SEC Announces $25 Million Distribution of J.P. Morgan Securities Inc. Fair Fund
The Securities and Exchange Commission announced the distribution of $25,033,692 in Fair Funds to Jefferson County, Alabama (County). In a previous SEC enforcement action, on November 4, 2009, the Commission issued an Order finding that J.P. Morgan Securities willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act of 1934, and Municipal Securities Rulemaking Board Rule G-17 in connection with County municipal bond and interest rate swap agreement transactions.
Among other things, the Commission found that J.P. Morgan Securities, through two of its managing directors, made over $8.2 million in undisclosed payments in 2002 and 2003 to local firms whose principals or employees were friends of County public officials. The firms had no official role in the transactions and performed few, if any services. The County officials were instrumental in selecting J.P. Morgan Securities as underwriter, and its affiliated bank as the swap provider, on over $5 billion in bond underwriting and interest rate swap agreement business awarded by the County. J.P. Morgan Securities passed on the costs of the improper payments to the County in the form of inflated interest rates on the swap agreements. These inflated interest rates directly harmed the County by increasing the swap payments it had to make over what it would have paid absent the improper payment scheme.
Pursuant to the Order, J.P. Morgan Securities was censured and ordered to cease and desist from committing or causing any violations and any future violations of the charged provisions. The Commission further ordered J.P. Morgan Securities to pay a $25 million civil penalty and $1 in disgorgement, and authorized the creation of a Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, to distribute the disgorgement and civil penalty paid by Respondent. Under the terms of the settlement, J.P. Morgan Securities also agreed to: (1) comply with a voluntary undertaking by making an immediate $50 million payment to the County; and (2) terminate any and all obligations of the County to make any payments to its affiliated bank under the swap agreements.
Securities Industry Professionals and Attorney Settle SEC Charges in Wall Street Insider Trading Case
The Securities and Exchange Commission today announced that on Feb. 9, 2011, the Honorable John G. Koeltl, United States District Judge for the Southern District of New York, entered final judgments against defendants Jeffrey Glover, Frederick Bowers, Thomas Faulhaber and Eric Holzer in a Commission case alleging widespread insider trading against nine defendants and three relief defendants. These four defendants are the first to settle the Commission's pending civil action and have agreed to pay a total of more than $1.3 million in disgorgement, prejudgment interest and civil penalties.
The Commission's complaint alleges that from at least March 2004 through July 2008, Matthew Devlin, then a registered representative at Lehman Brothers, Inc., traded on and tipped his clients and friends, including individuals in the securities and legal professions, with inside information about 13 impending corporate transactions. As alleged in the complaint, Devlin had misappropriated the inside information from his wife who was employed by a public relations firm working on the deals.
According to the complaint, Glover, an investment adviser and one of Devlin's clients, traded on Devlin's tips about five deals. The complaint alleges that Devlin also tipped his trading partner, Bowers, about three upcoming acquisitions. As alleged in the complaint, Bowers then tipped his client, Faulhaber, who was affiliated with a registered broker-dealer. Faulhaber traded in three deals, and kicked back cash to Bowers. The complaint further charges Holzer, Devlin's friend and a former tax associate in the New York City office of an international law firm, with trading on Devlin's tips in at least three deals. According to the complaint, Devlin and Holzer also agreed that Holzer would arrange for the purchase of shares for Devlin's benefit so Devlin could profit from the nonpublic information but evade scrutiny.
Without admitting or denying the allegations in the complaint, Glover, Bowers, Faulhaber and Holzer settled the Commission's insider trading charges. They agreed to injunctions from violating antifraud provisions, monetary relief and various bars in related administrative proceedings, as described below.
The final judgment against Glover (1) permanently enjoins him from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5 and 14e-3; and (2) orders him to pay disgorgement of $209,356, prejudgment interest of $55,390, and a $306,761 civil penalty. In a related settled administrative proceeding, the Commission barred Glover from associating with any broker, dealer, or investment adviser.
The final judgment against Bowers (1) permanently enjoins him from violating Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3; and (2) orders him to pay a $12,000 civil penalty. In a settled administrative proceeding, the Commission barred Bowers from associating with any broker, dealer, or investment adviser. The Commission's administrative order against Bowers finds that in a parallel criminal case, Bowers pleaded guilty to securities fraud and conspiracy to commit securities fraud and was sentenced to three years probation and ordered to pay a $15,000 fine and forfeit $12,000. U.S. v. Frederick E. Bowers, No. 1:09-cr-00496 (S.D.N.Y.).
The final judgment against Faulhaber (1) permanently enjoins him from violating Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3; and (2) orders him to pay disgorgement of $235,300, prejudgment interest of $50,663, and a civil penalty of $235,300. In a settled administrative proceeding, the Commission barred Faulhaber from associating with any broker or dealer.
