Commission Declines to Review Petition of Certain Participants under the Consolidated Tape Association and Consolidated Quotation Plans
The Commission dismissed a petition by the Boston Stock Exchange, the Chicago Board Options Exchange, the International Securities Exchange, the Nasdaq Stock Market, the National Stock Exchange, NYSE Arca, and the New York Stock Exchange to compel the American Stock Exchange, in its capacity as the Network B administrator under the Consolidated Tape Association Plan and the Consolidated Quotation Plan, to comply with directions that a majority of the participants in the Plans issued to the American Stock Exchange. Those directions called for the American Stock Exchange to reallocate certain settlement proceeds to the Plan participants "net" of the legal expenses incurred in connection with certain litigation under the Plans.
The Commission noted that its jurisdiction to consider an appeal from action taken in connection with the CTA and CQ Plans is discretionary pursuant to Rule 608(d) of Regulation NMS under the Exchange Act. The Commission found that the issues presented in this appeal pertained to an internal business dispute among the parties involving questions about the accounting characterization of the legal expenses and the applicable time period over which the settlement proceeds and expenses should be allocated and that, accordingly, this appeal did not implicate the broad objectives of the national market system - the public interest, the protection of investors, or the maintenance of fair and orderly markets. The Commission concluded that this business dispute should be left up to the courts, which have experience in adjudicating such state-law issues. The Commission also noted, however, that where the statutory objectives of the national market system are implicated, the Commission's oversight of the administration of the Plans gives it a compelling interest in ensuring that the Network B administrator carries out its duties equitably and commensurately with those statutory objectives. (Rel. 34-58191; File No. 3-12714)
Commission Declares Initial Decision as to Next Financial Group, Inc. Final
The Commission has declared final an initial decision of an administrative law judge with respect to NEXT Financial Group, Inc. (NEXT). The initial decision found that NEXT, a registered broker-dealer, willingly violated Rules 4, 6, 10 and 30(a)(1) of Regulation S-P, 17 C.F.R. Part 248 when NEXT engaged in the practice of disclosing nonpublic personal information about its customers to other brokerage firms without prior notice or a reasonable opportunity for the customers to opt out of the disclosures. NEXT recruited its registered representatives from various brokerage firms and encouraged them to bring their customer accounts with them.
The initial decision found that NEXT violated Rule 4 by not disclosing to customers that it allowed its departing registered representatives to divulge a customer's nonpublic information to nonaffiliated third parties. The initial decision also found that NEXT violated Rule 6 by not informing its customers that it allowed its departing registered representative to divulge all categories of customer nonpublic personal information to nonaffiliated third parties with which they intended to associate.
The initial decision also found that NEXT willfully aided and abetted and was a cause of non-parties' violation of Rule 10.
The initial decision determined that the likelihood of future violations was quite high and issued a cease-and-desist order. The initial decision further found that a meaningful civil penalty would help deter future violations of Regulation S-P by others and ordered a civil penalty be paid in the amount of $125,000. (Rel. 34-58192; File No. 3-12738)
In the Matter of Michael Sassano, Dogan Baruh, Robert Okin, and R. Scott Abry
On July 18, the Commission issued a settled order (Order) against Michael Sassano (Sassano) in a previously instituted administrative proceeding.
The Order finds that Sassano, a former registered representative (RR) at CIBC World Markets Corp. (CIBC) and Fahnestock & Co., Inc. (Fahnestock), engaged in a scheme to defraud mutual fund companies. Between 1998 and September 2003, Sassano and certain other registered representatives (the brokers), who acted under his direction, actively assisted market timing customers in deceiving mutual fund companies. CIBC, Fahnestock and the brokers received hundreds of letters and emails from mutual fund companies regarding their market timing trading activities. Sassano and the brokers repeatedly ignored these communications, and continued to work with their market timing customers to implement their market timing strategies in an attempt to deceive the mutual fund companies up until the point when the mutual fund companies threatened to terminate their dealer agreements with CIBC or Fahnestock. Among the deceptive practices that Sassano and the brokers engaged in on behalf of their customers were the following: (a) using new account numbers for blocked customer accounts; (b) creating new RR numbers to disguise themselves and their customers from the mutual funds; (c) trading in smaller amounts in order to avoid detection by the mutual funds, including using an in-house electronic trading platform to break up trades into small dollar volumes; (d) using annuities to avoid restrictions on market timing; (e) using the investment adviser trading platforms of two broker-dealers, Charles Schwab & Co., Inc. and FMR Corp., to continue market timing mutual funds that had previously blocked Sassano's customers' trading; and (f) on one instance, sending trades from a different branch to deceive the mutual funds about the origins of the trade. As a result of his conduct, Sassano willfully violated Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, willfully aided and abetted and caused his customers' violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and willfully aided and abetted and caused CIBC's violations of Section 15(c) of the Exchange Act and Rule 10b-3 thereunder.
