Closed Meeting - Thursday, January 13, 2011 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Thursday, January 13, will be: institution and settlement of injunctive actions; institution and settlement of administrative proceedings; adjudicatory matters; 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.
In the Matter of Paul George Chironis
On January 6, the Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the Securities Exchange Act of 1934, and Section 9(b) of the Investment Company Act as to Paul George Chironis (Order). The Commission previously instituted administrative and cease-and-desist proceedings against Chironis on April 23, 2010. The Order finds that, between January 2007 and January 2008, Chironis defrauded the Sisters of Charity of New York (Sisters), a congregation of mostly elderly nuns based in the Bronx, New York, by churning two accounts owned by the Sisters, which held primarily mortgage backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac (MBS), as well as certain closed-end bond funds.
The Order finds that between January 2007 and January 2008, Respondent charged excessive and fraudulent undisclosed markups and markdowns on riskless principal transactions. Specifically, the Sisters were charged an average undisclosed markup of 3.68% on 46 purchases of MBS and corporate bonds, and an average disclosed markup of 3.03% on 33 closed-end bond fund purchases, while also being charged an average undisclosed markdown of 1.92% on 67 MBS and bond sales and an average disclosed markdown of 1.86% on 15 closed-end bond fund sales. The Order further finds that Chironis churned the Sisters' accounts. Over the relevant time period, the Sisters were charged 10.8% of the value of the accounts, while simultaneously holding relatively low-yielding securities that had little chance of generating sufficient profits or income to make up for the costs being charged.
The Order finds that Chironis willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Based on the above, the Order bars Chironis from association with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, municipal advisor nationally recognized statistical ratings agency, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter.
Additionally, Chironis will pay a $100,000 civil penalty and $250,000 disgorgement. Both the civil penalty and the disgorgement will be distributed to the Sisters of Charity via a Fair Fund. Respondent Paul George Chironis consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rels. 33-9170; 34-63661; IC-29548; File No. 3-13869)
Commission Denies Attorney Steven Altman's Motion for Reconsideration and a Stay
The Commission has denied attorney Steven Altman's motion for reconsideration and a stay of its November 10, 2010 opinion and order permanently denying him the privilege of appearing or practicing before it pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice and Section 4C of the Securities Exchange Act of 1934. (Rel. 34 63665; File No. 3 12944)
SEC Charges Former Officers of Sterling Financial Corp. Subsidiary for Conducting Financial Fraud
The Commission announced that, on Jan. 6, 2011, it filed a civil action in the United States District Court for the Eastern District of Pennsylvania against Joseph M. Braas, of Lititz, Pennsylvania, and Michael J. Schlager, of Lancaster, Pennsylvania. The Commission's complaint alleges that Braas and Schlager, two senior officers at Equipment Finance, LLC (EFI), formerly a commercial lender to the soft pulp logging industry and wholly-owned subsidiary of Sterling Financial Corp. (Sterling), conducted a financial fraud that lasted over five years. Sterling was a publicly traded bank holding company based in Lancaster, Pennsylvania. Without admitting or denying the Commission's allegations, Braas and Schlager have agreed to settle the matter. The settlements are pending final approval by the court.
The Commission's complaint alleges that, from at least February 2002 until April 2007, Braas, EFI's Vice President and Chief Operating Officer, and Schlager, EFI's Executive Vice President, orchestrated a pervasive and wide-ranging scheme using fraudulent underwriting and reporting practices to hide mounting losses and defaults within EFI's commercial loan portfolio from Sterling's senior management and auditors.
The Commission further alleges that Braas and Schlager were able to subvert virtually every aspect of EFI's loan process and internal controls. They created fictitious loans for the purpose of making monthly payments on delinquent loans, altered loan documents to hide delinquent and fictitious loans, granted excessive deferrals and resets of delinquent loans to make them appear current, reassigned loan payments to unrelated accounts to fund payments on delinquent loans, and used aliases for borrowers to circumvent EFI's maximum lending limitations. They also deceived Sterling's internal and independent auditors through fraudulent accounting entries, false collateral descriptions and appraisals, fabricated UCC filings, and by recruiting vendors to assist in the circumvention of loan confirmation procedures.
As alleged in the complaint, Braas and Schlager caused EFI to report false financial information to Sterling which, in turn, from 2002 through 2006, filed quarterly and annual reports with the Commission containing materially false and misleading financial statements. As a result of the fraud, Sterling ultimately charged off $281 million of EFI finance receivables, which represented a large majority of EFI's loan portfolio, and approximately 13 percent of Sterling's total loan portfolio during the period of the fraud.
