Roundtable on Fair Value Accounting Standards
The Commission will hold a Roundtable on Fair Value Accounting Standards on Wednesday, July 9, 2008, beginning at 9:00 a.m.
The Roundtable will take place in the Auditorium of the Commission's headquarters at 100 F Street, N.E., Washington D.C. The Roundtable will be open to the public with seating on a first-come, first-served basis. Doors will open at 8:30 a.m. Visitors will be subject to security checks.
The roundtable will consist of an open discussion of the benefits and potential challenges associated with existing fair value accounting and auditing standards and will be organized as two panels. The first panel will discuss fair value accounting issues from the perspective of larger financial institutions and the needs of their investors. The second panel will discuss the issues from the perspective of all public companies, including small public companies and the needs of their investors.
For further information, please contact John Heine at (202) 551-4120.
SEC Chief Information Officer Corey Booth Completes SEC Service
The Securities and Exchange Commission today announced that Chief Information Officer R. Corey Booth completed his SEC service on June 30 and will join the Boston Consulting Group in New York as a leader of its financial services practice.
Mr. Booth, who also served as Director of the SEC's Office of Information Technology, joined the SEC in January 2004 after several years as a consultant with global consulting firm McKinsey and Company. As CIO at the SEC, Mr. Booth has been responsible for the full range of information technology-related functions at the SEC, and for ensuring that the agency's technology investments are aligned to support the agency's mission. The SEC's Office of Information Technology employs more than 600 staff and contractors.
Korn/Ferry International, an executive recruitment firm, will be assisting the SEC in identifying candidates interested in serving as the Commission's next Chief Information Officer as part of a nationwide search across both private and public-sector sources.
"During his four and a half years at the helm of the Office of Information Technology, Corey has dramatically improved the way that the SEC makes information available to investors and our markets," said SEC Chairman Christopher Cox. "He has led the implementation of our interactive data initiative for mutual fund and company disclosures, and he has improved the SEC's own financial reporting and internal operations as we work to protect investors. He will be long remembered and sorely missed."
Mr. Booth said, "I have been honored and humbled every day to work with such talented people to achieve the honorable mission of the SEC. I am immensely proud of the information technology team's accomplishments over the last few years, and I'm confident that they are on track to even greater achievements in the future."
Mr. Booth headed up a range of initiatives to improve the agency and its information technology capabilities:
Prior to joining the SEC, Mr. Booth was an associate principal in the financial services and information technology practices of McKinsey and Company. In that role, he was responsible for advising senior executives of major financial institutions on a variety of strategic and technology management issues. Mr. Booth received his MBA from Stanford University Graduate School of Business in 1995, and his A.B. summa cum laude in economics and English literature from Washington University in St. Louis in 1991. (Press Rel. 2008-126)
SEC Publishes Proposals to Increase Investor Protections by Reducing Reliance on Credit Ratings
The Securities and Exchange Commission today published for public comment proposed rule changes to make the limits and purposes of credit ratings clear to investors and ensure that the role assigned to ratings in SEC rules is consistent with the objectives of having investors make an independent judgment of credit risks.
The Commission voted unanimously on June 25, 2008, to issue for public comment this third set of proposed recommendations to bring increased transparency to the credit ratings process and curb practices that contributed to recent turmoil in the credit markets. The Commission voted to propose the first two sets of recommendations on June 11, 2008.
"This action is designed to ensure that the role we assign to ratings in our rules is consistent with the objective of having investors make an independent judgment of the risks associated with a particular security," said SEC Chairman Christopher Cox. "It should be neither the purpose nor the effect of any SEC rule to discourage investors from paying close attention to what credit ratings actually mean."
Erik R. Sirri, Director of the SEC's Division of Trading and Markets, said, "These proposals complete the rulemaking initiative begun two weeks ago with respect to NRSROs. I believe the proposed amendments will further promote the Commission's goals of strengthening the ratings process by reducing any undue reliance on NRSRO ratings and by encouraging independent evaluation and analysis of credit risk."
John White, Director of the SEC's Division of Corporation Finance, added, "These proposals are an important step toward clarifying the appropriate role of credit ratings in investors' decisions about the securities in which they invest. Not only do the proposals establish new criteria, independent of ratings, for issuers to access our forms and utilize the shelf registration process, they do so in a manner that protects the interests of investors."
