Securities and Exchange Commission Orders Hearing on Registration Revocation Against Two Public Companies for Failure to Make Required Periodic Filings
On Feb. 15, 2011, 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 two companies for failure to make required periodic filings with the Commission:
In this Order, the Division of Enforcement (Division) alleges that the two 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. 34-63911; File No. 3-14257)
In the Matter of Envision Capital Management, Ltd. and Michael M. Druckman
On Feb. 16, 2011, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, and Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order as to Envision Capital Management, Ltd. and Michael M. Druckman (Order), a registered investment adviser and its owner and officer, respectively. According to the Order, Envision Capital Management, Ltd. (Envision Capital) and Michael M. Druckman (Druckman) formed three affiliated funds, Equity Income Partners, L.P., Galileo Capital Partners LLC (Galileo LLC), and Galileo Capital Partners, Ltd. (collectively, the Funds), that invest in short-term asset-backed real estate loans. The Order finds that beginning in at least January 2007, Envision Capital and Druckman did not provide complete and accurate disclosure of material facts to investors regarding the Funds' redemption practices and loan-to-value ratios on real estate loans made by the Funds. The Order also finds that Envision Capital and Druckman overcharged performance and management fees for Galileo LLC, and at times, used cash from one Fund to pay another Fund's property expenses without disclosing the practice to investors. According to the Order, Envision Capital also failed to follow the custody rules of the Investment Advisers Act of 1940, did not implement Envision Capital's policies and procedures regarding the custody rule, and failed to appoint an appropriate chief compliance officer to oversee the firm's activities. Lastly, the Order finds that Druckman willfully aided and abetted and caused Envision Capital's custody rule and policies and procedures violations.
Based on the above, the Order censures Envision Capital and Druckman and orders them to cease and desist from committing or causing any violations of and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 206(2) of the Investment Advisers Act (antifraud provisions) and Section 206(4) of the Investment Advisers Act and Rules 206(4)-2 (custody rule provision) and 206(4)-7 (policies and procedures provision) thereunder, and as to Druckman, Sections 5(a) and 5(c) of the Securities Act (securities registration provisions). Pursuant to the Order, Envision Capital and Druckman must pay, jointly and severally, $100,000 in civil penalties, and the Order requires Envision Capital to comply with certain undertakings, including retaining an independent compliance consultant to review Envision Capital's relevant policies and procedures. Envision Capital and Druckman consented to the issuance of the Order without admitting or denying any of the findings in the Order, except as to the Commission's jurisdiction over them. (Rels. 33-9187; IA-3160; File No. 3-14260)
Civil Penalties Ordered Against Defendant Robert Comiskey
The Commission announced that on Feb. 8, 2011, the Honorable Kenneth A. Marra, United States District Court Judge for the Southern District of Florida, ordered Robert Comiskey to pay a civil penalty in the amount of $130,000.
Previously, on June 30, 2010, the Court entered a default judgment of permanent injunction against Comiskey, a sales agent for Winning Kids, Inc. which enjoined him from future violations of 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, Comiskey was ordered to pay disgorgement and prejudgment interest totaling $93,632.53. On January 29, 2010, the Commission filed its complaint against Comiskey and others alleging that they participated in a fraudulent offering scheme that raised approximately $2 million from investors nationwide, purportedly for the development and marketing of children's books. [SEC v. Winning Kids, Inc., et al., Civil Action No. 10-CV-80186-MARRA/JOHNSON (S.D. Fla.)] (LR-21857)
SEC Charges Former Patent Agent and His Brother in Insider Trading Scheme
On Feb. 15, 2011, the Securities and Exchange Commission filed an amended complaint charging a San Diego-based patent agent and his brother with illegally tipping inside information regarding two biotechnology companies, as part of a larger insider trading scheme. According to the amended complaint, Aaron J. Scalia, a former patent agent for Sequenom, Inc., tipped material, non-public information regarding Sequenom and another biotechnology company, to his brother Stephen J. Scalia. Stephen Scalia then tipped his fraternity brother, Brett A. Cohen, who, in turn, tipped his uncle, David V. Myers. Myers traded on the illegally obtained inside information, garnering more than $600,000 in illicit profits, and provided Stephen Scalia with $14,000 in cash kickbacks.
