Commission Charges Three Firms with Violating Custody Rule
The Securities and Exchange Commission (Commission) today sanctioned three SEC-registered investment advisory firms for violating the "custody rule" that requires them to meet certain standards when maintaining custody of their clients' funds or securities.
The majority of investment advisers do not maintain custody of client assets, which are instead held by qualified third-party custodians like a bank or broker-dealer. Investment advisers must comply with the custody rule if they have legal ownership or access to client assets or an arrangement permitting them to withdraw client assets. The Commission amended the custody rule in 2010 to strengthen investor protections by requiring all advisers with custody to undergo an annual "surprise exam" to verify the existence of client assets. Advisers also must have a reasonable basis to believe that a qualified custodian is sending account statements to fund investors at least quarterly. Advisers with custody of hedge fund or other private fund assets may alternatively comply with the custody rule through fund audits by a PCAOB-registered auditor, after which financial statements must be delivered to investors.
SEC investigations following referrals by agency examiners found that New York-based Further Lane Asset Management, Massachusetts-based GW & Wade, and Minneapolis-based Knelman Asset Management Group failed to maintain client assets with a qualified custodian or engage an independent public accountant to conduct surprise exams. The firms also committed other violations of the federal securities laws. Each firm has agreed to settle the SEC's charges.
"The heart of the relationship between advisers and their customers is the safety of client assets. Surprise exams or procedures associated with audited financial statements provide additional safeguards against assets being stolen or misused," said Andrew Ceresney, co-director of the SEC's Division of Enforcement. "These firms failed to comply with their custody rule obligations, and other firms who hold client assets should take notice that we will vigorously enforce such requirements."
The SEC issued orders instituting settled administrative proceedings against the three firms for deficiencies related to the custody rule – Rule 206(4)-2 under Section 206(4) of the Investment Advisers Act of 1940.
According to the SEC's order against Further Lane Asset Management (FLAM) and its CEO Jose Miguel Araiz, despite maintaining custody of assets of hedge funds managed by FLAM and affiliated adviser Osprey Group Inc. (OGI), Araiz and FLAM failed to arrange an annual surprise examination to verify the funds' assets. The funds' investors also did not receive quarterly account statements from a qualified custodian of the funds as required by the custody rule. FLAM and Araiz additionally engaged in fraud related to a fund-of-funds under their control. They caused the fund to acquire a promissory note from another entity that Araiz owned without informing investors in writing that the fund might acquire related party promissory notes or otherwise materially deviate from its fund-of-funds investment strategy. The order details other securities law violations, including FLAM and OGI engaging in securities transactions with advisory clients on a principal basis without providing prior written disclosure to clients or obtaining their consent. In consenting to a censure and cease-and-desist order, Araiz, FLAM and OGI agreed to pay disgorgement and prejudgment interest totaling $347,122. Araiz additionally agreed to pay a $150,000 penalty and be suspended from the industry for one year. FLAM consented to comply with certain compliance-based undertakings.
According to the SEC's order against GW & Wade, the firm was subject to the custody rule in part due to its practice of using pre-signed letters of authorization and then transferring client funds without always obtaining contemporaneous client signatures. The firm did not have proper safeguards as a custodian of client funds, and failed to identify itself as a custodian to its independent auditors or in public disclosures. This practice exposed clients to potential harm and ultimately contributed to a third-party fraud in one client account in June 2012, when someone hacked into the client's e-mail account and posed as the client. The imposter requested that GW & Wade wire the client's funds to a foreign bank, and the scheme was not discovered until three separate wires totaling $290,000 had been sent to the foreign bank. The firm reimbursed the client. GW & Wade additionally made inaccurate Form ADV disclosures about the amount of client assets in custody and its custody arrangements. In consenting to a censure and cease-and-desist order, GW & Wade agreed to pay a $250,000 penalty.
According to the SEC's order against Knelman Asset Management Group (KAMG) and its CEO and chief compliance officer Irving P. Knelman, KAMG had custody of the assets of a fund of private equity funds named Rancho Partners I. However, Rancho's funds were not subject to annual surprise examinations and Rancho members did not receive quarterly account statements from a qualified custodian. Alternatively, Rancho's financial statements were not audited or distributed to Rancho members. The order details other violations of the securities laws, including improper discretionary cash distributions to Rancho members, failure to adopt and implement controls designed to safeguard client assets, and failure to conduct annual compliance reviews. In consenting to a censure and cease-and-desist order, KAMG agreed to pay a $60,000 penalty. Knelman agreed to pay a $75,000 penalty and be barred from acting as a chief compliance officer for at least three years. KAMG and Knelman also consented to compliance training and other compliance-based undertakings.
