Jonathan S. Sokobin Named Acting Director of the SEC's Division of Risk, Strategy and Financial Innovation
On Jan. 20, 2011, Securities and Exchange Commission Chairman Mary L. Schapiro named Jonathan S. Sokobin as Acting Director of the SEC's Division of Risk, Strategy, and Financial Innovation (Risk Fin), replacing Henry T.C. Hu who left the agency this week.
Dr. Sokobin, currently the Deputy Director and Managing Executive of the Division, will hold the position until a new director is appointed.
"Jonathan is a seasoned financial economist who has extensive and up-to-date knowledge of the securities markets, as well as the internal workings of the Commission," said Chairman Schapiro. "He is exceptionally well positioned to guide the Division at this moment of significant change in the financial markets."
Risk Fin, created in September 2009, was the SEC's first new Division in 37 years. It provides sophisticated, interdisciplinary analysis across the entire spectrum of SEC activities, including policymaking, rulemaking, enforcement, and examinations. In addition to this role as an agency "think tank," Risk Fin was created to help break down silos that compartmentalized the SEC's institutional expertise.
Dr. Sokobin's SEC service spans more than 12 years. He first joined the Office of Economic Analysis as a Visiting Academic Scholar in 1998. He joined the SEC staff full-time in 2000, specializing in the economics of corporate governance and disclosure. In 2004, he was named Deputy Chief Economist. From 2008 to 2010, Dr. Sokobin served as Director of the former Office of Risk Assessment.
Dr. Sokobin received his Ph.D. and MBA in finance from the Graduate School of Business at the University of Chicago. He received his BA, with honors, from the Ohio State University. Prior to joining the SEC staff, Dr. Sokobin served as a member of the faculty of the Cox School of Business at Southern Methodist University. (Press Rel. 2011-16)
SEC Charges New York Investment Firms and Senior Officers With Fraud
On Jan. 20, 2011, the Securities and Exchange Commission charged three affiliated New York-based investment firms and four former senior officers with fraud, misuse of client assets, and other securities laws violations involving their $66 million advisory business.
The SEC alleges that the operation's investment adviser William Landberg and president Kevin Kramer - through the firms West End Financial Advisors LLC (WEFA), West End Capital Management LLC (WECM), and Sentinel Investment Management Corporation - misled investors into believing that their money was in stable, safe investments designed to provide steady streams of income. However, in reality West End faced deepening financial problems stemming from Landberg's failed investment strategies. When starved for cash to meet obligations of the West End funds or for his personal needs, Landberg misused investor assets, fraudulently obtained more than $8.5 million from a bank, and used millions of dollars from an interest reserve account for unauthorized purposes.
The SEC also charged West End's chief financial officer Steven Gould and controller Janis Barsuk for their roles in the scheme.
"The investment advisers here grossly abused the trust of their clients," said George S. Canellos, Director of the SEC's New York Regional Office. "They misappropriated and commingled their clients' assets and sustained the illusion of a viable and successful business through a range of false representations."
David Rosenfeld, Associate Director of the SEC's New York Regional Office, added, "West End raised millions from investors by touting false positive returns while concealing fraudulent bank loans, cash flow problems, and the misappropriation of investor assets."
According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, the misconduct occurred from at least January 2008 to May 2009. The SEC alleges that Landberg used substantial amounts of fraudulently-obtained bank loans to make distributions to certain West End fund investors, thereby sustaining the illusion that West End's investments were performing well. During the same period, Landberg also misappropriated at least $1.5 million for himself and his family. Landberg's wife Louise Crandall and their family partnership are named as relief defendants in the SEC's complaint.
The SEC further alleges that Gould and Barsuk knew, or were reckless in not knowing, that Landberg was defrauding a bank that provided loans to a West End fund by misusing funds in a related interest reserve account. Both officers nevertheless participated in the fraud by facilitating Landberg's misappropriations from that account. The SEC alleges that Gould conceived and used improper accounting methods to conceal aspects of the fraud, and he issued account statements to investors showing false investment returns. Barsuk facilitated Landberg's uses of investor money to cover his personal obligations. Similarly, Kramer knew, or was reckless in not knowing, that West End faced severe financial problems and had difficulty obtaining sufficient financing to sustain its investment strategy. Nevertheless, Kramer failed to disclose those material facts to investors as he continued to market the funds to new and existing investors through April 2009.
The SEC charged Landberg, Kramer, Gould, WEFA, WECM, and Sentinel with violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In addition, Landberg, WEFA, WECM, and Sentinel are charged with violating the antifraud provisions of the Investment Advisers Act of 1940. Kramer, Gould, and Barsuk are charged with aiding and abetting violations of the Advisers Act. Barsuk is also charged with aiding and abetting violations of the antifraud provisions of the Exchange Act. The SEC seeks to enjoin each defendant from future violations of the securities laws as well as monetary relief, the imposition of an independent monitor, and certain other sanctions.
