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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2010-23
February 4, 2010


SEC Issues Notice of Proposed Distribution Plan and Opportunity for Comment in the Matter of Heartland Advisors, Inc., William J. Nasgovitz, Paul T. Beste, Thomas J. Conlin, Greg D. Winston, Kevin D. Clark, Kenneth J. Della, and Hugh F. Denison

The Securities and Exchange Commission announced today that it has given notice, pursuant to Rule 1103 of the Securities and Exchange Commission's Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. S 201.1103, that the Division of Enforcement has filed a proposed plan (Distribution Plan) for the distribution of monies in the matter of Heartland Advisors, Inc., William J. Nasgovitz, Paul T. Beste, Thomas J. Conlin, Greg D. Winston, Kevin D. Clark, Kenneth J. Della, and Hugh F. Denison.

The Distribution Plan provides for distribution of the disgorgement, prejudgment interest, and civil penalties of $3,907,095, plus any accumulated interest, less any federal, state, or local taxes on the interest. The proposed plan provides for distribution of the monies to eligible shareholders of the Heartland Group, Inc. High-Yield Municipal Bond Fund and the Heartland Group, Inc. Short Duration High-Yield Municipal Fund at the close of market on Oct. 13, 2000. Each eligible shareholder shall receive its allocable share of the Distribution Fund calculated by Heartland Advisors, and reviewed and verified by a Fund Administrator, after payment of the Fund Administrator's reasonable fees and reimbursement of the Fund Administrator's reasonable costs and expenses.

A copy of the Distribution Plan may be obtained by submitting a written request to John E. Birkenheier, Esq., Supervisory Trial Counsel, United States Securities and Exchange Commission, 175 W. Jackson Street, Suite 900, Chicago, IL 60604. Interested parties may also print a copy of the proposed Distribution Plan from the Commission's public website, http://www.sec.gov. Any person or entity wishing to comment on the Distribution Plan must do so in writing by submitting their comments within 30 days of the date of the notice (i) to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549-1090; or (ii) via the Commission's Internet comment form (www.sec.gov/litigation/admin.shtml); or (iii) by sending an e-mail to rule-comments@sec.gov. Comments submitted by letter, by e-mail, or by the Commission's website should include the Administrative Proceeding File Number (Admin. Proc. File No. 3-12936) in the subject line. Comments received will be publicly available. Persons should submit only information that they wish to make publicly available. (Rel. 34-61481; File No. 3-12936)

Commission Meetings

Closed Meeting - Thursday, February 11, 2010 - 2:00 p.m.

The subject matter of the Closed Meeting scheduled for Thursday, February 11, will be: institution and settlement of injunctive actions; institution and settlement of administrative proceedings; an adjudicatory matter; and other matters relating to enforcement proceedings.

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.


Securities and Exchange Commission Orders Hearing on Registration Revocation or Suspension Against Tostel Corp. for Failure to Make Required Periodic Filings

On Feb. 3, 2010, the Commission 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 Tostel Corp. for failure to make required periodic filings with the Commission:

  • Tostel Corp. (TSTLF)

In this Order, the Division of Enforcement (Division) alleges that Tostel Corp. is delinquent in its 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 Administrative Law Judge will hear evidence from the Division and the Respondent 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 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of the Respondent 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. 34-61484; File No. 3-13775)

In the Matter of State Street Bank and Trust Company

The Securities and Exchange Commission today filed a settled civil action charging Massachusetts-based State Street Bank and Trust Company (State Street) with securities law violations for misleading investors during the subprime mortgage crisis in 2007 about the extent of subprime mortgage-backed securities held in certain funds under its management, and then selectively disclosing more complete information about subprime investments to certain investors. Investors in the funds lost over $600 million during the subprime market meltdown in mid-2007. State Street has already paid back over $300 million to harmed investors and has agreed to pay over $300 million more to settle the SEC's action, all of which will be returned to investors.