The Commission has reviewed the requirements in its rules and forms that rely on credit ratings. In many cases, it has concluded that such references can be removed or revised. These proposals also address recent recommendations issued by the President's Working Group on Financial Markets, the Financial Stability Forum, and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Consistent with these recommendations, the SEC has considered whether the inclusion of requirements related to ratings in its rules and forms has, in effect, placed an "official seal of approval" on ratings that could adversely affect the quality of due diligence and investment analysis. The SEC's proposal would reduce undue reliance on credit ratings and result in improvements in the analysis that underlies investment decisions.
Public comments on this third set of proposed rules should be received by the Commission no later than Sept. 5, 2008.
The proposing releases comprising this third set of rule proposals have been posted to the SEC Web site:
(Press Rel. 2008-127)
Dan Gallagher Named a Deputy Director in Division of Trading and Markets
Gallagher to Join Director Sirri, Deputy Director Colby as Part of Division's Senior Management Team
The Securities and Exchange Commission announced today that Daniel M. Gallagher has been named a Deputy Director in the agency's Division of Trading and Markets. Mr. Gallagher will join the Trading and Markets senior management team of Deputy Director Robert Colby and Director Erik Sirri.
Erik Sirri, Director of the Division of Trading and Markets, said, "I am thrilled to have Dan join the Division as a Deputy Director. His unique blend of Commission, private sector, and law firm experience will be a tremendous resource for both the Division and the Commission. With Dan and Bob Colby as Deputy Directors, the Division is well-positioned to handle the daily challenges presented by an ever-changing marketplace."
In recent years, the Division's staffing and responsibilities have grown to include supervision of the nation's largest investment banks under the 2004 Consolidated Supervised Entities program, and oversight of Nationally Recognized Statistical Rating Organizations under the 2006 Credit Rating Agency Reform Act. An additional Deputy Director position is designed to assist the Division in better managing its significant responsibilities.
Mr. Gallagher said, "It is an honor and a privilege to join the staff of the Division of Trading and Markets. I have a deep respect for the Division staff and mission, and I look forward to working with Erik, Bob, and my colleagues to help carry out the Division's responsibilities."
Mr. Gallagher has served as Counsel to SEC Chairman Christopher Cox since 2007, and before that he served as Counsel to Commissioner Paul S. Atkins. In those capacities, he has worked on many of the major Division of Trading and Markets rulemakings during the last few years, including the Nasdaq Exchange application, the NYSE/Euronext merger, Regulation R, the implementation of the Credit Rating Agency Act of 2006, the elimination of short selling restrictions, and various broker-dealer initiatives.
Mr. Gallagher was formerly the General Counsel and Senior Vice President of Fiserv Securities, Inc., a clearing broker-dealer, where he was responsible for managing all of the firm's legal and regulatory matters. Mr. Gallagher began his career at Wilmer Cutler Pickering Hale and Dorr, where he advised clients regarding broker-dealer regulatory issues, and represented clients in SEC and SRO enforcement proceedings.
Mr. Gallagher earned his J.D., magna cum laude, from the Catholic University of America, where he was a member of the law review, and he graduated from Georgetown University with a B.A. in English.
Mr. Gallagher's appointment will be effective July 21, 2008. (Press Rel. 2008-129)
RULES AND RELATED MATTERS
The Commission issued a release proposing to replace several rules and form requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 that rely on security ratings by nationally recognized statistical rating organizations with alternative requirements. Under the proposed amendments, among other things, an offering of asset-backed securities would be eligible for registration on Form S-3, regardless of the credit rating of the securities, if initial and subsequent sales of the securities are made in denominations of at least $250,000 and initial sales are made only to qualified institutional buyers, as defined in Securities Act Rule 144A. An offering of non-convertible securities would be eligible on Forms S-3 or F-3, regardless of the credit rating of the securities, if the issuer has issued for cash, as of a date within 60 days prior to the filing of the registration statement, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings, within the prior three years. The comment period for these proposals expires on Sept. 5, 2008. (Rels. 33-8940; 34-58071; File No. S7-18-08)
References to Ratings of Nationally Recognized Statistical Rating Organizations
On July 1, the Commission issued a release proposing to amend five rules under the Investment Company Act of 1940 and the Investment Advisers Act of 1940 that rely on NRSRO ratings. The proposed amendments to rules 2a-7, 3a-7, 5b-3, and 10f-3 under the Investment Company Act and rule 206(3)-3T under the Investment Advisers Act would eliminate references to NRSRO ratings in these rules and with two exceptions, substitute alternative provisions that are designed to appropriately achieve the same purpose as the ratings. The proposed amendments are designed to address concerns that the reference to NRSRO ratings in Commission rules may have contributed to an undue reliance on NRSRO ratings by market participants.
