SEC Staff Evaluating the Use of Derivatives By Funds
The SEC staff is conducting a review to evaluate the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies. The review will examine whether and what additional protections are necessary for those funds under the Investment Company Act of 1940.
Pending the review's completion, the staff has determined to defer consideration of requests from ETFs for exemptive relief that would allow them to make significant investments in derivatives. The staff's decision will affect new and pending requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives. The deferral does not affect any existing ETFs or other types of fund applications.
"It's only right to engage in a more thorough review of the use of derivatives by ETFs and mutual funds given the questions surrounding the risks associated with the derivative instruments underlying many funds," said SEC Chairman Mary Schapiro.
"Although the use of derivatives by funds is not a new phenomenon, we are concerned that the regulatory protections we have developed over time to protect investors have not kept up with the increasing complexity of these instruments and how they are used by fund managers," said Andrew Donohue, Director of the SEC's Division of Investment Management. "This is the right time to take a step back and rethink those protections."
The staff generally intends to explore issues related to the use of derivatives by funds, including, among other things, whether:
The staff also will seek to determine what, if any, changes in Commission rules or guidance may be warranted.
Registered investment companies enable investors to purchase shares in a portfolio of securities. ETFs are similar to traditional mutual funds, and, like those funds, may seek to track an underlying benchmark or securities index or be actively managed. Unlike traditional mutual funds, shares of an ETF can be traded throughout the day on a securities exchange. In addition, "leveraged" ETFs are index-based ETFs that seek to deliver multiples or inverse multiples of the daily performance of the selected index using swaps and other derivatives. (Press Rel. 2010-45)
Howard A. Scheck Named Chief Accountant in SEC Enforcement Division
The Securities and Exchange Commission announced today that Howard A. Scheck has been named Chief Accountant for the SEC's Division of Enforcement.
Mr. Scheck rejoins the SEC staff from Deloitte Financial Advisory Services LLP, where he has been a partner in the Forensic & Dispute Consulting practice. He previously worked at the SEC for 10 years, including as a Branch Chief in the Division of Enforcement. Mr. Scheck expects to begin in his new position in mid-April.
"Financial statement and accounting fraud are high enforcement priorities for the SEC, and Howard is highly qualified to lead our accounting staff in its relentless pursuit of these wrongful practices that are so harmful to investors," said Robert Khuzami, Director of the SEC's Division of Enforcement."
Mr. Scheck said, "The integrity and transparency of financial reporting is fundamental to investors and other users of public company financial statements. I am honored to have the opportunity to rejoin the Division of Enforcement as Chief Accountant and to contribute to a strong and effective program to prosecute those who would perpetrate and participate in accounting fraud."
As Chief Accountant for the Division of Enforcement, Mr. Scheck will lead the Division's accountants as they provide technical accounting advice and assistance during financial fraud investigations.
As a partner at Deloitte, Mr. Scheck led teams of forensic accountants in conducting accounting and FCPA investigations arising from whistleblower complaints and SEC inquiries. Mr. Scheck also worked with public companies to enhance their antifraud and FCPA compliance programs. Additionally, Mr. Scheck served as a forensic fraud specialist for audit engagements where he participated in antifraud brainstorming efforts and shadow investigations.
Previously at the SEC, Mr. Scheck participated in investigating and pursuing numerous enforcement actions relating to accounting, FCPA, market manipulation, and insider trading. He also wrote an SEC Enforcement Division internal training guide relating to accounting investigations and he regularly trained SEC enforcement lawyers and accountants.
Mr. Scheck earlier served in the audit department of Touche Ross & Co. where he conducted and supervised financial statement audits. His clients included publicly traded manufacturing and financial services companies. Mr. Scheck also served as a Senior Corporate Accountant for a technology company listed on the NYSE.
Mr. Scheck earned his BS/BA magna cum laude in accounting from Boston University, and his JD from the American University Washington College of Law. (Press Rel. 2010-46)
Office of the Chief Accountant Selects Eight Professional Accounting Fellows
The Securities and Exchange Commission's Office of the Chief Accountant has selected eight professional accounting fellows for two-year terms beginning in 2010:
The eight will join the current professional accounting fellows - Wesley R. Bricker, John F. Offenbacher, Sagar S. Teotia and Lisa D. Watson. Outgoing professional accounting fellows are Douglas K. Besch, Brian W. Fields, Douglas T. Parker, Allison M. Patti, Evan B. Sussholz, and Arie S. Wilgenburg.
