SEC Office of the Chief Accountant Releases Staff Accounting Bulletin
The U.S. Securities and Exchange Commission's Office of the Chief Accountant announced today the release of Staff Accounting Bulletin (SAB) No. 112.
This SAB updates the codification of previous SABs by removing material no longer necessary because of private-sector developments in U.S. generally accepted accounting principles, and in particular the Financial Accounting Standards Board's issuance of Statement 141(R), Business Combinations, and Statement 160, Noncontrolling Interests in Consolidated Financial Statements. The SAB also clarifies the basis of accounting for purchased assets and liabilities that should be used when a substantially wholly-owned subsidiary presents separate financial statements.
The statements in SABs are not rules or interpretations of the Commission, nor are they published as bearing the Commission's official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.
Notice of Federal Advisory Committee Establishment
The Commission issued a notice that it intends to establish an Investor Advisory Committee to provide the Commission with the views of a broad spectrum of investors on their priorities concerning the Commission's regulatory agenda. (Rel. 33-9037; Press Rel. 2009-126)
Revocation of Registration of Securities of Lexington Resources, Inc.
The Securities and Exchange Commission announced the revocation of the registration of the securities of Lexington Resources, Inc. (Lexington or the Company), a Nevada corporation, registered with the Commission pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act), on June 4, 2009, pursuant to Section 12(j) of the Exchange Act.
In its Order revoking the registration of securities of Lexington registered with the Commission pursuant to Section 12 of the Exchange Act, the Commission found that Lexington has failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder by failing to file an annual report on Form 10-KSB since May 17, 2007, failing to file quarterly reports on Form 10-QSB for any fiscal period subsequent to its fiscal quarter ending September 30, 2007, and failing to file current reports on Form 8-K disclosing Chapter 7 liquidation proceedings involving Lexington's only prior operating subsidiaries.
The Commission cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the Company.
Further, brokers and dealers should be alert to the fact that 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 pursuant to the preceding sentence.
Without admitting or denying the findings in the Order Instituting Proceedings Pursuant to Section 12(j) of the Securities Exchange Act of 1934, Making Findings, and Revoking Registration of Securities, Lexington consented to the entry of an order finding that it has failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder, and revoking the registration of each class of Lexington's securities registered with the Commission pursuant to Section 12 of the Exchange Act. (Rel. 34-60042; File No. 3-13501)
In the Matter of Merchant Capital, L.L.C.
On June 4, the Securities and Exchange Commission issued of an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b), 15B(c)(2) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Merchant Capital, L.L.C. (Merchant Capital). The Order finds that Merchant Capital violated the gifts and gratuities, fair dealing and supervisory rules of the Municipal Securities Rulemaking Board (MSRB) by paying for travel and entertainment expenses of family members, friends or associates of senior officials at two public finance clients and later receiving reimbursement for such expenses from those clients, including, in certain instances, reimbursement directly from the clients' bond offerings.
The Order instituted against Merchant Capital finds that on five separate trips taken between 2003 and 2005, municipal issuer officials were accompanied to New York City by several family members, friends or associates. Merchant Capital organized the trips and advanced the costs associated with the trips, which involved meals at upscale restaurants, Broadway entertainment, sporting events, and access to car service. Merchant Capital subsequently sought reimbursement for the expenses from the municipal issuers, at times directly out of the bond proceeds. This is the second case filed by the Commission this year alleging violations of the MSRB rules in connection with trips to New York City by guests of municipal issuer officials. On February 24, 2009, the Commission issued an Order against RBC Capital Markets Corporation for similar violations of the MSRB's fair dealing, gifts and gratuities, and supervisory rules. (Rel. 34-59439; File No. 3-13379)
Based on the above conduct, the Order censures Merchant Capital, orders Merchant Capital to cease and desist from committing or causing any violations or any future violations of Section 15B(c)(1) of the Exchange Act and MSRB Rules G-17, G-20 and G-27, and orders Merchant Capital to pay a $55,000 civil penalty. Merchant Capital consented to the issuance of the Order without admitting or denying any of the findings contained therein except for the Commission's jurisdiction over Merchant Capital and the subject matter. (Rel. 34-60043; File No. 3-13502)
Securities and Exchange Commission Orders Hearing on Registration Revocation or Suspension Against Six Public Companies for Failure to Make Required Periodic Filings
The Commission today instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registration of each class of the securities of six companies for failure to make required periodic filings with the Commission:
In the Matter of H-Entertainment, Inc., et al., Administrative Proceeding File No. 3-13503
In this Order, the Division of Enforcement (Division) alleges that the six issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 or 13a-16 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-60044; File No. 3-13503)
In the Matter of Dyadic International, Inc.
