RULES AND RELATED MATTERS
SEC Issues Order Approving Public Company Accounting Oversight Board Supplemental Budget Request to Establish an Office of Outreach and Small Business Liaison in 2010
Section 982 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act to authorize the PCAOB, among other things, to establish, subject to approval by the Commission, auditing and related attestation, quality control, ethics, and independence standards to be used by registered public accounting firms with respect to the preparation and issuance of audit reports to be included in broker-dealer filings with the Commission. In light of this new authority, the PCAOB reassessed its communications and outreach strategy. As a result of this reassessment, the PCAOB intends to enhance its outreach function by establishing a new Office of Outreach and Small Business Liaison to act as a liaison between the PCAOB and any PCAOB-registered public accounting firm, or any other person affected by the PCAOB's regulatory activities, including in particular, entities in the small business community, such as the auditors of broker-dealers.
Under the Commission's budget rule, in order to establish this office in 2010, the PCAOB was required to submit a supplemental budget request for Commission approval. Staff from the Commission's Offices of the Chief Accountant and Executive Director reviewed and analyzed the PCAOB's supplemental budget request and did not identify any matters that are inconsistent with Section 109 of the Sarbanes-Oxley Act or the Commission's budget rule. Upon considering the staff's review and analysis, the Commission determined that the PCAOB's request to create this office in 2010 is consistent with Section 109 of the Sarbanes-Oxley Act and the Commission's budget rule. (Rels. 33-9162; 34-63526)
In the Matter of Jefferies & Co., Inc.
On December 9, the Commission issued an Order Under Rule 602(e) of the Securities Act of 1933 Granting a Waiver of the Rule 602(c)(3) Disqualification Provision as to Jefferies & Co., Inc. (Waiver Order). The Waiver Order finds that Jefferies & Co., Inc. (Jefferies or Respondent) has submitted two letters, dated Nov. 28, 2006 and May 24, 2007, requesting a waiver of the Rule 602(c)(3) disqualification from the exemption from registration under Regulation E arising from Respondent's settlement of an administrative proceeding commenced by the Commission on Dec. 1, 2006 (Settlement Order). As part of the Settlement Order, the Commission found that, from May 2002 to October 2004, Respondent failed reasonably to supervise Kevin Quinn, an employee subject to its supervision, within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934 (Exchange Act), with a view to preventing Quinn's aiding and abetting violations of Section 17(e)(1) of the Investment Company Act of 1940. The Settlement Order also found that Respondent violated Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder by failing to make and keep current books and records. The Commission ordered Respondent to pay disgorgement of $4,214,945.65 and prejudgment interest of $580,316.26. Additionally, Respondent was required to cease and desist from committing or causing any violations and any future violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder; censured; and required to comply with certain undertakings as to adoption of policies and procedures designed to prevent further violations.
Based upon the representations set forth in Respondent's request, the Commission determined that a showing of good cause has been made that it is not necessary under the circumstances that the exemption be denied as a result of the Settlement Order. Accordingly, the Commission granted Respondent's waiver from the application of the disqualification provision of Rule 602(c)(3) under the Securities Act resulting from the entry of the Dec. 1, 2006 Settlement Order. (Jefferies & Co., Inc., et al. - Rel. 33-9161; 34-63510; File No. 3-12495; Quinn - Rel. 34-63511; IA-29523; File No. 3-12496)
Commission Revokes Registrations of Securities of Golden Goose Resources, Inc. (f/k/a Muscocho Explorations, Ltd.) for Failure to Make Required Periodic Filings
On December 10, the Commission instituted a settled proceeding pursuant to Section 12(j) of the Securities Exchange Act of 1934 (Exchange Act) revoking the registration of each class of registered securities of Golden Goose Resources, Inc. (f/k/a Muscocho Explorations, Ltd.) (Golden Goose) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings of the order, except as to jurisdiction, which it admitted, Golden Goose consented to the entry of an Order Instituting Proceedings, Making Findings, and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 finding that it had failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder and revoking the registration of each class of Golden Goose's securities pursuant to Section 12(j) of the Exchange Act.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
(Rel. 34-63516; File No. 3-14159)
In the Matter of Steven Byers
On December 10, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, And Notice of Hearing (Order) against Steven Byers (Byers). The proceedings are based on Byers' guilty plea and allocution entered before the United States District Court for the Southern District of New York, in United States v. Steven Byers et al., No. 08-cr-1092 (DC).
