U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19641 / April 5, 2006
SEC v. JB Oxford Holdings, Inc., National Clearing Corporation, James G. Lewis, Kraig L. Kibble, and James Y. Lin, Civil Action No. CV 04-7084 PA (VBKx) (C.D. Cal.)
SEC Settles Civil Fraud Charges Against JB Oxford Holdings, National Clearing Corporation, and Three Former Officers for Fraudulent Late Trading and Market Timing
The Securities and Exchange Commission announced on January 18, 2006, that Beverly Hills, California-based broker-dealer National Clearing Corporation (NCC), its parent company J.B. Oxford Holdings (JBOH), and three former NCC executives agreed to settle the SEC's charges alleging that they defrauded mutual fund investors through their participation in an improper late trading and market timing scheme.
As part of the settlements, NCC will disgorge over $1 million in ill-gotten gains and pay a civil penalty of $1 million, while JBOH agreed to cease and desist from future violations of the federal securities laws and to refrain from having a controlling interest in or operating a firm engaged in the broker-dealer clearing business for a period of five years.
Also settling the SEC's charges, which were originally filed in federal court in Los Angeles in August 2004, were:
- James G. Lewis, age 40, of St. John, U.S. Virgin Islands, who was chief executive officer and president of NCC, and president and a member of the board of directors of JBOH. Lewis agreed to pay a $200,000 penalty, to be permanently enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and to be barred from serving as an officer or director of a public company for five years. Lewis also consented to the issuance of an SEC order pursuant to Section 15(b)(6) of the Exchange Act, based on the entry of the injunction in the federal court action, that will bar him from association with any broker or dealer for at least five years.
- Kraig L. Kibble, age 45, of Washington D.C., who was director of operations for NCC. Kibble agreed to pay a $50,000 penalty and to be enjoined from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Kibble also consented to the issuance of an SEC order pursuant to Section 15(b)(6) of the Exchange Act, based on the entry of the injunction in the federal court action, that will bar him from association with any broker or dealer for at least four years.
- James Y. Lin, age 46, of Rancho Palos Verdes, California, who was the vice president of correspondent services at NCC. Lin agreed to pay a $35,000 penalty and to be permanently enjoined from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Lin also consented to the issuance of an SEC order pursuant to Section 15(b)(6) of the Exchange Act, based on the entry of the injunction in the federal court action, that will bar him from association with any broker or dealer for at least three years.
The final judgment against NCC permanently enjoins it from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Rule 22c-1 as adopted under Section 22(c) of the Investment Company Act of 1940; orders it to pay disgorgement of its ill-gotten gains in the amount of $1,035,324, plus prejudgment interest of $69,000; and orders it to pay a civil penalty of $1 million. The Commission instituted an administrative proceeding against JBOH requiring it to cease-and-desist from committing or causing future violations of Section 10(b) of the Exchange Act and Rule 10b-5.
The federal court judgments were approved by United States District Judge Percy Anderson on January 25, 2006. Each of the defendants settled the charges against them without admitting or denying the allegations. Pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002, the Commission will seek to have the disgorgement and penalty amounts distributed to victims of the violations.
The Commission's complaint alleges that:
- From June 2002 until September 2003, NCC facilitated thousands of late trades in more than 600 mutual funds on behalf of select institutional customers. NCC routinely received trading instructions from customers after 4:00 p.m. EST and executed those trades at the current day's NAV. NCC facilitated the late trading with the knowledge and at the direction of Lewis, Kibble, and Lin.
- NCC entered into written agreements with institutional customers who engaged in late trading and market timing. These agreements included up to a 1% custodial fee in exchange for facilitating market timing and late trading in mutual funds. NCC received approximately $1 million in compensation from the scheme while its customers reaped profits in excess of $8 million at the expense of long-term mutual fund shareholders.
- NCC received hundreds of "kick-out letters" from various mutual funds that rejected individual market timing trades and attempted to restrict the ongoing market timing activities of NCC's customers. In response to these restrictions, NCC engaged in a number of deceptive practices to conceal its customers' fraudulent market timing.
- JBOH reported its financial statements included within its Forms 10-Q and 10-K on a consolidated basis. Therefore, JBOH reported as revenues the proceeds NCC received from the fraudulent scheme. Lewis served simultaneously as an executive at JBOH and NCC and signed JBOH's 2002 and 2003 Forms 10-K.