In the Matter of John T. McDonald (CPA)
On May 27, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions against John T. McDonald (CPA). The Order finds that McDonald was Vice President and Treasurer of Kmart Corporation prior to the company's bankruptcy. On May 1, 2009, a final judgment was entered against McDonald, permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aiding and abetting violations of Sections 13(a) and Rules 12b-20 and 13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Charles C. Conaway and John T. McDonald, Case No. 2:05-CV-40263 in the United States District Court for the Eastern District of Michigan. McDonald was ordered to pay a $120,000 civil penalty and barred from serving as an officer or director of a publicly traded company for five years. The Commission's complaint alleged, among other things, that McDonald was responsible for materially false and misleading disclosure about the financial condition of Kmart in the Management's Discussion and Analysis section of the company's Form 10-Q and in a conference call with analysts and investors.
Based on the above, the Order suspends McDonald from appearing or practicing before the Commission as an accountant with a right to apply for reinstatement after three years. McDonald consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-59977; AAE Rel. 2975; File No. 3-13486)
Brian R. Spires, CPA Reinstated to Appear and Practice Before the Commission as an Accountant Responsible for the Preparation or Review of Financial Statements Required to Be Filed with the Commission
Pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice, Brian R. Spires, CPA has applied for and been granted reinstatement of his privilege to appear and practice before the Commission as an accountant responsible for the preparation or review of financial statements required to be filed with the Commission. Mr. Spires' privilege of appearing or practicing before the Commission as an accountant was denied on September 19, 2007. His reinstatement is effective immediately. (Rel. 34-59980; AAE Rel. 2976; File No. 3-12810)
Initial Decision Barring Michael J. Crow Declared Final
The Commission has declared final the initial decision of an administrative law judge barring Michael J. Crow from association with any broker, dealer, or investment adviser. The initial decision found that, on Nov. 13, 2008, the United States District Court for the Southern District of New York issued a Final Judgment in SEC v. Crow, No. 1:07-CV-03814-CM-MHD, permanently enjoining Crow from aiding and abetting violations of the broker-dealer registration and qualification provisions of the Exchange Act and Exchange Act rules, and ordered him to disgorge over $49 million jointly and severally with other defendants and to pay civil monetary penalties.
Crow had been previously enjoined from violations of the antifraud provisions and denied the privilege of appearing before the Commission.
Crow was associated with Duncan Capital, LLC a registered broker-dealer, and acted as an unregistered broker and generally oversaw Duncan Capital's brokerage activities. He was also Chairman and Chief Executive Officer of Duncan Capital Group; and, an owner and manager of an investment adviser, B&P Management LLC.
Although Crow was not a registered principal of Duncan Capital, he controlled virtually every significant aspect of Duncan Capital's operations and received the vast majority of its profits. Duncan Capital was a placement agent for approximately twenty securities offerings, from which it raised over $100 million for the issuers. Of these monies raised, Crow received millions in cash compensation and warrants. (Rels. 34-59982; IA-2881; File No. 3 13309)
Initial Decision Barring Alberto W. Vilar Declared Final
The Commission has declared final the initial decision of an administrative law judge barring Alberto W. Vilar from associating with any investment adviser. The initial decision found that, on Nov. 19, 2008, Vilar was found guilty in the United States District Court for the Southern District of New York of two counts of securities fraud; two counts of wire fraud; four counts of money laundering; one count of investment adviser fraud; one count of mail fraud; one count of making false statements; and one count of conspiracy to commit securities fraud, investment adviser fraud, wire fraud, mail fraud, and money laundering in United States v. Vilar, No. 1:05-cr-621 (RJS) (S.D.N.Y.).
