SEC News Digest

ENFORCEMENT PROCEEDINGS

Re-Trial of Case Against Courtney D. Smith Dismissed by Stipulation of Parties

On March 2, 2009, based upon the stipulation of the parties, the United States District Court for the Central District of California dismissed the Securities and Exchange Commission's enforcement action against Courtney D. Smith.

The Commission's Complaint against Smith, filed on Feb. 7, 2005, alleged that Smith had received remuneration from GenesisIntermedia, Inc. in consideration for recommending its stock to the investing public and his investment advisory clients without properly disclosing the remuneration and his business relationships with the company's chief executive officer. The complaint alleged that Smith violated the antifraud and other provisions of the federal securities laws.

The case was tried to a jury in January 2008. On Jan. 22, 2008, the jury found Smith "not liable" on the fraud claims but failed to reach a verdict on the Commission's claim under the anti-touting provisions of Section 17(b) of the Securities Act of 1934. Retrial on the remaining claim was scheduled to begin on March 10, 2009. [SEC v. Courtney D. Smith, Civil Action No. 05- 0941 (CAS) (VBKx) (C.D. Cal.)] (LR-21029)

Final Judgment Entered Against Oregon Investment Adviser

The Securities and Exchange Commission announced that on May 5, 2009, the United States District Court for the District of Oregon entered a final judgment against C. Wesley Rhodes for $11.8 million in disgorgement of ill-gotten gains, $4.6 million in prejudgment interest, and a $130,000 civil penalty. The District Court had previously entered, on May 30, 2007, a permanent injunction against Rhodes.

The Commission's complaint alleged that Rhodes raised millions of dollars from investors, including many senior citizens, by representing that he would invest their money in stocks and bonds. The complaint further alleged that contrary to those representations, Rhodes used the investors' money for other purposes, including buying vintage automobiles and sports memorabilia. According to the complaint, Rhodes sent account statements to the investors representing that their investments had an aggregate value of nearly $40 million as of June 30, 2006. As of September 21, 2006, however, Rhodes had less than $2 million invested in stocks and bonds.

Aside from Rhodes, the defendants named in the Commission's complaint were Rhodes' companies, Rhodes Econometrics, Inc., The Rhodes Company, and Resource Transactions, Inc. The District Court entered permanent injunctions against these companies on May 30 and June 21, 2007.

In a related criminal action, based on the same conduct alleged in the Commission's complaint, Rhodes pled guilty and was sentenced to a 10 year prison term beginning on June 1, 2009. [SEC v. C. Wesley Rhodes, Jr., Rhodes Econometrics, Inc., The Rhodes Company, and Resource Transactions, Inc., Civil Action No. CV06-1353-MO (D. Or.)] (LR-21030)

SEC Sues Dallas, Texas Oil and Gas Promoters for Conducting Fraudulent Offering

On May 7, 2009, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court in Dallas against Hartmut T. "Hardy" Rose and James Patrick Reedy for their fraudulent offers and sales of oil and gas interests. The Commission's complaint alleges that, between August 2003 and August 2005, Rose and Reedy, acting through Geo Companies of North America, Inc., Geo Natural Resources, Inc. and Geo Securities, Inc., a broker-dealer registered with the Commission (collectively "Geo"), raised more than $10 million from over 300 investors nationwide. The complaint further alleges that Rose and Reedy made numerous material false and misleading representations and omissions in connection with the offers and sales of the joint venture interests. Among other things, the complaint charges that Reedy touted Geo's successful track record, when, in reality, Geo had very few wells that produced in commercial quantities. Additionally, the Commission alleges that, in several instances, Rose and Reedy solicited investors for funds to complete wells, without disclosing that Geo's geologists advised against completing them. Finally, the complaint alleges that Rose and Reedy solicited investors for additional funds by falsely portraying prior wells as "successful," when the wells were dry holes.

The complaint alleges that Rose and Reedy violated Sections 5(a), 5(c) and 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 complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and civil penalties against Rose and Reedy.