The SEC filed its initial charges in the case in December 2010 against Cohen and Myers. In its amended complaint filed yesterday in federal court in San Diego, the SEC charged the Scalia brothers. In a parallel criminal proceeding, on February 15, 2011, the U.S. Attorney's Office for the Southern District of California filed criminal charges against the Scalia brothers.
According to the SEC's amended complaint, Aaron Scalia learned about two corporate events involving Sequenom prior to the public release of the information:
The SEC's amended complaint alleges that Aaron Scalia conducted intellectual property due diligence with respect to the EXAS transaction, and that he was the patent agent assigned to Sequenom's Down syndrome test.
The amended complaint further alleges that Aaron Scalia tipped material, non-public information about the EXAS transaction to his brother, Stephen Scalia, who relayed it to his fraternity brother Cohen. For example, Stephen Scalia sent Cohen an e-mail asking, "[a]ny word related to Blu H@rsesh0e? La Jolla says the times are ripe." The movie Wall Street uses the phrase, "Blue Horseshoe loves Anacot Steel," as a code for insider trading. "La Jolla" references the fact that Aaron Scalia lived and worked near La Jolla, California.
The SEC alleges that after at least a dozen phone calls among the scheme's four participants in the succeeding days, Myers made his first-ever purchase of EXAS securities, buying 15,000 shares. It was the first stock purchase in Myers's brokerage account since at least January 2007. Myers later purchased an additional 20,000 shares of EXAS stock before Sequenom publicly announced after the markets closed on Jan. 9, 2009, that it planned to acquire EXAS. EXAS stock rose 50 percent by the close of the markets on January 10 on increased trading volume of 466 percent. During the next few weeks, Myers sold nearly all of his EXAS stock for illegal profits of more than $34,000, and then sent a cash kickback of $4,000 to Cohen, who delivered it to Stephen Scalia as payment for the EXAS stock tip.
The SEC's amended complaint alleges that Aaron Scalia also tipped his brother ahead of Sequenom's announcement that investors could no longer rely on previously disclosed data related to its Down syndrome test. The announcement caused Sequenom's stock price to drop by more than 75 percent in one day. Stephen Scalia tipped Cohen just prior to the company's announcement, and Cohen immediately tipped Myers through a series of communications, including a call he placed from a pay phone near his workplace. Myers quickly purchased risky Sequenom put options just minutes before the markets closed on April 29, 2009. The next morning, Myers sold his entire Sequenom position for illegal profits of more than $570,000. Approximately one month later, Myers personally delivered $10,000 in cash to Stephen Scalia as payment for the Sequenom tip.
The SEC's amended complaint charges all four defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties against all four defendants.
The SEC thanks the U.S. Attorney's Office for the Southern District of California and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC also acknowledges the assistance of FINRA and the Options Regulatory Surveillance Authority in this investigation. [SEC v. Brett A. Cohen; David V. Myers; Aaron J. Scalia; and Stephen J. Scalia, United States District Court for the Southern District of California, Case No. 3:10-cv-2514-L-WMC (LR-21858)
SEC Files Insider Trading Charges Against Brother of Cosmetics Company Executive
The Securities and Exchange Commission today charged a San Francisco man with unlawfully profiting from advance knowledge of the pending acquisition of Bare Escentuals, Inc., a Bay Area cosmetics company, based on information he had garnered from his sister, a former executive with the company. According to the Commission, Zhenyu Ni, 36, overheard his sister discuss a then-secret acquisition of Bare while visiting her office, and misappropriated this information for his own benefit by purchasing Bare stock and call options. Without admitting or denying the allegations, Ni has agreed to pay disgorgement and penalties of over $300,000.
According to the Commission's civil complaint, filed in the United States District Court for the Northern District of California, Ni visited the office of his sister, Bare's then Director of Tax, in December 2009 while she was in the midst of preparing due diligence for the possible acquisition of Bare Escentuals by Shiseido Co., Ltd, a Japanese company. While there, Ni is alleged to have overheard his sister taking phone calls during which she used words such as "due diligence file," "potential buyer" and "merger structure." Ni then began purchasing Bare stock and call options, ultimately spending almost $165,000 over the next month acquiring securities in his and his father's brokerage accounts. When Bare announced the tender offer after market close on Jan. 14, 2010, the company's stock price jumped more than 40%, and Ni allegedly netted illegal profits of $157,066.