In the Order, the Division of Enforcement (Division) alleges that Byers, age 48, was the Chairman and owner of private equity firm Wextrust Capital, LLC (Wextrust Capital) from 2003 to August 2008. Wextrust Capital was a globally diversified private equity company formed in or about 2003, specializing in investments in real estate and specialty finance opportunities. Wextrust Capital was affiliated with several companies of a similar name, including Wextrust Securities, LLC (Wextrust Securities), a broker-dealer registered with the Commission.
Byers was also an owner and controlling person of Wextrust Securities. Records from Wextrust Securities show that Byers was managing that broker-dealer, had an internal representative number, and solicited investors while associated with the broker-dealer.
On April 13, 2010, Byers pleaded guilty to one count of securities fraud in violation of Title 15, United States Code, Sections 78j(b) and 78ff; Title 17, Code of Federal Regulations, Section 240.10b-5; and Title 18, United States Code, Section 2, and one count of conspiracy to commit securities fraud, mail fraud, and wire fraud in violation of Title 18, United States Code, Sections 371, 1341, and 1343, before the United States District Court for the Southern District of New York, in United States v. Steven Byers et al., No. 08-cr-1092 (DC).
In his guilty plea and allocution, Byers admitted, among other things, that from at least November 2005 through August 2008, Byers and others misappropriated approximately $9.2 million in funds raised from the purchasers of preferred membership interests in GSA Investors, LLC, by representing that the funds would be used to purchase and operate seven commercial properties that were leased to the United States General Services Administration (GSA). In reality, the seven GSA properties were never purchased. Instead, virtually all of the funds raised from investors to purchase the properties were diverted by Byers and others to unrelated projects and purposes including the payment of other investors. Byers did not disclose the diversion of investor funds to the GSA investors and he and others continued for years to make misrepresentations to investors including mailing to investors false K1 forms showing fictitious income. Byers made the misrepresentations with the intent of inducing investors to invest new money.
A hearing before an administrative law judge will be scheduled to determine whether the allegations in the Order are true, to provide Byers an opportunity to respond to these allegations, and to determine what, if any, remedial action is appropriate in the public interest. The Order directed the Administrative Law Judge to issue an initial decision within 210 days from the date of service of the Order. (Rel. 34-63528; File No. 3-14160)
In the Matter of Gordon A. Driver
On December 10, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) and Notice of Hearing (Order) against Gordon A. Driver. According to the Order, the Division of Enforcement alleges that Driver, age 51, resides in Las Vegas, NV. From October 2007 through May 2009, Driver managed Axcess Automation, LLC (Axcess), a Nevada company. On Dec. 14, 2009, a final judgment was entered by consent against Driver, permanently enjoining him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled SEC v. Gordon A. Driver, et al., Civil Action Number CV 09-34100 DW(RZx), in the United States District Court for the Central District of California.
According to the Order, the Division of Enforcement alleges that the Commission's complaint alleged that from Feb. 2006 to May 2009, Driver raised at least $14.1 million from over 100 investors, while representing that he would use investor funds to trade futures and pay a weekly return of 1% to 5%. Contrary to those representations, Driver operated Axcess as a Ponzi scheme and lost $3.55 million trading, misappropriated $10.7 million to pay investors and used $1.1 million to pay personal expenses. The complaint also alleged that Driver sold unregistered securities.
Based on the above, the Commission deems it necessary and appropriate in the public interest that public administrative proceedings be instituted to determine whether the allegations set forth in the Order are true and, if so, what remedial action is appropriate. The Commission ordered that the Administrative Law Judge issue an initial decision not later than 210 days from the date of service of the Order. (Rel. 34-63529; File No. 3-14161)
SEC v. Daniel Spitzer, et al.
The Securities and Exchange Commission announced that on Dec. 6, 2010, the Honorable Harry D. Leinenweber issued an Order granting a final judgment against Daniel Spitzer and a permanent injunction against the following eighteen entity defendants: Kenzie Financial Management, Inc.; Kenzie Services LLC; Draseena Funds Group, Corp.; Nerium Management Co.; Aneesard Management LLC; DN Management Co. LLC; Arrow Fund, LLC; Arrow Fund II, LLC; Conservium Fund, LLC; Nerium Currency Fund, LLC; Senior Strength Q Fund, LLC; SSecurity Fund, LLC; Three Oaks Advanced Fund, LLC; Three Oaks Currency Fund, LP; Three Oaks Fund, LP; Three Oaks Fund 25, LLC; Three Oaks Senior Strength Fund, LLC; and USFirst Fund, LLC. The Order also granted a continuation of an existing asset freeze of all the defendants' assets. The Court's Order permanently enjoins Spitzer and the entity defendants from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Order also permanently enjoins Spitzer and two of the asset management companies from violations of Section 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The Order further requires Spitzer to pay disgorgement in the amount of $33.9 million, plus prejudgment interest of $10 million, and a civil penalty of $150,000.