Without admitting or denying the Commission's allegations, Rose has consented to a permanent injunction against future violations of the registration and antifraud provisions. Rose also agreed to pay disgorgement of $58,914, prejudgment interest of $22,749.29 and a $50,000 civil penalty. Litigation continues against Reedy. [SEC v. Hartmut Theodor Rose and James Patrick Reedy, Civ. Action No. 3:09-cv-00857-G, USDC, NDTX (Dallas Division)] (LR-21031)

Day-Trader Settles SEC Charges of Manipulative Short Selling

The Securities and Exchange Commission announced that on May 4, 2009, the Honorable Leonard B. Sands of the United States District Court for the Southern District of New York, entered a Final Judgment of permanent injunction and other relief against Robert Todd Beardsley, who was charged with perpetrating a manipulative short selling scheme through brokerage accounts at the now defunct broker-dealer, Redwood Trading, LLC. The Final Judgment settles the Commission's claims against Beardsley that were asserted in a civil action filed on November 19, 2008.

The Commission's complaint alleged that Beardsley devised a scheme by which he routinely executed short sales in numerous stocks while the prices of those stocks were declining, in violation of the since-rescinded "uptick rule." As part of the alleged scheme, Beardsley also failed to mark orders as short sales in order to create the false appearance that the orders were long. The complaint charged Beardsley with having violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5, and provisions relating to short sales of securities, Section 10(a)(1) of the Exchange Act and former Exchange Act Rule 10a-1 (the "uptick rule").

Without admitting or denying the allegations in the complaint, Beardsley has consented to the entry of a final judgment that permanently enjoins him from committing future violations of the above-referenced provisions (except former Rule 10a-1, which no longer is in effect), and based on Beardsley's sworn representations in his Statement of Financial Condition, orders him to pay partial disgorgement of $100,000, and does not impose a civil penalty.

For additional information, please see Litigation Release No. 20814A (Nov. 19, 2008). [SEC v. Robert Todd Beardsley and George Lindenberg, Civil Action No. 08-cv-10054 (LBS), USDC, SDNY] (LR-21032)

SEC Files Settled Books and Records and Internal Controls Charges Against Novo Nordisk For Improper Payments to Iraq Under the U.N. Oil for Food Program - - Novo Nordisk Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against Novo Nordisk in the U.S. District Court for the District of Columbia. Novo Nordisk A/S, a Danish company, specializes in the manufacture and development of pharmaceutical products and is a leading supplier of insulin worldwide. The Commission's complaint alleges that from 2000 through 2003, Novo Nordisk paid $1,437,946 in kickbacks and agreed to pay an additional $1,315,454 in kickbacks in connection with its sale of humanitarian goods to Iraq under the United Nations Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Novo Nordisk diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission's Complaint:

Novo Nordisk engaged its long-time Jordan-based agent to submit bids on Novo Nordisk's behalf to Kimadia, the Iraq State Company for the Importation and Distribution of Drugs and Medical Appliances, under the Program. Two branches of Novo Nordisk -- RONE, based in Athens, Greece, and NEO, based in Amman, Jordan -- handled the sales to Iraq and supplied the agent with bid prices for each contract. In late 2000 or early 2001, a Kimadia import manager advised the agent that Kimadia required Novo Nordisk to pay a ten percent kickback in order to obtain a contract under the Program. The Kimadia import manager told the agent that Novo Nordisk should increase its prices by ten percent and pay that amount to Kimadia. By doing so, Novo Nordisk would recover the secret kickback from the U.N. escrow account when the contract, with the inflated price, was subsequently approved for disbursement and paid by the U.N.

A Novo Nordisk officer rejected the request to pay Kimadia a ten percent kickback, and instead suggested that Novo Nordisk find another way. Novo Nordisk offered to reduce the price of its medicines by ten percent, but the Kimadia import manager angrily refused the offer. A Novo Nordisk Senior Vice President, along with RONE and NEO managers authorized the kickbacks to Kimadia despite the other officer's refusal to do so. On or about April 2001 and August 2001, respectively, Novo Nordisk paid increased commissions to its agent to pay the kickbacks to Kimadia. The agent's commission was increased under the guise that the payment was used to cover the agent's increased distribution and marketing costs. Various e-mails discussed the scheme to conceal the conduct, and the U.N. contracts were artificially inflated by ten percent. According to the RONE managers, subsequent kickbacks were also approved by Novo Nordisk. Altogether, Novo Nordisk made a total of $1,437,946 in improper kickback payments on eleven contracts through the agent. Novo Nordisk also agreed to pay approximately $1,315,454 in ASSFs on two additional contracts. Novo Nordisk recorded the kickbacks as legitimate commission payments on its books and records.