The final judgment against Holzer (1) permanently enjoins him from violating Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3; and (2) orders him to pay $52,922 in disgorgement, prejudgment interest of $25,055.04 and a civil penalty of $172,269. In a related administrative proceeding, the Commission forthwith suspended Holzer, a certified public accountant, from appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission's Rules of Practice. The Commission's administrative order finds that in a parallel criminal case, Holzer pleaded guilty to securities fraud and conspiracy to commit securities fraud, felonies involving moral turpitude, and was sentenced to serve five years probation and ordered to pay a fine of $15,000 and forfeit over $119,300. U.S. v. Eric A. Holzer, No. 1:09-cr-00470 (S.D.N.Y.).
The Commission's action against the other defendants and relief defendants is ongoing.
The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation. [SEC v. Matthew C. Devlin, et al., Civil Action No. 08-CV-11001 (SDNY) (JGK)] (LR-21854); In the Matter of Frederick E. Bowers, 34-63901, IA-3157, File No. 3-14253; In the Matter of Thomas Faulhaber, 34-63902, File No. 3-14254; In the Matter of Jeffrey R. Glover, 34-63903, IA-3158, File No. 3-14255)
In the Matter of Global Sentry Equity Transfer, Inc.
On Feb. 14, 2011, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 17A(c)(3) and 21C of the Securities Exchange Act of 1934 (Order) against Global Sentry Equity Transfer, Inc. (Global Sentry), a registered transfer agent.
The Division of Enforcement (Division) alleges in the Order that Global Sentry failed to comply with recordkeeping requirements and to timely file required annual reports in violation of Sections 17(a)(1) and 17A(d)(1) of the Securities Exchange Act of 1934 and Rules 17Ad-6, 17Ad-7, 17Ad-10, 17Ad-19, and 17Ac2-2 thereunder. Specifically, the Division alleges that Global Sentry failed to maintain accurate master security holder files and stock certificates and failed to timely file required reports on Form TA-2 for 2008 and 2009.
A hearing will be scheduled before an administrative law judge to determine whether the allegations in the Order are true, to provide Global Sentry an opportunity to respond to these allegations, and to determine what, if any, remedial action is appropriate in the public interest. The Order directed the Administrative Law Judge to issue an initial decision within 300 days from the date of service of the Order. (Rel. 34-63908; File No. 3-14256)
Securities and Exchange Commission Orders Hearing on Registration Suspension or Revocation Against Six Public Companies for Failure to Make Required Periodic Filings
Today the Commission instituted public administrative proceedings to determine whether to revoke or suspend for a period not exceeding twelve months the registrations of each class of the securities of six companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the six issuers are delinquent in their required periodic filings with the Commission.
In this proceeding, instituted pursuant to Exchange Act Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the Administrative Law Judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The Administrative Law Judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of each class of the securities of these Respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-63912; File No. 3-14258)
In the Matter of Robert F. McCullough, Jr., CPA
On Feb. 15, 1, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Robert F. McCullough, Jr., CPA. The Order finds that on January 26, 2011, a final judgment was entered by consent against McCullough, the Chief Executive Officer and Chief Financial Officer of CytoCore, Inc., in the Commission's civil action against McCullough in United States District Court, enjoining McCullough from violating and aiding and abetting violations of certain provisions of the federal securities laws. The Commission's complaint alleged that, among other things, McCullough directed CytoCore to pay Daniel Burns, a CytoCore consultant that was not affiliated with a registered broker-dealer, commissions in connection with Burns' solicitation of investors for CytoCore. The Commission's complaint further alleged that McCullough failed to disclose numerous personal transactions in CytoCore stock on Forms 4 and in CytoCore's proxy statements, and that he repeatedly misreported his holdings in these filings.
Based on the above, the Order suspends McCullough from association with any broker, dealer, or investment adviser for a period of twelve months. McCullough consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted to the entry of the injunction. (Rels. 34-63913; IA-3159; File No. 3-14259)
Court Lifts Asset Freeze But Imposes Reporting Requirements and Orders Compliance With the Anti-Fraud Provisions of the Securities Laws
On Feb. 14, 2011, in the SEC's ongoing enforcement action against Idaho nuclear power company Alternate Energy Holdings Inc. (AEHI) and its principals, United States District Judge Edward J. Lodge signed an Order lifting the temporary asset freeze that the Court had previously imposed, while putting in place other protective measures for the duration of the litigation. The Order requires AEHI to provide the SEC with a monthly accounting of all expenditures of $2,500 or more, including the purpose of the expenditures and supporting documentation. The Order also prohibits AEHI, Chief Executive Officer Donald L. Gillispie and Senior Vice President Jennifer Ransom from violating, or aiding and abetting violations of, certain provisions of the federal securities laws, including Section 17(a) of the Securities Act and Sections 10(b) and 16(a) of the Exchange Act and Rules 10b-5 and 16a-3 thereunder.
