SEC NEWS DIGEST Issue 2003-11 January 16, 2003 COMMISSION ANNOUNCEMENTS SEC ADOPTS RULES ON PROVISIONS OF SARBANES-OXLEY ACT Actions Cover Non-GAAP Financials, Form 8-K Amendments, Trading During Blackout Periods, Audit Committee Financial Expert Requirements On Jan. 15, the Commission voted to adopt the following rules and amendments concerning provisions of the Sarbanes-Oxley Act of 2002. 1. Conditions for Use of Non-GAAP Financial Information Under Section 401(b) of Sarbanes-Oxley Act and Amendments to Form 8-K Under Section 409 Conditions for Use of Non-GAAP Financial Information Section 401(b) of the Sarbanes-Oxley Act of 2002 directs the Commission to issue final rules by Jan. 26, 2003, requiring that any public disclosure or release of "pro forma financial information" by a public company be presented in a manner that (1) does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the "pro forma financial information," in light of the circumstances under which it is presented, not misleading; and (2) reconciles the "pro forma financial information" presented with the financial condition and results of operations of the company under Generally Accepted Accounting Principles (GAAP). The Commission voted to adopt rules that will satisfy the mandate of Section 401(b) by defining the category of financial information that is subject to that mandate and then taking a two-step approach to regulating the use of that financial information. The Commission's rules under Section 401(b) of the Sarbanes-Oxley Act will apply to the public disclosure or release of material information that includes a "non-GAAP financial measure." For this purpose, a "non- GAAP financial measure" will be defined as a numerical measure of a company's financial performance that (1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or (2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented. Statistical and operating measures are not covered. The Commission voted to adopt new Regulation G, which will apply whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure. This regulation will prohibit material misstatements or omissions that would make the presentation of the material non-GAAP financial measure, under the circumstances in which it is made, misleading, and will require a quantitative reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure presented and the comparable financial measure or measures calculated and presented in accordance with GAAP. Regulation G will provide a limited exception for foreign private issuers where (1) the securities of the issuer are listed or quoted on a securities exchange or inter-dealer quotation system outside the United States; (2) the non-GAAP financial measure and the most comparable GAAP financial measure are not calculated and presented in accordance with generally accepted accounting principles in the United States; and (3) the disclosure is made by or on behalf of the issuer outside the United States, or is included in a written communication that is released by or on behalf of the issuer outside the United States. The Commission also voted to adopt amendments to Item 10 of Regulation S- K and Item 10 of Regulation S-B that address specifically the use of non- GAAP financial measures in filings with the Commission. These amendments will apply to the same categories of non-GAAP financial measures as are covered by Regulation G, but contain more detailed requirements than Regulation G. The Commission also decided to adopt amended Exchange Act Form 20-F to apply these requirements to annual reports filed with the Commission by foreign private issuers. Form 8-K Amendments Section 409 of the Sarbanes-Oxley Act added new Section 13(l) to the Exchange Act. New Section 13(l) obligates public companies to disclose "on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer . . . as the Commission determines, by rule, is necessary or useful for the protection of investors and in the public interest." The Commission voted to adopt amendments to Form 8-K to require public companies to furnish to the Commission releases or announcements disclosing material non-public financial information about completed annual or quarterly fiscal periods. These amendments will not require the issuance of earnings releases or similar announcements. However, such releases and announcements will trigger the new requirement. The new Form 8-K requirement will apply regardless of whether the release or announcement included disclosure of a non-GAAP financial measure. Public disclosure of financial information for a completed fiscal period in a presentation that is made orally, telephonically, by Web cast, by broadcast, or by similar means will not be required to be filed, if (1) the presentation occurs within 48 hours of a related release or announcement that is filed on Form 8-K; (2) the presentation is broadly accessible to the public; and (3) the information in the Web cast is posted on the company's Web site. The new rules and amendments will be effective 60 days from the date of their publication in the Federal Register. 