Vilar was the president, a director, and a shareholder of Amerindo Investment Advisors, Inc., a registered investment adviser during the time period when the violations occurred. (Rel. IA-2882; File No. 3 13345)
In the Matter of New York Life Investment Management LLC
On May 27, the Commission instituted a settled enforcement action against investment adviser New York Life Investment Management LLC (NYLIM) for failing to provide the Board of the Mainstay Equity Index Fund (Equity Index Fund), a mutual fund NYLIM advises, with information during the investment advisory contract renewal process and for making false or misleading statements in filings with the Commission. The Equity Index Fund seeks to replicate the movements of the S&P 500 index before expenses and has a "Guarantee" feature, under which a NYLIM affiliate guarantees that the value of a shareholder's investment on the tenth anniversary of purchase will be at least equal to the initial investment if all distributions are reinvested. As part of the settlement, NYLIM agreed to pay and distribute a total of approximately $6.2 million in disgorgement, prejudgment interest, and penalties.
The Commission's Order finds that, from March 2002 through June 2004, the disinterested members of the Board of Trustees as well as the Board of Trustees of The MainStay Funds, approved the renewal of three investment advisory contracts between NYLIM and the Equity Index Fund. For each contract renewal process, commonly known as the "15(c) process," the Board of Trustees received information showing that the management fees NYLIM charged to the Equity Index Fund were among the highest of the Equity Index Fund's peer-group of mutual funds. NYLIM urged the Board of Trustees to consider the Guarantee feature of the Equity Index Fund in evaluating the management fees NYLIM proposed, but, in violation of Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 15(c) of the Investment Company Act of 1940 (Investment Company Act), failed to provide the Board of Trustees information reasonably necessary to evaluate the cost of the Guarantee. Moreover, at the same time that NYLIM was claiming that the Guarantee should be considered to justify the Equity Index Fund's management fees, NYLIM was filing with the Commission, in violation of Section 34(b) of the Investment Company Act, prospectuses, annual reports, and registration statements in which it misrepresented that there was "no charge" to the Equity Index Fund or its shareholders for the Guarantee.
NYLIM consented, without admitting or denying the Commission's findings, to the issuance of the Commission's Order. Pursuant to the Order, NYLIM must cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Investment Advisers Act and Sections 15(c) and 34(b) of the Investment Company Act. In addition, NYLIM was censured and ordered to pay disgorgement of $3,950,075, prejudgment interest of $1,350,709, and a penalty of $800,000. NYLIM was also ordered to distribute the disgorgement, prejudgment interest, and penalty to affected shareholders of the Equity Index Fund. (Rels. IA-2883; IC-28747; File No. 3-13487)
SEC Charges Registered Investment Adviser and its Principal With Fraud and Breach of Fiduciary Duty
The Securities and Exchange Commission today charged a Monarch Beach, Calif.-based registered investment adviser and its principal with fraud and breach of fiduciary duty for failing to adequately disclose to clients the substantial risks associated with their investment strategies and failing to invest client assets in a manner suitable to clients' risk tolerance.
In a complaint filed in federal court in Santa Ana, Calif., the SEC alleges that Gendreau & Associates, Inc. (G&A) and Jacques R. Gendreau, age 67, who as of October 2007 had approximately 185 clients and $97 million in assets under management, advised their clients to become heavily leveraged and invested client funds using substantial margin. The SEC alleges that Gendreau failed to disclose to clients that his investment strategies were high-risk. The SEC also alleges that this high-risk strategy was unsuitable for many G&A clients due to their age, retirement status, and otherwise lower risk tolerance. According to the SEC's complaint, as a result of Gendreau's misconduct, G&A clients suffered catastrophic financial losses.
In its complaint, the SEC alleges that Gendreau invested client funds using substantial margin even though many clients had retired, needed the money in the short-term, or had otherwise expressed concerns about incurring additional losses. The SEC further alleges that in late August and early September 2008, Gendreau implemented his riskiest investment strategy by investing client funds using maximum margin solely in the preferred shares of Citigroup Inc. and Wachovia Corporation. The SEC's complaint contends that Gendreau invested client funds in the banks' preferred shares using significant margin even though this strategy was not suitable for many clients and was contrary to some clients' express instructions. Further, the SEC claims that Gendreau misrepresented to his clients that this investment strategy was "guaranteed" or with "practically no risk." According to the complaint, shortly after Gendreau purchased the preferred shares on behalf of his clients, the prices declined and G&A's custodial broker issued margin calls on the client accounts. The SEC alleges that Gendreau failed to meet these margin calls resulting in the custodial broker cancelling margin and liquidating the G&A client accounts. As a result of this investment strategy, according to the SEC's complaint, clients lost approximately $12 million (approximately 72% of their assets) within days, and approximately 42 G&A clients were left owing the custodial broker approximately $300,000 for margin loans.