Braas and Schlager have consented to the entry of orders permanently enjoining them from violating Section 17(a) of the Securities Act of 1933; Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder. The orders will bar Braas and Schlager from serving as officers or directors of a public reporting company. Braas will also be ordered to pay disgorgement and prejudgment interest of $1,489,024, and Schlager ordered to pay disgorgement and prejudgment interest of $1,121,302. In view of each defendant's agreement to pay restitution in conjunction with his guilty plea in a related criminal case filed by the U.S. Attorney's Office for the Eastern District of Pennsylvania [USA v. Braas, et al., Crim. No. 10-cr-00753-PD (E.D. Pa. Nov. 18, 2010)], the ordered amounts shall be deemed satisfied upon the entry of a restitution order in the criminal case that is equal to or greater than the amounts ordered in the Commission's case.
The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation. [SEC v. Joseph M. Braas and Michael J. Schlager, Case No. 11-cv-0087-PD (E.D. Pa.)] (LR-21797; AAE Rel. 3223)
SEC Charges Investment Firm With Illegally Dumping Billions of Penny Stock Shares
The Securities and Exchange Commission today charged Gendarme Capital Corporation (Gendarme) and its two executives with engaging in an illegal stock distribution scheme.
According to the SEC's complaint, filed today in federal district court in Sacramento, Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. The SEC alleges Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for "investment purposes only." Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets. Through its two principals - CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. - Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.
The SEC also alleges that Gendarme's outside attorney - Cassandra Armento of Greenwich, N.Y. - violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities. Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.
In its federal court action, the SEC alleges Gendarme, Rahimi, Lamphere, and Armento violated Sections 5(a) and (c) of the Securities Act of 1933. Against Gendarme, Rahimi, and Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock. The SEC seeks injunctive relief and monetary penalties against Armento. [SEC v. Gendarme Capital Corp., et al., Case No. 2:11-cv-00053-FCD-KJN (E.D. CA)] (LR-21798)
Court Enters Final Judgment Against Insider Trading Defendant Mitchell L. Sacks
The Commission today announced that on Jan. 3, 2011, Judge Susan D. Wigenton entered a final judgment against defendant Mitchell L. Sacks (Sacks), enjoining him from further violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment also ordered Sacks to disgorge $115,155 plus $85,919.62 in prejudgment interest and to pay a civil penalty of $115,155. Sacks consented to entry of this judgment without admitting or denying the allegations in the Commission's complaint.
The SEC's complaint, filed on April 22, 2004, charged Sacks with insider trading in the securities of C-Cube Microsystems, Inc. (C-Cube). Specifically, the complaint alleges that defendant Alfred S. Teo, Sr. (Teo), a former director of Cirrus Logic, Inc., which had been negotiating to take over C-Cube, misappropriated material, non-public information about the contemplated acquisition of C-Cube and subsequently tipped Sacks about the potential deal. The complaint further alleges that Sacks purchased C-Cube shares prior to the March 26, 2001 public announcement of C-Cube's acquisition by another company and that Sacks shortly thereafter sold those shares at a profit of $115,155. In addition to insider trading in C-Cube by Teo and Sacks, the complaint also alleges: (i) insider trading in the stock of Musicland Stores Corporation based on material, non-public information Teo provided to several other defendants regarding Musicland's acquisition by Best Buy Corporation in December 2000; and (ii) the filing of false and misleading Schedules 13D and other filings regarding the Musicland holdings of Teo and the MAAA Trust, a trust for Teo's children.
Between 2004 and 2007, the Court entered consent judgments against the tippee defendants charged with insider trading in Musicland stock, and in 2010, entered a consent judgment against Teo with respect to his charged insider trading in Musicland and C-Cube stock. The Commission's action against Teo and the MAAA Trust based on the false filing charges continues. [SEC v. Alfred S. Teo, Sr., et al., Civil Action No. 04-Cv-1815 (Sdw) (Mca) (D.N.J.)] (LR-21799)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by New York Stock Exchange to amend the exchange Price List (SR-NYSE-2010-87) 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 January 10. (Rel. 34-63642)
A proposed rule change filed by NYSE Amex amending the exchange Price List (SR-NYSEAmex-2010-125) 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 January 10. (Rel. 34-63644)
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