2. Rules Restricting Insider Trading During Pension Fund Blackout Periods Section 306(a) of the Sarbanes-Oxley Act of 2002 prohibits any director or executive officer of an issuer from, directly or indirectly, purchasing, selling or otherwise acquiring or transferring any equity security of the issuer during a pension plan blackout period that prevents plan participants and beneficiaries from engaging in transactions involving issuer equity securities held in their plan accounts. These prohibitions apply only if the securities acquired or disposed of by the director or executive officer were acquired in connection with his or her service or employment as a director or executive officer. Section 306(a) also requires an issuer to notify its directors and executive officers, as well as the Commission, of an impending blackout period on a timely basis. As directed by the statute, on Oct. 30, 2002, the Commission, after consultation with the Secretary of Labor, proposed new Regulation Blackout Trading Restriction (BTR) under the Securities Exchange Act of 1934 to clarify the scope and application of Section 306(a) and to prevent evasion of the statutory trading prohibition. The Commission received 18 comment letters in response to its proposal. Regulation BTR will incorporate a number of concepts developed under Section 16 of the Exchange Act. This will enable issuers to use the well-established body of rules and interpretations concerning the trading activities of corporate insiders under Section 16 in interpreting how Section 306(a) operates and, as to directors and executive officers of domestic issuers, facilitate enforcement of the statutory trading prohibition through monitoring of the reports publicly filed by directors and officers pursuant to Section 16(a). Persons Subject to Trading Prohibition Section 306(a) applies to the directors and executive officers of an issuer: * with a class of securities registered under Section 12 of the Exchange Act; * that is required to file reports under Section 15(d) of the Exchange Act; or * that files or has filed a registration statement that has not yet become effective under the Securities Act and that has not been withdrawn. Accordingly, Regulation BTR will apply to the directors and executive officers of domestic issuers, foreign private issuers, banks and savings associations, small business issuers and, in rare instances, registered investment companies. Under Regulation BTR, the term "director" will have the same meaning as under the general Exchange Act definition, and the term "executive officer" will have the same meaning as the term "officer" under the Section 16 rules. Securities Subject to Trading Prohibition By its terms, Section 306(a) applies to any equity security of an issuer. Regulation BTR will define the term "equity security" to include both equity securities and derivative securities relating to an equity security, whether or not issued by the issuer. To promote consistency and streamline compliance, Regulation BTR will provide that the term "derivative security" has the same meaning as under the Section 16 rules. Transactions Subject to Trading Prohibition The statutory trading prohibition of Section 306(a) is limited to equity securities that a director or executive officer "acquires in connection with his or her service or employment as a director or executive officer." Regulation BTR will specify the instances where an acquisition of equity securities by a director or executive officer is "in connection with" his or her service to, or employment with, an issuer. In addition, Regulation BTR will provide that any equity securities sold or otherwise transferred during a blackout period will be treated as "acquired in connection with service or employment as a director or executive officer" unless he or she establishes that the equity securities were acquired from another source and this identification is consistent with the treatment of the securities for tax purposes and all other disclosure and reporting requirements. To prevent evasion of the statutory trading prohibition, Regulation BTR will apply to indirect, as well as direct, acquisitions and dispositions of equity securities where a director or executive officer has a "pecuniary interest" in the transaction. "Pecuniary interest" will have the same meaning as under the Section 16 rules. Accordingly, acquisitions or dispositions of equity securities by family members, partnerships, corporations, limited liability companies and trusts will be deemed to be acquisitions or dispositions by a director or executive officer if he or she has a pecuniary interest in the equity securities. Regulation BTR will exempt from the statutory trading prohibition several categories of transactions that occur automatically, are made pursuant to an advance election or are otherwise outside the control of the director or executive officer, including: * acquisitions of equity securities under dividend or interest reinvestment plans; * purchases or sales of equity securities that satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c); * purchases or sales of equity securities, other than "discretionary transactions" (as defined under the Section 16 rules) pursuant to certain employee benefit plans; * compensatory grants and awards of equity securities pursuant to programs under which grants and awards occur automatically; * exercises, conversions or terminations of certain derivative securities, which, by their terms, occur only on a fixed date, or are exercised, converted or terminated by a counter-party who is not subject to the influence of the director or executive officer; * acquisitions or dispositions of equity securities involving a bona fide gift or a transfer by will or the laws of descent and distribution; * acquisitions or dispositions of equity securities pursuant to a domestic relations order; * sales or other dispositions of equity securities compelled by