Closed Meeting - Thursday, March 11, 2010 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Thursday, March 11, 2010, will be: formal order of investigation; institution and settlement of injunctive actions; institution and settlement of administrative proceedings; an adjudicatory matter; and other matters relating to enforcement proceedings.
At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.
RULES AND RELATED MATTERS
SEC Issues Policy Statement on Obtaining and Retaining Beneficial Ownership Information for Anti-Money Laundering Purposes
On March 5, 2010, the Securities and Exchange Commission issued a policy statement that provides guidance on obtaining and retaining beneficial ownership information for anti-money laundering purposes. This guidance is being issued jointly with the Financial Crimes Enforcement Network, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration, and in consultation with the staff of the Commodity Futures Trading Commission. The guidance provided in the policy statement clarifies and consolidates existing regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships. Publication is expected in the Federal Register during the week of March 8. (34-61651)
In the Matter of Donna M. McKelvy
On March 5, 2010, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) against Donna M. McKelvy (McKelvy).
The Order finds that on Dec. 16, 2009, an order of permanent injunction was entered by consent against McKelvy, permanently enjoining her from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled SEC v. Mantria Corporation, et al., Civil Action Number 1:09-CV-02676, in the United States District Court for the District of Colorado. The Commission's complaint in the civil injunctive action alleged that, from at least September 2007 through at least November 2009, Defendants, including McKelvy, sold the securities of Mantria Corporation and its subsidiaries and affiliates by making materially false representations to investors regarding, among other things, the intended use of the proceeds from the sale of such securities, the past rates of return that had been paid to other investors in such securities, and regarding the operational success of the companies issuing the securities. The complaint also alleged that Defendants omitted the material fact that the proceeds from the sale of these securities were used, in Ponzi-like fashion, to pay off earlier investors in these securities. The complaint further alleged that McKelvy acted as an unregistered broker and sold unregistered securities.
Based on the above, the Order bars McKelvy from association with any broker or dealer. McKelvy consented to the issuance of the Order without admitting or denying any of the findings except as to the entry of the injunction. (Rel. 34-61654; File No. 3-13760)
In the Matter of First Allied Securities, Inc.
On March 5, 2010, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940 (Order).
The Order finds that First Allied Securities, Inc. (First Allied), a registered broker-dealer, failed reasonably to supervise Harold H. Jaschke (Jaschke), a registered representative associated with the firm who, between May 2006 and March 2008, executed unauthorized transactions, made unsuitable recommendations, and churned his customers' accounts. The Order also finds that First Allied violated certain books and records provisions.
The Order finds that Jaschke violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder by engaging in an unauthorized high risk, short term Treasury bond trading strategy on behalf of two Florida municipalities. The municipalities were required by ordinance to invest their funds in order to provide for safety of capital, liquidity of funds, and investment income, in that order of importance, and were prohibited specifically from using the proceeds of repurchase agreements and reverse repurchase agreements for the purpose of making investments. Despite being aware of the ordinances, Jaschke engaged in a high risk trading strategy and leveraged the municipalities' accounts in violation of the ordinances. In addition, Jaschke lied to the municipalities to conceal the risky nature of the investments, his use of leverage, and large unrealized losses the accounts experienced as a result of his misconduct.
The Order finds that First Allied failed reasonably to supervise Jaschke because it did not establish reasonable systems to direct follow-up action in response to red flags regarding churning and suitability, and to monitor compliance with its rule prohibiting registered representatives from using their personal e-mail accounts to conduct firm business. First Allied received notices generated by its clearing broker that highlighted declining equity and high turnover in the municipalities' accounts. Nine months after receiving the notices, the firm sent the municipalities self-described "annual review" letters that did not, in fact, relate to an annual review, and failed to adequately inform the customers of the activity in their accounts. In addition, while First Allied had a written supervisory policy prohibiting registered representatives from using their personal e-mail accounts to conduct business, the firm had no system in place to monitor compliance with the rule and effectively relied on its employees to supervise themselves. This allowed Jaschke to circumvent the firm's policy by using his personal e-mail account to send and receive business-related e-mails that were neither reviewed nor retained by the firm. First Allied's former vice president of supervision and other members of senior management were aware that Jaschke sometimes used his personal e-mail account for business and asked him to stop doing so, but did nothing to verify that Jaschke had discontinued this practice. Thus, First Allied failed reasonably to supervise Jaschke.
The Order also finds that First Allied violated certain books and records provisions by failing to retain the business-related e-mails sent to and from certain of its employees, including Jaschke, who sent and received business-related e-mails from his personal e-mail account.
The Order censures First Allied, and requires it to cease and desist from committing or causing any violations and any future violations of certain books and records provisions. The Order also requires First Allied to pay disgorgement and prejudgment interest of $1,458,305, and to pay a $500,000 civil penalty. Finally, the Order requires the firm to comply with certain undertakings. First Allied consented to the issuance of the Order without admitting or denying any of the findings in the Order.