Previously, on June 17, 2010, the SEC filed a civil injunctive complaint against Spitzer, and entities he controlled, alleging that Defendants conducted a fraudulent scheme, which involved 400 investors, from at least 2004 to present. Spitzer only invested approximately $30 million of the more than $105 million he raised from investors. To cover up his scheme, Spitzer issued to his investors false Schedule K-1s that showed inflated returns and led them to believe that their investments were profitable. The SEC's complaint further alleged that Spitzer used offshore bank accounts to pay purported business expenses of his companies. Spitzer deposited investor funds into bank accounts at the National Bank of Anguilla and the First Bank of Puerto Rico, from which he paid more than $15 million in purported operating expenses and payments to himself and various sales agents. Spitzer also used more than $4.8 million to pay third-party business expenses. The SEC further alleged that Spitzer led an extravagant lifestyle and spent more than $900,000 at a Las Vegas casino.
On Aug. 2, 2010, the United States Attorney's Office for the Northern District of Illinois filed a criminal complaint in the United States Court for the Northern District of Illinois gainst Spitzer. The criminal complaint alleges mail fraud (18 U.S.C. §1341). [SEC v. Daniel Spitzer, et al., Civil Action No. 1:10-cv-03758 (N.D. Ill.) (Leinenweber, J.)] (LR-21768)
SEC Charges Vitesse Semiconductor Corporation and Four Former Vitesse Executives in Revenue Recognition and Options Backdating Schemes
On December 10, the Securities and Exchange Commission filed civil fraud charges in federal district court for the Southern District of New York against California-based integrated circuit maker Vitesse Semiconductor Corporation and four former senior executives of Vitesse - co-founder and former Chief Executive Officer Louis Tomasetta, former Chief Financial Officer and Executive Vice President Eugene Hovanec, former Controller and Chief Financial Officer Yatin Mody, and former Manager and Director of Finance Nicole Kaplan. The SEC alleges that Vitesse, through the former senior executives, perpetrated fraudulent and deceptive schemes during 1995 to April 2006 to inflate revenue from shipment of Vitesse's products and to backdate stock options to employees and officers by failing to record millions of dollars of compensation expense. The SEC alleges that all four former executives engaged in the revenue recognition fraud from 2001 to 2006 and that Tomasetta and Hovanec orchestrated the options backdating from 1995 to 2006. The four executives left Vitesse in 2006.
Vitesse has settled the matter by agreeing to be permanently enjoined and to pay a $3 million civil penalty. Mody and Kaplan have each agreed to a bifurcated settlement that provides they will be permanently enjoined and ordered to pay disgorgement, and that any civil penalty will be determined later by the district court. Mody has also agreed to be permanently barred from serving as an officer or director of a public company. The SEC's case against Tomasetta and Hovanec is contested.
The SEC's complaint alleges that during September 2001 through April 2006, Tomasetta, Hovanec, Mody, and Kaplan engaged in an elaborate channel stuffing scheme in order to improperly record revenue on product shipments. They caused Vitesse to immediately recognize revenue and record invalid accounts receivable for product shipped at period end to its largest distributor, even though the distributor had an unconditional right to return all of the product. The right of return was accomplished through undisclosed side letters and oral agreements. As a result, as alleged in the complaint, Vitesse materially inflated the revenue it reported in its financial statements in 14 quarters from September 2001 through early 2006.
The complaint further alleges that the defendants compounded their fraudulent revenue recognition practices by failing to timely record credits related to the invalid accounts receivable that were generated by the distributor's return of product. As further alleged, in order to conceal the true age of the accounts receivable from Vitesse's external auditor, Hovanec and Kaplan then directed that cash receipts received by Vitesse from the distributor and other customers be misapplied to these aged invalid receivables.
