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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2010-211
November 8, 2010

COMMISSION ANNOUNCEMENTS

SEC Approves New Rules Prohibiting Market Maker Stub Quotes

The Securities and Exchange Commission approved new rules proposed by the exchanges and FINRA to strengthen the minimum quoting standards for market makers and effectively prohibit “stub quotes” in the U.S. equity markets.

A stub quote is an offer to buy or sell a stock at a price so far away from the prevailing market that it is not intended to be executed, such as an order to buy at a penny or an offer to sell at $100,000. A market maker may enter stub quotes to nominally comply with its obligation to maintain a two-sided quotation at those times when it does not wish to actively provide liquidity. Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6, and subsequently broken.

“By prohibiting stub quotes, we are reducing the risk that trades will be executed at irrational prices, and then need to be broken, if the markets become volatile,” said SEC Chairman Mary L. Schapiro. “While we continue to look at other potential obligations for market participants, this is an important step in our effort to improve the functioning of the U.S. markets, and restore investor confidence following the events of May 6.”

The new rules address the problem of stub quotes by requiring market makers in exchange-listed equities to maintain continuous two-sided quotations during regular market hours that are within a certain percentage band of the national best bid and offer (NBBO). The band would vary based on different criteria:

  • For securities subject to the circuit breaker pilot program approved this past summer, market makers must enter quotes that are not more than 8% away from the NBBO.
     
  • For the periods near the opening and closing where the circuit breakers are not applicable, that is before 9:45 a.m. and after 3:35 p.m., market makers in these securities must enter quotes no further than 20% away from the NBBO.
     
  • For exchange-listed equities that are not included in the circuit breaker pilot program, market makers must enter quotes that are no more than 30% away from the NBBO.
     
  • In each of these cases, a market maker’s quote will be allowed to “drift” an additional 1.5% away from the NBBO before a new quote within the applicable band must be entered.

The new market maker quoting requirements will become effective on Dec. 6, 2010.

Since May 6, the Commission has taken several steps to reduce the chance that the events of that day would happen again. Among other things, the Commission:

  • approved the above-mentioned circuit breaker pilot program, in which trading would pause if a stock price moved more than 10% in five minutes. That program now applies to stocks in the S&P 500 or the Russell 1000, as well as certain exchange-traded products.
     
  • approved new rules requiring the exchanges to clarify up-front how and when trades would be broken.
     
  • proposed a new rule that would require the self regulatory organizations to establish a consolidated audit trail system the would enable regulators to track information related to trading orders received and executed across the securities markets.
     
  • adopted rules that would effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and alternative trading systems by assuring that broker-dealers implement appropriate risk controls.

At Chairman Schapiro’s request, Commission staff is continuing to evaluate further initiatives to address market structure issues revealed by the events of May 6 such as refining the single stock circuit breakers by incorporating a limit-up/limit-down type mechanism. (Press Rel. 2010-216; (Rel. 34-63255)


SEC Issues Notice of Proposed Plan of Distribution and Opportunity for Comment in the Matter of Value Line, Inc., Value Line Securities, Inc., Jean Bernhard Buttner, and David Henigson

The Securities and Exchange Commission announced today that it has given notice, pursuant to Rule 1103 of the Securities and Exchange Commission’s Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. 201.1103, that the Division of Enforcement has filed a proposed plan (Distribution Plan) for the distribution of monies in the matter of Value Line, Inc., Value Line Securities, Inc., Jean Bernhard Buttner, and David Henigson.

The Distribution Plan provides for distribution of a portion of the Fair Fund, which was created for Value Line, Inc.’s payment of disgorgement in the amount of $24,168,979, prejudgment interest of $9,536,786, and a civil penalty of $10,000,000, plus any accumulated interest, less any federal, state, or local taxes on the interest. The proposed plan provides for distribution to certain injured shareholders of nine Value Line mutual funds that held shares between Jan. 1, 1986 and Nov. 9, 2004. The affected mutual funds are: Value Line Asset Allocation Fund, Inc.; Value Line Centurion Fund, Inc.; Value Line Emerging Opportunities Fund, Inc. (formerly Value Line Small Cap Growth Fund, Inc.); Value Line Fund, Inc.; Value Line Income and Growth Fund, Inc.; Value Line Leveraged Growth Investors, Inc.; Value Line Special Situations Fund, Inc.; Value Line Strategic Asset Management Trust; and Value Line U.S. Multinational Company Fund, Inc. The Distribution Plan proposes to distribute to such injured shareholders their share of losses resulting from the violations, plus interest.

