SEC News Digest

ENFORCEMENT PROCEEDINGS

In the Matter of Granite Financial Group, LLC

On Feb. 4, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Granite Financial Group, LLC (Granite). The Order finds that: Granite, a Delaware limited liability company located in San Diego, California, is a registered broker-dealer; from 2003 to 2005, Granite provided securities brokerage services to several investment advisers to hedge funds, including JLF Asset Management, LLC (JLF); on Jan. 19, 2010, a final judgment was entered by consent against Granite, permanently enjoining it from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933, in the civil action entitled SEC v. Travis, et al., Civil Action Number 09-CV-2288 (PKC), in the United States District Court for the Southern District of New York; the Commission's complaint alleged that, Granite paid for the personal expenses of two JLF employees in exchange for the JLF employees directing a significant amount of the JLF Funds' securities trades through Granite; the personal expenses included rent for a JLF employee's residence and car service; Granite received commissions for executing the JLF Funds' trades; and the JLF employees concealed the scheme, and the material conflicts of interest that it created, from the investment adviser's hedge fund clients, which operated as a fraud and deceit on investors.

Based on the above, the Order censured Granite and ordered Granite to hire an independent compliance consultant to review Granite's policies and procedures with respect to the provision of gifts, travel and entertainment by Granite and its employees. Granite consented to the issuance of the Order without admitting or denying any of the findings except as to the entry of the final judgment. (Rel. 34-61502; File No. 3-13777)

In the Matter of David Harrison Baker

On Feb. 4, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against David Harrison Baker (Baker). The Order finds that: from October 2004 to August 2005, Baker was associated with broker-dealer Schonfeld Securities, LLC (Schonfeld); during that time, Baker acted as a sales trader, providing securities trade execution for several investment advisers to hedge funds, including JLF Asset Management, LLC (JLF); on Jan. 19, 2010, a final judgment was entered by consent against Baker, permanently enjoining him from future 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, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, in the civil action entitled SEC v. Travis, et al., Civil Action Number 09-CV-2288 (PKC), in the United States District Court for the Southern District of New York; the Commission's complaint alleged that while associated with Schonfeld, Baker entered into an agreement with employees of JLF whereby Baker agreed to pay certain personal expenses of the JLF employees, in exchange for the JLF employees directing JLF Funds' trades to Baker; Baker earned a portion of the commission that Schonfeld charged the JLF Funds for each executed trade; in 2004 and 2005, the JLF employees directed a substantial number of trades through Baker; at the request of one of JLF's employees, Baker paid personal travel expenses for JLF's employees; and the JLF employees concealed the bribery scheme, and the material conflicts of interest that it created, from the investment advisor's hedge fund clients, which operated as a fraud and deceit on investors.

Based on the above, the Order bars Baker from association with any broker or dealer. Baker consented to the issuance of the Order without admitting or denying any of the findings except as to the entry of the final judgment. (Rel. 34-61503; File No. 3-13778)

In the Matter of Daniel Schreiber

On Feb. 4, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Daniel Schreiber (Schreiber). The Order finds that: Schreiber, is the owner, Chief Executive Officer, and President of Granite Financial Group, LLC (Granite), a registered broker-dealer and a member of FINRA; from 2003 to 2005, Schreiber and Granite provided securities brokerage services to several investment advisers to hedge funds, including JLF Asset Management, LLC (JLF); on Jan. 19, 2010, a final judgment was entered by consent against Schreiber, permanently enjoining him from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933, in the civil action entitled Securities and Exchange Commission v. Travis, et al., Civil Action Number 09-CV-2288 (PKC), in the United States District Court for the Southern District of New York; the Commission's complaint alleged that, Schreiber caused Granite to pay for the personal expenses of two JLF employees in exchange for the JLF employees directing a significant amount of the JLF Funds' securities trades through Granite; the personal expenses included rent for a JLF employee's residence and car service; Schreiber personally profited from the commissions Granite generated for executing the JLF Funds' trades; and the JLF employees concealed the scheme, and the material conflicts of interest that it created, from the investment adviser's hedge fund clients, which operated as a fraud and deceit on investors.

