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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2009-144
July 29, 2009


Announcement from the SEC Investor Advisory Committee

The Securities and Exchange Commission's Investor Advisory Committee, which was formed to give investors a greater voice in the Commission's work, has agreed upon an ambitious and wide-ranging agenda.

At its first meeting Monday, the Committee, consisting of a broad spectrum of investors, identified an array of discussion topics, including:

  • Fiduciary duty: Should all financial intermediaries who provide investment advice to their customers be subject to the same fiduciary duties, and how should those duties be defined? Many investors rely heavily on financial advisors for investment decisions, but may not understand the different fiduciary standards that apply to brokers and investment advisers.

  • Proper disclosures: Does the information that investors currently receive - both before making an investment decision and afterwards - meet their needs, and if not, what changes are necessary to ensure that investors have the information that they need, when they need it?

  • Technology: Can technology be better used to improve the flow of information to and from investors?

  • Financial Literacy: Should there be a distinction between "investor information" and "investor education," and if so, what is that distinction? What is the role of "financial literacy," and how can the SEC promote early education of these issues?

  • Valuation: Do investors fully understand the role that underlying asset valuation plays in portfolio and fund valuation? For example, do investors in variable annuities understand that guaranteed minimum payouts do not necessarily hold if the underlying investments (mutual funds, etc.) decline by a certain amount? Do fixed income investors understand that high yield bond funds involve more risk than other fixed income investments, or that fixed income investments are typically much less liquid and, therefore more difficult to definitively value, than are equities?

  • Majority Voting: Should majority voting for directors be mandatory for all U.S. companies? Although most large U.S. companies have adopted a form of "majority voting," many other companies still enable directors to be elected based only on plurality support.

  • Director-Investor Communications: Are there more effective ways for investors and directors to communicate with one another and what steps can the Commission take to facilitate dialogue and help ensure that corporate manager interests are aligned with investor interests?

  • Proxy Voting: Do investors - both institutional and individual - have the information they need to make informed proxy voting decisions, and are these decisions effective in holding corporate directors accountable? Does the proxy voting process and system foster informed decision-making? Should there be more transparency to the market about investors' proxy decisions? What is the role of proxy advisory firms, and should they be subject to more oversight by the Commission?

  • Resources: Does the SEC have the resources it needs to effectively achieve its investor protection mission?

"The formation of this Committee is a signal of the Commission's renewed focus on investors and I am very pleased with the energy that the Committee members brought to the discussions," noted SEC Commissioner Luis A. Aguilar, who also serves as the Committee's sponsor and chief liaison to the Commission.

"The insights that the Committee members bring will be extremely important to the Commission as we move forward on our investor protection agenda," added SEC Chairman Mary L. Schapiro.

The Investor Advisory Committee's charter provides for a broad scope of interest, including:

  1. Advising the Commission on matters of concern to investors in the securities markets;
  2. Providing the Commission with investors' perspectives on current, non-enforcement, regulatory issues; and
  3. Serving as a source of information and recommendations to the Commission regarding the Commission's regulatory programs from the point of view of investors.

Committee Co-Chairs Richard Hisey from AARP Financial and Hye-Won Choi from TIAA-CREF, in consultation with Commissioner Aguilar and the Commission's Designated Federal Officer, will be forming several subcommittees to help organize the work and bring in additional external expertise.

Materials considered by the Committee at its meeting are posted on the SEC's Web site at http://www.sec.gov/spotlight/
. (Press Rel. 2009-175)


SEC Charges Four Arizona-Based Promoters in $197 Million Mortgage Lending Scheme

On July 28, the Securities and Exchange Commission charged four promoters and a Phoenix-based company with securities fraud for orchestrating a mortgage lending scheme that attracted hundreds of investors by making false and misleading statements about the safety and performance of the investments.

The Commission alleges that the foursome - which includes two certified public accountants, a pharmacist, and a grade school principal - raised more than $197 million from investors nationwide primarily through word of mouth between their friends and relatives. Through their company, Radical Bunny LLC, they pooled investor funds to make loans to Mortgages Ltd., a Phoenix-based originator of high-interest, short-term loans to real estate developers.

According to the Commission's complaint, the four promoters misrepresented how Mortgages Ltd. could use money loaned by Radical Bunny LLC by falsely telling investors that their funds could only be used for commercial development when there were no such restrictions. They also misrepresented to investors that they were closely monitoring Mortgages Ltd.'s financial condition, but they were caught completely unaware of the circumstances that ultimately led to its bankruptcy. Furthermore, they misrepresented to investors that the offering was not subject to the federal securities laws when, in fact, legal counsel had advised them otherwise on at least three separate occasions.

The Commission's complaint, which was filed in federal court in Phoenix, charges Radical Bunny LLC and its four managing members: Tom Hirsch of Paradise Valley, Ariz.; Harish Shah of Phoenix; and Howard Walder and Berta "Bunny" Walder, both of Phoenix. Hirsch and Shah operate an accounting practice together and obtained many investors through their accounting firm. Husband and wife Howard and Berta Walder are by profession a pharmacist and grade school principal, respectively.

According to the Commission's complaint, the foursome primarily communicated with investors through semi-annual meetings held at a luxury golf resort in Scottsdale, Ariz. Investors were provided with presentations about the status of their investments, and they were permitted to invite their friends, family, and others to the meetings as potential investors. Shah particularly solicited investors of South Asian descent, raising approximately $40 million from about 150 families.

