Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, March 6, 2009

SEC Charges Former Officers of CSK Auto with Accounting Fraud

The SEC filed a civil injunctive action in the United States District Court in Phoenix, Arizona against two former senior officers, Martin G. Fraser and Don W. Watson, the former controller, Edward W. O'Brien, and a former supervisor, Gary M. Opper, of Phoenix-based CSK Auto Corporation (CSK). The Commission's complaint alleges that the defendants orchestrated a multi-million dollar accounting scheme to inflate the company's financial results and overstate its net income in 2002 through 2004. At the time of the fraud, CSK was one of the nation's largest auto parts retailers with over 1000 stores located throughout the western United States. In July 2008, CSK became a wholly owned subsidiary of O'Reilly Automotive, Inc. 

The Commission is seeking a permanent injunction from future violations, disgorgement, prejudgment interest, and civil penalties against all the defendants, and an order barring Fraser, Watson, and O'Brien from serving as a director or officer of a public company.

March 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Sanctions Brokerage Firm for RR's Manipulation

The SEC issued administrative Orders against Newbridge Securities Corp (Newbridge) and Eric M. Vallejo. The Orders find that in 2003 and 2004, Newbridge and Vallejo failed reasonably to supervise Newbridge registered representative Daniel M. Kantrowitz while Kantrowitz was engaged in the manipulation of two stocks. The Order as to Newbridge further found that Newbridge failed reasonably to supervise Kantrowitz while he was engaged in the unregistered distribution of one of the stocks, failed to supervise other registered representatives who sent emails to customers during the waiting periods of two initial public offerings, and itself violated Sections 5(a) and (c) of the Securities Act of 1933.  Based on the foregoing, the Newbridge Order censures Newbridge and orders it to cease and desist from committing or causing any violations and any future violations of the Sections 5(a) and (c) of the Securities Act; orders the firm to pay disgorgement of $206,711 plus prejudgment interest of $1,722, and a civil penalty of $80,000; and directs Newbridge to comply with an undertaking to retain an independent consultant to review its written supervisory procedures and supervisory systems, and implement changes to those procedures and systems the independent consultant recommends. The Vallejo Order suspends Vallejo from acting in a supervisory capacity with any broker or dealer for a period of nine months; and orders Vallejo to pay disgorgement of $12,919 plus prejudgment interest of $172.79, and a civil penalty of $20,000. Newbridge and Vallejo each consented to the issuance of the Orders without admitting or denying the findings in the Orders. In the Matter of Newbridge Securities Corp., Guy S. Amico, Scott H. Goldstein, Eric M. Vallejo, and Daniel M. Kantrowitz

March 6, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Approves ICE US Trust's Operation as CDS Central Counterparty

The SEC took action to help improve transparency in the multi-trillion dollar credit default swap market by approving conditional exemptions that will allow ICE US Trust LLC to operate as a central counterparty for clearing credit default swaps.  In December 2008, the SEC approved temporary exemptions allowing LCH.Clearnet Ltd. to operate as a central counterparty for credit default swaps. The Commission has worked in close consultation with the Board of Governors of the Federal Reserve System and the Commodity Futures Trading Commission, executing a Memorandum of Understanding in November 2008 to lay out a framework related to central counterparties for credit default swaps.

The SEC is soliciting public comment on all aspects of these exemptions to assist in its consideration of any further action that may be needed in this area.

March 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Roundtable on Credit Rating Agencies

The SEC will hold a roundtable on April 15 relating to its oversight of credit rating agencies. Discussion topics will include issues related to recent SEC rulemaking initiatives, such as conflicts of interest, competition, and transparency.  Since Congress enacted the Credit Rating Agency Reform Act in fall 2006, the SEC has adopted two major rulemakings and has several pending proposals to further the Act's purpose of promoting accountability, transparency, and competition in the rating industry.

Roundtable participants will include leaders from investor organizations, financial services associations, government agencies, credit rating agencies, and academia. A final agenda including a list of panelists will be announced at a future date.

March 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Court Unfreezes Many Stanford Accounts

On March 5, 2009, the federal district court overseeing the Stanford matter issued an order at the request of Stanford court-appointed receiver Ralph S. Janvey unfreezing approximately 12,000 Stanford investor accounts held at Pershing LLC. The court’s order applies to customer accounts valued at $250,000 or less as of month-end February 2009, and is effective on March 9, 2009. Customers can immediately begin the process of obtaining control of their accounts by arranging to transfer their accounts to a new broker-dealer. To do so, the customer should make arrangements with the new broker-dealer to open a new account.