The Commission's complaint alleges that State Street established the Limited Duration Bond Fund (the Fund) in 2002 and marketed it as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives that magnified its exposure to subprime securities. The SEC alleged that State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of the Fund's concentration in subprime investments.

According to the complaint, beginning in July 2007, State Street sent investors a series of misleading communications concerning the effect of the turmoil in the subprime market on the Fund and other State Street funds that invested in the Fund. At the same time, State Street provided certain investors with more complete information about the Fund's subprime concentration and other problems with the Fund. These other investors included clients of State Street's internal advisory groups, which provided advisory services to some of the investors in the Fund and the related funds. According to the Commission's complaint, State Street's internal advisory groups subsequently decided to recommend that all their clients redeem from the Fund and the related funds. The pension plan of State Street's publicly-traded parent company (State Street Corporation) was one of those clients. The Commission alleged that State Street sold the Fund's most liquid holdings and used the cash it received from these sales to meet the redemption demands of better informed investors, leaving the Fund and its remaining investors with largely illiquid holdings.

Without admitting or denying the allegations of the complaint, State Street consented to the entry of a final judgment ordering it to pay a civil penalty of $50 million, disgorgement of $7,331,020, and $1,019,161 in prejudgment interest. These amounts will be paid into a Fair Fund and for the benefit of harmed investors, together with an additional amount of $255,240,472 that State Street has agreed to pay to compensate harmed investors. State Street also gets credit for having already paid over $340 million to some harmed investors through settlements of private actions, resulting in total compensation to injured investors of $663,191,540.

Additionally, State Street agreed to retain an Independent Compliance Consultant to conduct a comprehensive review of the company's disclosures, compliance and other policies and procedures for its pooled investment strategies.

The Commission today also instituted related cease-and-desist proceedings against State Street concerning the same conduct. In connection with these proceedings, State Street agreed to an order requiring it to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) and 17(a)(3) the Securities Act of 1933. For further information, please see Securities Act Release No. 33-9107 (February 4, 2010).

The Commission acknowledges the assistance of the Massachusetts Securities Division and the Massachusetts Attorney General's Office, each of whom filed related actions against State Street. [SEC v. State Street Bank and Trust Company, No. 1:10-CV-10172 (District of Massachusetts] (LR-21408); (Rel. 33-9107; File No. 3-13776)

SEC v. Coadum Advisors, Inc., et al.

The Securities and Exchange Commission announced today that the Honorable Orinda D. Evans, United States District Judge for the Northern District of Georgia has entered final judgment against defendants James A. Jeffery (Jeffery) of Ontario, Canada and Thomas E. Repke (Repke) of Holladay, Utah. The judgment arises from an order granting the Commission's motion for summary judgment against Jeffery and Repke, which also ordered that they pay disgorgement in the amounts of $1,228,739.29 and $2,739,862.33, respectively, along with prejudgment interest thereon. The final judgment further ordered Jeffery and Repke to pay civil penalties in amounts equal to their respective disgorgement. Jeffery and Repke along with defendants Coadum Advisors, Inc. (Coadum), Mansell Capital Partners III, LLC (Mansell), Coadum Capital Fund 1, LLC (Coadum 1), Coadum Capital Fund II, LP (Coadum II), Coadum Capital Fund III, LP (Coadum III) and Mansell Acquisition Company LP (MAC) had previously been permanently enjoined from from future violations of 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. The Court had also previously enjoined defendants Coadum, Mansell, Jeffery and Repke from future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act) [15 U.S.C. 15 U.S.C. SS 80b-6 (1) and (2)]. The order of permanent injunction against all of the defendants was entered on Jan. 25, 2008.

