Closed Meeting - Monday, January 11, 2010 - 10:30 a.m.
The subject matter of the Closed Meeting held on Monday, January 11, was: post argument discussion.
At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.
In the Matter of Crossroads Financial Planning and Julie Jarvis
On Jan. 11, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Sections 203(e) and 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Crossroads Financial Planning, Inc. and Julie M. Jarvis. The Order finds that, on April 8, 2009, the Commission filed a Complaint in the United States District Court for the Southern District of Ohio alleging that Jarvis and Crossroads misappropriated at least $2.3 million from clients. The Order further finds that, on Dec. 28, 2009, the Court entered permanent injunctions against Jarvis and Crossroads, from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder. The Order also finds that, on May 13, 2009, Jarvis pleaded guilty in the United States District Court for the Southern District of Ohio to a criminal information alleging mail fraud in connection with a scheme to defraud her investor clients.
Based on the above, the Order revokes the registration of Crossroads as an investment adviser and bars Jarvis from association with any investment adviser. Jarvis and Crossroads consented to the issuance of the Order. (See also Litigation Release Nos. 20996 and 21352). (Rel. IA-2975; File No. 3-13741)
SEC v. Edward P. May and E-M Management Co. LLC
The Securities and Exchange Commission announced that on Jan. 7, 2010, the Honorable John Feikens of the United States District Court for the Eastern District of Michigan issued a final judgment against Edward P. May (May), in connection with an $250 million offering fraud that allegedly involved phony Las Vegas casino and resort telecommunication deals that were sold to as many as 1,200 investors, many of whom are senior citizens. May consented to the Order without admitting or denying the allegations of the SEC's complaint. The Court's Order permanently enjoins May from violating Sections 5 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 Order further requires May to pay disgorgement in the amount of $37 million, plus prejudgment interest of $3.8 million, and a civil penalty of $130,000.
The SEC's civil injunctive complaint that was filed on Nov. 20, 2007, alleged that May, through E-M Management Co. LLC (E-M), raised as much as $250 million between 1998 and July 2007 from investors living in such states as Michigan, California, Florida, Illinois, New York, Ohio and New Jersey. According to the allegations of the complaint, May and E-M sold securities in the form of interests in limited liability companies (LLCs), and told investors that these LLCs had been contracted to install and provide telecommunications equipment and services to such major hotel chains and casinos as Hilton, MGM Grand, Motel 6, Tropicana and Sheraton. The complaint also alleged that May and E-M promised returns in the form of monthly payments to investors for a period as long as 12 to 14 years, and "guaranteed" that investors, at a minimum, would receive the promised payments for approximately the first 20 to 24 months after they invested.
The SEC's complaint further alleged that, in reality, the LLCs did not have any telecommunication contracts with the establishments identified in offering materials provided by May and E-M. To further their alleged scheme, May and E-M provided some investors with copies of fictitious contracts with various hotels and casinos. Some of which included the names of purported hotel executives who did not exist. The SEC's complaint alleged that the defendants' conduct violated antifraud and registration provisions of the federal securities laws.
In October 2009, the U.S. Attorney for the Eastern District of Michigan filed an indictment against May, charging him with 59 felony counts of mail fraud. If found guilty on all counts, May faces a statutory maximum sentence of 20 years incarceration on each count of the indictment. The indictment also includes forfeiture allegations which would require May to forfeit $35 million in proceeds of the charged crimes. [SEC v. Edward P. May and E-M Management Co. LLC, Civil Action No. 2:07-cv-14594 (E.D. Mich.) (Feikens, J.)] (LR-21367)
SEC Obtains Injunctions Against Desmond J. Milligan, Jason W. Brola, Market 99 Ltd., f/k/a eCarfly, Inc., Tryst Capital Group, LLC, and Griffdom Enterprises, Inc.