A copy of the Distribution Plan may be obtained by submitting a written request to Joseph Dever, Assistant Regional Director, United States Securities and Exchange Commission, 3 World Financial Center, Suite 400, New York, NY 10281. Interested parties may also print a copy of the proposed Distribution Plan from the Commission’s public website, http://www.sec.gov. Any person or entity wishing to comment on the Distribution Plan must do so in writing by submitting their comments within 30 days of the date of the notice (i) to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549-1090; or (ii) via the Commission’s Internet comment form (www.sec.gov/litigation/admin.shtml); or (iii) by sending an e-mail to rule-comments@sec.gov. Comments submitted by e-mail or via the Commission’s website should include the Administrative Proceeding File Number (Admin. Proc. File No. 3-13675) in the subject line. Comments received will be publicly available. Persons should submit only information that they wish to make publicly available. (Rel. 34-63269; File No. 3-13675)


ENFORCEMENT PROCEEDINGS

In the Matter of Victor Selenow

On November 5, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Victor Selenow. The Order finds that from March 2007 through December 2007, Selenow was a telemarketing sales agent for Winning Kids, Inc. During this period, Selenow solicited investors to purchase Winning Kids’ securities and received transaction-based compensation for selling Winning Kids’ securities. When he solicited investors to purchase Winning Kids’ securities, Selenow was neither registered as a broker or dealer nor associated with a registered broker or dealer.

Based on the entry of an injunction in the civil action entitled Securities and Exchange Commission v. Winning Kids, Inc., et al., Civil Action Number 9:10-CV-80186, in the United States District Court for the Southern District of Florida, the Order bars Selenow from association with any broker or dealer. Selenow consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted the entry of the injunction. (Rel. 34-63261; File No. 3-14110)


Matter of Nicholas A. R. Dunning, ACA

On November 5, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Nicholas A. R. Dunning, who was a regional finance director for Dell Inc.

In the Order the Commission finds that on Oct. 13, 2010, the United States District Court for the District of Columbia entered a final judgment permanently enjoining Dunning, by consent, from future violations of Securities Exchange Act of 1934 (Exchange Act) Section 13(b)(5) and Rule 13b2-1 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. Dunning was also ordered to pay $1 in disgorgement and a $50,000 civil money penalty.

The Commission’s complaint alleged, among other things, that Dunning engaged in improper accounting which resulted in Dell filing materially false and misleading financial statements in the company’s Annual Report on Form 10-K for the fiscal years ended Jan. 31, 2003 and Jan. 30, 2004, and in the company’s quarterly reports on Form 10-Q for the third quarter of fiscal year 2003 and the first two quarters of fiscal year 2004. The Complaint alleged that Dunning circumvented Dell’s system of internal accounting controls and falsified books, records, or accounts. The Complaint alleged further that Dunning aided and abetted improper accounting practices that materially misstated Dell’s consolidated, and the EMEA segment’s, annual and quarterly operating income in departure from Generally Accepted Accounting Principles. These practices included, among other things, creating, maintaining, and releasing restructuring reserves, general reserves and other improper accruals, circumventing Dell’s system of internal controls, and falsifying books, records, and accounts.

Based on the above, the Order suspends Dunning from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years from the date of the Order. Dunning consented to the issuance of the Order without admitting or denying the findings in the Order, except for the finding of the entry of the injunction by the United States District Court for the District of Columbia. [SEC v. Dell Inc., Michael S. Dell, Kevin B. Rollins, James M. Schneider, Leslie L. Jackson, Nicholas A. R. Dunning, Civil Action No. 1:10-cv-01245 (RJL) (D. Columbia)] (LR-21599). (Rel. 34-63262; AAE Rel. 3208; File No. 3-14111)


In the Matter of Randall D. Imhoff, CPA

On November 5, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Randall D. Imhoff, who was the Corporate Assistant Controller of Dell Inc.

In the Order the Commission finds that on Oct. 13, 2010, the United States District Court for the District of Columbia entered a final judgment permanently enjoining Imhoff, by consent, from future violations of Securities Exchange Act of 1934 (Exchange Act) Section 13(b)(5) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. Imhoff was also ordered to pay $12,852 in disgorgement of ill-gotten gains, $6,197 in prejudgment interest, and a $25,000 civil money penalty.