the laws or other requirements of an applicable jurisdiction; * acquisitions or dispositions of equity securities in connection with a merger, acquisition, divestiture or similar transaction occurring by operation of law; and * increases or decreases in equity securities holdings resulting from a stock split, stock dividend or pro rata rights distribution. Blackout Period The Section 306(a) trading prohibition is triggered only if a blackout period lasts more than three consecutive business days and temporarily suspends the ability of at least 50% of the participants or beneficiaries under all individual account plans maintained by the issuer to purchase, sell or otherwise acquire or transfer an interest in issuer equity securities held in an account plan. Regulation BTR will provide that, in the case of a domestic issuer, the Section 306(a) trading prohibition is triggered only if the ability of U.S. pension plan participants to trade in an issuer's equity securities through their individual plan accounts is temporarily suspended for more than three consecutive business days and this temporary suspension affects 50% or more of the participants under all pension plans with individual accounts maintained by the issuer. Regulation BTR will provide that, in the case of a foreign private issuer, the Section 306(a) trading prohibition is triggered only if the 50% test is satisfied and the number of U.S. plan participants subject to the temporary trading suspension is either (1) greater than 15% of the issuer's worldwide workforce, or (2) greater than 50,000 in number. Remedies A violation of the Section 306(a) trading prohibition by a director or executive officer is a violation of the Exchange Act, subject to possible Commission enforcement action. In addition, Section 306(a) provides that an issuer, or a security holder on its behalf, may bring an action to recover the profits realized by a director or executive officer from a prohibited transaction during a blackout period. Regulation BTR will provide that, generally, the amount recoverable in a private action is the difference between the amount paid or received for the equity security on the date of the transaction during the blackout period and the amount that would have been paid or received for the equity security if the transaction had taken place outside the blackout period. Notice Regulation BTR will specify the content and timing of the notice that an issuer is required to provide to its directors and executive officers and to the Commission about an impending blackout period. In the case of a domestic issuer, the notice to the Commission will be provided in a Form 8-K report. Section 306(a) takes effect on Jan. 26, 2003. Regulation BTR will take effect at the same time. 3. Disclosure Requirements to Implement Sections 406 and 407 of Sarbanes-Oxley Act The Commission voted to adopt rules implementing Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. These rules will require public companies to disclose information about corporate codes of ethics and audit committee financial experts. The rules will require a company subject to the reporting requirements of the Securities Exchange Act of 1934 to include the following two new types of disclosures in their Exchange Act filings. * Pursuant to Section 407, a company will be required to annually disclose whether it has at least one "audit committee financial expert" on its audit committee, and if so, the name of the audit committee financial expert and whether the expert is independent of management. A company that does not have an audit committee financial expert will be required to disclose this fact and explain why it has no such expert. * Pursuant to Section 406, a company will be required to disclose annually whether the company has adopted a code of ethics for the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. If it has not, the company will be required to explain why it has not. The rules also will require a company to disclose on a current basis amendments to, and waivers from, the code of ethics relating to any of those officers. Audit Committee Financial Experts The rules will expand the proposed definition of the term "financial expert" and also substitute the designation "audit committee financial expert" for "financial expert." The rules will define "audit committee financial expert" to mean a person who has the following attributes: (1) an understanding of financial statements and generally accepted accounting principles; (2) an ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (3) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; (4) an understanding of internal controls and procedures for financial reporting; and (5) an understanding of audit committee functions. A person can acquire such attributes through any one or more of the following means: (1) education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; (2) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions, or experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or (3) other relevant experience. An individual will have to possess all of the attributes listed in the above definition to qualify as an audit committee financial expert. Furthermore, the rules will eliminate the proposed requirement that a person's experience applying generally accepted accounting principles in connection with accounting for estimates, accruals and reserves be "generally comparable" to the estimates, accruals and reserves used in the registrant's financial