SEC Staff Statement on California IOUs
On July 9, the Securities and Exchange Commission staff today issued the following statement:
The staff of the Securities and Exchange Commission has expressed its belief that California's recently-issued IOUs are "securities" under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities.
California began issuing the IOUs (called "registered warrants" by California) on July 2 to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. The IOUs are obligations of the State of California, are negotiable, and bear interest. The staff's view that the IOUs are securities does not affect California's right to issue or repay the IOUs.
In addition to the antifraud provisions of the federal securities laws, other parts of the federal securities laws also apply to the purchase and sale of the IOUs. Persons acting as intermediaries between buyers and sellers of the IOUs may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges.
Broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs.
Finally, although the IOUs are labeled "registered warrants," they are not registered with the SEC. There is no registration requirement that applies because the IOUs are municipal securities. (Press Rel. 2009-154)
Commission Revokes Registration of Securities of iGenisys, Inc. for Failure to Make Required Periodic Filings
On July 10, the Commission revoked the registration of each class of registered securities of iGenisys, Inc. 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, iGenisys 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 iGenisys, Inc. 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 iGenisys's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against iGenisys in In the Matter of I Join Systems, Inc., et al., Administrative Proceeding File No. 3-13517.
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 I Join Systems, Inc., et al., Administrative Proceeding File No. 3-13517, Exchange Act Release No. 60105 (June 12, 2009). (Rel. 34-60277; File No. 3-13517)
In the Matter of Ameriprise Financial Services, Inc.
On July 10, the Securities and Exchange Commission announced settled enforcement proceedings against Minneapolis-based broker-dealer Ameriprise Financial Services, Inc., for receiving millions of dollars in undisclosed compensation as a condition for offering and selling certain real estate investment trusts (REITs) to its brokerage customers. As part of the settlement with the Commission, Ameriprise will pay $17.3 million in disgorgement and civil penalties.
REITs are entities that invest in different kinds of real estate or real estate related assets such as office buildings, retail stores, and hotels. The Commission's Order finds that Ameriprise demanded and received so called "revenue sharing" payments related to its sales of REITs and failed to disclose the payments as it was required to do pursuant to applicable law. In addition, Ameriprise sold at least $100 million of unregistered shares of one particular REIT, in violation of the registration provisions of the federal securities laws.
The Commission's Order finds that neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of REIT shares, or the conflicts of interest these additional payments created. The Commission's Order also finds that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue sharing payments that gave the appearance that the payments were legitimate reimbursements for services provided by Ameriprise.
The Commission censured Ameriprise and ordered it to cease and desist from committing or causing violations and any future violations of Sections 5(a), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Securities Exchange Act Rule 10b-10. The Commission also ordered Ameriprise to pay $17.3 million in disgorgement and civil penalties. Ameriprise has consented to the issuance of the Commission's Order without admitting or denying the findings contained therein.
The SEC's investigation is continuing. (Rels. 33-9051; 34-60279; File No. 3-13544)
Federal Court Enjoins Cary G. Brody, Colonial Investment Management LLC and Colonial Fund and Orders Disgorgement Totaling More Than $1.4 Million Plus a Civil Penalty Against Brody of $450,000
On July 7, the Honorable P. Kevin Castel, United States District Judge for the Southern District of New York, found after a bench trial that Cary G. Brody and two entities that he controlled, New York hedge fund Colonial Fund LLC and its adviser, Colonial Investment Management LLC, were liable for illegal trading relating to eighteen registered public offerings. The court permanently enjoined the defendants from violating Rule 105 of Regulation M under the Securities Exchange Act of 1934. Judge Castel also ordered defendants to pay disgorgement of over $1.4 million in ill-gotten gains, plus prejudgment interest, and required Brody to pay a civil penalty of $450,000.
In general, Rule 105 seeks to prevent manipulative trading by short sellers prior to registered public offerings and to promote offering prices that are based upon open market prices, determined by supply and demand, rather than by artificial forces. At the time of the violations, Rule 105 generally prohibited short sellers, regardless of intent, from using securities purchased in registered public offerings to cover short sales that occurred during the five business days before the pricing of the offerings (the restricted period).
The Commission's complaint, filed in federal court in Manhattan on Oct.15, 2007, alleged that the defendants violated Rule 105 when they used shares purchased in at least eighteen registered public offerings to cover short sales that they made during the rule's restricted period. The defendants allegedly realized profits in excess of $1.4 million from the illegal trades because Colonial Fund typically sold shares short during the restricted period at prices that were higher than the offering prices and then covered the restricted period short positions with shares purchased at lower prices in the offerings. The complaint also alleged the defendants often structured post-offering trades in an effort to conceal their Rule 105 violations.