On Dec. 22, 2009, the United States District Court for the Northern District of Texas entered judgments by default against defendants Desmond J. Milligan, Jason W. Brola, Market 99 Ltd. f/k/a eCarfly, Inc., Tryst Capital Group, LLC, all formerly of Dallas, Texas, and Griffdom Enterprises, Inc., a Texas corporation operating from Malibu, California. The court enjoined Milligan, Brola, Market 99 Ltd, and Tryst Capital from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 and Sections 5(a) and 5(c) of the Securities Act of 1933, and enjoined Griffdom Enterprises from violating these same provisions and Section 15(a) of the Exchange Act. The court also ordered Market 99 Ltd. to pay disgorgement and prejudgment interest totaling $658,463, with Milligan jointly liable for $197,029 of the principal amount plus payment of $24,743 in prejudgment interest. The court ordered Brola and Tryst Capital jointly to pay disgorgement and prejudgment interest totaling $1,480,484, and Griffdom Enterprise to pay disgorgement and prejudgment interest totaling $2,007,649. The court ordered each defendant to pay third-tier civil penalties of $120,000 with Brola and Tryst liable jointly for the payment of one penalty. The court also barred Milligan and Brola from acting as officers or directors of public companies. The court also permanently barred these defendants from participating in the offering of penny stocks. The Commission's claims against the remaining defendants, Ryan M. Reynolds, Timothy P. Page, Testre, L.P. and Bellatalia, L.P. have not been resolved. No trial date has been set. [SEC v. Ryan M. Reynolds, Desmond J. Milligan, Jason W. Brola, Timothy T. Page, Market 99 Ltd., f/k/a eCarfly, Inc., Tryst Capital Group, LLC, Griffdom Enterprises, Inc., Testre, L.P. and Bellatalia, L.P., 3:08-CV-1687-M (N.D. Texas)] (LR-21368)
SEC Obtains Emergency Relief to Halt Fraudulent Unregistered Offering Targeting the Los Angeles Iranian-American Community
The Securities and Exchange Commission filed a complaint in the United States District Court for the Central District of California against Beverly Hills, Calif.-based NewPoint Financial Services, Inc.(NewPoint), John Farahi and Gissou Rastegar Farahi (the Farahis), and Elaheh Amouei (collectively, the defendants) to halt the fraudulent, unregistered offering and sale of securities by defendants and to prevent the dissipation of investor funds. The court entered an order halting the alleged fraud and freezing the defendants' assets and those of relief defendant, Triple "J" Plus, LLC (Triple "J"), an entity controlled by the Farahis.
The SEC's complaint alleges that the defendants engaged in an unregistered offering fraud targeting the Los Angeles Iranian-American community. According to the complaint, most investors learned of NewPoint, a corporation controlled by the Farahis, through a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that investors were typically solicited to invest in the debentures by the Farahis and/or Elaheh Amouei, NewPoint's controller, after making an appointment to discuss investment opportunities offered by NewPoint. The SEC's complaint alleges that since at least 2003, NewPoint has offered and sold more than $20 million worth of debentures to more than one hundred investors.
The complaint alleges that the defendants misled investors by falsely telling investors that the NewPoint debentures were low-risk. According to the complaint, many investors were also falsely told that they were investing in FDIC insured certificates of deposit, government bonds, and/or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program, also known as "TARP." The SEC alleges that in reality the vast majority of the money raised was actually transferred to accounts controlled by the Farahis, including an account at relief defendant Triple "J" to, among other things, fund the construction of the Farahis' multi-million dollar personal residence in Beverly Hills, California and to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009.
Finally, the SEC alleges that since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint. Investors have allegedly been told that their money is safe and that they are guaranteed to get the entirety of their investment back -- despite the fact that NewPoint lacks sufficient funds to make all investors whole. The SEC alleges that John Farahi has also paid back some investors on a selective basis while failing to return money to other investors who have asked for a return of their investment. The SEC also alleges that Amouei has falsely told some of the investors who have not received a return of their investment that NewPoint was unable to return their money because the Commission has frozen NewPoint's financial accounts.
In its lawsuit, the SEC obtained an order (1) freezing the assets of NewPoint, the Farahis, and Triple "J"; (2) appointing a temporary receiver over NewPoint and Triple "J"; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple "J"; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of 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 also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple "J." A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for Jan. 15, 2010 at 10:00 a.m. [SEC v. NewPoint Financial Services, Inc., et al., Civil Action No. CV10 0124 DDP (JEMx) (C.D. Cal)] (LR-21369)
SEC Files Settled Insider Trading Charges Against Massachusetts Resident
The Securities and Exchange Commission today filed a settled civil injunctive action alleging insider trading against Brooke D. Wagner, former Vice President of Corporate Communications at Indevus Pharmaceuticals, Inc. (now known as Endo Pharmaceuticals, Inc.), a biotechnology company based in Lexington, Massachusetts. Wagner has agreed to pay a total of over $130,000 in disgorgement of ill-gotten gains, prejudgment interest, and civil penalties to settle the charges.