"I look forward to working with this highly experienced group of professionals as we continue to address the many challenging issues on our agenda. I am confident that their collective experiences and knowledge will help us achieve our goals. I also would like to thank the outgoing professional accounting fellows and wish them the very best as they continue to advance their careers," said James L. Kroeker, SEC Chief Accountant.
At the Commission, the newly selected professional accounting fellows will be involved in the study and development of rule proposals under the federal securities laws, liaison with accounting, auditing and other professional standard-setting bodies, and consultation with registrants on reporting matters. (Press Rel. 2010-47)
Closed Meeting - Thursday, April 1, 2010 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Thursday, April 1, 2010, will be: institution and settlement of injunctive actions; institution of administrative proceedings; 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.
Commission Revokes Registration of Securities of Utopia Marketing, Inc. (n/k/a Daytonabrands, Inc.) for Failure to Make Required Periodic Filings
On March 25, 2010, the Commission revoked the registration of each class of registered securities of Utopia Marketing, Inc. (n/k/a Daytonabrands, Inc.) (Utopia Marketing) for failure to make required periodic filings with the Commission.
Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, Utopia Marketing consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Utopia Marketing, Inc. (n/k/a Daytonabrands, Inc.) finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of Utopia Marketing's securities pursuant to Section 12(j) of the Exchange Act. This order settled the charges brought against Utopia Marketing in In the Matter of U.S. Biomedical Corp. (f/k/a United Textiles & Toys, Inc.), et al., Administrative Proceeding File No. 3-13793.
Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:
No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .
For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of U.S. Biomedical Corp. (f/k/a United Textiles & Toys, Inc.), et al., Administrative Proceeding File No. 3-13793, Exchange Act Release No. 61597 (Feb. 26, 2010). (Rel. 34-61777; File No. 3-13793)
In the Matter of Aaron Tsai
On March 25, 2010, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Notice of Hearing (Order) against Aaron Tsai (Tsai), a resident of Taiwan, based upon the entry of a permanent injunction against him in SEC v. Sierra Brokerage Services, Inc., et al., Civil Action No. C2-03-cv-326 (S.D. Ohio).
On March 31, 2009, the Honorable Algernon L. Marbley of the United States District Court for the Southern District of Ohio granted summary judgment in favor of the Commission and against Tsai, among others, finding him liable for violating Sections 5(a) and 5(c) of the Securities Act of 1933, Sections 13(d)(1) and 16(a) of the Securities Exchange Act of 1934 and Rules 13d-1 and 16a-3 thereunder.
According to the Opinion and Order issued on March 31, 2009 by the District Court, the Court found that Tsai formed MAS in 1996 as a shell company existing only to issue shares of stock and as a vehicle to accomplish a reverse merger. As the CEO, president, and treasurer, Tsai twice transferred ownership of many of MAS's outstanding shares of common stock to purported directors and nominee shareholders. The Court found that no registration statements were filed for any these transfers, that no exemption from registration was available, that Tsai had control and beneficial ownership of the shares he transferred and violated the disclosure requirements by failing to include those shares in required SEC filings. Tsai sold his shares of MAS which became BluePoint stock to others who distributed the stock into the public market without a registration statement in effect.
A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Tsai an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest.
The Order requires the Administrative Law Judge to issue an initial decision no later than 210 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice. (Rel. 34-61778; File No.3-13835)
SEC Charges Wall Street Investment Banker and Securities Industry Professional With Serial Insider Trading Scheme
The Securities and Exchange Commission charged Igor Poteroba, an investment banker at a global financial institution, Aleksey Koval, a securities industry professional, and their friend, Alexander Vorobiev, in a serial insider trading scheme that profited from highly confidential merger and acquisition information. The defendants, all Russian citizens, repeatedly tipped and/or traded on misappropriated inside information to obtain approximately $1 million in illicit profits.
According to the SEC's Complaint, filed yesterday in federal district court in Manhattan, from at least July 2005 through the present, Poteroba, an investment banker in UBS Securities LLC's Global Healthcare Group in New York City, misappropriated from UBS highly confidential inside information about at least eleven impending acquisitions, tender offers, or other business transactions. UBS had been retained as a financial adviser in ten of these transactions, and had been confidentially solicited as a source of capital in the eleventh. The Complaint alleges that, in advance of each transaction, Poteroba tipped his friend and financial professional, Koval (a/k/a Alexei Koval), with inside information concerning the impending transaction. After receiving the inside information, Koval traded on all the deals and tipped Vorobiev, a friend of both Koval and Poteroba, who traded on four of the deals. Based on the information tipped by Poteroba, Koval and Vorobiev traded in stocks and options of the companies targeted for acquisition.