The full text of the release concerning the proposals has been posted on the SEC Web site. The comment period for the proposal will end Sept. 5, 2008. (Rels. IC-28327; IA-2751; File No. S7-19-08)
Commission Sanctions Robert Radano
The Commission has barred Robert Radano from associating with any investment adviser, subject to a right to reapply after five years. Radano, the managing director and sole owner of Washington Investment Network, an investment advisory firm, had been enjoined by the United States District Court for the District of Columbia from future violations of the antifraud provisions of the Investment Advisers Act, and from an Investment Advisers Act provision prohibiting investment advisers from associating with a barred individual. The Commission determined that Radano's behavior constituted a fundamental breach of the high standards to which, as a securities professional associated with an investment adviser, he was subject. (Rel. IA-2750; File No. 3-12084)
Commission Dismisses Cease-And-Desist Proceeding Against Scott G. Monson
On June 30, the Commission dismissed an administrative proceeding against Scott G. Monson, the former general counsel of broker-dealer JB Oxford & Company. The order instituting the proceedings alleged that JB Oxford facilitated "late trades" in mutual funds for several institutional clients in 2002 and 2003 in violation of Investment Company Act Rule 22c-1. Monson was alleged to be a cause of these violations because of his role in drafting an agreement that JB Oxford used to establish trading relationships with clients who engaged in late trading. The Commission concluded that the record did "not establish by a preponderance of the evidence that Monson was negligent" and accordingly dismissed the proceeding. (Rel. IC-28323; File No. 3-12429)
Commission Dismisses Proceeding Against TelcoBlue, Inc.
The Commission has dismissed an administrative proceeding brought against TelcoBlue, Inc. The proceeding sought to revoke or suspend the registration of TelcoBlue's securities pursuant to Section 12(j) of the Exchange Act, for TelcoBlue's failure to file required periodic reports. On May 20, 2008, TelcoBlue's Form 15-12B, which the company filed to voluntarily de-register its securities, became effective. Based on this de-registration, the Division of Enforcement filed a motion to dismiss the proceeding. The Commission determined to grant the motion because TelcoBlue no longer has a class of securities registered under Section 12 of the Exchange Act and revocation or suspension of the registration are the only available remedies. (Rel. 34-58061; File No. 3-12965)
Commission Revokes Registration of Securities of American Motorcycle Corp. (f/k/a Scope Industries, Inc.) for Failure to Make Required Periodic Filings
On June 30, the Commission revoked the registration of each class of registered securities of American Motorcycle Corp. (f/k/a Scope Industries, Inc.) (American Motorcycle) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings in the order, except as to jurisdiction, which it admitted, American Motorcycle consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to American Motorcycle Corp. (f/k/a Scope Industries, Inc.) finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of American Motorcycle's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against American Motorcycle in In the Matter of American Kiosk Corp., et al., Administrative Proceeding File No. 3-13038.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of American Kiosk Corp., et al., Administrative Proceeding File No. 3-13038, Exchange Act Release No. 57798 (May 8, 2008). (Rel. 34-58065; File No. 3-13038)
SEC Obtains Preliminary Injunction, Asset Freeze, and Permanent Receiver in a $21 Million Fraud Involving Biotech Investment Funds
The Commission announced that on June 19, 2008, it obtained a preliminary injunction against Lincoln Funds International, Inc., and its predecessor, Brookstone Capital, Inc., both based in Costa Mesa, California, and its three principals, Robert L. Carver, age 53, his son Robert L. Carver II, age 34, both of Irvine, California, and James L. DeMers, age 64, of Cerritos, California. The defendants raised at least $21 million from nearly 400 investors nationwide in an alleged securities fraud scheme. The Honorable Cormac J. Carney, United States District Judge for the Central District of California, also granted additional relief that the Commission sought, including orders freezing the defendants' assets and the appointment of James H. Donell as permanent receiver over Lincoln Funds, Brookstone Capital, and their related entities.