The court has authorized the release of these accounts unless any of the following conditions apply:

  • They are owned by Stanford shareholders, directors, and certain employees.
    They are owned for the benefit of Stanford companies.
    They are managed by Stanford companies.
    They secure unpaid balances owed by customers or non-purpose loans made to customers.
    They are related to accounts in any of these categories by social security number, address or other similar indicators.

It was reported in the press that some Stanford customers brought suit against the SEC, challenging the freezing of their accounts as an unconstitutional search and seizure.

March 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, March 5, 2009

Three Former Krispy Kreme Officers Settle Fraud Charges

The SEC filed a Complaint in the United States District Court for the Middle District of North Carolina against three former officers of Krispy Kreme Doughnuts, Inc.: Scott A. Livengood (“Livengood”) (former CEO), John W. Tate (“Tate”) (former COO) and Randy S. Casstevens (“Casstevens”) (former CFO). The Complaint alleges that between February 2003 and May 2004, the Company inflated its quarterly and annual earnings and omitted to disclose the impact of certain adjustments on its ability to achieve what had become a prime benchmark of its historical performance, i.e., reporting quarterly earnings per share (“EPS”) that exceeded its previously announced EPS guidance by one cent. According to the Complaint, in the fourth quarter of fiscal 2003 and the first three quarters of fiscal 2004, the Company under accrued or reversed previously accrued incentive compensation expense pursuant to Krispy Kreme’s Senior Executive Incentive Compensation Plan. The respective under accrual and reversals, which were inconsistent with the formal incentive plan, were performed to inflate the Company’s earnings so as to meet the benchmark of exceeding the Company’s guidance by one cent. The Complaint alleges that the defendants understood the existence and significance of the under accrual and the reversals to the Company’s earnings, yet failed to disclose either to the public. In addition, the defendants described favorably the Company’s performance in earnings releases and analyst calls and did not disclose the under accrual and reversals or their impact on Company earnings. Further, the Complaint alleges that Livengood and Casstevens also signed and certified Krispy Kreme filings that misstated the Company’s financial performance. The Complaint also alleges that Tate caused Krispy Kreme to engage in a bogus round-trip transaction to falsely increase its quarterly earnings in the second quarter of fiscal 2004. Finally, the Complaint alleges that each of the defendants sold stock following the Company’s earnings announcement for the second quarter of fiscal 2004.

On the same day the Complaint was filed, the defendants consented to orders permanently enjoining the defendants from future violations, disgorgement of ill-gotten gains with prejudgment interest, and the imposition of civil penalties against defendants. The defendants consented to the entries of the final judgments without admitting or denying the allegations of the Complaint.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Ex-KB Home CEO Indicted for Stock Options Backdating

The Wall St. Journal reports that former KB Home CEO Bruce Karatz was indicted in Los Angeles federal court on backdating stock options fraud charges.  He previously settled SEC charges without admitting wrongdoing and agreed to pay $7.2 million.  WSJ, Ex-KB Home CEO Indicted for Stock-Option Backdating.

March 5, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

GAO Testimony on Systemic Risk Released

SYSTEMIC RISK: Regulatory Oversight and Recent Initiatives to Address Risks Posed by Credit Default Swaps; Highlights of GAO-09-397T:

The U.S. financial system is more prone to systemic risk today because (1) the current  U.S. financial regulatory system is not designed to adequately oversee today’s large and interconnected financial institutions, (2) not all financial activities and institutions fall under the direct purview of financial regulators, and (3) market innovations have led to the creation of new and sometimes complex products that were not envisioned as the current regulatory system developed.  Credit default swaps (CDS) are one of the products that have assumed a key role in financial markets.

March 5, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Gets Freeze on Assets of Alleged Foreign Currency Trading Fraud

On March 4, 2009, the U.S. District Court for the Northern District of Texas appointed a receiver and froze the assets of a Mansfield, Texas resident who is alleged to have raised at least $10.9 million from over 250 investors in a purportedly lucrative foreign currency trading program. Defendant Ray M. White, on behalf of his company, defendant CRW Management, L.P., claimed to have achieved returns as high as 8.1% per week for investors. In truth, the Commission's complaint alleges that White and CRW have been operating a fraudulent scheme since at least April 2007, during which White has misappropriated several million dollars of investor funds to, among other things, finance his son's car-racing career, purchase real estate, and to make Ponzi payments to earlier investors with new investor funds.