Novo Nordisk failed to maintain adequate systems of internal controls to detect and prevent the payments and their accounting for these transactions failed properly to record the nature of the payments. Novo Nordisk, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering Novo Nordisk to disgorge $4,321,523 in profits plus $1,683,556 in pre-judgment interest, and a civil penalty of $3,025,066. Novo Nordisk will also pay a $9,000,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. The Commission considered remedial acts promptly undertaken by Novo Nordisk and the cooperation the company afforded the Commission staff in its investigation.

The Commission's monetary relief in its Oil for Food investigation is now over $135 million. The investigation is continuing. The Commission acknowledges the assistance of the Department of Justice, Fraud Section and the United Nations Independent Inquiry Committee. [SEC v. Novo Nordiskn A/S, Civil Action No.1-09-CV-00862 (D.D.C.) (EGS)] (LR-21033)

SEC Brings Action Against Attorney for Role in Unregistered Offering Fraud

The Securities and Exchange Commission (Commission) announced today that on May 8, 2009 it filed a complaint against Daniel W. Nodurft, a resident of Louisiana and the former vice-president and current secretary and general counsel of Aerokinetic, Energy Corporation ("Aerokinetic"), a Sarasota-based company purportedly in the business of developing and marketing alternative power technologies and products. The Commission's complaint alleges that Nodurft violated the registration and antifraud provisions of the securities laws in connection with Aerokinetic's fraudulent unregistered securities offering.

The Commission's complaint alleges that from at least September 2006 until the Commission's emergency action in July 2008, Aerokinetic raised at least $535,000 from 24 investors nationwide, and was seeking to raise an additional $575,000, by making material misrepresentations and omissions about its technology, products, and financial prospects. Aerokinetic's fraudulent offering was halted on July 24, 2008, when the U.S. District Court for the Middle District of Florida issued a temporary restraining order against Aerokinetic and its president.

According to the complaint, Aerokinetic claimed to have developed new energy technologies, including a power generation station capable of creating electrical energy at a fraction of the cost of conventional or nuclear means, without generating any pollution. It further claimed to have built an operating power generation station and to hold patents on these new technologies, as well as to have standing purchase orders for the finished product. In addition, Aerokinetic projected millions of dollars of sales revenue within its first years of operations and billions of dollars shortly thereafter. The complaint alleges that these claims were false because Aerokinetic had no patents, income, or standing orders for its technology or products. Aerokinetic's purported energy technologies and products were, at best, in the early development stage and, therefore, its predictions of imminent financial success and its financial projections lacked any reasonable basis in fact.

The Commission's complaint further alleges that Nodurft was fully aware of Aerokinetic's material misrepresentations and omissions. Nodurft was associated with Aerokinetic from its inception and was a central player in Aerokinetic's fraudulent offering. He was in constant contact with the Company's president, provided recommendations concerning operations, and handled investor relations. Nodurft drafted, reviewed or approved all offering materials and the Company's two websites that contained Aerokinetic's false and misleading statements to prospective investors, and personally repeated many of these misrepresentations to prospective investors. Moreover, contrary to assurances that Aerokinetic would use investor funds to research and develop Aerokinetic's products, the complaint also alleges that Aerokinetic's president- with Nodurft's knowledge and approval- misappropriated investors' funds to pay his personal expenses, with approximately $250,000 in investor funds unaccounted for.

The Commission's complaint alleges that Nodurft violated Sections 5(a), 5(c) and 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 Commission seeks a final judgment against Nodurft enjoining him from future violations of the foregoing antifraud and securities registration laws and assessing civil penalties. [SEC v. Daniel W. Nodurft, Civil Action No. 8:09-CV-866-T26/TGW (M.D. Fla.)] (LR-21034)

INVESTMENT COMPANY ACT RELEASES

Cohen & Steers Advantage Income Realty Fund, Inc., et al.

