Chairman Cox to Testify
Christopher Cox, Chairman, U.S. Securities and Exchange Commission, will testify before the House Appropriations Subcommittee on Financial Services and General Government on Wednesday, April 16, 2008. Chairman Cox's testimony, which concerns the SEC's Fiscal Year 2009 Appropriations Request, will be delivered at a hearing of the Subcommittee held in Room 2220 of the Rayburn House Office Building at 10:00 a.m.
Commission Sustains in Part and Sets Aside in Part NASD Disciplinary Action Against Dennis Todd Lloyd Gordon and Sterling Scott Lee
The Commission has sustained in part and set aside in part NASD disciplinary action against Dennis Todd Lloyd Gordon, the chief executive officer of former NASD member firm Lloyd Scott and Valenti, Ltd. ("LSVL" or the "Firm"), and Sterling Scott Lee, LSVL's president. The Commission found that Gordon and Lee permitted Michael Guss, an unregistered individual, to function as a principal of the Firm and failed to maintain the accuracy of the Firm's membership application, in violation of certain NASD rules and By-Laws. The Commission also found that Gordon and Lee caused the Firm to charge excessive markups in thirty-one retail sales, in violation of NASD rules, although the Commission set aside NASD's finding that the markups were fraudulent. In addition, the Commission sustained an NASD finding that Lee violated Section 10(b) of the Securities Exchange Act of 1934 and was responsible for the Firm's violations of Exchange Act Rule 10(b)(10) because he failed to ensure that markups on the Firm's riskless principal transactions were disclosed to customers, but it set aside NASD's finding that Gordon was liable for those violations; the Commission found that Lee was responsible for ensuring that the Firm's remuneration was disclosed on confirmations sent to customers, but that the record did not show that Gordon knew or should have known that Lee was not fulfilling his responsibility in that area.
The Commission sustained the bar in all capacities that NASD imposed on Gordon and Lee for the registration violations. The Commission noted the importance of NASD's registration requirement in protecting public investors and found that in light of the pervasive management role that Guss exercised, and of Gordon's and Lee's acquiescence in Guss's managerial activity, the misconduct at issue was egregious. The Commission found, however, that the bar imposed by NASD for the markup violations was excessive, and imposed instead a six-month suspension on both Gordon and Lee, with an additional thirty-day suspension (to run concurrently) on Lee based on the violations of Exchange Act Section 10(b) and Exchange Act Rule 10(b)(10). The Commission also affirmed NASD's order of restitution. The Commission's order requires Gordon and Lee, for each transaction involving an excessive markup, to pay the lesser of (1) LSVL's profit in excess of a ten percent markup and (2) LSVL's profit in excess of $200. The order allows Gordon and Lee to reduce the restitution amount by amounts that they prove either the Firm or Guss paid to injured customers. (Rel. 34-57655; File No. 3-12573)
Commission Sustains Expulsion of PAZ Securities, Inc. and Bar of Joseph Mizrachi
In a proceeding remanded by the United States Court of Appeals for the District of Columbia Circuit, the Commission has sustained the expulsion of PAZ Securities, Inc. from NASD membership and the bar of Joseph Mizrachi from associating with any NASD member firm in any capacity for completely failing to respond to NASD requests for information. The Court of Appeals had remanded for the Commission to determine whether the sanctions were excessive or oppressive in light of factors raised in mitigation and to consider whether the sanctions served a remedial purpose. On remand, the Commission found that members and associated persons who, without mitigation, fail to respond in any manner to NASD requests for information pose too great a risk to markets and investors to be permitted to remain in the securities industry and that their removal from the industry therefore served the remedial purpose of protecting public investors. The Commission also found that the failure to respond to the requests for information in this case until after NASD had expelled PAZ and barred Mizrachi was tantamount to a complete failure to respond. The Commission found further that no factors mitigated the misconduct and that the sanctions were thus not excessive or oppressive. (Rel. 34-57656; File No. 3-11852)
In the Matter of 21st Century Technologies, Inc.
On April 11, the Commission instituted public administrative proceedings against 21st Century Technologies, Inc., (21st Century), to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding twelve months.
In the order instituting administrative proceedings (Order) against 21st Century, the Division of Enforcement (the Division) alleges that 21st Century's securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act). The Division also alleges that Exchange Act Section 13(a) and the rules promulgated thereunder require issuers with classes of securities registered pursuant to Exchange Act Section 12 to file with the Commission current and accurate information in periodic reports. The Division further alleges that 21st Century is delinquent in its required periodic filings with the Commission, having last filed a periodic report for the period ending September 30, 2004.
In these proceedings, instituted pursuant to Section 12(j) of the Exchange Act, a hearing will be scheduled before an Administrative Law Judge. At that hearing, the judge will hear evidence from the Division and 21st Century to determine whether the allegations contained in the Order are true. The judge will then determine whether it is necessary and appropriate for the protection of investors to revoke or suspend for a period not exceeding twelve months the registration of each class of 21st Century's securities registered pursuant to Section 12 of the Exchange Act.
The Commission has ordered that the administrative law judge issue an initial decision within 120 days from the service of the order instituting proceedings. (Rel. 34-57657; File No. 3-13005)
Commission Files Settled Actions Against Two Former Arthur Andersen Partners in Connection With the Audit of the 2001 Financial Statements of WorldCom, Inc.