In two related actions, on Dec. 29, 2009, the Commission charged Jaschke with violations of the antifraud provisions of the federal securities laws and instituted settled administrative proceedings against Jeffrey C. Young, First Allied's former vice president of supervision, for failing reasonably to supervise Jaschke. For further information, see Litigation Release No. 21355 and Exchange Act Release No. 34-61247. (Rels. 34-61655; IA-2995; File No. 3-13808)
SEC Obtains Asset Freeze and Temporary Restraining Order Against Alan Todd May and Prosper Oil and Gas, Inc.
On March 2, 2010, the Commission filed a civil action against Alan Todd May and Prosper Oil and Gas, Inc. a/k/a Prosper Energy, Inc., alleging their involvement in a multi-million dollar oil and gas offering fraud targeting U.S. investors. Pursuant to the Commission's motions for emergency relief, the court entered a temporary restraining order against the defendants, froze their assets, and appointed Kelly Crawford of Dallas as a receiver over both of them.
The SEC's complaint alleges that Prosper and May, a felon with a long criminal history of theft and fraud, raised at least $6 million from investors through the unregistered and fraudulent offer and sale of fractional, undivided royalty interests in oil-and-gas properties. The SEC alleges that the Defendants attracted investors through classified advertisements in various well-known business publications and postings on at least one auction website. In those advertisements and in correspondence with investors, the SEC alleges, the Defendants claimed that investors would earn between 25 and 38 percent annually from revenues based on oil and gas production. In reality, the SEC alleges, nearly all of the distributions made to investors were Ponzi payments from new investor funds.
The SEC's complaint, which was filed in the United States District Court for the Northern District of Texas, alleges that May and Prosper violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The Commission acknowledges the assistance of the Texas State Securities Board in this matter. [SEC v. Alan Todd May and Prosper Oil and Gas, Inc. a/k/a Prosper Energy, Inc., Civil Action No. 3:10-cv-425-L U.S.D.C./Northern District of Texas (Dallas Division)] (LR-21436)
SEC Charges Massachusetts-Based Operators of Real Estate Investment Fraud
On March 4, 2010, the Commission announced that it filed an enforcement action on March 1, 2010, in federal district court in Massachusetts against three individuals and the four entities that they operate in connection with inter-related real estate investment frauds. The Commission's complaint alleges that Kathleen S. Dobens and Charles T. Dobens, husband and wife business partners from Duxbury, Massachusetts, together with another business partner, Joseph A. Roche of Braintree, Massachusetts, defrauded approximately 60 investors who invested approximately $3.5 million beginning as early as 2007.
The Commission's complaint alleges that in February 2009, the individual defendants created Silex Group, LLC (Silex) to solicit investors' money with false promises of secured investments and guaranteed annual returns of 9% or 12%. According to the complaint, Silex and the individual defendants used a website and a series of other oral and written representations to solicit investments. The website claimed, among other things, that Silex owned over $20 million in real estate assets and would pool investors' money to invest in "multi-family housing assets." In reality, Silex never owned any real estate assets and the funds raised for Silex were diverted to repay an earlier Silex investor, for personal expenses of the individual defendants, and for expenses for other entities owned and controlled by the individual defendants. The Commission's complaint also alleges that the individual defendants operated earlier real estate investment frauds using the other entity defendants that they created.
The Commission's complaint alleges that defendants' conduct violated the antifraud provisions and registration requirements of the federal securities laws. The Commission is seeking permanent injunctions, disgorgement of ill-gotten gains plus pre-judgment interest, and civil penalties. The Commission is also seeking disgorgement plus prejudgment interest from the relief defendants. The Commission also sought preliminary relief against the defendants and relief defendants, including temporary restraining orders and asset freezes. On March 3, 2010, the court denied these requests for preliminary relief and the Commission's litigation as to all parties will proceed. [SEC v. v. Kathleen S. Dobens, Charles T. Dobens, Joseph A. Roche, Silex Group, LLC, Preakness Apartments I & II, LLC, Cherry Hills Apartments of Forth Worth, LLC, and Clear River Partners, LLC, as Defendants, and East Coast Investment Solutions, LLC, The Dobens Company, LLC, Crosscreeks Apartments I and Crosscreeks Apartments II, LLC, as Relief Defendants, Civil Action No. 10-CA-10360-MLW (D. Mass.)] (LR-21437)
Former CEO of Kmart Ordered to Pay Over $10 Million
The Commission announced today that Charles C. Conaway, the former Chief Executive Officer of Kmart Corporation, has been ordered to pay over $10 million in disgorgement, prejudgment interest and civil penalties. On Aug. 23, 2005, the Commission charged Conaway with misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy. On June 1, 2009, a jury returned a verdict in the SEC's favor on all charges following a three-week trial in Ann Arbor, Michigan, before Magistrate Judge Steven D. Pepe of the United States District Court for the Eastern District of Michigan. On March 3, 2010, the court ordered Conaway to pay disgorgement in the amount of $5,000,000, together with prejudgment interest thereon in the amount of $2,853,432, and a civil penalty of $2,500,000. The court further ordered that Conaway provide a declaration that he has not received and will not seek any payment, reimbursement, or indemnification from any third party for any portion of the civil penalty, and if he fails to provide such declaration, that Conaway pay a civil penalty of $5,000,000. The court enjoined Conaway from taking any action to transfer, conceal, or dissipate assets for 60 days while the parties attempt to negotiate the terms of a stay pending appeal. For additional information, see Litigation Release Nos. 21438 (March 5, 2010), 21065 (June 1, 2009) and 19344 (Aug. 23, 2005). [SEC v. Charles C. Conaway and John T. McDonald, Jr., 05 Civ. 40263 (E.D. Michigan)] (LR-21438)