statements. The rules also will provide a safe harbor to make clear that an audit committee financial expert will not be deemed an "expert" for any purpose, including for purposes of Section 11 of the Securities Act of 1933, and that the designation of a person as an audit committee financial expert does not impose any duties, obligations or liability on the person that are greater than those imposed on such a person as a member of the audit committee in the absence of such designation, nor does it affect the duties, obligations or liability of any other member of the audit committee or board of directors. Codes of Ethics Under the rules, a company will be required to disclose in its annual report whether it has a code of ethics that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The rules will define a code of ethics as written standards that are reasonably necessary to deter wrongdoing and to promote 1. honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 2. full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to, the Commission and in other public communications made by the company; 3. compliance with applicable governmental laws, rules and regulations; 4. the prompt internal reporting of code violations to an appropriate person or persons identified in the code; and 5. accountability for adherence to the code. A company will be required to make available to the public a copy of its code of ethics, or portion of the code that applies to the company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A company can make the code of ethics available to the public by filing it as an exhibit to its annual report, providing it on the company's Internet Web site, or as otherwise set forth in the final rule. A company, other than a foreign private issuer or registered investment company, also will be required to disclose any changes to, or waivers of, the code of ethics within five business days, to the extent that the change or waiver applies to the company's principal executive officer or senior financial officers. A company can provide this disclosure on Form 8-K or on its Internet Web site. Foreign private issuers and registered investment companies will be required to disclose changes to, and waivers of, such codes of ethics in their periodic reports or on their Internet Web sites. The new rules will be effective 30 days from the date of their publication in the Federal Register. Companies will be required to provide the new disclosures in annual reports for fiscal years ending on or after July 15, 2003. Small business issuers will be required to provide the new audit committee financial expert disclosure in annual reports for fiscal years ending on or after Dec. 15, 2003. The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible. (Press Rel. 2003-6) SEC AND NASD ACTION PLAN ON MUTUAL FUND SALES LOAD CHARGES Continuing their joint efforts to ensure that investors are charged the correct sales loads on their mutual fund transactions, the Securities and Exchange Commission and NASD have launched a multifaceted action plan. The SEC and NASD are seeking reports from all NASD member firms on the adequacy of their policies and procedures to ensure that larger mutual fund investors receive promised sales load charge reductions. Additionally, NASD is surveying all of its members to obtain data on their mutual fund sales. These actions follow up on the SEC staff's alert to all brokerage firms and NASD's Notice to Members, issued on Dec. 23, 2002, urging firms to conduct an immediate review of the adequacy of their existing sales load policies and procedures. Currently, the SEC and NASD, along with the New York Stock Exchange, are conducting examinations of selected firms that sell front-end load mutual funds. The examinations are designed to determine whether mutual fund purchasers are receiving promised sales load reductions for making larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as "breakpoints." The SEC and NASD expect to issue a joint statement of the examination results and firm responses in early February. In addition, SEC Chairman Harvey L. Pitt, in a Jan. 15 letter, asked NASD, the Securities Industry Association, and the Investment Company Institute to convene a working committee under NASD's aegis to explore and recommend ways in which the mutual fund and brokerage industries can prevent abuses and eliminate errors in the calculation of sales loads, make operational changes to ensure the accuracy of and assist brokers in calculating sales loads, improve investor education on sales loads, and simplify or enhance disclosure of sales discounts. "This is an issue that demands swift action by regulators, as well as the focused attention of the mutual fund and brokerage industries, others knowledgeable about the issue, and consumer advocates, to protect the investing public," Pitt said. Both the SEC and NASD have alerted investors to this issue and placed additional information on their Web sites. Investors can learn more about reduced sales loads by going to www.sec.gov/answers/breakpt.htm, www.nasdr.com/alert_breakpoint.htm, and www.nasdr.com/fundcalc/expense_analyzers.asp. Chairman Pitt's letter to NASD, SIA and ICI is available at www.sec.gov/spotlight/breakpoints/letter011503hlp.htm. The SEC letter to NASD members is available at www.sec.gov/spotlight/breakpoints/letter122302n-r.htm. The NASD Notice to members is available at www.nasdr.com/2610_2002.asp#02-85. (Press Rel. 2003-7) ENFORCEMENT PROCEEDINGS COMMISSION IMPOSES