RULES AND RELATED MATTERS
SEC Approves Amendments to Regulation SHO
The Securities and Exchange Commission adopted amendments to Rule 201 of Regulation SHO to place certain restrictions on short selling when a stock is experiencing significant downward price pressure to promote market stability and preserve investor confidence. The Commission also amended Rule 200(g) of Regulation SHO to add a "short exempt" marking requirement. Publication is expected in the Federal Register during the week of March 1, 2010. (Rel. 34-61595)
In the Matter of Reza Saleh
On March 3, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Reza Saleh (Saleh). The Order finds that Saleh, age 53, has, from at least 2006 until the present, been associated with an investment adviser registered with the Commission (Investment Adviser). The Order further finds that, on Jan. 11, 2010, an agreed permanent injunction was entered against Saleh by the United States District Court for the Northern District of Texas in SEC v. Reza Saleh, et al., Civil Action Number 3:09-CV-01778-M (N.D. Tex). The final judgment permanently enjoins him from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b and 14e-3 thereunder. The Commission's complaint alleged, among other things, that Saleh illegally traded on material, non-public information about a tender offer, which information he learned during the course of his duties for the Investment Adviser.
Based on the above, the Order bars Saleh from association with any investment adviser. Saleh consented to the issuance of the Order without admitting or denying the findings in the Order. (Rel. IA-2993; File No. 3-13806)
Ronnie Eugene Bass, Jr., Sanctioned
Ronnie Eugene Bass, Jr. (Bass), of South Florida, has been barred from association with any investment adviser. The sanction was ordered in an administrative proceeding before an administrative law judge, following a court-ordered injunction against him. In December 2009, Bass was enjoined from violating the antifraud provisions of the federal securities laws. He and entities that he controlled had raised approximately $14.3 million from hundreds of Haitian-American investors, using fraudulent representations as to the safety and terms of the proposed investments. Bass also misappropriated investor funds for personal use. (Rel. IA-2994; File No. 3-13771)
SEC Charges American Equity Investment Life Holding Company, David J. Noble, and Wendy C. Waugaman in Connection With Misleading Disclosure of Related-Party Transaction
On March 3, 2010, the Commission charged David Noble of Longboat Key, Florida, Wendy Waugaman of Waukee, Iowa, and American Equity Investment Life Holding Company (American Equity), based in West Des Moines, Iowa, in connection with misleading disclosure of a related-party transaction in American Equity's 2006 proxy statement. Noble is the founder, Chairman, and former Chief Executive Officer of American Equity, a full service underwriter of fixed annuity and life insurance products through its wholly-owned life insurance subsidiaries. Waugaman is American Equity's current Chief Executive Officer and former Chief Financial Officer and General Counsel.
The SEC's complaint, filed in federal court in Des Moines, alleges that in September 2005, American Equity acquired, for $1, American Equity Investment Service Company, a financing company wholly-owned by Noble. The complaint alleges that this acquisition conferred significant benefits on Noble, which Noble, Waugaman, and American Equity inadequately disclosed. The complaint alleges that, among other things, American Equity disclosed that, immediately prior to the acquisition, Noble received a $2.5 million distribution from the acquired company, but American Equity did not disclose that the acquired company had a large deficit at the time of the distribution. The complaint further alleges that American Equity's acquisition of Noble's company effectively relieved Noble of substantial potential personal liability for the acquired company's debts. According to the complaint, American Equity's 2006 proxy statement disclosure about the acquisition was materially misleading because it failed to fully disclose these financial benefits to Noble. The complaint also alleges that American Equity's proxy statement disclosure relating to Noble's compensation, which described Noble as modestly compensated and unwilling to accept additional salary or bonus, was materially misleading in light of the significant benefits he received from American Equity's acquisition of the company owned by Noble.
Noble, Waugaman, and American Equity settled the charges without admitting or denying the allegations of the SEC's complaint. Under the settlement, Noble, Waugaman, and American Equity agreed to be permanently enjoined from committing future violations of the provisions of the federal securities laws that prohibit materially false or misleading statements or materially misleading omissions in proxy statements. Additionally, Noble will pay a $900,000 penalty and Waugaman will pay a $130,000 penalty. American Equity has also agreed to certain undertakings in connection with the settlement. [SEC v. American Equity Investment Life Holding Company, David Noble, and Wendy Waugaman, Case No. 4:10-cv-87, USDC, S.D. Iowa] (LR-21431)
SEC Halts $14.7 Million Ponzi Scheme Targeting Retired Bus Operators
The Securities and Exchange Commission today announced that it has obtained an asset freeze and other emergency relief to halt an ongoing Ponzi scheme targeting retired bus drivers living in the Los Angeles area.
The Commission alleges that Thomas L. Mitchell, (Mitchell), through his investment advisory firm Mitchell, Porter & Williams, Inc. (MPW), operated two entities, the Adivanala AA Investment Trust (the AAA Trust) and AB3, Inc., (AB3), which collectively raised at least $14.7 million from 82 MPW clients nationwide.
