In the Matter of Allion Healthcare, Inc. and James G. Spencer
On March 18, the Commission issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Order) against Allion Healthcare, Inc. (Allion) and its former Chief Financial Officer, James G. Spencer (Spencer).
The Order finds that Allion, a provider of specialty pharmacy and disease management services for HIV/AIDS patients based in Melville, New York, failed to properly record and report two significant warrant grants made during the second quarter of 2005, prior to the company's initial public offering of stock in June 2005. Because Allion failed to recognize interest expense for the warrants in conformity with Generally Accepted Accounting Principles, the company materially overstated its net income and understated its loss per share when reporting results for the second quarter of 2005 and the nine months ended September 30, 2005. Allion restated its results in March 2006 after the company's independent auditor inquired about the accounting for the grants. The Order finds that Allion violated the federal securities laws by filing materially inaccurate periodic reports with the Commission, failing to make and keep accurate books and records, and failing to devise and maintain an adequate system of accounting controls.
The Order further finds that Spencer was a cause of the company's violations and certified the company's inaccurate Form 10-Qs for the second and third quarters of 2005. Spencer knew the warrants had potentially significant value, and was aware of the potential impact on the company's earnings associated with the larger of the two grants. Nevertheless, he failed to ensure that the company properly recorded and reported the warrant transactions.
Based on the above, the Order requires Allion to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The Order also requires Spencer to cease and desist from causing any violations and any future violations of these provisions, and from committing or causing any violations and any future violations of Exchange Act Rule 13a-14. Allion and Spencer consented to the issuance of the Order without admitting or denying the findings. (Rel. 34-59594; AAE Rel. 2951; File No. 3-13411)
Court Enters Consent Judgments Against Defendants Gerard A. McCallion, Tecumseh Holdings Corporation, Tecumseh Tradevest LLC, and S.B. Cantor & Co., Inc.
On March 9, the U.S. District Court for the Southern District of New York entered final consent judgments against defendants Gerard A. McCallion (McCallion), Tecumseh Holdings Corporation (Tecumseh), Tecumseh Tradevest LLC (Tradevest), and S.B. Cantor & Co., Inc (Cantor). Without admitting or denying the allegations of the complaint, McCallion consented to a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5, and from controlling any person who violates Section 17(a) of the Exchange Act and Rules 17-3 and 17a-4. The consent judgment also bars McCallion from participating in an offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act, orders him to pay a civil penalty of $40,000 and disgorgement of $1, and requires him to release all claims he may have against defendants Tecumseh, Tradevest, and Cantor.
Without admitting or denying the allegations of the complaint, the receiver for Tecumseh, Tradevest, and Cantor consented to a final judgment that permanently enjoins Tecumseh and Tradevest from violating Section 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 and that permanently enjoins Cantor from violating Sections 5(a) and 5(c) of the Securities Act and Section 17(a) of the Exchange Act and Rules 17a3 and 17a-4. The consent judgment also bars Tecumseh, Tradevest, and Cantor from participating in an offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act, orders Tecumseh to disgorge ill-gotten gains of $7,271,134, and holds Cantor jointly and severally liable with Tecumseh for $850,000 of Tecumseh's disgorgement liability.
The Commission's complaint, filed on July 24, 2003, alleges that, beginning in June 2000, defendants Tecumseh, Tradevest and John L. Milling (Milling) engaged in the unregistered, fraudulent offerings and sales of securities in Tecumseh, a purported financial services company with offices in New Jersey and California, and Tecumseh's subsidiary Tradevest. Tecumseh and Tradevest conducted the fraud largely through the efforts of Milling, a securities lawyer and Tecumseh's senior official. According to the Complaint, Tecumseh, Tradevest and Milling acted with the assistance of Cantor, then a registered broker-dealer; McCallion, Cantor's president; defendant Anthony M. Palovchik, Tecumseh's vice president; and defendant Dale Carone, manager of Tecumseh's California office; and others. Through the unregistered fraudulent offerings, the defendants together raised approximately $10 million from about 500 investors nationwide. The complaint also named as relief defendants three Tecumseh affiliates: Alpha Fund, Alpha LLC, and Stracq, Inc.