The Commission alleges that Hirsch, Shah, and the Walders each made false and misleading statements to persuade people to invest in Radical Bunny, and they falsely represented that Radical Bunny held a secured interest in Mortgages Ltd.'s assets even after their attorneys advised them that such documentation was either non-existent or defective. They also falsely represented that they (particularly Hirsch) had unfettered access to Mortgages Ltd.'s books and records, allowing them to monitor Mortgages Ltd.'s financial condition. However, they ignored the fact that most of Radical Bunny's funds were being shifted into Mortgage Ltd.'s riskier projects to the detriment of the Radical Bunny investors.

The Commission's complaint further alleges that Hirsch received at least $3 million, the Walders received at least $2 million, and Shah received at least $700,000 as part of a "vendor fee" that they claimed to have earned for maintaining accounts for the Radical Bunny investors and facilitating loans to Mortgages Ltd.

Radical Bunny was not registered with the Commission in any capacity and did not register any offering under the securities laws. Therefore, in addition to the securities fraud charges under Section 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, Hirsch, Shah, and the Walders were charged by the Commission with offering and selling unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act and for acting as unregistered broker-dealers in violation of Section 15(a) of the Exchange Act. Radical Bunny also was charged with offering and selling unregistered securities.

In its federal court action, the Commission seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against all of the defendants. [SEC v. Radical Bunny, LLC, Tom Hirsch, Berta Walder, Howard Walder, and Harish Shah, Case No. 2:09-cv-01560-SRB, USDC (D. Ariz.)] (LR-21157)

SEC Charges Promoters and Funds with Operating a Multi-Million Dollar Ponzi Scheme in the United States and Mexico

The Securities and Exchange Commission charged two Southern California individuals, one Mexican citizen, and their four Southern California entities with securities fraud for operating a Ponzi-like investment scheme involving investors in the United States and Mexico and obtained an emergency court order freezing their assets and halting the scheme.

According to the SEC's complaint, which was filed in the Central District of California, Diversity Capital Investments, Inc., Diversity Capital Bancorp de Mexico Ltd. (DCBM), Strong's Capital Investments, Inc., the Optimus Fund, Damian Meneses, 37, Edward Lantz Ferguson, 37, and Joel S. Ley, Jr., 31, raised at least $14 million by promising investors guaranteed returns based on profits from foreign currency trading. In fact, defendants used investor funds to pay other investors' returns, for their own personal use, or sent money to other entities or persons related to them. The defendants are alleged to have diverted funds to at least two individuals, Juan Galindo Flores, 48, and Socorro Terlizzi, 41, who are both named as relief defendants in the action.

The Diversity Capital website claims that it is one of the largest private funds in the market and manages over 1.7 billion dollars. According to the complaint, Meneses promised investors in Diversity Capital that they would receive returns of at least 4% each month from the profits made from foreign currency trading. The SEC alleges that Meneses encouraged investors to refinance their homes and to use the proceeds to invest in Diversity Capital. The complaint alleges, however, that Diversity Capital and its New Zealand affiliate, DCBM, did not generate any profits from foreign currency trading and instead used investor funds to pay earlier investors in a Ponzi-like fashion. According to the complaint, investor funds were also used for personal expenses, including car payments, mortgage payments, meals, travel and retail purchases.

According to the complaint, Ferguson, 37, identified himself to investors as the president of Chula Vista-based Strong's Capital. The complaint alleges that Ferguson told investors in Strong's Capital that he would guarantee them monthly profits of 3% to 8.25%. The complaint alleges that although Ferguson told investors that all of their money would be invested in Diversity Capital, Ferguson used over $500,000 of investor funds to pay out earlier investors and for his own personal use. The complaint alleges that Ley, 31, operated the Optimus Fund out of San Diego and identified himself as the president of the Optimus Fund. According to the complaint, Ley promised investors returns of at least 4% each month and sent out monthly statements reflecting these profits. The complaint alleges that although Ley told investors that all of their money would be invested in Diversity Capital, Ley used some of the money from investors to pay out earlier investors and for his own personal use, including for travel, automobile payments and retail purchases. The complaint alleges that neither Strong's Capital nor the Optimus Fund received any significant or regular payments from Diversity Capital.

On July 27, 2009, the SEC obtained an order (1) freezing the assets of Diversity Capital, DCBM, Strong's Capital, the Optimus Fund, Meneses, Ferguson, and Ley; (2) requiring accountings; (3) prohibiting the destruction of documents; (4) granting expedited discovery; and (5) temporarily enjoining defendants from future violations of the registration and antifraud provisions of the federal securities laws. The order also freezes assets belonging to two relief defendants who are alleged to have received money from the scheme, Flores and Terlizzi. The Complaint alleges that the defendants have 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 SEC seeks permanent injunctions, disgorgement of ill-gotten gains, and civil penalties. A hearing on whether a preliminary injunction should be issued against the defendants is scheduled for August 6, 2009 at 4 p.m. PDT.

The SEC acknowledges the assistance of the Federal Bureau of Investigation, the Commodity Futures Trading Commission, and the California Department of Corporations. [SEC v. Diversity Capital Investments, Inc., et al., Civil Action No. CV 09-5449 ODW (RCX) (C.D. Cal.)] (LR-21158)


GE Funds, et al.

An order has been issued on an application filed by GE Funds, et al. exempting applicants from Section 15(a) of the Investment Company Act and Rule 18f-2 under the Act. The order permits the applicants to enter into and materially amend subadvisory agreements without shareholder approval and grants relief from certain disclosure requirements. (Rel. IC-28839 - July 28)


Immediate Effectiveness of Proposed Rule Change

A proposed rule change filed by NASDAQ OMX PHLX relating to a pilot program for U.S. dollar-settled foreign currency options (SR-Phlx-2009-57) has become effective pursuant to Rule 19b-4 under the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of July 27. (Rel. 34-60392)





Modified: 09/14/2009