In his ruling, Judge Castel found, among other things, that the defendants' Rule 105 violations were complete when Colonial purchased offering stock, that the defendants' post-offering trading could not undo the violations, and that those trades were an effort by the defendants to create the false appearance to third parties and regulators that they had not used shares purchased in public offerings to illegally cover the short positions. Judge Castel further found that defendants acted recklessly with respect to five of the offerings, and knowingly, intentionally, and willfully with respect to the other thirteen offerings. The court imposed a $450,000 civil penalty on Brody, finding that Brody's unlawful actions involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. [SEC v. Colonial Investment Management LLC, Colonial Fund LLC and Cary G. Brody, Civil Action No. 07 Civ. 8849 USDC, SDNY, PKC] (LR-21123)
SEC Freezes Assets of Illinois-Based Hedge Fund Manager Who Was $2 Billion Feeder to Ponzi Scheme
The Securities and Exchange Commission today announced fraud charges and an asset freeze against a Highland Park, Ill.-based hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.
The SEC's complaint, filed in U.S. District Court for the District of Minnesota, alleges that Gregory Bell and Lancelot Management LLC invested more than $2 billion in hedge funds assets with Petters and pocketed millions of dollars in fraudulent fees at the expense of investors in the funds. The SEC's complaint also charges Petters with fraud for perpetrating the massive Ponzi scheme through the sale of notes related to consumer electronics. When Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.
Bell, Lancelot Management, and the hedge funds they manage have never been registered with the SEC or any other regulatory agency.
At the SEC's request for emergency relief for investors, the Hon. Ann D. Montgomery, United States District Court, District of Minnesota, issued a court order freezing all assets of Bell and Lancelot Management as well as relief defendants, including Bell's wife Inna Goldman. Among other things, the court order requires that they repatriate all overseas assets to the United States. Petters was previously charged by the U.S. Attorney for the District of Minnesota in early October 2008, and his assets were frozen at that time. He is in custody awaiting trial.
According to the SEC's complaint, Petters carried out his Ponzi scheme from as early as 1995 through September 2008, promising investors that proceeds from the notes they were sold would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to "Big Box" retailers including such well-known chains as Wal-Mart and Costco. Instead, the "purchase order inventory financing" business was a complete sham, and the vendors secretly returned most investor money back to Petters, who diverted billions of dollars for his own purposes.
The SEC alleges that Petters sold the notes to several feeder funds that in turn raised their investment capital from hundreds of private investors in the U.S. and abroad. Beginning in 2002, Bell and Lancelot Management raised approximately $2.62 billion from hundreds of investors through the sale of interests in three hedge funds they managed (Lancelot Investors Fund, L.P., Lancelot Investors Fund II, L.P., and Lancelot Investors Fund, Ltd.). The investors included individuals, retirement plans, individual retirement accounts, trusts, corporations, partnerships, and other hedge funds. Bell and Lancelot Investment used almost all of the fund assets to purchase notes offered by Petters and his companies.
The SEC's complaint alleges:
The SEC's complaint charges Bell, Lancelot Management and Petters with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also charges Bell and Lancelot Management with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).
The SEC seeks entry of a court order of permanent injunction against Bell, Lancelot Management and Petters, as well as an order of disgorgement, including prejudgment interest and financial penalties. The SEC also seeks an order requiring the relief defendants to disgorge all ill-gotten gains and pay prejudgment interest.
The SEC's investigation is continuing. [SEC v. Thomas J. Petters, Gregory M. Bell and Lancelot Investment Management LLC, Defendants, and Inna Goldman, Inna Goldman Revocable Trust, Asia Trust Ltd., Blue Sky Trust, and Gregory Bell Revocable Trust, Relief Defendants, Civil Action No. 09 SC 1750 ADM/JSM (D. Minn.)] (LR-21124)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the BATS Exchange (SR-BATS-2009-019) to establish its new Sponsored Access Risk Management Tool service 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 6. (Rel. 34-60236)
A proposed rule change filed by NYSE Arca (SR-NYSEArca-2009-63) amending NYSE Rules 7.31(x) and 7.31(kk) 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 6. (Rel. 34-60262)
The Commission issued notice of filing and immediate effectiveness of a proposed rule change (SR-BATS-2009-022) filed by BATS Exchange under Rule 19b-4 of the Securities Exchange Act of 1934 to amend BATS Rule 11.9, entitled "Orders and Modifiers." Publication is expected in the Federal Register during the week of July 6. (Rel. 34-60266)
A proposed rule change filed by NASDAQ OMX PHLX (SR-Phlx-2009-42) relating to Complex Orders 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 6. (Rel. 34-60267)
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