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U.S. Securities and Exchange Commission

SEC News Digest

Issue 2010-111
June 16, 2010


SEC Charges Former Chairman of Major Mortgage Lender With $1.5 Billion Securities Fraud and Related Tarp Scheme

The Securities and Exchange Commission today charged the former chairman and majority owner of what was once the nation's largest non-depository mortgage lender with orchestrating a large-scale securities fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).

The SEC alleges that Lee B. Farkas through his company Taylor, Bean & Whitaker Mortgage Corp. (TBW) sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas also was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company - Colonial BancGroup, Inc. - issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.

"As the country's mortgage markets began to falter, Farkas arranged the sale of more than one billion dollars worth of mortgage loans and securities he knew to be fictitious or impaired," said Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement. "Farkas also lied about a sham equity investment he engineered to defraud U.S. taxpayers and the U.S. Treasury's Troubled Asset Relief Program."

According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas executed the fraudulent scheme from March 2002 until August 2009, when TBW - a privately-held company headquartered in Ocala, Fla. - filed for bankruptcy. TBW was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division (MWLD). Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.

According to the SEC's complaint, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured an officer at Colonial Bank to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.

The SEC alleges that in order to conceal this initial fraudulent conduct, Farkas devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Farkas also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Farkas's misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas caused BancGroup to misstate to investors and TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Contrary to his representations to BancGroup and the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.

The SEC's complaint charges Farkas with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company.

The SEC's case was investigated by William P. Hicks, M. Graham Loomis, Aaron W. Lipson, Yolanda L. Ross and Barry R. Lakas of the Atlanta Regional Office. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development. The SEC brought its enforcement action in coordination with these other members of the Financial Fraud Enforcement Task Force.

The SEC's investigation is continuing.

For more information concerning this enforcement action, contact:

Lorin L. Reisner

Deputy Director, SEC Enforcement Division

(202) 551-4787

Rhea Kemble Dignam - Regional Director

William P. Hicks - Associate Regional Director

SEC's Atlanta Regional Office

(404) 842-7600

(Press Rel. 2010-102)

SEC Proposes New Measures to Help Investors in Target Date Funds

The Securities and Exchange Commission today voted unanimously to propose rule amendments to help clarify the meaning of a date in a target date fund's name and enhance the information provided to investors in these funds as they invest for retirement.

Target date funds are designed to make it easier for Americans to invest for retirement by providing the simplicity for which many investors yearn. They've been marketed as a "set it and forget it" approach to investing. The name of these funds usually includes a date that represents the year in which the investor intends to retire.

The rule changes proposed by the SEC would enable investors to better assess the anticipated investment glide path and risk profile of a target date fund by, for example, requiring graphic depictions of asset allocations in fund advertisements. The rules also would require an asset allocation "tag line" adjacent to a target date fund's name in an advertisement.

"These proposed rule changes would help clarify the meaning of the date in a target date fund and improve the information provided when these funds are advertised and marketed to investors," said SEC Chairman Mary L. Schapiro. "Together these rule amendments are designed to foster investor understanding of target date funds and reduce the possibility that investors will be confused or misled."

Last month, as a first step to address potential investor misunderstanding of target date funds, the SEC issued an Investor Bulletin jointly with the Department of Labor explaining target date funds and various aspects that an investor should consider before investing in one.

The SEC is seeking public comment on the rule amendments proposed today for a period of 60 days following their publication in the Federal Register.



What Are Target Date Funds? - Target date funds are designed to make investing for retirement more convenient by automatically changing the investment mix or asset allocation over time - and thus are intended to free investors from actively changing their asset allocations. Target date funds contain years in their names, which correspond to the year the investor plans to retire.

Most target date funds are designed so that the fund's mix of investments - such as stocks, bonds and cash - will automatically change in a way that is intended to become more conservative as the target date approaches. This automatic asset allocation has been referred to as a fund's "glide path."

Since the inception of target date funds in the mid-1990s, assets held by these funds have grown considerably. Today, assets of target date funds registered with the SEC total approximately $270 billion.