The Commission’s complaint alleged, among other things, that Imhoff engaged in improper accounting which resulted in Dell filing materially false and misleading financial statements in the company’s annual reports on Forms 10-K and quarterly reports on Forms 10-Q from fiscal year 2002 to fiscal year 2004. The Complaint alleged that Imhoff rendered substantial assistance to Dell’s improper use of general reserves, including the “Corporate Contingencies,” a Corporate restructuring reserve, bonus and profit sharing accruals, certain reserves in Dell’s Europe, Middle East and Africa segment, and relocation accruals. It further alleged that, with regard to the Corporate restructuring reserve established in fiscal year 2002, Imhoff tracked excess accruals, directed the re-designation of excess accruals to other liability accounts, and worked with others to utilize excess for unrelated operating expenses. With regard to the “Corporate Contingencies,” the Complaint alleged that Imhoff instructed others at Dell to maintain general reserves in “Corporate Contingencies” so they could be used for unrelated operating expenses in later periods. The complaint also alleged that Imhoff provided substantial assistance with respect to Dell’s maintenance of bonus and profit sharing over-accruals from quarter to quarter and its periodic release of over-accruals from prior periods to offset current operating expenses. It also alleged that Imhoff provided substantial assistance with respect to Dell’s failure to record a required reserve for the Las Cimas liability.

Based on the above, the Order suspends Imhoff from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years from the date of the Order. Imhoff consented to the issuance of the Order without admitting or denying the findings in the Order, except for the finding of the entry of the injunction by the United States District Court for the District of Columbia. [SEC v. Imhoff, Civil Action No. 1:10-cv-01465 (RJL) (D. Columbia)] (LR-21634). (Rel. 34-63263; AAE Rel. 3209; File No. 3-14112)


In the Matter of Robert W. Davis, CPA

On November 5, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Robert W. Davis, who was the Chief Accounting Officer of Dell Inc.

In the Order, the Commission finds that on Oct. 13, 2010, the United States District Court for the District of Columbia entered a final judgment permanently enjoining Davis, by consent, from future violations of Securities Act of 1933 Sections 17(a)(2) and 17(a)(3), Securities Exchange Act of 1934 (Exchange Act) Section 13(b)(5) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. Davis was also ordered to pay $19,080 in disgorgement of ill-gotten gains, $9,078 in prejudgment interest, and a $175,000 civil money penalty.

The Commission’s complaint alleges, among other things, that Dell fraudulently committed various accounting violations through the conduct of Davis and others. The Commission’s complaint also alleges that Davis directed and engaged in improper accounting that resulted in Dell filing materially false and misleading financial statements in the company’s annual reports on Form 10-K and in the company’s quarterly reports on Form 10-Q from FY02 to FY05. The Complaint alleges that Davis directed Dell’s improper use of reserves, including the Strat Fund and other “Corporate Contingencies,” accrued relocation accruals, a Corporate restructuring reserve, and bonus and profit-sharing accruals. The Commission’s complaint alleges further that Davis directed others to maintain and track excess reserves and to use excess reserves from prior periods to offset unforecasted expenses in order to meet financial targets. The complaint also alleges that Davis was involved in Dell’s improper accounting with respect to Dell’s Europe, Middle East, and Africa segment restructuring reserve restructuring reserve and Dell’s failure to increase its reserves for Las Cimas liabilities.

Based on the above, the Order suspends Davis from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after five years from the date of the Order. Davis consented to the issuance of the Order without admitting or denying the findings in the Order, except for the finding of the entry of the injunction by the United States District Court for the District of Columbia. [SEC v. Robert W. Davis, Civil Action No. 1:10-cv-01464 (RJL) (D. Columbia)] (LR-21634). (Rel. 34-63264; AAE Rel. 3210; File No. 3-14113)


In the Matter of Leslie L. Jackson, CPA

On November 5, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (Order) against Leslie L. Jackson, who was a Corporate Assistant Controller of Dell Inc.

In the Order the Commission finds that on Oct. 13, 2010, the United States District Court for the District of Columbia entered a final judgment permanently enjoining Jackson, by consent, from future violations of Securities Exchange Act of 1934 (Exchange Act) Section 13(b)(5) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder.

The Commission’s complaint alleged, among other things, that Dell engaged in improper accounting that resulted in the company filing materially false and misleading financial statements in its annual reports on Form 10-K for the fiscal years ended Feb. 1, 2002, January 31, 2003, Jan. 30, 2004, and Jan. 28, 2005, and in the company’s quarterly reports on Form 10-Q for the first three quarters of fiscal years 2002 through 2004 and for the first two quarters of 2005. The Complaint alleged that Jackson knowingly circumvented or failed to implement Dell’s system of internal accounting controls and falsified Dell’s books, records, or accounts.