Based on the above, the Order directs Sassano to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violations and any future violations of Section 15(c) of the Exchange Act and Rule 10b-3 thereunder. The Order bars Sassano from association with any broker, dealer or investment adviser, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. Finally, the Order directs Sassano to pay disgorgement of $1 and a civil money penalty in the amount of $1,000,000. Sassano consented to the issuance of the Order without admitting or denying the Commission's findings, except as to the Commission's jurisdiction over him and the subject matter of the proceedings. See also: Rel. No. 33-8592 (July 20, 2005); Rel. No. 3-12554 (Jan. 31, 2007); Rel No. 55209 (Jan. 31, 2007); Rel. No. 34-57880 (May 28, 2008); Rel. No. 34-57879 (May 28, 2008). (Rels. 33-8945; 34-58193; IA-2756; IC-28333; File No. 3-12554)
Commission Revokes Registration of Securities of National Properties Investment Trust for Failure to Make Required Periodic Filings
On July 21, the Commission revoked the registration of each class of registered securities of National Properties Investment Trust (National Properties) 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, National Properties 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 National Properties Investment Trust 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 National Properties's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against National Properties in In the Matter of National Fruit and Vegetable Technology Corp., et al., Administrative Proceeding File No. 3-13080.
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 National Fruit and Vegetable Technology Corp., et al., Administrative Proceeding File No. 3-13080, Exchange Act Release No. 58009 (June 24, 2008). (Rel. 34-58198; File No. 3-13080)
SEC Charges Biofuel Company and its CEO with Fraud
The Commission announced today that it filed a complaint in the United States District Court for the Southern District of Mississippi, Western Division, against U. S. Sustainable Energy Corp. (USSE) and John H. Rivera (Rivera), defendants, and Alice M. Price (Price) relief defendant. The complaint alleges that Rivera is USSE's Chairman and CEO and that USSE is a Nevada corporation, headquartered in Natchez, Mississippi.
The complaint further alleges that, between October 2006 and February 2007, Rivera caused USSE to issue false and misleading press releases regarding the company's business and technology to convert soybeans into biofuel. The Commission also alleges that during the same period, Rivera made false and misleading oral statements regarding USSE. Specifically, the Commission's complaint alleges that USSE and Rivera made material misrepresentations by claiming that USSE owned patents or pending patents; that USSE's cost to produce biofuel was $0.50 per gallon; that USSE had contracts for the sale of its product; that USSE had a fully operational plant; and that USSE's technology, when combined with the technology of another company with which it had agreed to merge, had an immediate market value of between 9 and 12 billion dollars. The complaint also alleges that after the press releases and false statements were issued, Price, who resided with Rivera at the time, sold USSE stock at artificially inflated prices, thereby profiting at least $721,000.
The complaint alleges that USSE and Rivera violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks permanent injunctions against future violations; disgorgement of ill-gotten gains plus prejudgment interest; imposition of civil penalties against USSE and Rivera; and a penny stock bar and an officer and director bar against Rivera. The Commission's complaint also names Price as a relief defendant, and seeks disgorgement of her ill-gotten gains plus prejudgment interest. [SEC v. U.S. Sustainable Energy Corp. and John H. Rivera, et al.,Civil Action No. 5:08-CV-245 DCB-JMR] (LR-20648)
Three Defendants Named in SEC Action Found Guilty by a Federal Jury
The Commission announced that on June 17, 2008, a federal jury in San Diego, California, convicted three defendants named in a prior enforcement action brought by the Commission for their participation in a fraudulent scheme to solicit money from the public, ostensibly for participation in high-yield "prime bank" trading programs and venture capital investments. The jury found Randall T. Treadwell, formerly of Savannah, Georgia, Ricky D. Sluder of Whitehouse, Texas, and Larry C. Saturday of Savannah, Georgia, guilty on felony counts of wire fraud and conspiracy. A fourth defendant, Arnulfo M. Acosta of Hidalgo County, Texas, pleaded guilty prior to trial to felony counts of conspiracy and making a false statement to a federal officer. Treadwell and Sluder are scheduled to be sentenced on Sept. 22, 2008, and Acosta and Saturday on Oct. 14, 2008.
The defendants were indicted in September 2005 by a federal grand jury in San Diego charging them with wire fraud and conspiracy. According to the indictment obtained by the United States Attorney's Office for the Southern District of California, the defendants, though Learn Waterhouse, Inc., a Texas corporation, Wealth Builders Club, Inc., and Qwest International, Inc., both Nevada corporations, fraudulently solicited over $50 million from investors. The indictment alleged that the defendants induced investors by falsely representing and causing others to represent that investors' money would be used for investments that would generate high yielding monthly returns. The indictment alleged that only a small fraction of the money raised was used to make investments and they generated almost no returns, money received from new investors was used to make payments to earlier investors, and millions of investors' funds were used for the defendants' own personal use.