The Commission's complaint, filed on June 6, 2008 in federal court in Santa Ana, California, alleges that from April 2004 through late May 2008, the defendants sold securities in Lincoln Funds, Brookstone Capital, 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 (IPO) in Brookstone Capital and later, Lincoln Funds, when no steps had been taken for that purpose. The complaint alleges that the defendants made baseless predictions of an 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 various state regulatory orders. The complaint alleges that the defendants also concealed Carver's prior criminal record and failed to invest investor funds in biotechnology ventures, as promised.
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 Carver, Carver II, and DeMers 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. In addition to the relief already granted by the Court, the Commission seeks permanent injunctions, disgorgement, and civil penalties.
For more information about the risks of "Pre-IPO" investing, visit the SEC's website at http://www.sec.gov/investor/pubs/preipo.htm. To report suspicious activity involving possible fraud, visit http://www.sec.gov/complaint.shtm. The website for James Donell, the permanent receiver appointed in this case, is www.fedreceiver.com.
For more information about this case, refer to Litigation Release No. 20614 (June 11, 2008). [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-20631)
SEC v. Northshore Asset Management, et al.
The Commission announced today that in SEC v. Northshore Asset Management, et al., CV 05-2192 (WHP) (S.D.N.Y.), Judge William H. Pauley III entered a final judgment against defendant Francis J. Saldutti (Saldutti). The final judgment permanently enjoins Saldutti from violating the antifraud provisions of the federal securities laws and requires him to pay more than $5,082,138 in disgorgement and prejudgment interest. Saldutti consented to entry of the final judgment without admitting or denying the allegations of the Commission's Second Amended Complaint.
On Feb. 16, 2005, the Commission filed SEC v. Northshore, alleging that, in April 2003, defendant Northshore Asset Management LLC (Northshore) and its three principals, defendants Kevin Kelley (Kelley), Glenn Sherman (Sherman), and Robert Wildeman (Wildeman) (together, the Northshore Defendants), purchased Saldutti Capital Management, L.P. (SCM) from Saldutti and thereby obtained control over two hedge funds, Ardent Research Partners L.P. and Ardent Research Partners Ltd. (together, the Ardent Funds). Kelley, Sherman, and Wildeman proceeded fraudulently to divert tens of millions of dollars of the Ardent Funds' cash assets to their own personal use, including purported personal loans and self-dealing investments. Consequently, by early 2005, the Ardent Funds became illiquid and were unable to meet investor redemption requests.
In October, 2005, the Commission filed a First Amended Complaint that added securities fraud and investment adviser fraud claims against Saldutti, the Ardent Funds' founder and investment adviser, and Douglas Ballew, Northshore's former CFO. In March 2008, the Commission filed a Second Amended Complaint that, among other things, added certain factual allegations against Saldutti. The Commission alleged that after his sale of SCM to the Northshore Defendants, Saldutti remained as the portfolio manager of the Ardent Funds and became a part owner, creditor, and employee of Northshore. The Commission alleged that Saldutti failed to disclose adequately, and made affirmative misrepresentations regarding, the sale of SCM to Northshore and his numerous conflicts of interest to the Ardent Funds and the Ardent Funds' investors. The Commission also alleged that Saldutti failed to disclose adequately, and made affirmative misrepresentations regarding, his transfer of tens of millions of dollars of Ardent Funds' cash from their prime brokerage accounts to Northshore-controlled accounts. The Commission further alleged that Saldutti failed to disclose certain material facts to two new investors that he welcomed to the Ardent Funds in late 2004, including the fact that Kelley had been arrested and charged with unrelated investment advisers fraud in early December 2004.