PENNY STOCK BAR ON JOHN DUFFELL III The Commission instituted an administrative proceeding pursuant to Section 15(b) of the Securities Exchange Act of 1934 against John W. Duffell III, a stock promoter of JDMC Global Corp. Simultaneous with the institution of the proceeding, Duffell submitted an Offer of Settlement in which, while neither admitting nor denying the Commission's findings, he consented to the entry of an Order barring him from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. The Order was based on the entry of a permanent injunction in a civil action against Duffell. The civil complaint filed in that action alleged that from June through September 1996, Duffell, age 53, provided false and misleading information regarding JDMC Global's financial condition to a retail brokerage firm and a public relations firm, both of which were recommending the purchase of JDMC stock to investors. The complaint also alleged that, from June through September 1996, Duffell offered and sold JDMC securities to investors. The Commission wishes to thank the French Commission des Operations de Bourse, the British Columbia Securities Commission and NASD, Inc. for their assistance in this matter. (Rel. 34-47192; File No. 3-11011) SEC ALLEGES FRAUD AGAINST AVENTURA, FLORIDA INTERNET COMPANY IN CONNECTION WITH UNREGISTERED SECURITIES OFFERING The Commission announced that on Jan. 10 it filed an emergency federal civil injunctive action against GetAnswers, Inc. (GetAnswers) of Aventura, Florida, James Koenig, GetAnswers' chief executive officer and president, and Robert Cournoyer, GetAnswers' chief operating officer, seeking to halt an on-going fraudulent offering of unregistered securities by GetAnswers. On Jan. 10, the Honorable James Lawrence King, United States District Judge for the Southern District of Florida, entered, among other things, a temporary restraining order and an asset freeze against all of the defendants. According to the Commission's complaint, GetAnswers, which operates an Internet "knowledge management" service company, has raised approximately $6.3 million through a network of sales representatives offering and selling GetAnswers' stock from its Aventura, Florida offices. The complaint alleges, among other things, that (i) GetAnswers misleadingly described Koenig's background in its offering materials and sales pitches; (ii) GetAnswers falsely described an academic alliance with a South Florida college; (iii) the majority of investor funds raised have been used to line the pockets of GetAnswers' management and employees, including the individual defendants and (iv) GetAnswers' misrepresented Cournoyer's compensation. Moreover, GetAnswers and its sales representatives misled investors about the safety, security and rate of return of GetAnswers securities. As a result, the Commission has charged GetAnswers, Koenig and Cournoyer with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is also seeking, among other things, preliminary and permanent injunctions, disgorgement of ill-gotten profits and a civil money penalty against GetAnswers, Koenig and Cournoyer in its lawsuit. Upon the Commission's motion, the Court appointed Kathy M. Klock, Esq., an attorney in the law firm of Steel Hector & Davis LLP, as Receiver over GetAnswers. Among other things, Ms. Klock is responsible for taking control of GetAnswers and for marshaling and safeguarding its assets. [SEC v. GetAnswers, Inc., James Koenig, and Robert Cournoyer, Case No. 03-20048-CIV-KING, S.D. Fla.] (LR-17933) TEMPORARY RESTRAINING ORDER SOUGHT AGAINST CLEARONE COMMUNICATIONS BASED FINANCIAL FRAUD The Commission filed a complaint in the United States District Court for the District of Utah, on Jan. 15, seeking a temporary restraining order and preliminary and permanent injunctions against ClearOne Communications, Inc., Frances M. Flood, ClearOne's Chairman, CEO and President, and Susie Strohm, ClearOne's CFO and Vice President of Finance. The complaint alleges that ClearOne, Flood and Strohm violated the antifraud, reporting, issuer books and records and lying to auditors provisions of the federal securities laws. The complaint also seeks, among other relief, disgorgement, civil money penalties, officer- director bars against Flood and Strohm, an order prohibiting the destruction of documents and appointment of a special monitor to oversee ClearOne's sales, billing and collection operations. The complaint alleges that from the quarter ended March 31, 2001, through the quarter ended Sept. 30, 2002, ClearOne, Flood and Strohm have engaged in a program of inflating the company's revenues, net income and accounts receivable by engaging in improper revenue recognition. It is alleged that this course of conduct, covering two annual reporting periods and five separate quarterly reporting periods, was effected primarily through a program of channel stuffing conceived and directed by Flood, assisted by Strohm. It is further alleged that Flood and Strohm shipped large amounts of inventory to the company's distributors at the end of each quarter with the understanding that the distributors did not have to pay for these products until the distributors resold the products to their own customers, and that in some instances the distributors were given the right to return or exchange unwanted ClearOne products the distributors were unable to sell. In addition, it is alleged that on December 11, 2001, while this conduct was ongoing, ClearOne closed a $25.5 million private placement of common