The SEC's case was investigated by Ken C. Joseph, Matthew J. Watkins, and Cynthia A. Matthews of the SEC's New York Regional Office, with assistance from Alistaire Bambach. The SEC's litigation effort will be led by Howard Fischer.
The SEC acknowledges the assistance of the U.S. Attorney for the Southern District of New York, the Federal Bureau of Investigation, and the U.S. Commodity Futures Trading Commission.
For more information about this enforcement action contact:
Ken C. Joseph
(Press Rel. 2011-17)
SEC Approves New Rules Regulating Asset-Backed Securities
On Jan. 20, 2011, the Securities and Exchange Commission voted to adopt two sets of new rules designed to help revitalize the important asset-backed securities (ABS) market by encouraging better disclosure for investors.
The SEC approved one set of rules that requires issuers of asset-backed securities to disclose the history of the requests they received and repurchases they made related to their outstanding asset-backed securities.
The Commission also approved a second set of rules that would require issuers of asset-backed securities to conduct a review of the assets underlying those securities.
"At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy. However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline," said SEC Chairman Mary L. Schapiro. "These rational measures are designed to help revitalize the important asset-backed securities market by encouraging better disclosure for investors." (Press Rel. 2011-18)
In the Matter of C-3D Digital, Inc.
An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in C-3D Digital, Inc., Administrative Proceeding No. 3-14164. The Order Instituting Proceedings (OIP) alleged that seven Respondents each failed repeatedly to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission.
The Default Order finds the allegations of the OIP to be true and revokes the registrations of each class of registered securities of C-3D Digital, Inc., California Clean Air, Inc., CEC Properties, Inc., Censtor Corp., The Centennial Group, Inc., Century Technologies, Inc., and Chief Consolidated Mining Co. pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-63748; File No. 3-14164)
SEC Charges Arizona-Based Health Food Company and Former Executives With Accounting Fraud
On Jan. 20, 2011, the Securities and Exchange Commission charged NutraCea, three former executives, and two former accounting personnel for engaging in a fraudulent accounting scheme to inflate NutraCea's product sales revenues.
The SEC alleges that NutraCea overstated its sales revenues for the second and third quarters of its fiscal year 2007 and fiscal year 2007 by booking false sales and engaging in improper revenue recognition practices. Through misstated financial statements, NutraCea disguised its true operating results in the second and third quarter of 2007 and fiscal year 2007.
The SEC charged NutraCea's former chief executive officer, Bradley D. Edson, former chief financial officer, Todd C. Crow, and former senior vice president and secretary, Margie Adelman, for their roles in the fraudulent accounting scheme. The SEC also charged former controller, Joanne D. Kline, and former director of financial services, Scott Wilkinson, for their roles in the improper accounting.
NutraCea, an Arizona-based company that manufactures and sells health food products, agreed to settle the SEC's charges. Edson agreed to pay a $100,000 penalty, reimburse NutraCea $350,000 in bonuses he received in 2008, and agreed to a permanent officer and director bar to settle the SEC's charges against him. Adelman, Kline, and Wilkinson also agreed to settle the SEC's charges.
The SEC's complaint, filed in federal district court in Arizona, alleges that NutraCea, Edson, Crow, and Adelman falsified NutraCea's sales revenues in 2007. The SEC's complaint further alleges that Kline and Wilkinson engaged in improper accounting by recording these false revenues.
According to the SEC's complaint, NutraCea booked $2.6 million in false sales to Bi-Coastal Pharmaceutical Corp. in the second quarter of 2007, resulting in overstated product sales revenue of as much as 35% in the second quarter of 2007. The complaint also alleges that NutraCea improperly recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. in the fourth quarter of 2007. As a result of these two transactions alone, NutraCea overstated its product sales revenue by 36.8% for fiscal year end 2007. These false revenues caused NutraCea to misstate its operating loss by over 89% in the second quarter 2007, over 17.6% in the third quarter 2007, and nearly 7% in fiscal year 2007.
Without admitting or denying the SEC's allegations, NutraCea, Edson, Adelman, Kline, and Wilkinson agreed to settle this matter on the following terms:
NutraCea consented to the entry of an order that permanently enjoins it from future violations of Section 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.
Edson consented to a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. Edson also agreed to a permanent officer and director bar, to pay a civil penalty of $100,000, and to reimburse NutraCea, pursuant to the Sarbanes Oxley Act of 2002, the $350,000 in bonuses he received in 2008.
Adelman consented to a final judgment permanently enjoining her from future violations of Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. Adelman further consented to a five year officer and director bar.
Kline and Wilkinson both consented to final judgments permanently enjoining them from future violations of Section 13(b)(5) of the Exchange Act, and Rules 13b2-1 and 13b2-2 thereunder, and for aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. Kline and Wilkinson also agreed to each pay a civil penalty of $25,000. Kline and Wilkinson further consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending each of them from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after one year.
These settlements are subject to the approval of the U.S. District Court of Arizona.