The complaint further alleges that the defendants used only $93,900 of the investors' funds to trade in the foreign-currency market, loosing the vast majority of these funds in unsuccessful trades. According to the complaint, White perpetuated his scheme by sending investors fictitious account statements reflecting, in some instances, monthly returns of over 30%. White allegedly supported these bogus returns by making approximately $4.5 in Ponzi payments to investors. White used the remaining amount of investor funds to, among other things, purchase homes and cars, and finance car-racing activities. Approximately $3.5 million was paid to third parties for unknown and undisclosed purposes.

The complaint alleges that White and CRW violated the anti-fraud provisions and  seeks permanent injunctions, disgorgement together with prejudgment interest, and civil penalties.  The Court has frozen the defendants' and relief defendants' assets and appointed a receiver to recover and conserve assets for the benefit of defrauded investors.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Granted Summary Judgment Against Prime Bank Fraud Perpetrator

On February 26, 2009, the United States District Court granted the SEC's motion for summary judgment on its claims against Zahra Ghods ("Ghods"), and a company that she controls, RUSA Cap., Inc. ("Rusa Cap"). They were found to have defrauded investors in connection with Ghods's false promises to earn generous returns for investors in "prime bank" instruments. The Court ordered Ghods to pay disgorgement of $4,045,736, prejudgment interest of $810,121, and a $120,000 civil penalty. In addition, the Court ordered Rusa Cap to pay a civil penalty of $600,000. The Court also enjoined Ghods and Rusa Cap from further violations of the federal securities laws.

The Court found that Ghods and Rusa Cap violated the antifraud provision of the federal securities laws by actively and knowingly participating in certain fraudulent "prime bank" schemes perpetrated by Geoffrey Gish ("Gish"). Gish and the companies that he operated were the subject of a separate enforcement action in SEC v. Geoffrey Gish; Weston Rutledge Financial Services, Inc.; Zamindari Capital, LLC; Lexington International Fund, LLC; and Oxford Adams Capital, LLC, Case No. 1:06-CV-1171-CC (N.D. Ga.), in which a final judgment was entered on June 15, 2007.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Jury Exonerates Broker in CTT Manipulation Case

A jury in the federal district court for the District of Connecticut on March 3, 2009 returned a verdict in favor of Richard A. Kwak, a former registered representative of a broker-dealer in Rancho Bernardo, California.  The SEC charged Kwak with participating in a scheme to manipulate the stock price of Competitive Technologies, Inc., ("CTT"), a technology development company located in Fairfield, Connecticut. The verdict followed a one-week trial.  The Commission's complaint, filed against a total of eight defendants on August 11, 2004, alleged that the defendants participated in a scheme to manipulate and inflate the price of CTT stock from at least July 1998 to June 2001. The complaint alleged that the defendants (which included CTT itself and its former CEO, plus six former registered representatives of broker-dealers) raised and maintained the price of CTT's stock and created a false or misleading appearance with respect to the market for CTT stock through manipulative practices such as placing buy orders at or near the close of the market in order to inflate the reported closing price ("marking the close"), placing successive buy orders in small amounts at increasing prices ("painting the tape"), and using accounts they controlled or serviced to place pre-arranged buy and sell orders in virtually identical amounts (placing "matched trades").

A previous trial in November 2007 resulted in a verdict in the Commission's favor against one scheme participant, Sheldon A. Strauss, a former registered representative from Cleveland, Ohio, and a hung jury against Kwak and one other defendant, Stephen J. Wilson. The Commission retried the case against Wilson, which resulted in an October 14, 2008 jury verdict in Wilson's favor. The Commission retrial of the case against Kwak resulted in the March 3, 2009 verdict. In addition, the Commission previously settled charges in the same case against: former registered representative Chauncey Steele, formerly of Cohasset, Massachusetts, in July 2005; CTT in October 2007; Frank McPike of Ridgefield, Connecticut, the former CEO of CTT, in October 2007; John R. Glushko, formerly a registered representative associated with a broker-dealer in Las Vegas, Nevada, in October 2007; and former registered representative Thomas C. Kocherhans of Orem, Utah, in October 2007.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Freeze on Los Angeles Firms Alleging Real Estate Investment Fraud

The SEC filed a complaint in the United States District Court for the Central District of California against Los Angeles-based Diversified Lending Group (DLG), Applied Equities, Inc. (AEI), and their principal, Bruce Friedman. The SEC alleges that DLG, AEI, and Friedman are perpetrating an ongoing $216 million real estate investment fraud. The court entered an order halting the alleged fraud and freezing the assets of DLG, AEI, and Friedman.  The SEC's complaint alleges that DLG, AEI, and Friedman raised at least $216 million from hundreds of investors nationwide, many of whom are senior citizens, by promising guaranteed high returns through real estate-related investments. Instead, the complaint alleges, Friedman diverted substantial investor money to ventures unrelated to real estate, and also misappropriated at least $17 million to support his lavish lifestyle, including purchases of a luxury home, cars, vacations, jewelry, and designer clothing for himself and an alleged girlfriend, who is named as a relief defendant.

