Wednesday, January 31, 2007
The SEC announced today that, on January 29, 2007, the U.S. District Court for the Northern District of Illinois entered a Final Judgment in the Commission's civil action against Directors Financial Group, Ltd. ("DFG"), an Illinois investment adviser formerly registered with the Commission, and Sharon E. Vaughn, DFG's owner and operator. In addition to relief previously ordered, the Court's Final Judgment requires Vaughn to pay a $200,000 civil penalty. Vaughn consented to the Final Judgment without admitting or denying the allegations of the Complaint.
The Commission filed its Complaint on March 2, 2006, alleging that Vaughn and DFG defrauded their private hedge fund clients in Directors Performance Fund, L.L.C. (the "Fund"). According to the Complaint, Vaughn and DFG, among other things (1) invested the Fund's assets in a fraudulent Prime Bank trading scheme (the "Trading Program") contrary to the Fund's disclosed trading strategy, (2) failed to investigate the Trading Program or its promoters, (3) entered into an undisclosed profit sharing agreement that ceded 25% of the Fund's purported profits to one of the Trading Program's promoters, (4) gave control of the Fund's assets to the Trading Program's promoters in violation of the terms of the Fund's prospectus, and (5) tried to cover up their fraud by withholding documents from — and providing fake documents to — the Commission's exam staff. See SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd., Case No. 06-C-1135 (N.D. Ill.)
IN THE MATTER OF MICHAEL SASSANO, DOGAN BARUH, ROBERT OKIN and R.
On January 31, the Commission issued an Order Instituting Administrative Proceedings against Michael Sassano, Dogan Baruh, Robert Okin and R. Scott Abry, alleging that Sassano and Baruh, former registered representatives with CIBC World Markets Corp. and Fahnestock & Co., Inc., collaborated with numerous hedge fund customers to deceptively market time mutual funds through a variety of deceptive practices. Mutual funds, for example, repeatedly detected Sassano's, Baruh's, and their customers' fraudulent conduct from at least 1999 until September 2003, and sent World Markets and Fahnestock numerous letters and emails complaining about this abusive market timing. In response to the mutual funds' efforts to stop the market timing, Sassano and Baruh used numerous strategies to help their hedge fund customers deceive the mutual funds. Okin, the Head of CIBC's Private Client Services, and Abry, Sassano's and Baruh's branch manager, supervised Sassano and Baruh and knew of, and assisted, Sassano and Baruh's deceptive market timing practices.
The Division of Enforcement seeks cease-and-desist orders, disgorgement, civil penalties, prejudgment interest, and all other remedial sanctions that are appropriate and in the public interest. (Rels. 33-8778; 34-55208; IA-2587; IC-27692; File No. 3-12554).
William Sorin, former General Counsel of Comverse Technologies, consented to sanctions under Rule 102(e) in connection with the backdating stock options scandal involving that company and Kobi Alexander. This follows the entry of a consent injunction in federal district court enjoining Sorin from future violations of federal securities laws. The Commission's complaint alleges, among
other things, that beginning no later than 1991, and continuing through 2001, Sorin engaged in a fraudulent scheme with Comverse's former Chairman and Chief Executive Officer, and from at least 1998 with Comverse's former Chief Financial Officer, to grant undisclosed, in-the-money options to themselves and others, by backdating stock option grants to coincide with historically low annual and quarterly closing prices for Comverse's stock. Among other things, the Commission's Complaint alleges that Sorin created company records that falsely indicated that Comverse's compensation committee had approved a grant of stock options on a date when, in reality, no such corporate action took place. The complaint also alleges that Sorin created false company records that facilitated a similar backdating scheme at Ulticom, Inc., another public company that is a majority-owned subsidiary of Comverse.
In a speech before the Securities Traders Association, Doug Shulman, Vice Chair of NASD, addressed a number of issues, including the following: the merger of the NYSE and NASD regulatory arms, the effect of technology and product convergence on the markets, and Regulation NMS.
The NYSE and Tokyo Stock Exchange agreed to an alliance that could ultimately lead to cross-listings of securities, in NYSE's latest move toward globalization. See WSJ, Tokyo Exchange, NYSE Agree to Form an Alliance. For more details, see the NYSE press release.
As expected, Altria announced that it would split up Altria and Kraft Foods. The transaction will take place by the end of March, and Altria shareholders will get .7 share of Kraft for every Altria share they own. WSJ, Altria Board Approves Spinoff Of Company's Kraft Foods Unit.