The Complaint also alleged that Jackson aided and abetted improper accounting practices that materially misstated Dell’s annual and quarterly financial statements. The Complaint alleged that Dell received substantial assistance in connection with the corporate contingencies from Jackson, and that Jackson knew or was reckless in not knowing that Dell improperly maintained excess reserves in the corporate contingencies for use in future periods. The Complaint also alleged that Jackson reviewed and approved the Forms 10-K and 10-Q that materially misstated Dell’s financial results because of Dell’s improper accounting for the corporate contingencies. The Complaint also alleged that Jackson made material misrepresentations to Dell’s independent auditors.

Based on the above, the Order suspends Jackson from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years from the date of the Order. Jackson consented to the issuance of the Order without admitting or denying the findings in the Order, except for the finding of the entry of the injunction by the United States District Court for the District of Columbia. [SEC v. Dell Inc., Michael S. Dell, Kevin B. Rollins, James M. Schneider, Leslie L. Jackson, Nicholas A. R. Dunning, Civil Action No. 1:10-cv-01245 (RJL) (D. Columbia)] (LR-21599). (Rel. 34-63265; AAE Rel. 3211; File No. 3-14114)


SEC Obtains Consent Orders and Judgments as to Defendants Roomy Khan and Rajiv Goel

The SEC announced that, on Oct. 27, 2010 and Nov. 5, 2010, respectively, the Honorable Jed S. Rakoff, United States District Judge, United States District Court for the Southern District of New York, entered Consent Orders and Judgments as to Defendants Roomy Khan (Khan) and Rajiv Goel (Goel) in the SEC’s insider trading case, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR). The SEC filed its action on Oct. 16, 2009, against Raj Rajaratnam (Rajaratnam), Galleon Management, LP (Galleon), Goel, and others. On Nov. 5, 2009, the Commission amended its complaint to add allegations against additional entities and individuals, including Khan. Rajaratnam is the founder and a Managing General Partner of Galleon, a New York hedge fund, which at the time of the alleged insider trading had billions of dollars under management. When the SEC’s complaint was filed, Goel, a friend of Rajaratnam’s, was a managing director within the treasury group of Intel Corp. (Intel), as well as the Director of Strategic Investments at Intel Capital, an Intel subsidiary that makes proprietary equity investments in technology companies. Khan was an individual investor who had been employed at Intel in the late 1990s and had been subsequently employed at Galleon.

The Consent Order and Judgment entered against Khan permanently enjoins her from violating the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act of 1933 (Securities Act). It also orders her to pay disgorgement in the amount of $1,552,566.94, plus prejudgment interest in the amount of $304,398.77, for a total of $1,856,965.71. The order provides that the Court will determine at a later date whether any civil penalty is appropriate. Khan has agreed to cooperate with the SEC in connection with this action and related investigations.

The Consent Order and Judgment entered against Goel permanently enjoins him from violating the antifraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act. It also orders him to pay disgorgement in the amount of $230,570.52, plus prejudgment interest in the amount of $23,447.21, for a total of $254,017.73. The order provides that the Court will determine at a later date whether any civil penalty is appropriate. The order also bars Goel from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. Goel has agreed to cooperate with the SEC in connection with this action and related investigations. [SEC v. Galleon Management, LP, et al., Civil Action No. 09-CV-8811 (SDNY) (JSR)] (LR-21732)


SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change (SR-C2-2010-007) filed by the C2 Options Exchange relating to PULSe fees 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 November 8. (Rel. 34-63246)


Proposed Rule Changes

The Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2010-053) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend the panel composition rule, and related rules, of the Code of Arbitration Procedure for Customer Disputes, to provide the option to choose an all public arbitration panel in all cases involving a customer. Publication is expected in the Federal Register during the week of November 8. (Rel. 34-63250)

The Depository Trust Company filed a proposed rule change (SR-DTC-2010-14) pursuant to Section 19(b)(1) of the Act that would allow DTC to amend its Certificate of Organization to authorize an additional 1,750,000 shares of preferred stock and to designate such shares as Series A preferred stock. Publication is expected in the Federal Register during the week of November 8. (Rel. 34-63254)


Accelerated Approval of Proposed Rule Change

The Commission issued notice of filing of Amendments No. 1 and 2 to a proposed rule change, and an order granting accelerated approval of a proposed rule change, as amended, submitted by Financial Industry Regulatory Authority (SR-FINRA-2010-034) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to adopt FINRA Rule 4560 (Reporting Requirements) in the Consolidated FINRA Rulebook. Publication is expected in the Federal Register during the week of November 8. (Rel. 34-63260)


SECURITIES ACT REGISTRATIONS


RECENT 8K FILINGS

http://www.sec.gov/news/digest/2010/dig110810.htm


Modified: 11/08/2010