The SEC's complaint charges Friedman and his companies with selling securities in the form of one- or five-year "Secured Investment Notes," representing that DLG pools investor money and invests it 70 to 80 percent in real estate property and 20 to 30 percent in mortgage lending. Once investors invested in the Notes, defendants continued to represent to them that their money was being used as represented, that DLG's investments were profitable, that their money was safe, and that returns of either 9 percent or 12 percent were guaranteed. In fact, as alleged in the complaint, Friedman and his companies did not invest DLG investor proceeds as represented. Instead, they diverted a substantial amount of investor money to undisclosed business ventures unrelated to real property or mortgage lending, including Friedman's charitable foundation and businesses operated by affiliates and Friedman's family members and friends. Friedman and his companies only recently changed their written disclosure to mention these additional business ventures to DLG investors, even though DLG investors had financed them for years. Friedman also misappropriated substantial investor money for his own personal purposes.

In its lawsuit, the SEC obtained an order (1) freezing the assets of DLG, AEI, Friedman, and the relief defendant, Tina Placourakis; (2) appointing a temporary receiver over DLG, AEI and their affiliates; (3) preventing the destruction of documents; (4) granting expedited discovery; (5) requiring accountings from DLG, AEI and Friedman; and (6) temporarily enjoining DLG, AEI, and Friedman from future violations 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 SEC also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against DLG, AEI and Friedman and disgorgement from Placourakis.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Review of Whistleblower Tips

In the wake of criticism that the agency failed to heed repeated warnings that Bernard Madoff was engaged in securities fraud, SEC Chairman Mary L. Schapiro announced today that the agency is moving to improve the handling of whistleblower complaints and enforcement tips in order to better protect investors.  The SEC has enlisted the services of the Center for Enterprise Modernization, a federally funded research and development center operated by The MITRE Corporation, to begin immediately working with the SEC to conduct a comprehensive review of internal procedures used to evaluate tips, complaints, and referrals. The agency is seeking to establish a more centralized process that will more effectively identify valuable leads for potential enforcement action as well as areas of high risk for compliance examinations.

The SEC's review will scrutinize the agency's processes for receiving, tracking, analyzing, and acting upon the tips, complaints, and referrals from these outside sources. The goal of the review is to improve the efficiency, effectiveness, and overall management of how the agency addresses tips, complaints, and referrals, and how SEC staff utilizes the information received to protect investors.

March 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 4, 2009

SEC Finds Krispy Kreme Misstated Earnings in 2003-04

The SEC issued an Order Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Order) against Krispy Kreme Doughnuts, Inc. (Krispy Kreme). The Order finds that Krispy Kreme materially misstated its earnings in its financial statements filed with the Commission between the fourth quarter of fiscal 2003 and the fourth quarter of fiscal 2004. In each of these periods, Krispy Kreme falsely reported earnings per share (EPS) equal to its EPS guidance plus one cent in the fourth quarter of fiscal 2003 through the third quarter of fiscal 2004 or, in the case of the fourth quarter of fiscal 2004, earnings that met its EPS guidance.

Specifically, Krispy Kreme improperly accounted for its incentive compensation plan for senior executive officers (Incentive Plan) and for three round-trip transactions in connection with the acquisition of company franchises. Krispy Kreme's accounting for the Incentive Plan operated as a de facto reserve accounting mechanism which virtually guaranteed that reported quarterly EPS would equal Krispy Kreme's quarterly guidance plus $0.01. For example, in the second and third quarters of fiscal 2004, Krispy Kreme reversed previously accrued incentive compensation expenses, which increased after-tax earnings by $569,999 and $499,999 respectively. By effecting the reversals, Krispy Kreme increased its earnings for each quarter and reported EPS that equaled its previously announced EPS guidance plus $0.01.