The Commission today announced the filing and simultaneous settlement of actions against two former Arthur Andersen LLP (Andersen) partners, Melvin Dick (Dick) and Kenneth M. Avery (Avery), who served on the WorldCom, Inc. (WorldCom) audit for the fiscal year ended December 31, 2001. Dick, former lead engagement partner for the WorldCom audit, and Avery, an audit partner on the engagement, consented to settled administrative proceedings which found that they had engaged in improper professional conduct in connection with their work on the WorldCom audit. Dick and Avery each consented to the entry of an order pursuant to Rule 102(e) of the Commission's Rules of Practice denying them the privilege of appearing or practicing before the Commission as an accountant, with the right to apply for reinstatement after four years and three years, respectively. The respondents settled without admitting or denying the findings in the Commission's Orders.
The Commission's Orders find that during the 2001 audit, Andersen had designated WorldCom as a "Maximum Risk" client, and Dick and Avery were aware of several factors that increased the potential for fraud at WorldCom. Nevertheless, they failed to alter their planning and execution of the audit to take these risks into account as required under Generally Accepted Auditing Standards (GAAS). In addition, Dick and Avery failed to carry out certain audit procedures in critical audit areas, such as WorldCom's Property, Plant & Equipment (PP&E) and line cost accounts, where WorldCom's management posted its fraudulent accounting entries.
In particular, the Commission's Orders find that Dick and Avery failed to ensure that the audit team tested additions to PP&E from a complete population and, instead, limited their testing to PP&E additions that were made through certain control processes. In addition, Dick and Avery failed to conduct any substantive testing of PP&E between their interim testing as of September 31, 2001 and the year-end balance sheet date, during which time nearly half of the additions to PP&E were fraudulent. Dick and Avery also failed to reconcile the line cost expenses that were subject to testing to WorldCom's general ledger or financial statements. Further, Dick and Avery failed to perform sufficient audit procedures to identify non-standard journal entries made by WorldCom management.
The Commission's Orders further find that Dick's and Avery's failure to implement these fundamental audit steps violated GAAS in that they failed to: exercise due professional care and professional skepticism in the planning and performance of the audit, obtain sufficient evidential matter to afford a reasonable basis for Andersen's opinion regarding WorldCom's financial statements; expand the extent of the audit procedures applied, apply procedures closer to or as of year end, particularly in critical audit areas, or modify the nature of procedures to obtain more persuasive evidence, in light of the significant risks of material misstatement that existed at WorldCom; plan and perform the audit to obtain reasonable assurance about whether the financial statements were free of material misstatement, whether caused by error or fraud; and issue an audit report that accurately stated that the audit was conducted in accordance with GAAS and that WorldCom's financial statements were presented in conformity with Generally Accepted Accounting Principles. Based on these findings, the Commission found that Dick and Avery engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii). (Dick - Rel. 34-57662, AAE Rel. 2808, File No.3-13006; Avery - Rel. 34-57663, AAE Rel. 2809, File No. 3-13007).
Proposed Rule Changes
The Commission noticed a proposed rule change (SR-Amex-2007-107), as modified by Amendment No. 3 thereto, submitted pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 by the American Stock Exchange relating to Section 31 related fees. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57641)
The Chicago Board Options Exchange filed a proposed rule change (SR-CBOE-2006-105), as modified by Amendment No. 2 thereto, to list for trading binary options on broad-based indexes. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57642)
The Depository Trust Company filed an amended proposed rule change (SR-DTC-2007-10) under Section 19(b)(1) of the Exchange Act that would implement a new issue information dissemination service for municipal securities. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57647)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change as modified by Amendment 1 thereto (SR-ISE-2008-31) filed by the International Securities Exchange relating to fee changes 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 April 14. (Rel. 34-57643)
A proposed rule change filed by the American Stock Exchange (SR-Amex-2008-32) relating to the allocation of executed options contracts has become immediately 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 April 14. (Rel. 34-57644)
A proposed rule change filed by the Chicago Board Options Exchange to amend Rule 6.20A to permit Sponsored Users access to the CBOE Stock Exchange Facility (SR-CBOE-2008-37) 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 April 14. (Rel. 34-57646)
The Commission, pursuant to Section 19(b)(3)(C) of the Securities Exchange Act of 1934, has issued an order summarily abrogating a proposed rule change by NYSE Arca (SR-NYSEArca-2008-19) relating to its "Primary Only" order type. The proposed rule change had been filed under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57648)
Order Approving and Declaring Effective an Amendment to the Plan for the Allocation of Regulatory Responsibilities
The American Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, International Securities Exchange, Financial Industry Regulatory Authority, The Nasdaq Stock Market, NYSE Arca, and Philadelphia Stock Exchange filed a proposed amendment to the plan for the allocation of regulatory responsibilities pursuant to Rule 17d-2 under the Securities Exchange Act of 1934 relating to market surveillance (File No. 4-551) and the Commission has approved and declared effective the amended plan pursuant to Rule 17d-2 under the Securities Exchange of 1934. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57649; File No. 4-551)
Approval of Proposed Rule Change
The Commission granted approval of proposed rule change (SR-FICC-2007-08), as amended, filed by the Fixed Income Clearing Corporation under Section 19(b)(1) of the Exchange Act that allows FICC to resume interbank clearing for the GCF Repo service. Publication is expected in the Federal Register during the week of April 14. (Rel. 34-57652)
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