Target date funds have become more prevalent in 401(k) plans because the Department of Labor has designated them as qualified default investment alternatives. That means that employers are protected from liability when investing an employee's contributions in a target date fund, when that employee has not otherwise made an investment choice.

The 2008 Experience - The name of a target date fund often includes a date that reflects the year an investor plans to retire. For example, funds with names like "Portfolio 2030" or "Retirement Fund 2030" are designed for individuals who intend to retire in or near the year 2030.

But, just because target date funds share the same target date does not mean they share similar investment strategies and risks. In fact, the name does not guarantee that a person will have sufficient retirement income at the target date, or that an investor will not lose money.

The financial crisis of 2008 highlighted the volatility and variability even among funds that shared the same target dates. For instance, funds with a target date of 2010 averaged nearly 24 percent in losses in 2008. And, the losses for 2010 funds ranged between approximately 9 and 41 percent. In 2009, the returns continued to vary widely for 2010 target date funds, ranging between approximately 7 and 31 percent, with an average return of approximately 22 percent.

In June 2009, the SEC and the Department of Labor held a joint hearing on target date funds. A number of participants at the hearing raised concerns, particularly regarding investor understanding of the risks associated with, and the differences among, target date funds. One concern raised was the potential for a target date fund's name to contribute to investor misunderstanding about the fund. Another concern raised was whether target date fund marketing materials provided to 401(k) plan participants and other investors may have contributed to a lack of understanding by investors of those funds and their investment strategies and risks.

The Proposed Rules

The Commission today proposed amendments to its mutual fund advertising rules, Securities Act rules 156 and 482 and Investment Company Act rule 34b-1. The rules would address the concerns regarding the potential for investor misunderstanding stemming from target date fund names and marketing materials.

Fund Name and Target Date Asset Allocation

The SEC's proposal would require marketing materials for a target date fund that includes the target date in its name to disclose the asset allocation of the fund among types of investments. The types of investments - such as equity securities, fixed income securities, or cash - would need to appear with the funds name the first time the fund's name is used.

Asset Allocation Table, Chart, or Graph

The SEC's proposal would require marketing materials that are in print or delivered electronically to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund. These proposals would also require that the table, chart, or graph be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation.

Risks and Considerations

The SEC's proposal would require target date marketing materials to include a statement informing the investor:

  • To consider the investor's risk tolerance, personal circumstances, and complete financial situation.
  • That an investment in the fund is not guaranteed and that it is possible to lose money by investing in the fund, including at and after the target date.
  • Whether, and the extent to which, the intended percentage allocations of a target date fund among types of investments may be modified without a shareholder vote.

Antifraud Guidance

The SEC proposed changes to its antifraud guidance to note that a statement in marketing materials suggesting that securities of an investment company are an appropriate investment could be misleading because of:

  • The emphasis it places on a single factor, such as age or tax bracket, as the basis for determining that an investment is appropriate.
  • Representations that investing in the securities is a simple investment plan or requires little or no monitoring.

The proposed amendments to the antifraud guidance would apply to all types of investment companies, including target date funds. (Press Rel. 2010-103) (Rels. 33-9126; 34-62300; IC-29301; File No. S7-12-10)


In the Matter of P&P Research Co., Ltd.

An Administrative Law Judge has issued an Order Making Findings and Revoking Registration by Default (Default Order) in P&P Research Co., Ltd., Administrative Proceeding No. 3-13833. The Order Instituting Proceedings alleged that P&P failed repeatedly to file required annual and quarterly reports while its securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true. It revokes the registration of each class of registered securities of P&P Research Co., Ltd., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-62298; File No. 3-13833)

In the Matter of Institutional Capital Management

On June 9, 2010, the Honorable William Haynes of the Middle District of Tennessee entered an Order permanently enjoining defendants Aaron Donald Vallett (Vallett), a registered representative in Brentwood, Tennessee, and A.D. Vallett & Co., LLC (Vallett & Co.), a state-registered investment adviser, from 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 promulgated thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

In its Complaint, the U.S. Securities and Exchange Commission alleged that between September 2008 and April 2010, Vallett raised $5.5 million from 19 investors by misrepresenting the nature of Vallett & Co.'s investments. Vallett used investor funds to cover personal expenses and to pay investors in his first offering with investment funds intended for his second offering. Vallett also claimed that Vallett & Co.'s investments were for notes to be secured by Vallett's personal and business assets; however, in a recent examination by the Financial Institutions Regulatory Authority, Vallett provided false documentation suggesting that the collateral exceeded the amount raised.