The complaint alleges that Tecumseh, Tradevest, and Milling induced investors to acquire securities of Tecumseh and Tradevest by means of a host of material misrepresentations. Through offering memoranda and other materials, these defendants: (i) touted false and misleading profit projections; (ii) promised some investors "returns on investment" or "dividends" without disclosing that Tecumseh and Cantor had no earnings to distribute and that any such payments necessarily would come from capital, including funds raised from other investors; and (iii) made materially misleading statements concerning NASD approval for Tecumseh's acquisition of Cantor. The complaint also alleges that Tecumseh, Tradevest, and Milling knew or acted in reckless disregard of the fact that their representations to investors concerning these matters were materially false and misleading.
Previously, relief defendant Stracq consented to a final consent judgment ordering it to disgorge ill-gotten gains of $660,000. In addition, defendants Carone and Palovchik have previously consented to judgments enjoining them from future violations of the securities laws and barring them from participating in an offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act. Pursuant to their consent judgments, monetary relief against them will be determined later by the court on motion by the Commission.
The Commission has dismissed the complaint against relief defendants Alpha Fund and Alpha LLC. The case remains pending against Milling. [SEC v. Tecumseh Holdings Corporation, et al., 03 Civ. 5490 (SAS) (S.D.N.Y.)] (LR-20958)
SEC Charges Madoff Auditors With Fraud
The Securities and Exchange Commission today charged the auditors of Bernard Madoff's broker-dealer firm with committing securities fraud by falsely representing that they had conducted legitimate audits, when in fact they had not.
In its complaint filed today in federal court in Manhattan, the SEC alleges that from 1991 through 2008, certified public accountant David G. Friehling and his firm, Friehling & Horowitz, CPAs, P.C. (F&H), purported to audit financial statements and disclosures of Bernard L. Madoff Investment Securities LLC (BMIS). The SEC previously charged Madoff and BMIS with committing securities fraud through a multi-billion dollar Ponzi scheme perpetrated on advisory and brokerage customers of his firm.
"The evidence revealed that these auditors helped perpetuate the Madoff scheme by giving it the false appearance of legitimacy," said SEC Chairman Mary L. Schapiro. "We are continuing our investigation and will hold accountable all those who helped to facilitate this massive fraud."
James Clarkson, Acting Director of the SEC's New York Regional Office, said, "Friehling's and F&H's misconduct is egregious as they held themselves out to investors and regulators as the independent auditors. In fact, Friehling sold his license to Madoff and agreed to look the other way for more than 17 years as Madoff committed his Ponzi scheme."
The SEC's complaint alleges that Friehling enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited BMIS financial statements pursuant to Generally Accepted Auditing Standards (GAAS), including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities.
F&H also made representations that BMIS financial statements were presented in conformity with Generally Accepted Accounting Principles (GAAP) and that Friehling reviewed internal controls at BMIS, including controls over the custody of assets, and found no material inadequacies. According to the SEC's complaint, Friehling knew that BMIS regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators.
The SEC's complaint alleges that all of these statements were materially false because Friehling and F&H did not perform a meaningful audit of BMIS, and did not perform procedures to confirm that the securities BMIS purportedly held on behalf of its customers even existed.
Instead, the SEC alleges that Friehling merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. If properly stated, those financial statements, along with BMIS related disclosures regarding reserve requirements, would have shown that BMIS owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent.
According to the SEC's complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.
The SEC further alleges that Friehling and F&H obtained ill-gotten gains through compensation from Madoff and BMIS, and also from withdrawing returns from accounts held at BMIS in the name of Friehling and his family members.