According to the SEC's Complaint, the scheme began in at least July 2005 when Koval and Vorobiev traded in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma, Inc. Using, among other means of communication, coded email messages that referred to securities as "frequent flier miles" and "bonus miles," Poteroba urged Koval to purchase Guilford securities prior to the public announcement of the Guilford acquisition.
With respect to subsequent transactions, the SEC's Complaint alleges that Poteroba also supplied information to Koval using coded email messages that referred to securities or money as Macy's wedding registry gifts or "potatoes." For example, in discussing the need to purchase Molecular Devices Corporation securities prior to the imminent public announcement of its merger, Poteroba wrote to Koval, "Let me know if you've started your wedding registry at Macy's" and "Happy to talk about sales items and etc. . . . sale ends soon . . . so hurry up."
The SEC's Complaint further alleges that, during the course of the scheme, Koval used his home computer or cell phone to access and to trade in Vorobiev's on-line brokerage account. Koval also made cash withdrawals from Vorobiev's bank account using automated teller machines in Pasadena, California and Chicago, Illinois. In addition, Koval and Vorobiev conducted insider trading through brokerage accounts held in their own names. The Complaint also alleges that certain of the insider trading was also conducted through brokerage accounts held in the names of Tatiana Vorobieva, Vorobiev's wife, and Anjali Walter, Koval's wife, and portions of the proceeds from the illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter are named as relief defendants in this action to recover investor assets now in their possession.
According to the SEC's Complaint, Poteroba misappropriated material, nonpublic information from UBS and illegally tipped Koval regarding: (1) Guilford Pharmaceuticals, Inc.; (2) ID Biomedical Corp.; (3) Molecular Devices Corp.; (4) ViaCell, Inc.; (5) Mindray Medical International Limited (trading was in Datascope Corp.); (6) Millennium Pharmaceuticals, Inc.; (7) Sciele Pharma, Inc.; (8) Indevus Pharmaceuticals, Inc.; (9) Advanced Medical Optics, Inc.; and (10) PharmaNet Development Group, Inc. In addition, Poteroba misappropriated and illegally tipped inside information that UBS obtained when it was solicited by Vestar Capital to provide funding for its proposed acquisition of Radiation Therapy Services, Inc.
The SEC's complaint charges the Defendants with violating Section 10(b) of the Exchange Act and Rule 10-b5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against Poteroba, Koval, and Vorobiev, and disgorgement of illicit profits with prejudgment interest from the Relief Defendants. Also, pending before the court is the Commission's application seeking an emergency asset freeze of the Defendants' and Relief Defendants' assets. Today, the court issued an emergency order temporarily freezing the assets of the Defendants and Relief Defendants.
The SEC thanks the U.S. Attorney's Office for the Southern District of New York, the Federal Bureau of Investigation, and FINRA for their cooperation and assistance in connection with this matter. The SEC acknowledges the assistance of the Ontario Securities Commission. The SEC also acknowledges the cooperation of UBS Securities LLC. [SEC v. Igor Poteroba, Aleksey Koval, Alexander Vorobiev, and Relief Defendants Tatiana Vorobieva and Anjali Walter, Civil Action No. 10-civ-2667 (AKH) (S.D.N.Y)] (LR-21460)
Court Enters Final Judgment of Permanent Injunction and Other Relief Against James H. Park
The Commission announced that on March 15, 2010, the Honorable Anne C. Conway of the United States District Court for the Middle District of Florida entered a Final Judgment of Permanent Injunction and Other Relief Against Defendant James H. Park. The final judgment enjoins Park from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. In addition to injunctive relief, the final judgment orders Park to pay disgorgement of $143,031, prejudgment interest of $13,763 and a civil penalty of $130,000. Park consented to the entry of the final judgment without admitting or denying any of the allegations in the Commission's complaint.