stock. [SEC v ClearOne Communications, Inc., Frances M. Flood and Susie Strohm, Docket No. 2:03 CV-0055 DAK, USDC, D.Ut.] (LR- 17934) COURT SENTENCES UNREGISTERED INVESTMENT ADVISER TO 27 MONTHS IN PRISON AND ORDERS HIM TO PAY OVER $800,000 IN RESTITUTION TO INVESTORS The Commission announced that on Jan. 9 a federal judge sentenced unregistered investment adviser Alfred M. Lemcke of Quincy, Massachusetts to 27 months in prison followed by three years probation and ordered him to pay $843,470 in connection with charges brought by the Massachusetts U.S. Attorney's Office in May 2002. Lemcke pled guilty on Sept. 24, 2002, to one count of fraud under the Investment Advisers Act of 1940 and nine counts of wire fraud. The criminal indictment, which was based on the same facts as a civil fraud action the Commission filed against Lemcke on Nov. 6, 2001, alleged that from at least March 1996 through September 2001, Lemcke defrauded five of his investment advisory clients of several hundred thousand dollars. According to the indictment, Lemcke obtained funds from his clients with false promises that he would invest the funds in various securities, and in some cases induced his clients to liquidate existing investments. The indictment further alleged that, contrary to his representations, Lemcke used essentially all of the fraudulently obtained funds to support his lifestyle and to repay a loan. On Nov. 1, 2002, in connection with the Commission's prior related action against Lemcke, a federal judge permanently enjoined Lemcke from further violations of the antifraud provisions of the federal securities laws and ordered him to disgorge his interest in the proceeds from the sale of a house he had owned with his wife and as well as money in an account that the court had previously frozen. Lemcke consented to the entry of the final judgment. The Commission continues to litigate against relief defendant Rosemary Grogan-Lemcke concerning the disposition of the proceeds from the sale of the Lemcke home. On Sept. 30, 2002, Lemcke was administratively barred by the SEC from associating with any broker, dealer or investment adviser based on his guilty plea. For further information, see Litigation Release Nos. 17237 (Nov. 16, 2001), 17515 (May 14, 2002) and 17738 (Sept. 23, 2002); Exchange Act Release No. 46574; and Advisers Act Release No. 2063. [SEC v. Alfred M. Lemcke, et al., Civil Action No. 01-547, RRL, D.R.I.] (17935) COMMISSION OBTAINS EMERGENCY RELIEF HALTING $4.5 MILLION OFFERING FRAUD On Jan. 15, the Honorable R. Gary Klausner, United States District Judge for the Central District of California, granted the Commission's application and issued a temporary restraining order halting an ongoing $4.5 million securities fraud by Nicholas Roblee a/k/a Nicholas Richmond (Richmond), a 34 year-old resident of Encino, California, and Premier Marketing and Investments, Inc. (Premier), an entity controlled by him that has its principal place of business in Los Angeles. The Court: (1) granted the Commission's application for a temporary restraining order; (2) placed a freeze on the defendants' assets; (3) prohibited the destruction of documents by the defendants; (4) ordered accountings from the defendants; and (5) granted expedited discovery. The Commission's complaint, filed yesterday, alleges that, since November 2000, Richmond and Premier have raised at least $4.5 million from dozens of investors in at least eight states, purportedly for the purpose of investing in a variety of "high-yield" investment programs. The defendants represented that investors could earn returns of up to 200% per month through the programs, which included high-yield promissory notes, bridge loans and the purchase and sale of precious metals. In fact, Richmond and Premier have been operating a "prime- bank" scheme and are misappropriating investor funds and using the funds for, among other things: (1) Richmond's personal expenses, including limousines, armed guards and a down payment on a $1.5 million house in Encino, California; (2) working capital for Premier Pictures, a company owned by Richmond that produced adult films and operated an adult website; (3) other failed business ventures of Richmond, including a forfeited deposit made in connection with the aborted purchase of a male strip club; and (4) the operational costs of maintaining Premier's fraudulent scheme, including office rental and employee salaries. In addition, although investor funds did not generate any income, Richmond and Premier paid purported profits, interest payments and fees to certain individuals in an attempt to perpetuate a Ponzi-like scheme to enable Richmond to continue to raise funds from unwary investors. The Commission obtained an order temporarily restraining Richmond and Premier from committing securities fraud in violation of 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. The order also temporarily restrained Richmond and Premier from committing violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act. The Court ordered the temporary restraining order and asset freeze to remain in effect until Jan. 25, at 1 p.m., pending a hearing on the Commission's motion for a preliminary injunction, which is scheduled for Jan. 23, 2003 at 9 a.m. In addition to the interim relief granted today, the Commission seeks a final judgment against Richmond and Premier enjoining them from future violations of the foregoing registration and antifraud provisions, ordering them to disgorge all ill-gotten gains, and