The SEC's complaint specifically alleges that Friehling and F&H violated Section 17(a) of the Securities Act, violated and aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted violations of Sections 206(1) and 206(2) of the Advisers Act, Section 15(c) of the Exchange Act and Rule 10b-3 thereunder, and Section 17 of the Exchange Act and Rule 17a-5 thereunder. Among other things, the SEC's complaint seeks permanent injunctions, civil penalties and a court order requiring both Friehling and F&H to disgorge their ill-gotten gains.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation. The SEC's investigation is continuing. [SEC v. David G. Friehling, C.P.A and Friehling & Horowitz, CPA'S, P.C. (S.D.N.Y. Civ. 09 CV 2467)] (LR-20959)
SEC Brings Civil Action Against Purported Anti-Terrorism Company, its Principals and Others for Pump-And-Dump Scheme
The Commission announced that on March 13, 2009, it filed a civil injunctive action against Sky Way Global LLC (aka Sky Way Global, Inc.) (Global), an internet service provider and purported anti-terrorism company based in Tampa, Florida, and its principals Brent C. Kovar, Glenn A. Kovar, and James S. Kent, who allegedly defrauded investors through an unregistered fraudulent offering of Global stock and orchestrated a pump-and-dump scheme of SkyWay Communications Holding Corp. (SkyWay). The Commission also charged Kenneth Bruce Baker and Kenneth R. Kramer, alleged unregistered broker-dealers, who found investors for SkyWay and sold SkyWay stock.
The Commission's complaint, filed in the United States District Court for the Middle District of Florida, alleges that from at least February 2002 until December 2005, Global, Brent Kovar (Global's senior vice president and president), Kent (Global's director of business operations and CEO), and Glenn Kovar (Global's manager and member) raised approximately $1.38 million from 18 investors by offering and selling unregistered shares of Global's stock. In connection with the offer and sale of Global's securities, Global, Brent Kovar, Kent, and Glenn Kovar made numerous material misrepresentations and omissions to investors through marketing and offering materials, including, among other things, that Global possessed a nationwide network of broadcasting towers and anti-terrorism technology that would allow the government to monitor and, if necessary, take control of an airplane. These claims were patently false because Global had no towers and no technology to monitor and take control of airplanes.
The complaint further alleges that after a Global subsidiary merged with a public shell to become SkyWay (in June 2003) and Global transferred its purported technology and assets to SkyWay, Brent Kovar and Kent, with Glenn Kovar's assistance, carried out a pump-and-dump scheme of SkyWay stock. From August 2003 to May 2005, Brent Kovar (SkyWay's President) and Kent (SkyWay's CEO and CFO), issued false press releases to increase SkyWay's stock price and trading volume. The press releases stated, among other things, that SkyWay had a nationwide network of broadcasting towers, and the same purported anti-terrorism technology that Global had claimed to have. The press releases also claimed SkyWay had technology for providing Internet services on airplanes. During the same period, Global, Brent and Glenn Kovar, and Kent dumped 76.65 million shares of their SkyWay stock on the unsuspecting public and made more than $12 million in profits. Brent Kovar and Kent also engaged in other misconduct in connection with the SkyWay pump-and-dump scheme by improperly issuing S-8 stock to promoters Baker and Kramer in exchange for finding investors and selling SkyWay stock.
The Commission's complaint charges Global, Brent Kovar, Kent, and Glenn Kovar with violating the registration and anti-fraud provisions of the federal securities laws, specifically, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and further charges Glenn Kovar with aiding and abetting SkyWay's violations of Section 10(b) of the Exchange Act and Rule 10b-5. The Complaint further charges Brent Kovar and Kent with aiding and abetting SkyWay's violations of disclosure provisions under Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11; and charges Baker and Kramer with violating the broker-dealer registration provisions under Section 15(b) of the Exchange Act. The Commission's complaint seeks permanent injunctive relief against all defendants, enjoining them from future violations of the provisions charged, and an order requiring them to disgorge their ill-gotten gains, with prejudgment interest, and imposing civil penalties against each of them; imposing a penny stock bar against the individual defendants, and an officer and director bar against Brent Kovar and Kent. [SEC v. Sky Way Global LLC (dba Sky Way Global, Inc.), Brent C. Kovar, Glenn A. Kovar, James S. Kent, Kenneth Bruce Baker (aka Bruce Baker), and Kenneth R. Kramer, Civil Action No. 08: 09-CV-455-T23/TBM (M.D. Fla.)] (LR-20960)
SEC Settles E-Mail Spam Campaign Case Against Two Texas Individuals
The Securities and Exchange Commission settled securities fraud charges against two Texas men for orchestrating a 20-month market manipulation scheme. The agreement, which was entered today in the form of two final judgments by Judge Kenneth Hoyt of the U.S District Court in Houston, prohibits Darrel T. Uselton and his uncle, Jack E. Uselton, from violating antifraud provisions of the federal securities laws and trading in penny stock. Darrel Uselton also agreed to pay over $2.8 million in disgorgement and prejudgment interest and another $1 million in civil penalties.