In addition, the SEC's complaint alleges that from 1995 to 2006, Tomasetta and Hovanec engaged in a scheme to backdate stock option grant dates for their personal benefit and the benefit of other Vitesse executives and employees. The complaint alleges that Tomasetta and Hovanec disregarded the dates on which Vitesse's Compensation Committee actually approved and granted the options. Instead, they intentionally selected grant dates in the past based on low points in the company's stock price in order to assign favorable exercise prices for the options. They also used hindsight to reprice option grants as Vitesse's stock price declined. In total, as alleged, Tomasetta and Hovanec backdated or repriced 40 option grants to employees and officers, representing over 60% of the total options that Vitesse awarded during the period.
As alleged in the complaint, Tomasetta and Hovanec collectively reaped millions of dollars in illicit profits from exercising backdated options. Despite representing in Vitesse's periodic filings made with the Commission that Vitesse did not grant in-the-money options and complied with applicable accounting rules, Tomasetta and Hovanec intentionally manipulated grant dates in order to award in-the-money options and failed to ensure that Vitesse properly recorded compensation expenses for the backdated grants. As a result of the backdating, Vitesse failed to record approximately $184 million in compensation expense, overstating its pretax income or understating its pretax loss by as much as 45% annually for its fiscal years 1996 through 2005.
The complaint further alleges that after the Wall Street Journal questioned Vitesse in November 2005 about the legitimacy of its option granting practices, Tomasetta and Hovanec engaged in a cover-up to hide some of their prior backdating. As alleged in the complaint, between November 2005 and April 2006, Tomasetta and Hovanec lied to Vitesse board members and to Vitesse's auditor by falsely telling them that past option grants were proper and correctly accounted for in the company's books.
The SEC alleges that in furtherance of their cover-up, Tomasetta and Hovanec fabricated minutes of two non-existent 2001 meetings during which Vitesse's Compensation Committee purportedly granted stock options. Tomasetta and Hovanec inserted these fabricated minutes into the stock option administrator's computer and turned back the clock on the computer thereby creating the false appearance that the minutes had been written at the same time as when the purported meetings occurred. Tomasetta also inserted the dates of these two phantom meetings into his Palm Pilot thereby creating the façade that these two meetings had actually happened. Also, as further alleged, on or about December 2005, Hovanec directed his assistant to create a third set of fabricated Compensation Committee meeting minutes to substantiate another backdated grant date from 2003.
Vitesse, Mody, and Kaplan have agreed to settle this matter, without admitting or denying the allegations in the complaint, on the following terms:
These settlements are subject to the approval of the United States District Court for the Southern District of New York. The settlement with Vitesse takes into account the company's cooperation in the SEC's investigation.
The complaint against Tomasetta and Hovanec alleges that each of them violated or aided and abetted violations of the antifraud, record-keeping, financial reporting, internal controls, lying to auditors, and equity transaction reporting provisions of the federal securities laws. Tomasetta is also charged with violating the proxy provisions of the Exchange Act. The complaint also alleges that Tomasetta and Hovanec violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 that were false and misleading. The SEC's complaint against Tomasetta and Hovanec seeks permanent injunctions, disgorgement with interest, civil monetary penalties, and officer and director bars.
Separately, the United States Attorney's Office for the Southern District of New York today filed criminal charges against Tomasetta and Hovanec, and announced that Mody and Kaplan have pleaded guilty to criminal charges.
The SEC's investigation was conduct by Tim England, Margaret McGuire, Richard Dominguez, Debbie Maisel, Dwayne Brown, and Michi Harthcock in the SEC's Enforcement Division in Washington, DC. [SEC v. Vitesse Semiconductor Corporation, Louis R. Tomasetta, Eugene F. Hovanec, Yatin D. Mody, and Nicole R. Kaplan, Case No. 10 CIV 9239 (JSR). (S.D.N.Y.)] (LR-21769; AAE Rel. 3217)
SEC Files Settled FCPA Case Against Rae Systems Inc.
The Securities and Exchange Commission today filed a settled enforcement action against RAE Systems Inc., a San-Jose based company, alleging violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (FCPA). RAE's proposed settlement offer has been submitted to the Court for its consideration. RAE has offered to pay approximately $1.2 million as part of its settlement with the SEC. Without admitting or denying the Commission's allegations, RAE has consented to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; ordering it to pay $1,147,800 in disgorgement, plus $109,212 in prejudgment interest; and ordering it to comply with certain undertakings regarding its FCPA compliance program.
The SEC acknowledges the assistance of DOJ in its investigation. [SEC v. RAE Systems Inc. Civil Action No. 1:10-cv-02093 (D.D.C.)] (LR-21770)
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