In October 2004, the Commission filed a civil complaint against the defendants and Learn Waterhouse. The court issued a preliminary injunction prohibiting future violations of the antifraud and the securities registration provisions of the federal securities laws, freezing the defendants' assets, and appointing Thomas Lennon as the permanent receiver over Learn Waterhouse. The court thereafter issued orders finding Treadwell in civil contempt for violating the asset freeze and ultimately revoked his pretrial release pending the trial in the criminal action. The court also issued an order staying the Commission's action until the conclusion of the criminal action, which also provided that the receiver shall continue to perform all of his duties, however, the receiver cannot pay any investor claims until the stay is lifted or expires.
For more information about prime bank frauds, visit the SEC's "Prime Bank Information Center" at http://www.sec.gov/divisions/enforce/primebank.shtml. To report suspicious activity involving possible fraud, visit http://www.sec.gov/complaint.shtml. The website for Thomas Lennon, the receiver appointed in the case, is www.tflinc.com.
For further information, see Litigation Release Nos. 18932 (Oct. 14, 2004), 18959 (Nov. 4, 2004), 19059 (Feb. 1, 2005), 19142 (March 17, 2005), 19384 (Sept. 20, 2005), 19412 (Oct. 4, 2005), 19461 (Nov. 9, 2005), and 19540 (Jan. 24, 2006). [U.S. v. Randall T. Treadwell, Ricky D. Sluder, Larry C. Saturday, and Arnulfo M. Acosta, United States District Court, Southern District of California, Case No. 05 CR 1570 W] (LR-20649)
INVESTMENT COMPANY ACT RELEASES
Pimco Funds, et al.
A notice has been issued giving interested persons until Aug. 11, 2008, to request a hearing on an application filed by PIMCO Funds, et al., for an order under Section 6(c) of the Investment Company Act of 1940 (Act) for an exemption from Rule 12d1-2(a) under the Act. The order would permit funds of funds relying on Rule 12d1-2 under the Act to invest in certain financial instruments. (Rel. IC-28331 - July 17)
Proposed Rule Changes
The Financial Industry Regulatory Authority filed a proposed rule change and Amendment No. 1 thereto (SR-FINRA-2008-021) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 relating to the adoption of NASD Rules 4000 through 10000 Series and the 12000 through 14000 Series as FINRA rules in the New Consolidated FINRA Rulebook. Publication is expected in the Federal Register during the week of July 21. (Rel. 34-58176)
The NASDAQ Stock Market filed a proposed rule change (SR-NASDAQ-2008-062) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to clarify the application of Nasdaq rules when a listed company combines with a non-Nasdaq entity. Publication is expected in the Federal Register during the week of July 21. (Rel. 34-58182)
Approval of Proposed Rule Changes
The Commission published notice of filing of Amendment No. 1 and granted accelerated approval to a proposed rule change (SR-SCCP-2008-01), as modified by Amendment No. 1 thereto, filed by Stock Clearing Corporation of Philadelphia under Section 19(b)(1) of the Exchange Act to amend and restate its Articles of Incorporation. Publication is expected in the Federal Register during the week of July 21. (Rel. 34-58180)
The Commission approved a proposed rule change (SR-NASDAQ-2008-035), as modified by Amendment No. 1 thereto, to amend the by-laws of the NASDAQ OMX Group, in connection with the acquisitions of Boston Stock Exchange, Incorporated and Philadelphia Stock Exchange, Inc. Publication is expected in the Federal Register during the week of July 21. (Rel. 34-58183)
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2008-46), as modified by Amendment No. 1 thereto, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to create a new NYSE Market Model with certain components to operate as a one-year pilot that will provide market participants with additional abilities to post hidden liquidity, phase out specialists by creating a Designated Market Maker, and enhance the speed of execution through technological enhancements. Publication is expected in the Federal Register during the week of July 21. (Rel. 34-58184)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by Philadelphia Stock Exchange relating to participation guarantees for crossing and facilitation orders (SR-Phlx-2008-54) has become immediately 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 July 21. (Rel. 34-58185)
A proposed rule change filed by Chicago Board Options Exchange (SR-CBOE-2008-75) relating to sponsored user fees 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 July 21. (Rel. 34-58189)
A proposed rule change filed by the Philadelphia Stock Exchange relating to disclaimer of warranties (SR-Phlx-2008-47) 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 July 21. (Rel. 34-58194)
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