Is there a backlash against private equity funds? Yes, says a WSJ columnist, citing Clear Channel Communications, and it is not deserved. The question is why can't public company managers produce the same profits for their shareholders that the private firms do? See WSJ, Private Equity's Successes Stir Up A Backlash That May Be Misdirected.
BetterInvesting, a NFP umbrella group of investment clubs, once riding high, is facing dissension from many of its mostly senior volunteers, who question its high expenses and governance practices. Meanwhile, it is trying to recruit new investors, particularly teenagers, and has received a grant to teach investing to high schoolers. See WSJ, Peeved Members Of Investing Clubs Turn on Leaders.
Carl Icahn is at it again. He announced yesterday that he is seeking a seat on the board of directors of Motorola. He has only a 1.4% interest in the company, whose stock prices has been in a decline for some months. Last year, Icahn threatened Time-Warner with a proxy contest before backing down. See NY Times, Icahn Seeks Board Seat at Motorola. The story also makes page one of the WSCJ, Icahn Bid Adds To Woes Dogging Motorola's CEO.
The New York Times features Altria's proposed spinoff of Kraft Foods, in an article discussing investors' positive reactions about the spinoff and the tobacco industry. Altria's a cash cow -- although regulation of smoking increases, people still smoke and apparently will pay any price for cigarettes. See Tobacco’s Stigma Aside, Wall Street Finds a Lot to Like .
Tuesday, January 30, 2007
The Commission's complaint alleged that, during 2001, Pollet traded in the
securities of ten public companies after receiving confidential non-
public information that these entities were either engaged in, or were
contemplating engaging in, "PIPE" financings. A "PIPE" is a private
investment in public equity. Specifically, the complaint alleged that
Pollet routinely sold short the publicly traded securities of the PIPE
issuers prior to the close of the PIPE transaction in order to lock in
gains for SG Cowen's proprietary account.
The Tokyo Stock Exchange is "very close" to an agreement on an alliance with the NYSE, according to TSE's chief executive. John Thain, head of NYSE, predicts that this should eventually led to uniform regulation of cross-border transactions. WSJ, NYSE, Tokyo Stock Exchange Are 'Very Close' to an Alliance.
Did a promise of protection against charges of backdating stock options cause Caremark's board to favor CVS's bid for the company over Express Scripts? So alleges Express Scripts in a lawsuit charging the Caremark board with breaching its obligations to obtain the best price for the shareholders. See WSJ, Caremark Options Probes Ruffle Deal.
Index funds with high fees? That's the new product in the funds industry, as companies create higher-risk index funds with a specific focus -- as a fund that index dividend-paying stocks or stocks of companies that are buying back their own stock. See WSJ, Investors Bombarded By Index-Fund Choices.
Clara Furse, the CEO of the London Stock Exchange, writes a WSJ commentary on the Alternative Investment Market (AIM) of the LSE and how it is attracting U.S. small caps to its market. In the last 12 months, 23 U.S. companies have joined, raising a total of over $1 billion in capital. See Taking AIM at Small Caps.
Congress has attached to the bill raising the minimum wage a provision that caps at $1 million per year the amount of deferred compensation. Other attempts to limit executive compensation may follow. See WSJ, Strike One for Executive Pay.
The SEC, for the first time, has approved a market-based method for valuing employee stock options in a letter to Zions Bancorp. The move could lead to reduced reported values for the options. See SEC Clears Market-Based WayTo Value Staff Stock Options.
The WSJ reports that, the Chinese stock market boom is drawing more investors to the capital and, with it, risky practices familiar to the U.S. dot.com era -- including using funds borrowed from credit card companies and mortgage on the house to invest in the market. See Stock Frenzy In China Stokes Official Concern.
Monday, January 29, 2007
SEC Commissioner Paul Atkins spoke on hedge fund regulation at the Ninth Alternative Investment Roundup on Jan. 29. He reviewed the history of attempted regulation of hedge funds, including the SEC's controversial rule -- invalidated last summer by the D.C. Circuit -- that would have required registration of hedge fund advisers. He also discussed the narrower proposed rule put out for comment in December which will clarify the SEC's authority to bring enforcement actions against investment advisors for fraud against investors and will narrow the pool of investors eligible to invest in hedge and private equity funds. On the latter, the Commissioner expressed concern about the rule as a barrier to entry for newly established hedge fund advisors.