According to the SEC initial complaint, the Useltons generated proceeds of more than $4 million by obtaining stock from at least 13 penny stock companies. The pair would then, according to the SEC, sell those shares into an artificially active market that they created through manipulative trading, spam e-mails, direct mailers, and internet-based promotional activities.
Darrel Uselton and Jack Uselton, without admitting or denying the allegations, settled the action by consenting to entry of a court order that: (i) permanently bars them from Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and (ii) prohibits them from participating in an offering of penny stock pursuant to Section 21(d)(6) of the Exchange Act. In addition, Darrel Uselton consented to entry of a court order that orders him to pay disgorgement and prejudgment interest in the amount of $2,838,866.72, which will be deemed satisfied upon entry of an order requiring him to pay that amount in restitution to the State of Texas. It also requires him to pay a civil monetary penalty of $1 million.
In a related enforcement action, the Useltons are in the process of settling criminal charges originally filed by the Attorney General's Office for Texas and the Harris County District Attorney's Office (Houston, Texas) in July 2007 and have agreed to forego any right to $2,838,866.72 that previously was seized by the Texas criminal authorities from bank and brokerage accounts controlled by Darrel Uselton.
The Commission acknowledges the assistance of the Attorney General's Office for Texas and New York, The Harris County (Houston, Texas) District Attorney's Office, the Federal Bureau of Investigation, the Texas State Securities Board, the United States Attorney's Office District of Colorado, the Financial Industry Regulatory Authority, the State of Oklahoma Department of Securities, and the National Cyber-Forensics & Training Alliance. [SEC v. Darrel T. Uselton and Jack E. Uselton, Case No. 07-2211 (S.D. Tex.)] (LR-20961)
INVESTMENT COMPANY ACT RELEASES
Massachusetts Financial Services Company, et al.
A notice has been issued giving interested persons until April 13, 2009, to request a hearing on an application filed by Massachusetts Financial Services Company, et al. for an order under Section 12(d)(1)(J) of the Investment Company Act for an exemption from Sections 12(d)(1)(A) and (B) of the Act, under Sections 6(c) and 17(b) of the Act for an exemption from Section 17(a) of the Act, and under Section 6(c) of the Act for an exemption from Rule 12d1-2(a) under the Act. The order would (a) permit certain management investment companies registered under the Act to acquire shares of certain open-end management investment companies registered under the Act that are outside the same group of investment companies as the acquiring investment companies, and (b) permit funds of funds relying on Rule 12d1-2 under the Act to invest in certain financial instruments. (Rel. IC-28649 - March 17)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-NASDAQ-2006-056) filed by the NASDAQ Stock Market to establish Nasdaq Custom Data Feeds. Publication is expected in the Federal Register during the week of March 16. (Rel. 34-59579)
The Commission approved a proposed rule change (SR-NASDAQ-2007-006) filed by the NASDAQ Stock Market to establish the Nasdaq Daily Share Volume Service and to establish fees for the service. Publication is expected in the Federal Register during the week of March 16. (Rel. 34-59580)
The Commission approved a proposed rule change (SR-FINRA-2008-045), as modified by Amendment No. 1 thereto, filed by the Financial Industry Regulatory Authority relating to amending the FINRA Rule 9520 series regarding eligibility procedures for persons subject to certain disqualifications. Publication is expected in the Federal Register during the week of March 23. (Rel. 34-59586)
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