In the second, third and fourth quarters of fiscal 2004, Krispy Kreme engaged in round-trip transactions in connection with the reacquisition of a franchise. In each transaction, Krispy Kreme paid money to the franchise, the franchise paid the money back to Krispy Kreme in a pre-arranged manner and Krispy Kreme recorded additional pre-tax net income in an amount roughly equal to the funds originally paid to the franchise. The first round-trip transaction occurred in June 2003, in connection with the reacquisition of a franchise in Texas. Krispy Kreme increased the price it paid for the franchise by $800,000 in return for the franchise purchasing from Krispy Kreme certain doughnut making equipment at the request of Krispy Kreme. At closing, Krispy Kreme paid the additional amount to the franchise and then debited the franchise's bank account for the equipment. This additional revenue boosted Krispy Kreme's net income for the second quarter by approximately $365,000 after taxes. The second round-trip transaction occurred in October 2003, in connection with the reacquisition of a franchise in Michigan. Krispy Kreme increased the price it paid for the franchise in an amount that represented the approximate total of two disputed amounts that Krispy Kreme claimed it was owed by the Michigan franchise. When the reacquisition closed, Krispy Kreme recorded the transaction as if it had been reimbursed for the two disputed amounts and overstated its net income in the third quarter by approximately $310,000 after taxes. The third round-trip transaction occurred in January 2004, in connection with Krispy Kreme's reacquisition of the ownership interest of the manager of a franchise in California. A few days before the closing, Krispy Kreme provided the former franchise manager with funds that he immediately transferred back to Krispy Kreme as payment of a management fee. Krispy Kreme booked this fee as income, thereby overstating Krispy Kreme's net income in the fourth quarter by approximately $361,000.

Based on the above, pursuant to Section 21C of the Exchange Act, Krispy Kreme was Ordered to cease and desist from committing or causing violations and future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13, promulgated thereunder. Krispy Kreme consented to the issuance of the Order without admitting or denying the findings in the Order.

In a related proceeding, the SEC issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Order) against Sherry J. Polonsky. The Order finds that Polonsky, the former Senior Vice President of Finance for Krispy Kreme Doughnuts, Inc., caused Krispy Kreme to record improperly two round-trip transactions in connection with the acquisition of Company franchises located in Michigan and California in the third and fourth quarters of Krispy Kreme's 2004 fiscal year. In both transactions, Krispy Kreme paid money to the franchisee with the understanding that the franchisee would pay the money back to Krispy Kreme. In each instance, Krispy Kreme recognized additional income in an amount roughly equal to the funds that were paid back to it. As a result, Krispy Kreme filed annual, quarterly, and current reports with the Commission that contained misstated financial results, failed to have books and records that accurately and fairly reflected its transactions and disposition of assets, and failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that its accounts were accurately stated in accordance with generally accepted accounting principles.

Based on the above, Polonsky was ordered to cease and desist from causing any violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Polonsky consented to the issuance of the Order without admitting or denying the findings in the Order.

March 4, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (3)

SEC Fines Specialist Firms for Unlawful Proprietary Trading

The SEC brought enforcement actions against 14 specialist firms for unlawful proprietary trading on several regional and options exchanges. The firms agreed to settle the SEC's charges by collectively paying nearly $70 million in disgorgement and penalties.  According to the SEC's order, the firms engaged in improper proprietary trading on the American Stock Exchange, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange. The SEC charged the specialist firms for violating their fundamental obligation to serve public customer orders over their own proprietary interests by "trading ahead" of customer orders, or "interpositioning" the firms' proprietary accounts between customer orders.

The SEC instituted settled administrative and cease-and-desist proceedings against eight specialist firms for unlawful proprietary trading on several regional and options exchanges: Botta Capital Management L.L.C.; Equitec Proprietary Markets LLC; Group One Trading L.P.; Knight Financial Products LLC; Goldman Sachs Execution & Clearing L.P.; SLK-Hull Derivatives LLC; Susquehanna Investment Group; and TD Options LLC.  The SEC filed civil injunctive actions in the United States District Court for the Southern District of New York charging 6 Specialist firms for engaging in unlawful proprietary trading on the Chicago Stock Exchange (CHX). The defendants are Automated Trading Desk Specialists, LLC (ATD); E*Trade Capital Markets LLC (E*Trade); Melvin Securities, L.L.C. (Melvin); Melvin & Company LLC (Melvin Co); Sydan, LP (Sydan); and TradeLink, LLC (TradeLink) (collectively, the Defendants).  Without admitting or denying the allegations set forth in the complaints, the Defendants have consented to the entry of orders permanently enjoining them from engaging in the violations set forth above, and have agreed to disgorge ill-gotten gains totaling in the aggregate over $35.7 million and pay civil penalties totaling more than $6.7 million. The orders are subject to the approval of the Court.

