SEC Proposes Comprehensive Reforms to Bring Increased Transparency to Credit Rating Process
The Securities and Exchange Commission today voted to formally propose a comprehensive series of credit rating agency reforms to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets.
"The events of recent months have had a profound effect on our economy and our markets, and they have galvanized regulators and policymakers not only in this country but around the world to re-examine every aspect of the regulatory framework governing credit rating agencies," said SEC Chairman Christopher Cox. "This package of proposed rules would foster increased transparency, accountability, and competition in the credit rating agency industry for the benefit of investors."
Erik Sirri, Director of the SEC's Division of Trading and Markets, said, "The rules proposed today are designed to improve investor understanding of credit ratings through enhanced disclosure of NRSRO methods and performance data, and to promote investor confidence in credit ratings by minimizing conflicts of interest."
The proposed rulemaking continues the implementation of new regulatory authority that the SEC recently received from Congress to register and oversee nationally recognized statistical rating organizations (NRSROs). Since its authority went into effect in September 2007, the SEC has rigorously applied its new oversight to examine how credit ratings have been created and disseminated. Informed by these ongoing examinations as well as input from international regulatory organizations studying these issues and the Congressional committees responsible for the recent Credit Rating Agency Reform Act, the Commission has proposed this package of rules that would regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies.
The regulatory program established by Congress through the Credit Rating Agency Reform Act allows the SEC to promulgate rules regarding public disclosure, recordkeeping and financial reporting, and substantive requirements designed to ensure that NRSROs conduct their activities with integrity and impartiality. These additional proposed rules supplement initial rules implemented by the Commission under the Act in June 2007.
The Commission is proposing the rulemaking in three parts, with the first two portions being proposed today and the third portion to be considered on June 25.
The first part of the Commission's rule proposal would:
The second part of the Commission's proposal would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities.
The third set of recommendations for the Commission's proposal, to be considered on June 25, are being designed to ensure that the role the SEC has assigned to ratings in its rules is consistent with the objective of having investors make an independent judgment of risks and of making it clear to investors the limits and purposes of credit ratings for structured products.
Public comments on today's proposed amendments and rule must be received by the Commission within 30 days after their publication in the Federal Register. (Press Rel. 2008-110)
In the Matter of Terry E. Provence
On June 11, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Terry E. Provence. The Order finds Provence, the President of DT Capital LLC (DT Capital) of Naples, Florida, an entity not registered with the Commission in any capacity, from at least February 2007 through December 2007, solicited investors to invest in an options index trading program, from which Provence and DT Capital received compensation based on the number and purported success of trades. The Order was based on the entry by consent of a final judgment against Provence, permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. Terry E. Provence, et al., Civil Action Number 07-22204-CIV, in the United States District of Florida. The Commission's complaint in the civil action alleged, among other things, that in connection with the solicitation of investors to invest in the options trading program, Provence and DT Capital made numerous material misrepresentations and omissions, including misrepresenting the success rate of the trading program and the background of its trader, as well as baselessly projecting extraordinary returns of 10 to 20 percent a month.
Based on the permanent injunction, the Order bars Provence from association with any broker or dealer. Provence consented to the issuance of the Order without admitting or denying any of the findings except for the Commission's jurisdiction over him and the subject matter of the proceedings and the permanent injunction before the District Court in the civil action. (Rel. 34-57948; File No. 3-13064)
Final Judgment Entered Against Ronald K. Bowen for Defrauding Investors Regarding Potential Investment in Under Armour IPO
The Commission announced today that on June 4, 2008, the United States District Court for the District of Maryland entered a final judgment against Ronald K. Bowen for violating the anti-fraud provisions of the federal securities laws by lying to investors about the possibility of investing in the November 2005 initial public offering by Under Armour, Inc. Bowen raised more than $230,000 from four investors through his fraudulent scheme.
The Commission's complaint alleged that Bowen defrauded the investors by purporting to offer to sell them more than 100,000 shares of stock of Under Armour, Inc., a Baltimore based sports apparel company, in late 2005 and early 2006. Bowen falsely claimed that he had access to Under Armour stock pursuant to an initial public offering by Under Armour in November 2005. In order to induce the investors to participate, Bowen drafted and disseminated phony disclosure documents that appeared to demonstrate that Bowen's IPO stock purchase offer was legitimate. In fact, Bowen never had access to Under Armour IPO stock.
The final judgment against Bowen enjoins him from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment also orders Bowen to pay $272,840 in disgorgement and prejudgment interest and a $233,300 penalty.
The United States Attorney's Office for the District of Maryland filed related criminal charges against Bowen on Dec. 13, 2007, which are pending.
