amount of claims paid by Am Re, Am Re would return the difference to Assurant Solutions.
Assurant accounted for the Am Re treaty improperly by using principles of reinsurance accounting instead of deposit accounting. Under reinsurance accounting, the reinsured is permitted to offset relevant losses in the amount of the probable recovery under a reinsurance agreement, which reduces the impact of those losses on the reinsured's income statement. Under deposit accounting, the payment by the reinsurer is treated as the return of a loan or deposit and cannot be used to offset losses on the income statement. Because the "handshake" agreement between Assurant and Am Re, and in particular its pay-back provision, negated risk transfer, GAAP required the use of deposit accounting and not reinsurance accounting for the premiums paid and any recoveries made under this particular treaty.
After the 2004 Florida hurricane season, Assurant booked a $10 million claim payment made by Am Re as a reinsurance recovery rather than the return of a deposit, thereby reducing the adverse impact of the hurricane losses incurred by Assurant Solutions on Assurant's reported financial results. By improperly booking the $10 million payment using reinsurance accounting instead of deposit accounting, Assurant overstated its net income for the quarter ended Sept. 30, 2004 by $6.41 million, or 9.4%. Assurant misstated its financial results for the third quarter of 2004 to the public in two Forms 8-K, filed on November 4 and Dec. 22, 2004, and in a Form 10-Q filed on Nov. 12, 2004.
Assurant is charged in the SEC's complaint with violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13. In offering to settle these charges, Assurant has consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining it from violating the foregoing Exchange Act provisions and imposing a civil penalty in the amount of $3.5 million. The determination of this penalty amount took into account, among other things, the company's failure fully to comply with Commission subpoenas on a timely basis. The proposed settlement is subject to court approval. [SEC v. Assurant, Inc., Civil Action No. 10-Civ.-0484 (MGC) (SDNY)] (LR-21388; AAE Rel. 3109)
SEC Secures Settlement with Former Mutual Fund Manager, Steven A. Nothern, Following a Federal Jury's Verdict
The Securities and Exchange Commission announced today that Steven E. Nothern of Scituate, Massachusetts, who had previously been found liable for insider trading by a federal jury, has agreed to pay a civil penalty of $460,000 and to be enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In June 2009, a federal jury in Boston, Massachusetts found Nothern, a former Senior Vice President and manager of seven fixed income mutual funds for Massachusetts Financial Services Company, liable for insider trading when he purchased and tipped others to purchase U.S. Treasury 30-year bonds ahead of the Oct. 31, 2001, Treasury Department announcement that it was suspending the future issuance of long bonds. The proposed settlement is subject to the Court's approval. Nothern has also agreed to be barred from association with any investment adviser, with the right to reapply after five years, in a separate administrative proceeding before the Commission. This action is one of several brought by the Commission arising from trading in U.S. Treasury 30-year bonds.
For more information about this and related cases, see the Commission's Litigation Release Nos. 21389 (Jan. 22, 2010), 21099 (June 22, 2009), 18322 (Sept. 4, 2003), 18453 (Nov. 12, 2003), and 19223 (May 12, 2005). [SEC v. Steven E. Nothern (United States District Court for the District of Massachusetts, Civil Action No. 05-CV-10983 (NMG))] (LR-21389)
SEC Settles Fraud Charges Against Two Registered Representatives and a Broker-Dealer
The Securities and Exchange Commission announced today that on Jan. 19, 2010, the Honorable P. Kevin Castel, United States District Judge for the Southern District of New York, entered final judgments against defendants David Harrison Baker, Daniel Schreiber, and the broker-dealer that Schreiber owns and controls, Granite Financial Group, LLC in SEC v. Brian Travis, et al., 09 CV 2288. The litigation remains pending against defendants Brian Travis and Nicholas Vulpis.
The Commission's complaint alleged that from March 2003 to October 2005, Travis and Vulpis, two employees of investment advisor JLF Asset Management LLC, solicited and accepted bribes from registered representatives of broker-dealers, including Baker and Schreiber. The bribes took the form of payments for expensive travel, rent for a personal residence, and daily car service. In exchange for those bribes, Travis and Vulpis directed trades, and the resulting commissions, to those broker-dealers paying the bribes. Travis and Vulpis did not disclose these bribes or the material conflict of interest that they created to the investment advisor, defrauding the hedge funds that JLF advised.
In connection with the settlement, Baker consented, without admitting or denying the allegations in the Commission's complaint, to an order permanently enjoining him against future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisors Act of 1940, and to pay a penalty of $100,000.