Judge Pauley previously entered final judgments against Wildeman on May 2, 2008, and Kelley and Ballew on May 19, 2008. Sherman passed away in August 2007. [SEC v. Northshore Asset Management, et al., Civil Action No. CV 05-2192(WHP) (S.D.N.Y.)] (LR-20632)
SEC Settles With Microtune Inc. and Sues Former Microtune Officers in Stock Option Backdating Scheme
On June 30, 2008, the Commission filed a civil action in United States District Court in Dallas, Texas against Microtune, Inc. and two former senior officers-former Chairman and Chief Executive Officer Douglas J. Bartek and former Chief Financial Officer and General Counsel Nancy Richardson. Without admitting or denying the Commission's allegations, Microtune agreed to an injunction that permanently enjoins it from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9. The Commission's litigated action alleges that Bartek and Richardson violated Section 17(a) of the Securities Act and Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, and 14a-9 thereunder, and aided and abetted Microtune's violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. The Commission seeks injunctive relief, disgorgement of wrongful profits, civil monetary penalties, officer and director bars, and reimbursement of profits from stock sales pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.
The Commission's complaint alleges that Bartek, with assistance from Richardson, routinely backdated the date on which he granted stock options to senior executives and other employees. To conceal the scheme, as alleged, Bartek directed others to backdate employment records, including offer letters, to establish falsified start dates and grant dates that preceded the actual dates the new hires began working for Microtune. According to the SEC's complaint, the undisclosed backdating scheme ensured that the options falsely appeared to have been granted on dates in the past corresponding to low stock prices, thus resulting in potentially lucrative "in-the-money" options granted at below fair market value. As alleged, rather than report compensation expense as required at the time by U.S. Generally Accepted Accounting Principles, Bartek and Richardson falsified or directed others to falsify stock option records to make it appear that the backdated options were granted as of the backdated date, and therefore "at-the-money." [SEC v. Microtune, Inc., Douglas Bartek, and Nancy Richardson, United States District Court for the Northern District of Texas; Case No. 3:08cv1105-B (N.D. Tex.] (LR-20633)
INVESTMENT COMPANY ACT RELEASES
Notices of Deregistration under the Investment Company Act
For the month of June, 2008, a notice has been issued giving interested persons until July 22, 2008, to request a hearing on any of the following applications for an order under Section 8(f) of the Investment Company Act declaring that the applicant has ceased to be an investment company:
(Rel. IC-28322- June 27)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-NYSEArca-2008-49) submitted pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 by NYSE Arca to amend its Minor Rule Plan and certain underlying rules. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58034)
Proposed Rule Changes
The Philadelphia Stock Exchange filed a proposed rule change (SR-Phlx-2007-33) as modified by Amendment Nos. 1 and 2 thereto relating to margining. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58045)
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2008-45) under Section 19(b)(1) of the Securities Exchange Act of 1934 to amend NYSE Rule 98 and related rules to redefine specialist operations at the NYSE. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58052)
Immediate Effectiveness of Proposed Rule Changes
The National Securities Clearing Corporation filed a proposed rule change (SR-NSCC-2008-03), which became effective upon filing pursuant to Section 19(b)(3)(A) of the Exchange Act, that enhances NSCC's insurance services to support the processing of instructions for the transfer or reallocation of underlying investment options within a variable insurance contract. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58053)
A proposed rule change filed by NYSE Arca to amend its Schedule of Fees and Charges for Exchange Services in order to extend the current pilot program regarding transaction fees charged for trades executed through the intermarket options linkage (SR-NYSEArca-2008-67) 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 June 30. (Rel. 34-58056)
Accelerated Approval of Proposed Rule Changes
The Commission granted accelerated approval of a proposed rule change (SR-Amex-2008-36) submitted by the American Stock Exchange pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to list and trade shares of the MacroShares $100 Oil Up Trust and the MacroShares $100 Oil Down Trust. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58057)
The Commission granted accelerated approval to a proposed rule change (SR-NYSEArca-2008-65) filed by NYSE Arca, pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, to trade shares of the MacroShares Oil Trusts pursuant to unlisted trading privileges. Publication is expected in the Federal Register during the week of June 30. (Rel. 34-58058)
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