For further information, see Litigation Release No. 20399 (Dec. 14, 2007). [SEC v. Ronald K. Bowen, Civil Action No. RDB 07-3345 (U.S.D.C. District of Maryland, Baltimore Division)] (LR-20613)
SEC Halts a $21 Million Fraud Involving Biotech Investment Funds
The Securities and Exchange Commission yesterday announced an action charging advisory firm Lincoln Funds International, Inc. and its three principals who raised at least $21 million from nearly 400 investors nationwide in an alleged securities fraud scheme that involved its biotechnology investment fund companies.
According to the Commission's complaint, filed in U.S. District Court in Orange County, one of the defendants, James L. DeMers, age 64, of Cerritos, Calif., cleaned out all of the cash in the Lincoln Funds' accounts earlier this month by transferring approximately $2.9 million to his own separate company. The SEC obtained a temporary restraining order, asset freeze and other emergency relief in a civil action to halt the defendants' fraudulent activities and strip them of any ill-gotten gains. Simultaneous with the filing of the Commission's complaint on June 6, the California Department of Corporations issued an Order against two of the individuals and Lincoln Funds ordering them to desist and refrain from offering, buying or selling securities in the state by means of any false or misleading statements.
The Commission's complaint charges Lincoln Funds and its predecessor, Brookstone Capital, Inc., both based in Costa Mesa, Calif., and their principals, Robert L. Carver, age 53, of Irvine, Calif., his son Robert L. Carver, II, age 34, of Irvine, Calif., and DeMers. The complaint also names as relief defendants Lincoln Biotech Ventures LP, Lincoln Biotech Ventures II, and LP Lincoln Biotech Ventures III LP -- the three biotechnology venture funds created and controlled by the defendants. Also named is MacAuslan Capital Partners, LLC, a company controlled by DeMers. These relief defendants held cash or other assets acquired from investor proceeds. Robert Carver has been the subject of at least five state administrative orders including three by the California Department of Corporations since 1996.
The Commission's complaint alleges that since April 2004, the defendants sold securities in Brookstone Capital, Lincoln Funds, and three Lincoln Biotech Venture funds created purportedly for making biotechnology-related investments. The defendants enticed investors by dangling the prospect of an upcoming initial public offering in Brookstone Capital and later, Lincoln Funds, when they knew full well that no steps had been taken for this purpose. The complaint further alleges that the defendants made baseless predictions about the eight- to ten-fold appreciation in the entities' projected stock price, and engaged in a sham transaction designed to hold Lincoln Funds out as a company with no connection to Brookstone Capital or Carver, which were subjects of state regulatory orders. The defendants additionally concealed Carver's prior criminal record, and failed to invest investor funds in biotechnology ventures, as promised. At least $2.5 million of the proceeds remain unaccounted for.
Acting on the Commission's lawsuit, on June 6, 2008, the Honorable Judge Cormac J. Carney, United States District Judge for the Central District of California, granted the Commission's application for a temporary restraining order against the defendants and issued orders freezing the defendants' and relief defendants' assets and prohibiting the destruction of documents. The Court also appointed James H. Donell as the temporary receiver over the assets of Brookstone Capital, Lincoln Funds, and its affiliates, including the three Lincoln Biotech Venture funds. The Court ordered the temporary restraining order and asset freeze to remain in effect until June 19, 2008, on which date the Court will hold a hearing on the Commission's motion for a preliminary injunction and appointment of a permanent receiver at 10:00 a.m. In addition to emergency relief, the Commission's complaint seeks preliminary and permanent injunctions, repayment of all ill-gotten gains, and also civil penalties.
The Commission's complaint alleges that all of the defendants violated the antifraud provisions 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, Sections 206(1) and (2) of the Investment Advisers Act of 1940, and the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. Additionally, the complaint alleges that all three individuals violated the broker-dealer registration provisions of Section 15(a) of the Exchange Act. Finally, the Commission alleges that Lincoln Funds and DeMers violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.
The SEC acknowledges the assistance of the Alabama Securities Commission and the National Futures Association in this investigation. [SEC v. Robert Louis Carver; Robert Louis Carver, II; James Lowell Demers; Lincoln Funds International, Inc.,and Paropes Corporation, f/k/a Brookstone Capital, Inc., defendants, and Lincoln Biotech Ventures, L.P.; Lincoln Biotech Ventures II, L.P.; Lincoln Biotech Ventures III, L.P., And Macauslan Capital Partners, LLC, as relief defendants, Case No. CV08-627 CJC (RNBx) (C.D. Cal.)] (LR-20614)
Accelerated Approval of Proposed Rule Change
The Commission granted accelerated approval to a proposed rule change (SR-FINRA-2008-023) filed by the Financial Industry Regulatory Authority, Inc., pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 relating to violations appropriate for disposition under FINRA's Minor Rule Violation Plan. Publication is expected in the Federal Register during the week of June 16. (Rel. 34-57935)
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