The Commission commenced this action on July 1, 2009, by filing an action against Park for his alleged role in a fraudulent pyramid scheme. Wealth Pools International, Inc. (Wealth Pools) purported to be a multi-level marketing company selling a language tutorial DVD through a network of members around the world. The Commission alleged that in reality, it was a fraudulent pyramid scheme premised on the sale of memberships and thus destined to collapse, leaving the majority of investors with substantial losses. The complaint alleged that Park established the telemarketing sales force at Wealth Pools, headed the customer service department, and solicited investors into the fraudulent pyramid scheme. The complaint also alleged that while offering and selling Wealth Pools' securities, Park misled investors about Wealth Pools' business structure, the safety of the Wealth Pools investment, and the dilutive effect on the commissions from the addition of new investors. [SEC v. James H. Park, Civil Action No. 6:09-cv-1137-Orl-22DAB (M.D. Fla.)] (LR-21461)
SEC Charges Three Individuals With Fraud Relating to TVI Corporation
On March 25, 2010, the Commission filed a settled injunctive action in the United States District Court for the District of Maryland against the former CEO and President of TVI Corporation, Richard V. Priddy of Severn, Maryland; the former Executive Vice President of TVI, Charles L. Sample of Annapolis, Maryland; and their personal accountant, J. Michael Broullire of Bethesda, Maryland; for violating the antifraud and other provisions of the federal securities laws. The Commission alleged that, from 2003 through 2006, Priddy and Sample, in some instances aided by Broullire, engaged in multiple schemes to defraud TVI and its shareholders. The schemes involved undisclosed related party transactions and compensation. At the time, TVI was a public company based in Glendale, Maryland, but the Commission revoked TVI's securities registration in a settled proceeding in 2009.
According to the Commission's complaint, in two schemes, Priddy and Sample had Broullire create corporate entities that purchased products from a supplier and then resold the products to TVI at significantly marked-up prices. Priddy also had TVI pay one of the entities a finder's fee for a corporate acquisition even though the entity did nothing to earn the fee. The Commission alleged that Priddy, Sample, and Broullire had agreed to split the ill-gotten profits from their schemes 42.5%, 42.5%, and 15%, respectively. These related party transactions were not disclosed to TVI and, consequently, were not disclosed in TVI's filings with the Commission.
In another scheme, Priddy increased Sample's compensation and Sample kicked-back a portion of the increased compensation to Priddy in return. Neither Priddy nor Sample disclosed to TVI this arrangement or their actual compensation, and, consequently, TVI did not disclose their accurate compensation in its filings with the Commission or in its proxy statements.
Without admitting or denying the allegations in the Commission's complaint, Priddy and Sample have agreed to permanent injunctions from violating Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, and 14a-9 thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder; Priddy also agreed to a permanent injunction from violating Rule 13b2-2 under the Exchange Act; and Broullire agreed to a permanent injunction from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Priddy and Sample each also agreed to a permanent officer and director bar. The settlements are subject to Court approval.
In a related criminal case, the U.S. Attorney's Office for the District of Maryland announced the filing of a criminal information charging the defendants with conspiracy to commit wire fraud in connection with the self-dealing scheme. Priddy and Sample each also are charged with filing a false federal income tax return. The offenses carry possible penalties that include imprisonment, fine, and restitution to the company. [SEC v. Richard V. Priddy; Charles L. Sample; and J. Michael Broullire, Civil Action No. 1:10-cv-00739 (BEL) (D. Md.)] (LR-21462)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by The NASDAQ Stock Market (SR-NASDAQ-2010-038) to permit the concurrent listing of $3.50 and $4 strikes for classes participating in the $0.50 Strike and $1 Strike Programs 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 29. (Rel. 34-61736)
A proposed rule change filed by the International Securities Exchange (SR-ISE-2010-22) to permit the concurrent listing of $3.50 and $4 strikes for classes in the $0.50 Strike and $1 Strike Programs 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 29. (Rel. 34-61737)
A proposed rule change filed by Chicago Board Options Exchange (SR-CBOE-2010-029) relating to delete outdated references in the Exchange fees schedule 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 29. (Rel. 34-61754)
A proposed rule change (SR-Phlx-2010-46) filed by NASDAQ OMX PHLX relating to U.S. dollar-settled foreign currency options 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 29. (Rel. 34-61764)
Proposed Minor Rule Violation Plans
EDGX Exchange, Inc. has filed a proposed Minor Rule Violation Plan (File No. 4-594) pursuant to Section 19(d)(1) of the Securities Exchange Act of 1934 and Rule 19d-1(c)(2) thereunder. Publication is expected in the Federal Register during the week of March 29. (Rel. 34-61752)
EDGA Exchange, Inc. has filed a proposed Minor Rule Violation Plan (File No. 4-595) pursuant to Section 19(d)(1) of the Securities Exchange Act of 1934 and Rule 19d-1(c)(2) thereunder. Publication is expected in the Federal Register during the week of March 29. (Rel. 34-61753)
Proposed Rule Change
The Commission issued notice of filing of a proposed rule change (SR-NYSEArca-2010-16) submitted by NYSE Arca pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, amending Rule 6.37A and Rule 6.64. Publication is expected in the Federal Register during the week of March 29. (Rel. 34-61759)
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