On June 4, 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 Dyadic International, Inc. (Dyadic). The Order finds that for fiscal years ended Dec. 31, 2005 and 2006, Dyadic filed periodic reports with the Commission incorporating financial statements that materially misstated its revenues and accounts receivable balances. Specially, in contravention of Generally Accepted Accounting Principles (GAAP), Dyadic improperly recognized revenue from sales made by its wholly-owned subsidiary, Puridet (Asia) Limited (Puridet), overstated Puridet's accounts receivable balances and failed to disclose material related party transactions by Puridet with members of Puridet's management. During this time period, Dyadic did not maintain accurate books and records and had deficient internal accounting controls.
Based on the above, Dyadic was ordered 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 Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. Dyadic consented to the issuance of the Order without admitting o r denying any of the findings in the Order. (Rel. 34-60047; AAE Rel. 2984; File No. 3-13504)
SEC Files Subpoena Enforcement Action Against Restoration Hardware Finance Employee Who Refused to Testify in Insider Trading Investigation
The Securities and Exchange Commission announced today that it filed a subpoena enforcement action in the U.S. District Court for the Northern District of California against Oakland, California resident Lena Yan, an analyst in the finance department at Restoration Hardware, Inc. Pursuant to subpoenas issued by the Commission, Lena Yan was obligated to appear for sworn testimony at the San Francisco Regional Office of the Commission in an insider trading investigation involving Restoration Hardware stock. Yan appeared for testimony on May 6, 2009, but refused to answer all substantive questions by improperly invoking two marital-based privileges. Accordingly, the Commission filed its Application for an Order Requiring Compliance with Administrative Subpoenas.
The Commission's action relates to an investigation into possible insider trading in advance of the Nov. 8, 2007 announcement by Restoration Hardware that it was to be acquired. The investigation has already led to the filing of a civil action against a Restoration Hardware finance vice president and three stock traders entitled SEC v. Francis Elias Axiaq, et al., Civil Action No. C-08-4637-CRB.
According to the Commission's filing today, Lena Yan's husband, Daniel Hew, traded in Restoration Hardware stock prior to the company's Nov. 8, 2007 acquisition announcement, and profited significantly on the dramatic stock price increase triggered by the announcement. Accordingly, the Commission staff is investigating whether, among other things, Lena Yan and others, including her husband Daniel Hew, may have violated the federal securities laws by engaging in fraudulent insider trading in Restoration Hardware stock. In response to the Commission subpoenas, Lena Yan refused to testify substantively and instead asserted various privileges, which the Commission staff contends lacked a legal basis.
Pursuant to its Application, the Commission is seeking an Order from the federal district court compelling Ms. Yan to comply with the Commission's administrative subpoenas and to provide substantive, sworn testimony without asserting any further improper privilege claims.
The Commission notes that it is currently conducting a fact-finding inquiry and has not concluded that anyone has broken the law. [SEC v. Lena Yan, Civil Action No. C-09-80116 MISC WHA (N.D. Cal.)] (LR-21067)
SEC Charges Former Countrywide Executives With Fraud
Former CEO Angelo Mozilo Additionally Charged With Insider Trading
The Securities and Exchange Commission today charged former Countrywide Financial CEO Angelo Mozilo and two other former executives with securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company's market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.
The SEC alleges that Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.
The SEC's enforcement action alleges that from 2005 through 2007, Countrywide engaged in an unprecedented expansion of its underwriting guidelines and was writing riskier and riskier loans, which these senior executives were warned might ultimately curtail the company's ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so.
According to the SEC's complaint, Countrywide's credit risks were so alarming that Mozilo internally issued a series of increasingly dire assessments of various Countrywide loan products and the resulting risks to the company. In one internal e-mail, Mozilo referred to a profitable subprime product as "toxic." In another internal e-mail regarding the performance of its heralded Pay-Option ARM loan, he acknowledged that the company was "flying blind."
"This is the tale of two companies," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as 'toxic,' and said another's performance was so uncertain that Countrywide was 'flying blind.'"
Rosalind Tyson, Director of the SEC's Los Angeles Regional Office, added, "Angelo Mozilo had access to detailed and alarming information about Countrywide's operations. He knew that Countrywide was gambling with increasingly risky mortgages and he kept those details from investors while he was actively taking his own chips off the table."
According to the SEC's complaint, filed in federal district court in Los Angeles, Countrywide's annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide "manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities." Its annual reports for 2005 and 2006 falsely stated that the company ensured its "access to the secondary mortgage market by consistently producing quality mortgages." The annual report for 2006 also falsely claimed that Countrywide had "prudently underwritten" its Pay-Option ARM loans.
The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.
According to the SEC's complaint, Countrywide developed what was internally referred to as a "supermarket" strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, Countrywide's underwriting guidelines were as wide as they had ever been, and Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.
The SEC's complaint alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public.
The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide's increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.