The complaint against Crow alleges that he violated and aided and abetted violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws. The complaint also alleges that Crow violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. The SEC's complaint against Crow seeks a permanent injunction, a civil penalty, and an officer and director bar. The case against Crow is ongoing. [SEC v. NutraCea, et al., United States District Court, District of Arizona, Civil Action No.CV 11-0092-PHX-DGC] (LR-21819; AAE Rel. 3234)
In the Matter of Zizhong Fan and Zishen Fan
The Securities and Exchange Commission today announced that it has obtained a court order freezing the bank and brokerage accounts controlled by an individual who made more than $800,000 in illegal profits by trading on inside information tipped to him by an employee of a Seattle-area biopharmaceutical firm. In a complaint unsealed late yesterday by the U.S. District Court for the Western District of Washington, the SEC alleges that Zizhong (James) Fan, a manager at Seattle Genetics, told family member Zishen (Brandon) Fan about confidential positive trial results for the company's flagship cancer treatment. Zishen spent hundreds of thousands of dollars purchasing speculative stock options in the company as well as common stock, which skyrocketed in value when the news became public in late September 2010.
According to the SEC's complaint, the SEC staff contacted both Zizhong and Zishen last Thursday, January 13. Almost immediately after being contacted, Zishen attempted to wire several hundred thousand dollars to a bank in China while Zizhong informed his employer that he was leaving unexpectedly for China. The SEC thereafter filed an emergency enforcement action. Late Wednesday, January 19, Judge Marsha J. Pechman of the Western District of Washington issued an order freezing brokerage and bank accounts containing the Seattle Genetics trading proceeds.
The SEC's alleges that Zizhong Fan, who lives in Bothell, Wash., was employed during 2010 as the manager of clinical programming at Seattle Genetics. He was involved in clinical trials for a development-stage product to be used in the treatment of Hodgkin's lymphoma. As Zizhong Fan began learning information about the success of those trials, Zishen Fan, who lives in Chino Hills, Calif., began amassing large quantities of risky stock options that would allow him to profit from a rise in the company's stock price.
The SEC's complaint alleges that on Sept. 24, 2010 - the day that Zizhong attended a series of meetings to finalize the results for presentation to the company's senior executives - Zishen made his largest options purchase to date (over 50 percent of the options trades in the entire market), while also buying $150,000 in stock. The next business day - September 27 - Seattle Genetics reported the positive results to the public, and its stock price rose nearly 18 percent. According to the SEC, Zishen ultimately realized net trading profits of more than $803,000.
The SEC's complaint charges Zizhong Fan and Zishen Fan with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and monetary penalties. The SEC also named another family member Junhua Fan, who resides in the People's Republic of China, as a relief defendant in the case. His brokerage account was used by Zishen to make many of the illegal trades, according to the SEC's complaint.
The SEC's investigation was conducted by Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office. The case will be litigated by Robert L. Mitchell. The SEC would like to thank the Options Regulatory Surveillance Authority for its assistance in this matter. The SEC also acknowledges the cooperation of Seattle Genetics. [SEC v. Zizhong Fan and Zishen Fan, Defendants and Junhua Fan, Relief Defendant, Civil No. 2:11-cv-00096-MJP (W.D. Washington] (LR-21820)
Judgment of Permanent Injunction and Other Relief Entered Against Defendant Donald R. McKelvey
The Commission announced that on Jan. 6, 2011, the United States District Court for the Middle District of Florida entered a judgment of permanent injunction and other relief against Defendant Donald R. McKelvey. The judgment enjoins McKelvey from violations of Sections 5(a), 5(c), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 (Securities Act). In addition to injunctive relief, the judgment bars McKelvey from participating in the offering of any penny stock and orders him to pay disgorgement, prejudgment interest, and a civil penalty in amounts to be later determined. McKelvey consented to entry of the judgment without admitting or denying any of the allegations in the complaint.
The Court also approved the stipulation of dismissal as to the scienter based claims against McKelvey alleging violations of Section 17(a)(1) of the Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and as to the Commission's request for an officer-and-director bar.
The Commission began this action by filing its complaint on June 5, 2009, against Wall Street Communications, Inc., Howard Scala, Ross Barall, and McKelvey, charging them with securities fraud in connection with a series of stock manipulation schemes and a fraudulent, unregistered distribution of stock. [SEC v. Wall Street Communications, Inc., et al., Civil Action No. 8:09-CV-1046-JSM-TGW (M.D. Fla.)] (LR-21821)
Order Approving Amendment to Joint-SRO Plan Establishing Procedures Under Rule 605 of Regulation NMS
The Commission has issued an order approving an amendment filed by the BATS-Y Exchange to join the national market system plan (File No. 4-518) establishing procedures under Rule 605 of Regulation NMS. Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63719)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-NSCC-2010-16) filed by the National Securities Clearing Corporation under Section 19(b)(1) of the Exchange Act. The approved rule change amends Procedure II (Trade Comparison and Recording Service) of the NSCC Rules & Procedures to modify the money tolerance comparison provisions for fixed income securities. Publication is expected in the Federal Register during the week of January 24. (Rel. 34-63722)
SECURITIES ACT REGISTRATIONS
RECENT 8K FILINGS