assessing civil penalties against them. For more information on prime bank fraud, investors are advised to access the Commission's "Prime Bank" investor alert that provides tips on how to avoid being a victim of these scams. The investor alert can be found on the Commission's web site, at www.sec.gov/divisions/enforce/primebank.shtml. [SEC v. Premier Marketing and Investments, Inc. and Nicholas Roblee a/k/a Nicholas Richmond, Civil Action No. CV-03-0342 RGK, JTLx, C.D. Cal.] (LR-17936) NOTICE NOT TO PURSUE OUTSTANDING CLAIMS FILED WITH THE COURT IN SEC v. I-NET PROVIDERS, ET AL. CASE The Commission announced that on Dec. 31, 2002, it filed a notice with the United States District Court for the Middle District of Florida stating that that it will not further pursue its outstanding claims for permanent injunctions, disgorgement of ill-gotten gains, and civil money penalties against defendants I-Net Providers, I-Net Holdings, Inc., Twenty-First Century Connection, Inc., Capital Link Holding, Inc., and Marketing Concepts Group, Inc. (the corporate defendants), or its claims for disgorgement against relief defendants Apex Marketing, Inc., Capital Link, Inc., Frontline Consulting, Inc., d/b/a Midland & Associates, and Twenty-First Century Connection LP (the relief defendants). The Commission filed this action in 1996, alleging that the corporate defendants and certain individual defendants were engaged in an offering fraud. The Commission also alleged that the relief defendants had obtained investor funds. During this action, the Court appointed a receiver over the corporate defendants and the relief defendants. The Receiver recovered assets and has made distributions to qualified investors. The corporate defendants and the relief defendants are under the control of the court appointed receiver. The Commission obtained substantial relief against all of the individual defendants that it had alleged engaged in the offering fraud: * Michael Coyne: On June 30, 1999, the Court entered a Final Judgment of Permanent Injunction and Other Relief by consent against Coyne. The judgment enjoined Coyne from 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. The judgment also ordered Coyne to pay disgorgement of $70,002, plus prejudgment interest, but waived payment of that amount and did not impose a civil money penalty based on Coyne's demonstrated financial inability to pay. * Gary Mariarossi: On July 21, 1999, upon motion by the Commission, the Court entered a Final Judgment of Permanent Injunction and Other Relief against Mariarossi. The judgment enjoined Mariarossi 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 judgment also ordered Mariarossi to disgorge his ill-gotten gains of $273,597, plus prejudgment interest, and to pay a civil money penalty of $50,000. * Robert H. Shields: Also on July 21, 1999, upon motion by the Commission, the Court entered a Final Judgment of Permanent Injunction and Other Relief against Shields. The judgment enjoined Shields 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 judgment also ordered Shields to disgorge his ill-gotten gains of $782,416, plus prejudgment interest, and to pay a civil money penalty of $50,000. The United States Attorney's Office for the Middle District of Florida also brought charges against both Coyne and Mariarossi for their roles in the fraud that formed the basis of the Commission's action. Coyne pled guilty and, in December 1999, was sentenced to five year's probation and ordered to pay restitution of $70,000. Mariarossi pled guilty and, in November 1999, was sentenced to five year's probation and ordered to pay restitution of $456,995. [SEC v. I-Net Providers, et al, Case No. 8:96-cv-2206-T-23TBM, M.D. Fla.] (LR-17937) SEC SETTLES FRAUD CASE AGAINST JDMC GLOBAL CORP. STOCK PROMOTERS The Commission announced today that the U.S. District Court for the Central District of California entered settled judgments against John W. Duffell and Charles Yost, two former stock promoters of JDMC Global Corporation, formerly based in Los Angeles. Defendants Duffell and Yost, without admitting or denying the allegations of the complaint, consented to the entry of judgments permanently enjoining them from committing violations of the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The final judgment against Duffell also permanently enjoins him from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act and orders him to pay disgorgement of $547,264.60, plus prejudgment interest of $218,871.43 and a penalty of $547,264.60. Duffell also consented to the entry of an administrative order barring him from participating in any offering of a penny stock. The final judgment against Yost orders him to pay disgorgement in the amount of $25,347.50, plus prejudgment interest, but waives payment of disgorgement and prejudgment interest and does not assess civil penalties based upon his sworn representations in his statement of financial condition. The order further prohibits Yost from participating in any offering of penny stock for two years. The Commission's complaint charged that from June through September 1996, Duffell, 52, of Annecy, France, and Yost, 49, of Euless, Texas, along with the former CEO of JDMC, Robert N. Rooks, 57, of Los Angeles, fraudulently sold JDMC stock. The complaint alleged that defendants disseminated false and misleading information concerning JDMC's financial condition and supposed South African housing project. The complaint further alleged that the defendants' conduct caused