The SEC's complaint charges G&A and Gendreau with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act); G&A with violating Section 204 of the Advisers Act and Rule 204-2 thereunder; and Gendreau with aiding and abetting G&A's violation of Section 204 of the Advisers Act and Rule 204-2 thereunder. The SEC is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against the defendants. [SEC v. Gendreau & Associates, Inc., and Jacques R. Gendreau, United States District Court for the Central District of California, Civil Action No. CV 09-03697 AHM (FMOx)] (LR-21057)
SEC Charges Three Former Senior Finance Executives of Cardinal Health, Inc. for Fraudulent Earnings and Revenue Management Scheme
The Securities and Exchange Commission today filed a civil action against three former finance executives of Cardinal Health, Inc. (Cardinal), a pharmaceutical distribution company based in Dublin, Ohio, in which the former Cardinal executives agreed to settle charges that they engaged in a fraudulent revenue and earnings management scheme. Cardinal's former chief financial officer, Richard J. Miller, former controller and principal accounting officer, Gary S. Jensen, and former senior vice president of finance, Michael E. Beaulieu, without admitting or denying the allegations, consented to the entry of an injunction and agreed to pay a total of $245,000 in civil penalties.
The Commission's Complaint alleges that, at different times from September 2000 through March 2004, the former Cardinal executives engaged in the misconduct in order to present a false picture of Cardinal's operational results to the financial community and the investing public - one that matched Cardinal's publicly disseminated earnings guidance and analysts' expectations, rather than its true economic performance. The Complaint alleges that as a result of these actions, Cardinal materially overstated its operating revenue, earnings, and growth trends in public earnings releases and filings with the Commission.
According to the Complaint, the Defendants and other members of Cardinal's management closely monitored Cardinal's financial performance to assess whether it met internal expectations and external guidance to analysts. Miller, Jensen, and Beaulieu, as the Complaint describes, engaged in the management of Cardinal's reported revenue and earnings through a variety of undisclosed and improper actions. The Complaint alleges that their actions had the effect of inflating reported operating revenue through the improper misclassification of more than $5 billion of bulk sales as operating revenue. As detailed in the Complaint, Cardinal classified its revenue from drug distribution as either "bulk" revenue or operating revenue. Bulk revenue consisted primarily of certain full case quantities of pharmaceutical products delivered to customer warehouses and had virtually no profit margin. Operating revenue consisted primarily of customized orders delivered to pharmacies and other provider customers. The Complaint alleges that in November 2001, with Miller's approval and Beaulieu's knowledge, Cardinal implemented an undisclosed internal practice, under which it reclassified any revenue from the sale of bulk product held on its premises for 24 hours or longer as operating revenue. The Complaint alleges that Jensen became aware of this undisclosed practice and its impact on operating revenue after becoming Cardinal's controller in August 2002. Shortly after implementing this practice, as the Complaint describes, Cardinal began to intentionally hold bulk inventory orders on its premises for longer than 24 hours in certain quarters, in order to convert the sale of this product from bulk revenue to operating revenue (the 24-Hour Lever). The Complaint alleges that Miller decided when to use the 24-Hour Lever and that Beaulieu and Jensen participated in deciding to activate the 24-Hour Lever, based on the strength or weakness of Cardinal's quarterly sales. Miller, Jensen, and Beaulieu used the 24-Hour Lever, along with other revenue and earnings management practices, to fraudulently overstate Cardinal's reported operating revenue and earnings.