The Commission's complaint alleges that MPW's clients, many of whom are recently retired bus operators, were referred to the firm by former colleagues. According to the complaint, Mitchell met with the clients, and encouraged them to take their retirement pensions as a lump sum payment, rather than a monthly annuity. The complaint alleges that Mitchell advised MPW's clients to invest their retirement money in a promissory note offered by the AAA Trust and AB3. The complaint further alleges that the promissory note offering carried fixed interest returns ranging between 10-15% per year for 3-6 year terms. The complaint alleges that Mitchell made various claims to investors as to how he could generate such large returns, including investing in stocks, bonds, and real estate.
The Commission's complaint, which was filed in federal court in Los Angeles, alleges that, rather than making any actual investments, Mitchell and the other defendants in fact operated a Ponzi scheme, in which new investor money was used to pay interest to existing investors. The complaint alleges that between April 2009 and December 2009, the AAA Trust raised approximately $1.4 million from 6 investors. According to the complaint, $1.1 million of these funds were used to pay interest to existing investors, and another $300,000 was diverted to MPW, which Mitchell used to pay his living expenses. The complaint alleges that during this time, the AAA Trust only invested $32,000 worth of investor funds.
On March 3, 2010, the Honorable Philip S. Gutierrez, United States District Judge, granted the Commission's application for a temporary restraining order against the defendants and issued orders freezing their assets and prohibiting the destruction of documents. On March 16, 2010, the Court will hold a hearing on the Commission's motion for a preliminary injunction.
The Commission's complaint charges defendants with violating the antifraud, securities registration and broker-dealer registration provisions of the federal securities laws. In addition to the emergency relief, the Commission seeks preliminary and permanent injunctions, disgorgement, prejudgment interest, and financial penalties. [SEC v. v. Mitchell, Porter & Williams, Inc., The Adivanala AA Investment Trust, AB3, Inc., Thomas L. Mitchell, United States District Court for the Central District of California, Case No. 10-CV-01576 PSG (FFM)] (LR-21432)
SEC Charges Nationally Known Psychic in Multi-Million Dollar Offering Fraud
On March 4, 2010, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Sean David Morton, a nationally-recognized psychic who bills himself as "America's Prophet," and three corporate entities that Morton co-owns, for engaging in a multi-million dollar offering fraud. Beginning in or around the summer of 2006, Morton solicited individuals to invest in one of several companies he and his wife, Melissa Morton, controlled - defendants Vajra Productions, LLC, 27 Investments, LLC, and Magic Eight Ball Distributing, Inc. (referred to herein as the Entities and, along with Morton, referred to as the Defendants) - under the umbrella of the Delphi Associates Investment Group (Delphi Investment Group). According to the Commission's complaint, in soliciting these individuals, Morton claimed that he would use his psychic expertise to provide investment guidance to his investing team, and he falsely touted his historical success in psychically predicting the various rises and falls of the market. Morton further claimed that he would use the pooled funds to trade in foreign currencies and distribute pro rata the trading profits among the investors. However, according to the complaint, Morton lied to investors about his past successes, and about key aspects of the Delphi Investment Group, including the use of investor funds and the liquidity of the funds, and that the profits in the accounts were audited and certified. All together, Morton fraudulently raised more than $6 million from more than 100 investors for the Delphi Investment Group.
According to the Commission's complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his psychic abilities. Morton made numerous materially false representations relating to his psychic abilities in order to solicit investors for the Delphi Investment Group. For example, Morton wrote to potential investors in his July 20, 2006 newsletter that: "I have called ALL the highs and lows of the market, giving EXACT DATES for rises and crashes over the last 14 years." (emphasis in original.) The Commission alleges that this assertion, like others Morton made in soliciting investors, is false.
Further, according to the complaint, Morton, who did not seek accreditation status from the Delphi Investment Group investors, placed investor funds in the bank accounts of one of the Entities, and that Morton and/or Melissa Morton, commingled the investors' funds among the Entities' accounts. Additionally, according to the complaint, while Morton promised investors that all of their funds would be used to trade foreign currencies, in fact, he invested only about half of the funds with foreign currency trading firms. Unbeknownst to the investors, instead of investing all of the funds into foreign currency trading firms, Morton, and/or Melissa Morton, diverted some of the investor funds. For instance, the Mortons diverted at least $240,000 of investor funds to their own nonprofit religious organization, Prophecy Research Institute (PRI). Melissa Morton and PRI are named as relief defendants (Relief Defendants) in the complaint.