JDMC's stock price to skyrocket from $.13 to $4, or more than 3,000%, during June through September 1996. Previously, the Court entered a final judgment against Rooks, finding him liable for securities fraud and ordering him to pay a $100,000 penalty. The Court also found that Duffell violated the securities registration provisions of the federal securities laws by engaging in an unregistered offer and sale of JDMC stock and directing the company's sales efforts in the United States. In September 1996, the Commission suspended trading in JDMC stock. In an unrelated Commission action, in 1979, the U.S. District Court for the Central District of California prohibited Duffell from committing securities fraud and securities registration violations. In 1982, in a related criminal action, the court sentenced Duffell to prison for the same conduct charged in the 1979 Commission action. The Commission wishes to thank the French Commission des Operations de Bourse, the British Columbia Securities Commission, and NASD, Inc. for their assistance in this matter. [SEC v. Robert N. Rooks, John W. Duffell III and Charles E. Yost II, Civil Action No. EDCV 01-846, C.D. Cal.] (LR-17938) SEC FILES COMPLAINT AGAINST LINKNET, INC., LINKNET DE AMERICA LATINA, LTD., ALLEN JOHNSON, JOSEPH ISAAC AND DALE CARONE FOR FRAUDULENT SALE OF STOCK IN LINKNET AND LATINA The Commission today charged LinkNet, Inc., LinkNet de America Latina, Ltd., Allen R. Johnson, Joseph W. Isaac and Dale R. Carone with the fraudulent offer and sale of unregistered securities of LinkNet and Latina. The complaint alleges the defendants conducted these offerings from August 1999 through October 2000 and raised approximately $17 million from investors by selling the stock through a boiler room established by Johnson, Isaac and Carone in Encino, California. The complaint alleges that in making the offering the defendants failed to disclose the fact that at least $5.1 million, or thirty percent, of the offering proceeds were paid as commissions to the boiler room operations. It is also alleges that the defendants made false representations that: (1) a public offering of LinkNet stock was imminent; LinkNet's stock would shortly be listed on NASDAQ; investors could realize phenomenal returns on their investment in a short time; and LinkNet and Latina had contracts for the sale of long distance service in the United States and Mexico which would generate millions of dollars in revenue to the companies. The complaint also alleges that, while the offerings were ongoing, Isaac, Carone and Johnson also sold their personal shares of LinkNet and Latina stock through the Encino boiler room and by other means. All of the defendants are charged with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5 thereunder. Johnson, Isaac and Carone are also charged with violations of Section 15(a) of the Exchange Act. The complaint seeks a final judgment: (i) enjoining the defendants from future violations of the above-cited provisions, (ii) requiring an accounting and disgorgement of their ill-gotten gains, plus prejudgment interest; (iii) assessing civil penalties; (iv) barring Johnson from acting as an officer or director of any public company registered with the Commission; and (v) barring Johnson, Isaac and Carone from any future participation in an offering of penny stock. [SEC. v. Dale Carone, et al., CV 03 374NM, FMOx, USDC C.D. Cal.] (LR-17939) HOLDING COMPANY ACT RELEASES KEYSPAN CORPORATION NORTHEAST GAS MARKETS, ET AL. An order has been issued authorizing proposals by KeySpan Corporation (KeySpan), a registered holding company, Northeast Gas Markets LLC (NEGM), a nonutility subsidiary of KeySpan; Alberta Northeast Gas Limited (ANE) and Boundary Gas, Inc. (Boundary), both nonutility affiliate companies of KeySpan; and KeySpan's utility subsidiaries Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York; KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery Long Island; Boston Gas d/b/a KeySpan Energy Delivery New England; Essex Gas Company d/b/a KeySpan Energy Delivery New England; and EnergyNorth Natural Gas, Inc. d/b/a KeySpan Energy Delivery New England. The order authorizes: (A) through October 31, 2007, NEGM to continue to provide contract services to ANE, and (B) through March 31, 2006, NEGM to enter into transactions to provide contract services to the above KeySpan utilities. (Rel. 35-27638) SELF-REGULATORY ORGANIZATIONS PROPOSED RULE CHANGE The Philadelphia Stock Exchange filed a proposed rule change (SR-Phlx- 2002-61) and Amendment No. 1 thereto to include violations for failure to obtain approval to disengage the NBBO feature of Phlx's automated options market system in the Phlx's minor rule plan. Publication of the proposal is expected in the Federal Register during the week of Jan. 13. (Rel. 34-47166) IMMEDIATE EFFECTIVENESS OF PROPOSED RULE CHANGE A proposed rule change filed by the National Securities Clearing Corporation to allow NSCC to correct a typographical error in NSCC Rule 50 (SR-NSCC-2002-12) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication of the proposal is expected in the Federal Register during the week of Jan. 20. (Rel. 34- 47172) ACCELERATED APPROVAL OF PROPOSED RULE CHANGE The Commission approved, on an accelerated basis, a proposed rule change filed by the Pacific Stock Exchange (SR-PCX-2002-74) relating to two new order types on the Archipelago Exchange. Publication of the proposal is expected in the Federal Register during the week of Jan. 20. (Rel. 34- 47178)