Based on the above, the Order censured Schreiber. Schreiber consented to the issuance of the Order without admitting or denying any of the findings except as to the entry of the final judgment. (Rel. 34-61504; File No. 3-13779)

SEC Will Not Proceed Further Against Broadcom Officers for Backdating Stock Options Based on Rulings and Comments from the Court

On May 14, 2008, the Securities and Exchange Commission filed a civil action in the United States District Court for the Central District of California alleging that Henry T. Nicholas III, Henry Samueli, William J. Ruehle, and David Dull, current or former officers of Irvine, Calif.-based Broadcom Corporation, engaged in a scheme to backdate stock options at the company from 1998 to 2003. The Commission's action was stayed at the request of the United States Attorney's Office pending the criminal trial of Nicholas and Ruehle on related charges.

On Dec. 15, 2009, after the close of the evidence in Ruehle's criminal trial, the Court entered a judgment of acquittal in Ruehle's favor and dismissed with prejudice the stock option backdating indictment against Nicholas. In issuing these decisions, the Court questioned the conduct of the U.S. Attorney's Office and the sufficiency of the evidence. Separately, the Court dismissed the Commission's complaint without prejudice, and discouraged the Commission from proceeding further with its action.

On Jan. 28, 2010, at a hearing on the Commission's motion to clarify the order dismissing its complaint, the Court expressed its view that the evidence adduced during Ruehle's criminal trial and the Court's ruling precluding the testimony of Broadcom's former vice president of human resources would result in insufficient evidence for the Commission to withstand summary judgment motions.

After careful consideration of the Court's sua sponte dismissal of the Commission's complaint on Dec. 15, 2009, and the Court's comments during the Jan. 28, 2010 hearing, the Commission does not intend to proceed further in this action. [SEC v. Henry T. Nicholas III, Henry Samueli, William J. Ruehle, and David Dull, Civil Action No. SACV 08-539 CJC (RNBx) (C.D. Cal.)] (LR-21409)

SEC Obtains Preliminary Injunction Against Massachusetts-Based Operator of Alleged Ponzi Scheme

The Securities and Exchange Commission announced thaton Feb. 4, 2010, it obtained a preliminary injunction, order freezing assets, and other relief in federal district court in Massachusetts against Richard Elkinson in connection with an alleged Ponzi scheme which defrauded investors in at least 12 states. The Commission's complaint, filed as an emergency enforcement action on Jan. 7, 2010, alleges that Elkinson, of Framingham, Massachusetts, lured at least 130 investors to invest approximately $28 million with him through his d/b/a Northeast Sales, which he operated out of his home.

The Commission's complaint alleges that since at least 1997, Elkinson offered and sold unregistered securities in the form of promissory notes. According to the complaint, Elkinson falsely told investors that he was in the business of brokering contracts on behalf of a Japanese firm that manufactured uniforms (such as police uniforms and prison uniforms) to be sold to large purchasers such as state and local governments (and even the U.S. Olympic Committee) and that investors' money would be used to help finance specific uniform contracts. The investors received promissory notes signed by Elkinson, with terms that generally required payment within 300 to 330 days and with an interest rate that ranged from 9% to 13%. According to the complaint, however, Elkinson had no relationship with a Japanese uniform manufacturer, and there were no contracts to purchase uniforms. The Commission alleges that, while some investors did receive payments of principal and interest, those payments were made using funds obtained from other investors, and Elkinson was able to keep the scheme going as long as most of the investors kept rolling over their investments. In reality, according to the complaint, Elkinson used most of the investors' money for his own personal purposes, including gambling.