The Court has not ruled on the merits of the SEC's action. The parties are engaged in pre-trial discovery with a trial date remaining to be set. [SEC v. Alternate Energy Holdings, Inc., et al., Civil Action No. 1:10-cv-00621-EJL (S.D. Idaho] (LR-21855)
SEC Charges Monroe L. Beachy in $33 Million Offering Fraud That Targeted Amish
On Feb. 15, 2011, the Securities and Exchange Commission filed a civil injunction action in the United States District Court for the Northern District of Ohio charging Monroe L. Beachy with conducting an unregistered and fraudulent offering of securities that raised more than $33 million. The SEC alleges that Beachy, a 77-year-old Amish man from Sugarcreek, Ohio, targeted his fellow Amish as investors in his fraudulent offering.
The SEC's complaint alleges that from as early as 1986 through June 2010, Beachy, doing business as A&M Investments, raised at least $33 million from more than 2,600 investors through the offer and sale of investment contracts. The vast majority of Beachy's investors were Amish. Beachy enticed investors by promising interest rates that were greater than banks were offering at the time. Many of Beachy's investors treated their investment accounts with Beachy like money market accounts, from which they could withdraw their money at any time. Beachy told his investors that their money would be used to purchase risk-free U.S. government securities, which would generate returns for the investors. In reality, Beachy used the money to make speculative investments in high yield (junk) bonds, mutual funds, and stocks.
The complaint further alleges that Beachy suffered significant losses in investor principal, which Beachy hid from his investors. Beachy mailed his investors monthly account statements showing fabricated rates of return and exaggerated account balances. As of June 2010, Beachy's investors believed, based on the fraudulent monthly statements Beachy had sent them, that they had approximately $33 million invested with Beachy. In reality, less than $18 million of investor money remained. Beachy filed for Chapter 7 bankruptcy on June 30, 2010, and his assets are currently under the control of a Chapter 7 bankruptcy trustee appointed by the bankruptcy court.
The SEC's complaint charges Beachy with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. Beachy has agreed to settle the SEC's charges without admitting or denying the allegations. Beachy has consented to the entry of a final judgment permanently enjoining him from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC's proposed judgment does not impose a civil penalty based on Beachy's financial condition.
The settlement is subject to the approval of the United States District Court for the Northern District of Ohio.
The SEC's investigation was conducted by Brian D. Fagel, John J. Sikora, Jr. and James L. Silverwood in the SEC's Chicago Regional Office. [SEC v. Monroe L. Beachy, Civil Action No. 11-cv-320-SL in the United States District Court for the Northern District of Ohio.] (LR-21856)
INVESTMENT COMPANY ACT RELEASES
Capital International, Inc., et al.
A notice has been issued giving interested persons until March 7, 2011 to request a hearing on an application filed by Capital International, Inc. (Capital International), et al. for an order to exempt certain limited partnerships and other investment vehicles formed for the benefit of eligible employees of Capital International and its affiliates from certain provisions of the Investment Company Act. Each partnership or other investment vehicle will be an "employees' securities company" within the meaning of Section 2(a)(13) of the Act. (Rel. IC-29577 - February 10)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the Chicago Board Options Exchange (SR-CBOE-2011-015) relating to the CFLEX Surcharge Fee Cap 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 14. (Rel. 34-63887)
A proposed rule change filed by the New York Stock Exchange (SR-NYSE-2011-03) to cease operating NYSE MatchPoint effective February 28, 2011 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 14. (Rel. 34-63898)
A proposed rule change filed by the NASDAQ Stock Market to offer an additional routing option (SR-NASDAQ-2011-026) 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 14. (Rel. 34-63900)
NASDAQ OMX PHLX has filed a proposed rule change under Rule 19b-4 (SR-Phlx-2011-17) to establish and adopt fees for the new Short Sale Monitor service and PSX Data Add-On. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63905)
The NASDAQ Stock Market has filed a proposed rule change under Rule 19b-4 (SR-NASDAQ-2011-024) to establish and adopt fees for the new Short Sale Monitor service and Nasdaq Data Add-On. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63906)
NASDAQ OMX BX has filed a proposed rule change under Rule 19b-4 (SR-BX-2011-008) to establish and adopt fees for the new Short Sale Monitor service and BX Data Add-On. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63907)
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