According to the Complaint, Miller, Jensen, and Beaulieu manipulated Cardinal's reported earnings by selectively accelerating, without disclosure, the payment of vendor invoices in order to prematurely record a cumulative gross total of $133 million in cash discount income. The Complaint further alleges that, at different times, and to varying degrees, Miller, Jensen, and Beaulieu also boosted Cardinal's reported earnings by improperly creating and using a general reserve account and approving improper adjustments to other reserve accounts. The Complaint alleges that these improper reserve practices contributed to Cardinal's approximately $65.9 million overstatement of its net earnings from fiscal years 2000 through 2004. According to the Complaint, Miller also advocated for and approved the improper classification of $22 million in anticipated litigation settlement proceeds, which enabled Cardinal to meet its earnings targets in two quarters.
The Complaint alleges that Miller, Jensen, and Beaulieu each: violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Exchange Act Rule 10b-5; violated the falsification of accounting records and circumvention of internal controls provision of the Exchange Act, Section 13(b)(5), and Exchange Act Rule 13b2-1; and aided and abetted Cardinal's violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Complaint also alleges that Miller and Jensen each signed one or more materially false and misleading management representation letters to Cardinal's auditor in violation of Exchange Act Rule 13b2-2 and that Miller signed officer certifications to Cardinal's periodic filings in violation of Exchange Act Rule 13a-14.
Without admitting or denying the allegations set forth in the Commission's Complaint, Miller, Jensen, and Beaulieu have consented to the entry of orders permanently enjoining them from engaging in the violations set forth above. Miller agreed to an order imposing a $120,000 civil penalty against him and prohibiting him from acting as an officer or director of a public company for a period of five years. Jensen agreed to an order imposing a $75,000 civil penalty and prohibiting him from acting as an officer and director of a public company for three years. Beaulieu agreed to an order imposing a $50,000 civil penalty and prohibiting him from acting as an officer or director of a public company for three years. The settlements are subject to the approval of the United States District Court for the Southern District of New York.
In addition, separately, without admitting or denying the Commission's findings, Miller has consented to the institution of administrative proceedings pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant, with a right to re-apply after five years, based on the anticipated entry of the injunction. Without admitting or denying the Commission's findings, Jensen and Beaulieu also have consented to the institution of administrative proceedings pursuant to Rule 102(e)(3), suspending them from appearing or practicing before the Commission as accountants, with a right to re-apply after three years, based on the anticipated entry of the injunctions.
On July 26, 2007, the Commission filed a related action against Cardinal, in which it consented to the entry of an order enjoining it from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and agreed to pay a $35 million penalty. For more information about that action, see Commission Litigation Release Number 20212 (July 26, 2007). [SEC v. Richard J. Miller, Gary S. Jensen, and Michael E. Beaulieu, United States District Court for the Southern District of New York, Civil Action No. 09-CV-4945 (S.D.N.Y.] (LR-21058; AAE Rel. 2977)
U.S. District Court Enters $265,924 Default Judgment Against Defendant Gerald L. Brodsky for Insider Trading
A federal judge in New York, on a complaint brought by the Securities and Exchange Commission, has imposed the maximum civil penalty for insider trading on defendant Gerald L. Brodsky (Brodsky) for acting on a tip from his daughter to realize $63,400 in unlawful trading profits in the securities of Freescale Semiconductor, Inc. (Freescale). On May 21, 2009, Judge P. Kevin Castel of the United States District Court for the Southern District of New York ordered Brodsky to surrender his profits along with prejudgment interest, plus a penalty equal to three times those profits, for a total of $265,924. Judge Castel also enjoined Brodsky from further violations of the antifraud provisions of the United States securities laws.
The complaint alleged that by using the inside information, Brodsky violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Brodsky did not defend against the charges and the judgment was entered as a default. See also Litigation Release No. 20,603 (May 29, 2008). [SEC v. James E. Gansman, et al., Civil Action No. 08-CV-4918 (PKC)(S.D.N.Y)] (LR-21059)
Immediate Effectiveness of Proposed Rule Change
The Options Clearing Corporation filed a proposed rule change (SR-OCC-2009-09) under Section 19(b)(3)(A)(i) of the Securities Exchange Act of 1934, which proposed rule change became effective upon filing, that certifies security futures contracts on two exchange-traded funds based on broad-based stock indices as eligible contracts for purposes of OCC/CME cross-margining. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59945)
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