The Commission's complaint alleges that Elkinson 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 Honorable Joseph L. Tauro issued a preliminary injunction against further violations of the securities laws, an order freezing Elkinson's assets and all proceeds of the misconduct held by others, an order prohibiting the acceptance of additional investor funds, and an order prohibiting the alteration or destruction of relevant documents. (LR-21410)

INVESTMENT COMPANY ACT RELEASES

U.S. One, Inc. and U.S. One Trust

A notice has been issued giving interested persons until Feb. 26, 2010, to request a hearing on an application filed by U.S. One, Inc. and U.S. One Trust for an order to permit (a) series of certain open-end management investment companies to issue shares (Shares) redeemable in large aggregations only (Creation Units); (b) secondary market transactions in Shares to occur at negotiated market prices; and (c) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connection with the purchase and redemption of Creation Units. (Rel. IC-29128 - February 2)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change (SR-ISE-2010-09) filed by International Securities Exchange to add 75 options classes to the Penny Pilot Program 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 February 8. (Rel. 34-61470)

A proposed rule change (SR-NYSEAmex-2010-06) filed by NYSE Amex adding 75 options classes to the Penny Pilot Program 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 February 8. (Rel. 34-61471)

A proposed rule change filed by the National Stock Exchange (SR-NSX-2010-01) to amend the NSX Fee and Rebate Schedule to increase the rebate for liquidity adding displayed orders of securities priced under one dollar in the Auto Execution mode of order interaction to 0.25% of trade value 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 February 8. (Rel. 34-61474)

The Depository Trust Company filed a proposed rule change (SR-DTC-2010-02) under Section 19(b)(1) of the Exchange Act, which became effective upon filing, to establish fees related to Invitation to Cover Short requests. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61476)

The Depository Trust Company filed a proposed rule change (SR-DTC-2010-01) under Section 19(b)(1) of the Exchange Act, which became effective upon filing, to expand its Invitation to Cover Shorts capability to include short positions outside DTC. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61477)

A proposed rule change (SR-CBOE-2010-009) filed by the Chicago Board Options Exchange relating to the Penny Pilot Program 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 February 8. (Rel. 34-61478)

A proposed rule change (SR-NYSEAmex-2010-08) filed by NYSE Amex amending Rule 960NY Trading Differentials 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 February 8. (Rel. 34-61479)

A proposed rule change (SR-Phlx-2010-14), filed by NASDAQ OMX PHLX relating to transaction fees and rebates for options 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 February 8. (Rel. 34-61480)

A proposed rule change filed by The Options Clearing Corporation (SR-OCC-2010-01) to revise OCC's By-Laws and Rules to accommodate options for which the premium and exercise price are expressed as other than a per unit basis has become effective pursuant to Section 19(b)(3)(A)(iii) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61485)

A proposed rule change filed by NASDAQ OMX PHLX deleting obsolete provisions relating to Phlx's quote lock counting period (SR-Phlx-2010-10) 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 February 8. (Rel. 34-61492)

Approval of Proposed Rule Changes

The Commission approved a proposed rule change (SR-FINRA-2009-087) submitted by the Financial Industry Regulatory Authority to repeal NASD Rules 2760 and 2780, Incorporated NYSE Rules 2B and 411, and the Interpretation to Incorporated NYSE Rule 411(a)(ii)(5) as part of the process of developing the consolidated FINRA rulebook. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61473)

The Commission approved a proposed rule change (SR-FINRA-2009-073) submitted by the Financial Industry Regulatory Authority (f/k/a National Association of Securities Dealers, Inc. (NASD)) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 related to the hearing location rules of the Codes of Arbitration Procedure for customer and industry disputes. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61497)

Proposed Rule Changes

The Commission issued notice of a proposed rule change submitted by NASDAQ OMX PHLX (SR-Phlx-2010-18) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to codify pricing for co-location services. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61486)

The Commission issued notice of a proposed rule change submitted by NASDAQ OMX BX (SR-BX-2010-012) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to codify pricing for co-location services. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61487)

The Commission issued notice of a proposed rule change submitted by The NASDAQ Stock Market (SR-NASDAQ-2010-019) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to codify pricing for co-location services. Publication is expected in the Federal Register during the week of February 8. (Rel. 34-61488)

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