The SEC's investigation of Further Lane Asset Management was conducted by Asset Management Unit members Mark D. Salzberg, Robert Guzman, Igor Rozenblit, and Valerie A. Szczepanik as well as Daphna A. Waxman and Roseann Daniello in the New York Regional Office. The preceding examination was conducted by Raymond Slezak, Michael O'Donnell, Charles Hooper, and Dave Miller of the New York office.
The SEC's investigation of GW & Wade was conducted by Asset Management Unit members Mayeti Gametchu and Kevin Kelcourse in the Boston Regional Office. The preceding SEC examination was conducted by Raymond Tan, Matthew Keating, John Clark, and Melissa Clough of the Boston office.
The SEC's investigation of Knelman Asset Management Group was conducted by Asset Management Unit member Paul Montoya as well as Ruta Dudenas and Delia Helpingstine of the Chicago Regional Office. The preceding examination was conducted by Vanessa Horton, Kristin Dryer, and Steven Levine of the Chicago office. (Press Rel. 2013-230; Rels. 34-70759; IA-3706; IA-3705)
Commission Obtains Permanent Injunction and $100,000 Civil Penalty against Cellular Telephone Company President for Role in Fraudulent Scheme
The Commission today announced that on October 24, 2013, the Honorable James E. Boasberg, United States District Judge for the District of Columbia, entered a final judgment against defendant Paul V. Greene, President of privately-held Americas Premiere Corporation (APC), a former vendor of InPhonic, Inc. (InPhonic), a now-bankrupt online retailer of cellular phones. The final judgment permanently enjoins Greene from violating the antifraud, books and records and reporting provisions of the securities laws and orders him to pay a $100,000 penalty.
According to the Commission's complaint, starting in the third quarter of 2005, and in each quarter of 2006, Greene and Len A. Familant, then an InPhonic Senior Vice President, engaged in a series of undisclosed "round-trip transactions" to help InPhonic artificially inflate its financial results. After the end of the quarters, but before InPhonic publically reported its financial results, Familant obtained APC credits from Greene. At the same time, however, Familant and Greene entered into an oral side agreement under which InPhonic would repay the credits through future purchases of certain cell phone models at inflated prices and by paying for inflated and fake repairs. The complaint further alleges Greene hid the scheme from InPhonic's independent auditors even after APC's accountant had informed Greene that APC's sham credit transactions with InPhonic were illegal. InPhonic improperly recorded a total of almost $10 million in credits from APC as a decrease in cost of goods sold, which allowed InPhonic to materially understate its losses and meet its quarterly and annual financial targets in reports filed with the Commission. A final judgment against defendant Len Familant was previously entered by the Court.
Without admitting or denying the allegations in the Commission's complaint, Greene consented to the entry of the final judgment permanently enjoining him from violating the antifraud provisions, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), and books and records provision, Exchange Act Rule 13b2-1, and aiding and abetting violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), books and records provision, Section 13(b)(2)(A) of the Exchange Act, and reporting provisions, Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, and ordering him to pay a $100,000 civil penalty. [SEC v. Paul V. Greene, Civil Action No. 1:12-CV-00119 (JEB/JMF) (D.D.C.)] (Rel. LR-22856)
Investment company orders
Notice of Applications for Deregistration under the Investment Company Act of 1940
For the month of October, 2013, a notice has been issued giving interested persons until November 19, 2013, to request a hearing on any of the following applications for an order under Section 8(f) of the Investment Company Act of 1940 declaring that the applicant has ceased to be an investment company:
SEI Alpha Strategy Portfolios, LP [File No. 811-22112]John Hancock Series Trust [File No. 811-3392]
Multi-Cap Growth Portfolio [File No. 811-8558]
Focused Growth Portfolio [File No. 811-10607]
Global Dividend Income Portfolio [File No. 811-21875]
Arden Macro Fund, L.L.C. [File No. 811-22702]
Arden Macro Master Fund, L.L.C. [File No. 811-22703]
Greater China Growth Portfolio [File No. 811-7264]
Empiric Funds, Inc. [File No. 811-9088]
UBS Juniper Crossover Fund, LLC [File No. 811-10113]
Separate Account I of Washington National Insurance Company [File No. 811-3640]
Medley Capital Corporation, et al.