The Commission's complaint, filed in federal district court in Boston, Massachusetts, alleges that Wagner sold shares of Indevus stock upon learning material non-public information that would have a negative effect on Indevus's stock price. According to the Commission's complaint, on June 4, 2008, Indevus announced that the United States Food and Drug Administration (FDA) had expressed concerns about a potential side effect of a drug for which Indevus was seeking FDA approval, and, as a result, the approval process would be delayed by at least 18 months. On the date of the announcement, the closing price of Indevus stock fell $2.84 per share from the prior day's closing price of $4.10 per share to $1.26 per share, a decline of 69%. The complaint alleges that Wagner and others at Indevus first learned of the FDA's concerns on May 30, 2008, and, on the same day, Wagner entered an order to sell all of his Indevus holdings. The complaint further alleges that, later that day, and again on June 2, 2008, Wagner executed "short sales" of Indevus stock. A "short sale" is a sale of shares that the seller does not own but commits to buying at a later date with the expectation that the share price will drop, thereby allowing the seller to buy shares to "cover" the transaction at a lower price and earn a profit. Wagner purchased shares of Indevus stock to cover his short sales two days after the announcement.
Wagner has agreed to settle this matter, without admitting or denying the allegations in the Commission's complaint, on the following terms. He has consented to the entry of a permanent injunction prohibiting him from violating 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. Additionally, Wagner will disgorge ill-gotten gains of $64,190.46, plus prejudgment interest thereon of $4,741.57, and he will pay a civil monetary payment of $64,190.46. [SEC v. Brooke D. Wagner, No. 10-CV-10031 (District of Massachusetts] (LR-21370)
SEC Authorizes Charges Against Bank of America for Failure to Disclose Extraordinary Losses at Merrill Lynch Prior to Shareholder Vote to Approve Merger
The Securities and Exchange Commission today announced that it seeks to charge Bank of America with failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.
The SEC has asked the U.S. District Court for the Southern District of New York for permission to amend its pending complaint against Bank of America to include the new charges. The agency earlier charged the bank with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. That complaint was amended in October to add a charge for Bank of America's failure to comply with certain affirmative disclosure obligations under the federal proxy rules.
The Commission's proposed second amended complaint alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.
The SEC's proposed second amended complaint, which the court made public today, alleges that Merrill's slumping performance represented a fundamental change to the financial information that Bank of America provided shareholders in a Nov. 3, 2008 proxy statement to solicit their votes for approval of the Merrill Lynch merger on terms that had principally been negotiated in September 2008. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.
The SEC's proposed complaint would allege that Bank of America erroneously and negligently concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The Commission also would allege that the lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. According to the proposed complaint, Bank of America's failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.
In the course of discovery in the pending case against Bank of America and earlier investigation, the Commission's staff reviewed tens of thousands of pages of records, including e-mail and other electronic communications relating to the merger. SEC staff took testimony or conducted investigative interviews of dozens of witnesses, including senior executives, internal counsel, and external counsel of both Bank of America and Merrill Lynch. Pursuant to a stipulation and order entered by the court in October 2009, Bank of America waived all claims of privilege relating to the proxy disclosures made in connection with the merger and several other subjects in order to permit the SEC to conduct a thorough investigation of these subjects, including the actions, advice and communications of counsel.
According to the SEC's proposed complaint, Bank of America executives at various times discussed the firm's disclosure obligations with internal and external counsel. These executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead. Nor is any counsel alleged to have acted with scienter or intent to mislead. For these reasons, the SEC's proposed complaint does not seek charges against any individual officers, directors or attorneys. SEC staff has advised the Commission that, after a careful assessment of the evidence and all of the relevant circumstances, it has determined that charges against individuals for their roles in connection with proxy disclosure are not appropriate.
The SEC's proposed second amended complaint adds an allegation that Bank of America has violated Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote. The filing of the proposed second amended complaint is subject to the approval of the Honorable Jed S. Rakoff, before whom the case is pending. The Commission's authorization of the proposed second amended complaint concludes the investigation of its staff concerning the disclosures made in connection with the solicitation of proxies supporting Bank of America's merger with Merrill Lynch.