The Commission's complaint, filed in federal district court for the Northern District of California, charges Ni with violations of the antifraud and tender offer provisions of the federal securities laws. Ni has agreed to settle the SEC's charges without admitting or denying the allegations. Ni has consented to the entry of a final judgment permanently enjoining him from violating the antifraud and tender offer provisions of the federal securities laws, and requiring him to pay disgorgement of ill-gotten gains, prejudgment interest and a civil penalty. The SEC's action does not name Ni's sister as a party. [SEC v. Zhenyu Ni, Civil Action No. CV-11-0708 DMR (N.D.Cal.)] (LR-21859)
Court Enters Final Judgments Against Swiss Defendants and Bulgarian Relief Defendant in Insider Trading Case
On Jan. 25, 2011, the U.S. District Court for the Eastern District of Pennsylvania entered Final Judgments against Swiss Defendants Peter Kohler and Swiss Real Estate International Holding AG (Swiss Real Estate), and Bulgarian Relief Defendant Sacho Todorov Dermendjiev (Dermendjiev) in the Commission's action alleging insider trading by Lorenz Kohler (Kohler) for his own account and for the accounts of Swiss Real Estate and Dermendjiev in advance of the Oct. 9, 2006 public announcement of a $566 million merger between CNS, Inc. (CNS) and GlaxoSmithKline plc. Kohler died in 2010, while the Commission's action against him was pending. His son, Peter Kohler, as the representative of Kohler's heirs, subsequently consented to be substituted for his father as a defendant in the pending action. Neither Peter Kohler nor relief defendant Dermendjiev were charged with federal securities law violations. The Final Judgments order the Defendants collectively to pay disgorgement of $374,655. The Defendants and Relief Defendant consented to the entry of Final Judgments against them, without admitting or denying the allegations in the Commission's First Amended Complaint, except as to jurisdiction.
In its First Amended Complaint, filed on June 8, 2009, the Commission alleged that Kohler, a Swiss national, purchased out-of-the-money call options in CNS in his personal account and in an account in the name of Swiss Real Estate, a company controlled by Kohler, based on material non-public information relating to the company's potential acquisition. The Commission also alleged that Kohler purchased call option contracts on CNS stock for Dermendjiev's account just prior to announcement of the acquisition of CNS and sold these options immediately after announcement of the CNS acquisition. The First Amended Complaint named Dermendjiev, a Bulgarian national, as a relief defendant.
The First Amended Complaint superseded the Commission's original complaint in this action, which was filed on an emergency basis against purchasers of CNS call options whose identities were not, at that time, known to the Commission.
The Final Judgments order Peter Kohler to pay disgorgement of $85,631, Swiss Real Estate to pay disgorgement of $214,369, and Dermendjiev to pay disgorgement of $74,655.
The Commission acknowledges the assistance of the Swiss Financial Market Supervisory Authority (FINMA) in the investigation of this matter. [SEC v. Lorenz Kohler and Swiss Real Estate International Holding AG, Defendants, and Sacho Todorov Dermendjiev, Relief Defendant, Civil Action No. 06-4540 (E.D. Pa.)] (LR-21860)
Proposed Rule Changes
The Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2011-005) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend Rule 13806 of the Code of Arbitration Procedure for Industry Disputes to provide that FINRA will appoint a chair-qualified public arbitrator to a panel resolving a promissory note dispute instead of appointing a chair-qualified public arbitrator also qualified to resolve a statutory discrimination claim. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63909)
The Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2011-006) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to amend FINRA Rules 12206, 12503, and 12504 of the Code of Arbitration Procedure for Customer Disputes and Rules 13206, 13503, and 13504 of the Code of Arbitration Procedure for Industry Disputes (collectively, Codes), to provide moving parties with a five-day period to reply to responses to motions. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63910)
NASDAQ OMX PHLX filed a proposed rule change (SR-Phlx-2011-15) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to expand the $2.50 Strike Price Program. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63914)
Approval of Proposed Rule Change
The Commission approved a proposed rule change (SR-NYSEArca-2010-121) submitted by NYSE Arca under Rule 19b-4 of the Securities Exchange Act of 1934 relating to the listing and trading of FactorShares Funds. Publication is expected in the Federal Register during the week of February 14. (Rel. 34-63915)
Immediate Effectiveness of Proposed Rule Change
A proposed rule change filed by BATS Exchange to amend BATS Rule 11.13, entitled "Order Execution," (SR-BATS-2011-005) 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. 34-63916)
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