A notice has been issued giving interested persons until November 22, 2013 to request a hearing on an application filed by Medley Capital Corporation, et al., for an amended order to permit certain business development companies to co-invest with each other and with certain affiliated investment funds in portfolio companies. (Rel. IC-30769)
Cambria ETF Trust, et al.
A notice has been issued giving interested persons until November 22, 2013, to request a hearing on an application filed by Cambria ETF Trust, et al., for an order to permit: (a) certain open-end management investment companies or series thereof to issue shares ("Shares") redeemable in large aggregations only ("Creation Units"); (b) secondary market transactions in Shares to occur at negotiated market prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days from the tender of Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units; and (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Shares. (Rel. IC-30768)
Immediate Effectiveness of Proposed Rule Change
A proposed rule change filed by the Topaz Exchange LLC to amend the schedule of fees (SR-Topaz-2013-09) 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 October 28th. (Rel. 34-70761)
A proposed rule change filed by NYSE MKT LLC to specify that the Specialist Pool and Directed Order Market Makers receive execution allocations of incoming Electronic Complex Orders and Complex Order Auction eligible orders in accordance with the guaranteed participation provision of Rule 964NY(c)(2)(B), without any exceptions (SR-NYSEMKT-2013-85) 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 October 28th. (Rel. 34-70760)
National Market System Plans
A proposed amendment to the Options Order Protection and Locked/Crossed Market Plan filed by Miami International Securities Exchange, LLC pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 to add Miami International Securities Exchange, LLC as a Plan Participant has become effective. Publication of the proposal is expected to be made in the Federal Register during the week of October 28th. (Rel. 34-70762)
A proposed amendment to the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options filed by Miami International Securities Exchange, LLC pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 to add Miami International Securities Exchange, LLC as a Plan Participant has become effective. Publication of the proposal is expected to be made in the Federal Register during the week of October 28th. (Rel. 34-70764)
A proposed amendment to the Options Order Protection and Locked/Crossed Market Plan filed by Topaz Exchange, LLC pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 to add Miami International Securities Exchange, LLC as a Plan Participant has become effective.
Publication of the proposal is expected to be made in the Federal Register during the week of October 28th. (Rel. 34-70763)
A proposed amendment to the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options filed by Topaz Exchange, LLC pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 to add Topaz Exchange, LLC as a Plan Participant has become effective. Publication of the proposal is expected to be made in the Federal Register during the week of October 28th. (Rel. 34-70765)
The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.
Registration statements may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.