In connection with the settlement, Schreiber and Granite consented, without admitting or denying the allegations in the Commission's complaint, to orders permanently enjoining them against future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and to pay penalties of $100,000 and $250,000 respectively.
For further information, see Litigation Release No. 20948 (Mar. 12, 2009). [SEC v. Brian Travis, et al., Civil Action No. 09-10073 (S.D.N.Y.)] (LR-21390)
SEC Distributes More Than $10 Million to More Than 7,000 Investors Injured in Financial Fraud
The Securities and Exchange Commission announced that on Jan. 22, 2010 the fund administrator issued checks totaling $10.2 million to approximately 7000 shareholders of Nicor, Inc. who had been injured by the company's financial fraud. The Commission had earlier filed a settled civil injunctive action against Nicor, Inc. and Jeffrey Metz on March 29, 2007, alleging financial fraud lasting from 1999 to 2002. See Litigation Release No. 20060 (March 29, 2007).
The complaint alleged that Nicor, a major Chicago-area natural gas distributor, and Metz, its former Assistant Vice President and Controller, engaged in improper transactions, made material misrepresentations, and failed to disclose material information regarding Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based rate plan administered by the Illinois Commerce Commission.
Without admitting or denying the Commission's allegations, Nicor and Metz each consented to an order permanently enjoining them from violating the antifraud and reporting provisions of the federal securities laws. Nicor also consented to pay $1 of disgorgement and a civil penalty of $10 million. Metz also consented to pay disgorgement of $7,404, prejudgment interest of $2,647, a civil penalty of $50,000, and was barred from serving as an officer or director of a public company for five years. All the funds collected were placed in a Fair Fund for distribution to affected shareholders of Nicor's fraud.
On Feb. 23, 2009, the court appointed The Garden City Group, Inc. (GCG) as the fund administrator to oversee the distribution of the settlement funds. GCG worked with the Commission staff to create a distribution plan and submitted the plan to the court for its approval. On June 30, 2009, the court approved the plan. Thereafter, GCG mailed notices and claim forms to affected shareholders, reviewed and processed claim forms and calculated each approved claimant's recognized loss. GCG is now distributing checks to these approved claimants. [SEC v. Nicor Inc. and Jeffrey L. Metz, Civil Action No.07-CV-01739 (N.D. Illinois)] (LR-21391)
SEC v. Avi Fogel
On Jan. 22, 2010, the Securities and Exchange Commission today filed a settled injunctive action in the United States District Court for the District of Massachusetts, alleging that Avi Fogel, a former EMC Corp. executive, made more than $190,000 in illicit profits when he engaged in insider trading in the common stock of Document Sciences Corp., prior to the announcement on Dec. 27, 2007 that EMC would acquire Document Sciences.
The Commission's Complaint alleges the following:
From June 2006 to approximately February 2008, Fogel was a Vice President of strategic initiatives at EMC, and in that role led the team which ultimately decided on an acquisition of Document Sciences.
Fogel recommended to colleagues that EMC acquire Document Sciences through at least late August of 2007. Fogel subsequently remained in contact with certain high-level Document Sciences executives, and knew of EMC's initial letter of intent to acquire Document Sciences and EMC's plans to submit a higher revised bid for Document Sciences. On Nov. 16, 2007, Fogel emailed a high-ranking Document Sciences executive what Fogel termed a "due diligence question" about one of Document Sciences' customers. On Nov. 23, 2007, Fogel forwarded the response from the Document Sciences' executive to an EMC colleague working on the acquisition of Document Sciences.
Between November 23 and Nov. 30, 2007, Fogel purchased 20,000 shares of Document Sciences common stock for prices ranging from $8.35 to $8.40. Then, two trading days before the public announcement of the deal, Fogel acquired an additional 10,000 Document Sciences common shares for $8.22 per share on Dec. 24, 2007. Fogel later sold all 30,000 shares of his Document Sciences common stock after the public announcement of the acquisition, on Feb. 28, 2008.
Fogel has consented, without admitting or denying the allegations of the Commission's Complaint, to the entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Exchange Act of 1934, specifically Section 10(b) and Rule 10b-5 thereunder. As part of the proposed settlement, Fogel also has agreed to pay disgorgement of $191,363, prejudgment interest of $14,639.62, and a civil penalty of $191,363. The settlement is subject to the approval of the U.S. District Court for the District of Massachusetts.
The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA).
The Commission's investigation is ongoing. [SEC v. Avi Fogel, United States District Court for the District of Massachusetts, Civil Action No. 1:10-CV-10097 (D. Mass.)] (LR-21392)
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