The Commission's complaint charges each of the Defendants with 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 complaint further charges that the Relief Defendants were unjustly enriched by receiving investor funds. The complaint seeks a final judgment permanently restraining and enjoining the Defendants from future violations of the above provisions of the federal securities laws. The complaint further seeks a final judgment ordering the Defendants, jointly and severally, to disgorge their ill-gotten gains plus prejudgment interest, ordering the Relief Defendants to disgorge their ill-gotten gains plus prejudgment interest, and ordering the Defendants to pay civil penalties. The complaint also seeks a final judgment ordering the Defendants and Relief Defendants to provide a verified accounting. [SEC v. Sean David Morton, Vajra Productions, LLC, 27 Investments, LLC, and Magic Eight Ball Distributing, Inc., defendants, and Melissa Morton and Prophecy Research Institute, relief defendants, Civil Action No. 10-CV-1720 (SDNY) (DC)] (LR-21433)
SEC Charges Former North American Technologies Group, Inc.'s CEO, Rodney E. Wallace, With Misappropriating Over $538,000
On March 3, 2010, the Securities & Exchange Commission filed suit in U. S. District Court in Dallas against Rodney E. Wallace, former CEO of North American Technologies, Inc. (NATG) for misappropriating over $538,000. The Commission charged Wallace with violating or aiding and abetting violations of the antifraud, reporting, books and records, internal controls, lying to accountants and Sarbanes-Oxley certification provisions of the federal securities laws. The Commission also charged Joe B. Dorman, NATG's general counsel and former acting CFO, and John A. Blank, NATG's former controller, with aiding and abetting violations of the internal controls and books and records provisions.
The Commission alleges that between April and November 2008, Wallace misappropriated funds from NATG mostly through reimbursement for fictitious purchases of raw materials he claimed to have made on NATG's behalf. During the period in which Wallace misappropriated NATG's funds, he falsely certified NATG's third quarter Form 10-Q. Wallace also knowingly provided NATG's auditors with phony documents in an attempt to substantiate his purported purchases. The complaint also alleges that Dorman and Blank authorized Wallace's requests and recorded his purported purchases on NATG's books without obtaining appropriate documentation.
Without admitting or denying the Commission's allegations, Dorman and Blank have consented to settlements in which they agree to be enjoined from aiding and abetting future violations of the internal control and books and records provisions. Dorman also agrees to pay a $15,000 civil penalty. In a related administrative proceeding to be instituted pursuant to Section 12(j) of the Exchange Act, NATG consented to the revocation of its securities registration. [SEC v. Rodney E. Wallace, Joe B. Dorman and John A. Blank. Action No. 3:10-cv-440 (United States District Court for the Northern District of Texas, Dallas Division)] (LR-21434); (Administrative Proceeding In the Matter of North American Technologies Group – Rel. 34-61652; File No. 3-13807)
SEC Settles With Aider and Abettor of U.S. Foodservice Financial Fraud
The Securities and Exchange Commission announced today that the U.S. District Court for the District of Columbia, on March 3, 2010, entered a settled Modified Final Judgment as to defendant Anthony Holohan. Holohan is a former employee of a vendor that supplied U.S. Foodservice. The Commission's complaint alleges that Holohan aided and abetted the financial fraud at U.S. Foodservice, Inc. by signing and returning materially false audit confirmations. The Commission's complaint further alleges that U.S. Foodservice personnel contacted Holohan and urged him to sign and return the false confirmation letters to the auditors for U.S. Foodservice. At the time, U.S. Foodservice was a subsidiary of Royal Ahold (Koninklijke Ahold N.V.).
Without admitting or denying the allegations in the Commission's complaint, Holohan agreed to settle the action against him by consenting to a Final Judgment permanently enjoining him from aiding and abetting violations of antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws and imposing a $25,000 civil penalty. Two other defendants settled previously.
The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, and the New York Office of the Federal Bureau of Investigation. [SEC v. Joseph Grendys et al., Civil Action No. 07-120 (DDC)] (LR-21435; AAE Rel. 3118)
INVESTMENT COMPANY ACT RELEASES
The Chile Fund, Inc., et al.
A notice has been issued giving interested persons until March 29, 2010 to request a hearing on an application filed by The Chile Fund, Inc., et al., under Section 6(c) of the Investment Company Act for an exemption from Section 19(b) of the Act and Rule 19b-1 under the Act. The order would permit certain registered closed-end investment companies to make periodic distributions of long-term capital gains with respect to their outstanding common stock as frequently as monthly in any taxable year, and as frequently as distributions are specified by or in accordance with the terms of any outstanding preferred stock that such investment companies may issue. (Rel. IC-29167 - March 2)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by NASDAQ OMX PHLX (SR-Phlx-2010-22) relating to the Linkage pilot 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 March 8. (Rel. 34-61617)
A proposed rule change (SR-NYSE-2010-07) filed by New York Stock Exchange amending NYSE Rule 476 to add a provision for violations relating to failing to observe high standards of commercial honor and just and equitable principles of trade 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 March 8. (Rel. 34-61626)
A proposed rule change filed by NYSE Amex Amending NYSE Amex Rule 476 to Add a Provision for Violations Relating to Failing to Observe High Standards of Commercial Honor and Just and Equitable Principles of Trade has become immediately 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 March 8. (Rel. 34-61627)
A proposed rule change filed by the Chicago Board Options Exchange related to multi-class broad-based index option spread orders (SR-CBOE-2010-019) 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 March 8. (Rel. 34-61628)
Proposed Rule Change
NYSE Amex filed a proposed rule change (SR-NYSEAmex-2010-18) relating to the designation of a "Professional Customer." Publication is expected in the Federal Register during the week of March 8. (Rel. 34-61629)
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