S-1 TETRAPHASE PHARMACEUTICALS INC, 480 ARSENAL STREET, SUITE 110, WATERTOWN, MA, 02472, 617.715.3600 - 0 ($40,000,000.00) Equity, (File 333-191890 - Oct. 25) (BR. 01B) S-8 Endurance International Group Holdings, Inc., 10 CORPORATE DRIVE, SUITE 300, BURLINGTON, MA, 01803, 781-852-3200 - 0 ($216,000,000.00) Equity, (File 333-191894 - Oct. 25) (BR. 03B) S-1 MIDDLEFIELD BANC CORP, 15985 E HIGH ST, P O BOX 35, MIDDLEFILED, OH, 44062-9263, 4406321666 - 196,635 ($5,136,106.20) Equity, (File 333-191895 - Oct. 25) (BR. 07C) S-1 MBT FINANCIAL CORP, 102 EAST FRONT STREET, MONROE, MI, 48161, 7342422893 - 0 ($20,000,000.00) Equity, (File 333-191901 - Oct. 25) (BR. 07C) S-1 Universal Movers Corp, SUITE 1132 - 5348 VEGAS DRIVE, LAS VEGAS, X1, 89108, 702-997-0887 - 3,000,000 ($60,000.00) Equity, (File 333-191904 - Oct. 25) (BR. 05) S-8 Constellium N.V., TUPOLEVLAAN 41-61, SCHIPHOL-RIJK, P7, 1119NW, 31-20-654-97-80 - 0 ($92,032,940.00) Equity, (File 333-191905 - Oct. 25) (BR. 06C) N-2 Blackstone Real Estate Income Fund II, 345 PARK AVENUE, NEW YORK, NY, 10154, 212-583-5000 - 0 ($1,000,000.00) Equity, (File 333-191906 - Oct. 25) (BR. ) F-10 Acasti Pharma Inc., 225 PROMENADE DU CENTROPOLIS, SUITE 200, LAVAL, A8, H7T 3B3, (450) 687-2262 - 0 ($150,000,000.00) Unallocated (Universal) Shelf, (File 333-191907 - Oct. 25) (BR. 01B) S-8 MRI INTERVENTIONS, INC., ONE COMMERCE SQUARE, SUITE 2550, MEMPHIS, TN, 38103, 9015229300 - 1,800,000 ($2,515,317.05) Equity, (File 333-191908 - Oct. 25) (BR. 10B) F-3ASR Golar LNG Partners LP, PAR-LA-VILLE PLACE, FOURTH FLOOR, 14 PAR-LA-VILLE ROAD, HAMILTON, D0, HM 08, 1 441-295-4705 - 0 ($0.00) Other, (File 333-191909 - Oct. 25) (BR. 05A) S-8 WESTERN DIGITAL CORP, 3355 MICHELSON DRIVE, SUITE 100, IRVINE, CA, 92612, 9499325000 - 0 ($15,472,885.00) Equity, (File 333-191910 - Oct. 25) (BR. 03B) S-8 SAFEGUARD SCIENTIFICS INC, 435 DEVON PARK DR, BLDG 800, WAYNE, PA, 19087, 6102930600 - 70,000 ($1,078,000.00) Equity, (File 333-191911 - Oct. 25) (BR. 08C) S-8 EPL OIL & GAS, INC., 919 MILAM STREET, SUITE 1600, HOUSTON, TX, 77002, 713-228-0711 - 0 ($44,704,000.00) Equity, (File 333-191912 - Oct. 25) (BR. 04A) S-11 Carey Watermark Investors Inc, 207 E. WESTMINSTER, SUITE 200, LAKE FOREST, IL, 60045, 847-482-8600 - 0 ($650,000,000.00) Equity, (File 333-191913 - Oct. 25) (BR. 08C) S-8 AAR CORP, 1100 N WOOD DALE RD, WOOD DALE, IL, 60191, 6302272000 - 0 ($72,125,000.00) Equity, (File 333-191915 - Oct. 25) (BR. 05A) S-8 CatchMark Timber Trust, Inc., 6200 THE CORNERS PARKWAY, SUITE 250, NORCROSS, GA, 30092, (770) 449-7800 - 0 ($15,913,718.00) Equity, (File 333-191916 - Oct. 25) (BR. 08C) S-8 POTBELLY CORP, 222 MERCHANDISE MART PLAZA, 23RD FLOOR, CHICAGO, IL, 60654, 3129510600 - 0 ($76,018,371.18) Equity, (File 333-191917 - Oct. 25) (BR. 05A) S-1 PROSPECT GLOBAL RESOURCES INC., 1401 17TH STREET, SUITE 1550, DENVER, CO, 80202, 303-990-8444 - 0 ($11,992,153.00) Other, (File 333-191918 - Oct. 25) (BR. 06B) S-8 MEDTRONIC INC, 710 MEDTRONIC PKWY, MS LC300, MINNEAPOLIS, MN, 55432, 7635144000 - 72,121,596 ($2,867,500,000.00) Equity, (File 333-191919 - Oct. 25) (BR. 10B) S-3 QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC., 25242 ARCTIC OCEAN DRIVE, LAKE FOREST, CA, 92630, 949-399-4500 - 5,078,898 ($25,216,728.57) Debt Convertible into Equity, 3,411,235 ($16,936,781.78) Equity, (File 333-191920 - Oct. 25) (BR. 05B)
Recent 8K Filings
Form 8-K is used by companies to file current reports on the following events:
In most cases, recent 8-K reports may be viewed by using the search function on the Commission's Web site located at http://www.sec.gov/edgar/searchedgar/currentevents.htm.