SEC Files Settled Charges Against Chaya Unger for Fraud in Connection with Bank Conversions
On March 5, the Securities and Exchange Commission filed settled fraud charges against Chaya Unger in connection with her fraudulent purchase of stock in four public offerings of banks that were converting from mutual to stock form of ownership. According to the complaint filed in U.S. District Court for the Eastern District of New York, in each instance, Unger circumvented offering terms and banking regulations by secretly using her friends or relatives, who were depositors at the converting banks and thus had priority rights in the offerings, as nominees to acquire stock in those conversions. In each instance, Unger had the nominees falsely represent to the converting banks that the nominees were purchasing the stock for their own accounts, and that they had no agreement or understanding regarding the sale or transfer of the stock. In fact, the nominees were purchasing the stock with funds provided mostly or wholly by Unger and with the understanding that, once the stock was received, most or all of the stock or the proceeds from its sale would be transferred to Unger. The illegal profits from the fraudulently obtained stock amounted to approximately $227,589. The complaint charges Unger with violating and aiding and abetting the violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Without admitting or denying the allegations in the SEC's complaint, Unger has agreed to a permanent injunction from further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. She has also agreed to pay disgorgement of $227,588.84, prejudgment interest of $80,998.25, and a civil penalty of $65,000. The settlement is subject to the approval of the Court. [SEC v. Chaya Unger, Civil Action No. 10-CV-0991 (ILG) (E.D.N.Y.)] (LR-21439)
U.S. District Court Enters Final Judgments Against Defendants Simone Fevola and Wealth Management LLC and Relief Defendants WML Gryphon Fund LLC, WML Watch Stone Partners LP, WML L3 LLC, WML Palisade Partners LP, WML Pantera Partners LP, and WML Quetzal Partners LP
The Commission announced that on March 4, 2010, the Honorable William C. Griesbach of the United States District Court for the Eastern District of Wisconsin entered final judgments against defendants Simone Fevola and Wealth Management LLC and relief defendants WML Gryphon Fund LLC, WML Watch Stone Partners LP, WML L3 LLC, WML Palisade Partners LP, WML Pantera Partners LP, and WML Quetzal Partners LP. The final judgments against Fevola and Wealth Management LLC permanently enjoin them from violating Sections 206(1), 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the final judgments require that Fevola to pay a disgorgement of $1.24 million, plus prejudgment interest of $149,567 and Wealth Management LLC to pay $1,322,209 in disgorgement, plus $148,793 in prejudgment interest. Fevola consented to the entry of the final judgment without admitting or denying any of the allegations in the Complaint. The final judgments against Wealth Management LLC and each of the relief defendants were entered by default for failing to answer the Commission's Complaint.
The Commission commenced this action in May 2008 by filing an emergency action charging Wealth Management LLC, an Appleton, Wisconsin investment adviser, James Putman, its founder and Chief Executive Officer, and Fevola, its former President and Chief Investment Officer, for engaging in a kickback scheme and other fraudulent conduct involving six unregistered investment pools they managed. The Complaint alleges that Putman and Fevola each accepted $1.24 million in undisclosed payments derived from investments made by the unregistered investment pools in 2006 and 2007. The Complaint also alleges that Wealth Management, Putman and Fevola misrepresented the safety and stability of the two largest investment pools and placed clients into these investments even though they were inconsistent with some clients' objectives. [SEC v. Wealth Management LLC, et al., Case No. 1:09-cv-00506-WCG, USDC, E.D. Wisc.] (LR-21440)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by NYSE Arca relating to listing of Wilshire 5000 Total Market ETF and the Wilshire 4500 Completion ETF (SR-NYSEArca-2010-09) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61639)
A proposed rule change (SR-CBOE-2010-020) filed by the Chicago Board Options Exchange relating to the Options Regulatory Fee has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61641)
A proposed rule change filed by NYSE Arca (SR-NYSEArca-2010-08) deleting Rules 6.96 and 14.5 has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61644)
A proposed rule change filed by The NASDAQ Stock Market to modify fees for members using the NASDAQ Market Center (SR-NASDAQ-2010-029) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61645)
Proposed Rule Change
The Commission issued notice of filing of a proposed rule change (SR-NYSEArca-2010-07) submitted by NYSE Arca pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, relating to listing of AdvisorShares WCM/BNY Mellon Focused Growth ADR ETF. Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61642)
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