The Court's Order also continued an asset freeze ordered earlier, provided for expedited discovery and, among other provisions, ruled that the issues of whether to order that the defendants pay disgorgement, prejudgment interest thereon and civil penalties will be decided at a later date. Vallett and Vallett & Co. consented to the issuance of the Order without admitting or denying the allegations in the Commission's Complaint. [SEC v. Aaron Donald Vallett and A.D. Vallett & Co. LLC, Case No. 3:10-CV-00551 (M.D. Tenn.)] (LR-21557)

Massachusetts Broker Sentenced to Seven Years in Prison in Connection with Securities Fraud

The Securities and Exchange Commission announced today that on June 15, 2010, Gregg Thomas Rennie, 43, of Quincy, Massachusetts, was sentenced to seven years in prison followed by three years of supervised release in connection with his guilty plea to thirteen counts of securities fraud and one count of wire fraud in a case prosecuted by the United States Attorney's Office in Boston, Massachusetts. In addition, Rennie was ordered to pay $3.78 million in restitution to the victims of his fraud. On Sept. 30, 2009 the U.S. Attorney's Office filed a criminal Information against Rennie, a licensed securities broker, charging that he defrauded investors by selling approximately $3.2 million in purported investments in federally subsidized real estate developments, among other things, and used the investors' funds to pay his own expenses and debts. Rennie pleaded guilty to these charges on Jan. 12, 2010.

The Commission previously filed a civil injunctive action against Rennie based on similar conduct on Jan. 23, 2009. According to the Commission's complaint, from early 2007 through early 2009, Rennie made misrepresentations to several of his clients about investing their money in risk-free "federal housing certificates" that paid up to 12% per year, tax free, and were offered by a real estate investment company based in Boston. In fact, however, the complaint alleges that the investments were completely fictitious and that Rennie had no relationship with the real estate investment company whose name he used. According to the Commission's filings, Rennie defrauded clients who were elderly, including an 89 year old man. The filings allege that Rennie induced some clients to cash out their investments in annuities, incurring substantial surrender charges, in order to invest in his fraudulent program. According to the complaint, Rennie used investor proceeds to pay personal expenses, including a gym membership and liquor, grocery, shoe and department store purchases, and withdrew thousands of dollars in cash from the account where investor funds were sent.

On May 18, 2009, the Commission obtained a final judgment by default against Rennie in which he was enjoined from future violations of the securities laws and ordered to pay disgorgement in the amount of $3,678,377, representing profits gained as a result of the conduct alleged in the Commission's Complaint, prejudgment interest in the amount of $30,653, and a penalty of $500,000.

On May 29, 2009, the Commission instituted administrative proceedings against Rennie based on the entry of the final judgment by default in the civil injunctive action to determine what, if any, remedial action was appropriate and in the public interest. On Aug. 12, 2009, Administrative Law Judge James T. Kelly issued an order by default barring Rennie from association with any broker or dealer or investment adviser. [U.S. v. Gregg Thomas Rennie, Criminal Action No. 09-CR-10285-EFH, (D. Mass.); Gregg Thomas Rennie, Civil Action No. 09-CV-10107 -DPW, (D. Mass.)] (LR-21558)


Separate Account VA WM

An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that Separate Account VA WM has ceased to be an investment company. (Rel. IC-29298 - June 15)

Separate Account VA Z

An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that Separate Account VA Z has ceased to be an investment company. (Rel. IC-29299 - June 15)

Separate Account VA GNY

An order has been issued pursuant to Section 8(f) of the Investment Company Act declaring that Separate Account VA GNY has ceased to be an investment company. (Rel. IC-29300 - June 15)





Modified: 06/16/2010