The SEC acknowledges the assistance of the U.S. Attorney's Offices for the Southern District of New York and Western District of North Carolina, the Federal Bureau of Investigation, and the Office of The Special Inspector General for the Troubled Asset Relief Program. [SEC v. Bank of America Corporation, Civil Action No. 09-6829 (JSR) (S.D.N.Y.)] (LR-21371)
SEC Charges Florida-Based Father and Son Investment Adviser Team for Their Role in a Massive Hedge Fund Fraud
The Securities and Exchange Commission today filed securities fraud charges against two Sarasota, Florida investment advisers for their roles relating to a large-scale hedge fund fraud perpetrated by Arthur G. Nadel.
The SEC alleges that Neil V. Moody and his son, Christopher D. Moody, distributed materials to investors that overstated the historical returns and asset values of three hedge funds they managed and controlled: Valhalla Investment Partners, L.P.; Viking IRA Fund, LLC; and Viking Fund, LLC (the Moody Funds). Under an arrangement the Moodys had with him, Arthur Nadel provided all of the investment advice to the Moodys' three hedge funds.
According to the SEC's complaint, filed in federal court in Tampa, Florida, from at least 2003 through December 2008, Neil and Christopher Moody disseminated to investors and prospective investors offering materials, account statements, and newsletters that misrepresented the Moody Funds' historical investment returns and overstated their asset values by as much as $160 million. The Moodys made these representations to investors based on grossly overstated performance numbers that Nadel created and provided to them. The Moodys failed to independently verify the accuracy of the performance figures they received from Nadel and relied exclusively on Nadel's information despite multiple red flags that should have caused them to question his figures.
The complaint also alleges that the Moodys misled investors regarding their role in managing the assets of the Moody Funds by claiming that they controlled all of the investment and trading decisions. In truth, Nadel controlled nearly all of the Moody Funds' investment and trading activities with no meaningful supervision or oversight by the Moodys.
The SEC has charged the Moodys with securities fraud and seeks permanent injunctions, disgorgement of illegal gains and financial penalties. Without admitting or denying the SEC's allegations, the Moodys have consented to permanent injunctions against future securities fraud violations. The Moodys also consented to the entry of a Commission order that will bar them for five years from associating with any investment adviser. [SEC v. Neil V. Moody and Christopher D. Moody (U.S. District Court for the Middle District of Florida, Civil Action No. 8:10-CV-0053-T-33TBM] (LR-21372)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-CBOE-2009-098) filed by the Chicago Board Options Exchange relating to exchange fees for Fiscal Year 2010 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 January 11. (Rel. 34-61295)
A proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2009-094) relating to extending the pilot period regarding the use of multiple MPIDs on FINRA Facilities 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 January 11. (Rel. 34-61297)
A proposed rule change (SR-BX-2009-087) filed by NASDAQ OMX BX to amend rules 2240 and 2250 to reflect changes to corresponding FINRA rules 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 January 11. (Rel. 34-61298)
A proposed rule change filed by the Chicago Board Options Exchange (SR-CBOE-2009-102) to amend its Chicago Board Options Exchange Stock Exchange fees schedule has became 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 January 11. (Rel. 34-61303)
A proposed rule change filed by New York Stock Exchange to modify the liquidity credits paid to supplemental liquidity providers (SR-NYSE-2009-133) 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 January 11. (Rel. 34-61309)
A proposed rule change filed by NYSE Amex to modify its liquidity credits and establish separate liquidity credits for supplemental liquidity providers (SR-NYSEAmex-2009-102) 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 January 11. (Rel. 34-61310)
The Commission issued notice of filing and immediate effectiveness of proposed rule change (SR-NYSEArca-2009-116) filed by NYSE Arca pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 amending Rule 2.3. Publication is expected in the Federal Register during the week of January 11. (Rel. 34-61313)
Proposed Rule Change
The Commission issued notice of a proposed rule change submitted by the Chicago Stock Exchange (SR-CHX-2009-18) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to amend its Co-Location Fees. Publication is expected in the Federal Register during the week of January 11. (Rel. 34-61304)
Approval of Proposed Rule Change
The Commission has issued an order approving a proposed rule change (FINRA-2009-072) filed by the Financial Industry Regulatory Authority to amend Rule 12307 of the Code of Arbitration for Customer Disputes and Rule 13307 of the Code of Arbitration for Industry Disputes to clarify the date of filing of an arbitration claim once a deficiency is corrected. Publication is expected in the Federal Register during the week of January 11. (Rel. 34-61311)
SECURITIES ACT REGISTRATIONS
RECENT 8K FILINGS