The Court made significant findings of fact and conclusions of law in the final judgment against Jeffery and Repke. Specifically, the Court concluded that the defendants falsely represented to investors that they would receive a return of from 3 to 6% per month, misrepresented that their principal was protected and never left the escrow account; and that Jeffery and Repke failed to disclose that they made loans to themselves from the investor proceeds. The Court also concluded that the defendants transferred the majority of the funds to Exodus Equities, Inc. (Exodus) a Malta based "investment platform" which in turn appeared to have placed the funds in the Exodus Platinum Genesis Fund, Ltd. (Exodus Platinum Fund), a Bermuda hedge fund which had no begun operation, and in "Pre-REIT convertible bonds" which as yet had not provided any return. Furthermore, the final judgment concluded that the defendants falsely represented in monthly account statements to investors that they had earned approximately 4% per month, and that all or most of their principal was in escrow. Finally, the Court found that, without disclosure to investors, defendants Coadum and Mansell through the efforts of Jeffery and Repke also "borrowed" in excess of $3 million of, or against, the investors' funds and fraudulently disbursed approximately $5 million to related parties. The Court ordered defendants Jeffery and Repke to pay disgorgement, prejudgment interest thereon, and their respective civil penalties within 30 days from the entry of the final judgment, by making payment to the court appointed Receiver for the entity defendants. [SEC v. Coadum Advisors, Inc.; Mansell Capital Partners III, LLC; James A. Jeffery; Thomas E. Repke; Coadum Capital Fund 1, LLC; Coadum Capital Fund II, LP; Coadum Capital Fund III, LP; and Mansell Acquisition Company LP, Civil Action File No. 1:08-CV-0011-ODE (N.D. Ga.)] (LR-21406)

Bank of America Agrees to Pay $150 Million to Settle SEC Charges

The Securities and Exchange Commission today filed a motion seeking court approval of a proposed settlement whereby Bank of America will pay $150 million and strengthen its corporate governance and disclosure practices to settle SEC charges that the company failed to properly disclose employee bonuses and financial losses at Merrill Lynch before shareholders approved the merger of the companies in December 2008.

The SEC previously filed two sets of charges in the U.S. District Court for the Southern District of New York alleging Bank of America failed to disclose material information to shareholders prior to their vote to approve the merger with Merrill Lynch. In the first enforcement action on Aug. 3, 2009, the Commission charged Bank of America with failing to disclose, in proxy materials soliciting shareholder votes for approval of the merger, its prior agreement authorizing Merrill to pay year-end bonuses of up to $5.8 billion to its employees prior to the closing of the merger. In the second enforcement action on Jan. 12, 2010, the Commission charged Bank of America with failing to disclose the extraordinary losses that Merrill sustained in October and November 2008.

Under the terms of the proposed settlement, which are subject to approval by the Honorable Jed S. Rakoff, the $150 million penalty will be distributed to Bank of America shareholders harmed by the Bank's alleged disclosure violations. The Commission will propose a distribution plan at a later date.

The proposed settlement requires Bank of America to implement and maintain seven remedial undertakings for a period of three years:

  • Retain an independent auditor to perform an audit of the Bank's internal disclosure controls, similar to an audit of financial reporting controls currently required by the federal securities laws.
  • Have its Chief Executive and Chief Financial Officers certify that they have reviewed all annual and merger proxy statements.
  • Retain disclosure counsel who will report to, and advise, the Board's Audit Committee on the Bank's disclosures, including current and periodic filings and proxy statements.
  • Adopt a "super-independence" standard for all members of the Board's Compensation Committee that prohibits them from accepting other compensation from the Bank.
  • Maintain a consultant to the Compensation Committee that would also meet super-independence criteria.
  • Provide shareholders with an annual non-binding "say on pay" with respect to executive compensation.
  • Implement and maintain incentive compensation principles and procedures and prominently publish them on Bank of America's Web site.

The proposed settlement includes a Statement of Facts describing the details behind the allegations in the actions based on the discovery record.

The SEC is grateful for the support and cooperation of Attorney General Andrew Cuomo and the Office of the New York State Attorney General. The SEC also thanks Attorney General Roy Cooper, Attorney General of the State of North Carolina, and his staff for their collaboration on the terms of the proposed settlement. 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 in the investigation leading to the actions. [SEC v. Bank of America Corporation, Civil Actions Nos. 09-6829, 10-0215 (S.D.N.Y.)] (LR-21407)





Modified: 02/04/2010