A notice has been issued giving interested persons until May 29, 2009 to request a hearing on an application filed by Cohen & Steers Advantage Income Realty Fund, Inc., et al. (Funds) for an order (Order) under section 6(c) of the Investment Company Act of 1940 (Act) granting an exemption from sections 18(a)(1)(A) and (B) of the Act for a period from the date of the Order until October 31, 2010. The Order would permit each Fund to issue or incur debt subject to asset coverage of 200% that would be used to refinance the Fund's auction preferred shares issued prior to February 1, 2008 that are outstanding at the time such post-Order debt is issued or incurred. The Order also would permit each Fund to declare dividends or any other distributions on, or purchase, capital stock during the term of the Order, provided that any such debt has asset coverage of at least 200% after deducting the amount of such transaction. (Rel. IC-28721 - May 8)

Flaherty & Crumrine Preferred Income Fund Incorporated, et al.

A notice has been issued giving interested persons until May 29, 2009 to request a hearing on an application filed by Flaherty & Crumrine Preferred Income Fund Incorporated, et al. (Funds) for an order under section 6(c) of the Investment Company Act of 1940 (Act) granting an exemption from sections 18(a)(1)(A) and (B) of the Act for a period from the date of the order until October 31, 2010. The order would permit each Fund to issue or incur debt that would be used to redeem the Fund's auction preferred shares issued prior to February 1, 2008 that are outstanding at the time of such issuance or incurrence of debt (post-order debt), and to refinance such post-order debt, subject to the 200% asset coverage requirement ordinarily applicable to a senior security that is stock. The order also would permit each Fund to declare dividends or any other distributions on, or purchase, capital stock during the term of the order, provided that any such post-order debt has asset coverage of at least 200% after deducting the amount of such transaction. (Rel. IC-28722 - May 8)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change by New York Stock Exchange (SR-NYSE-2009-47) to modify certain equity transaction fees and rebates 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 May 11. (Rel. 34-59863)

A proposed rule change filed by New York Stock Exchange (SR-NYSE-2009-46) extending until October 1, 2009 the six-month pilot program which established a new class of NYSE market participants referred to as "Supplemental Liquidity Providers" and is designated as Exchange Rule 107B 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 May 11. (Rel. 34-59869)

A proposed rule change filed by the Municipal Securities Rulemaking Board (SR-MSRB-2009-06) relating to auction rate securities and variable rate demand obligations 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 May 11. (Rel. 34-59873)

A proposed rule change filed by the International Securities Exchange (SR-ISE-2009-21) relating to fee changes 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 May 11. (Rel. 34-59882)

A proposed rule change filed by NYSE Amex LLC (SR- NYSEAmex-2009-16) making certain amendments to its price list 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 May 11. (Rel. 34-59883)

A proposed rule change (SR-NYSE-2009-43) filed by New York Stock Exchange to delete all references in the NYSE rule book to "Alternext" and "Alternext US" and substitute references to "Amex" to reflect the recent name change of NYSE Alternext US LLC to NYSE Amex LLC 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 May 11. (Rel. 34-59884)

A proposed rule change filed by NYSE Arca (SR-NYSEArca-2009-39) regarding amendments to NYSE Arca Equities Rule 8.3 (Listing of Currency and Index Warrants) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. A proposed rule change filed by NYSE Amex LLC (SR- NYSEAmex-2009-16) making certain amendments to its price list 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 May 11. (Rel. 34-59886)

A proposed rule change filed by the International Securities Exchange (SR-ISE-2009-23) relating to fee changes 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 May 11. (Rel. 34-59888)

A proposed rule change filed by the BATS Exchange (SR-BATS-2009-011) related to fees for use of BATS Exchange, Inc. 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 May 11. (Rel. 34-59889)

Accelerated Approval of Proposed Rule Change

The Commission has issued a notice and order granting accelerated approval of a proposed rule change filed by the International Securities Exchange (SR-ISE-2009-24) relating to amounts that Direct Edge ECN, in its capacity as an introducing broker for non-ISE members, passes through to such non-ISE members. Publication is expected in the Federal Register during the week of May 11. (Rel. 34-59887)

Proposed Rule Change

A proposed rule change (SR-CBOE-2009-027) filed by the Chicago Board Options Exchange relating to 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 May 11. (Rel. 34-59892)

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