The SEC's complaint alleges that each of the defendants violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and aided and abetted violations of Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint further alleges that Mozilo and Sieracki violated Rule 13a-14 under the Exchange Act. The SEC's complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol. [SEC v. Angelo Mozilo, David Sambol, and Eric Sieracki, (C.D. Cal.), Civil Action No. CV 09-03994 (VBF)] (LR-21068A; AAER No. 3023)
SEC Charges Investor Relations Account Executive and His Tippees for $1.4 Million Insider Trading Scheme
The Securities and Exchange Commission today charged a former account executive of an investor relations firm for repeatedly misappropriating confidential information from firm clients and tipping his current employer and former colleague, who traded on that information and tipped others. As alleged in the Commission's complaint, the defendants reaped more than $1.4 million in total profits through insider trading.
The Commission alleges that Zachary Bryant, a former account executive at the Los Angeles office of Lippert Heilshorn & Associates, Inc., an investor relations firm, routinely learned material information about Lippert's clients before the information was released to the public. The Commission further alleges that Bryant tipped Ahmad Haris Tajyar of Encino, California, in advance of five announcements made by Lippert's clients. The Commission alleges that Bryant and Ahmad Tajyar met as co-workers in 1997, and Ahmad Tajyar later hired Bryant of North Hollywood, California, to work at Investor Relations International, a Los Angeles-based investor relations firm owned by Ahmad Tajyar.
The Commission's complaint, filed in federal court in Los Angeles, alleges that on five separate occasions from at least April 2005 through December 2006 Bryant misappropriated nonpublic information from his firm's clients by illegally tipping Ahmad Tajyar. The complaint further alleges that Ahmad Tajyar traded on the information in his own accounts and in the account of Dionysus Capital, LP, a hedge fund he managed. The complaint alleges that Ahmad Tajyar also tipped his cousin Omar Tajyar and that one of the Tajyars, in turn, tipped and/or traded in the account of a business associate, Vispi Shroff, a certified public accountant. The complaint alleges that the Tajyars, Shroff and Dionysus Capital reaped illegal profits totaling over $1.4 million.
The complaint alleges that the Tajyars, Bryant, and Shroff each violated the antifraud provisions of the federal securities laws, Section 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 is seeking permanent injunctive relief, disgorgement, and civil penalties against all the defendants. The Commission also seeks an officer and director bar against the Tajyars. Finally, the Commission seeks disgorgement from relief defendant, Dionysus Capital, L.P.
The Commission acknowledges the Financial Industry Regulatory Authority, the Chicago Board Options Exchange, and the New York Stock Exchange for their assistance in this matter. The Commission also acknowledges the assistance provided by Lippert during the investigation. [SEC v. Tajyar, et al., United States District Court for the Central District of California, Case No. CV 09-03988 SJO (PJWx) (C.D. Cal. June 4, 2009)] (LR-21069A; AAER No. 3023)
Proposed Rule Changes
NYSE Amex filed a proposed rule change (SR-NYSEAmex-2009-19) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder to adopt rules to implement the Options Order Protection and Locked/Crossed Market Plan. Publication is expected in the Federal Register during the week of June 1. (Rel. 34-60015)
The Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2009-031), relating to the reporting of over-the-counter transactions in equity securities executed outside normal market hours pursuant to Rule 19b-4 under the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of June 1. (Rel. 34-60022)
Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2009-035) to adopt FINRA's temporary and permanent cease and desist authority pilot program on a permanent basis. Publication is expected in the Federal Register during the week of June 1. (Rel. 34-60028)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change submitted by NASDAQ OMX BX (SR-BX-2009-020) regarding market maker obligations. Publication is expected in the Federal Register during the week of June 1. (Rel. 34-60026)
The Commission granted approval to a proposed rule change filed by the Municipal Securities Rulemaking Board (SR-MSRB-2009-04) under Section 19(b)(2) of the Securities Exchange Act of 1934, Relating to the Voluntary Submission of Continuing Disclosure Documents to Its Upcoming Continuing Disclosure Service of the Electronic Municipal Market Access System (EMMA(R)). Publication is expected in the Federal Register during the week of June 1. (Rel. 34-60033)
Accelerated Approval of Proposed Rule Change
The Securities and Exchange Commission has issued a notice and order granting accelerated approval of a proposed rule change filed by the International Securities Exchange (SR-ISE-2009-31) 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 June 1. (Rel. 34-60030)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the International Securities Exchange (SR-ISE-2009-29) 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 June 1. (Rel. 34-60031)
A proposed rule change, as modified by Amendment No. 1 thereto, filed by the NASDAQ Stock Market to establish a new voluntary Flash and Cancel Order (SR-NASDAQ-2009-048) 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 1. (Rel. 34-60037)
A proposed rule change, as modified by Amendment No. 1 thereto, filed by the NASDAQ Stock Market to reduce the length of the optional pre-routing display period for its DOT, SCAN and STGY routing strategies (SR-NASDAQ-2009-050) 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 1. (Rel. 34-60039)
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