March 4, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, March 2, 2009

SEC Sanctions Investment Adviser for Taking Warrants from Hedge Fund Clients

The SEC announced that it sanctioned M.A.G. Capital, LLC (M.A.G.), a Los Angeles registered investment adviser, and David F. Firestone, its president and sole owner, for taking warrants from three hedge funds that it advises (the Funds) without compensating the Funds for them. M.A.G. and Firestone agreed to settle the charges, without admitting or denying the Commission's findings, by agreeing to the issuance of a censure, a cease-and-desist order, and payment of civil penalties of $100,000 and $50,000, respectively.

On forty-four separate occasions between May 2003 and September 2006, M.A.G. took warrants from the Funds without compensating the Funds for them. The Funds had purchased the warrants and other securities in PIPEs transactions (private investment in public equity). As part of these transactions, M.A.G. took, as compensation for itself, warrants that were being paid for by its clients, the Funds. M.A.G. did not adequately disclose that the warrants that M.A.G. took were being paid for by the Funds and that M.A.G. was not compensating the Funds for these warrants. The net value of the warrants retained by M.A.G. was approximately $18.9 million. Firestone instituted the warrant-taking practice and knew that M.A.G. did not compensate the Funds for the warrants that it took.

M.A.G. and Firestone consented to the issuance of an order which censures them and orders them to cease and desist from committing or causing violations and any future violations of Section 206(2) of the Investment Advisers Act of 1940, and to pay civil penalties of $100,000 and $50,000, respectively. The Commission considered remedial acts promptly undertaken by M.A.G. and Firestone and the cooperation they afforded the Commission staff in its investigation. (Rel. IA-2849; File No. 3-13387)

March 2, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Retirement Home Operator with Fraud

The SEC filed a complaint charging Oregon-based Sunwest Management Inc., with securities fraud and is seeking an emergency court order freezing its assets. The SEC alleges that Sunwest, which operates hundreds of retirement homes across the United States, lied to investors about its operations and concealed the risks of the investments, exposing investors to massive losses when the economic downturn triggered Sunwest's collapse.  According to the SEC's complaint, Sunwest raised at least $300 million from more than 1,300 investors nationwide by promising a steady income stream and touting its success in running the properties. The complaint, filed today in federal district court in Eugene, Ore., charges Sunwest, its former President and CEO Jon M. Harder of Salem, Ore., and several related entities with securities fraud. According to the complaint, Sunwest, which operates more than 200 retirement homes at one point valued at $2 billion, told investors that they would be investing in a particular property. Investors were told that the property would generate sufficient profits to pay annual returns of around 10 percent, and that Sunwest had a track record of never missing a payment. Between 2006 and 2008, Sunwest raised more than $300 million from investors, which was used for the down payments on approximately 100 retirement homes, with the balance financed by institutional lenders and banks.

The SEC alleges that at least half of the properties had lost money, and Sunwest concealed this information from investors by commingling all of its finances and making investor payments from this pot of cash. The SEC further alleges that investor returns came not just from these commingled assets, but from mortgage refinancings as well as loans from Harder. According to the SEC's complaint, Sunwest concealed its precarious financial position and the risks it posed to investors by failing to disclose that Sunwest was being run as a single massive enterprise with its fortunes tied to the success of hundreds of properties and contingent on future financing ability. When the recent credit crisis derailed Sunwest's ability to continue to refinance the properties, payments to investors ceased and many of them stood to lose their entire investments.

The SEC further alleges that, even after Sunwest encountered difficulties refinancing properties and lenders began foreclosing, the defendants continued raising money from investors. Sunwest obtained millions more in investments up through June 2008, continuing to misrepresent that the money was designated for a specific property when, according to the SEC, it was being used to prop up the failing business.

The Commission's complaint additionally seeks disgorgement from a number of Relief Defendants who may have received proceeds related to the misconduct of the Defendants. The Commission therefore seeks an order temporarily freezing the assets of Sunwest Chief Operating Officer Darryl E. Fisher, General Counsel J. Wallace Gutzler, and Chief Restructuring Officer Hamstreet & Associates and its principal Clyde Hamstreet, as well as Harder's wife and several entities Harder controls.

March 2, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NYSE Files Amendment to Rule Change Eliminating Broker Discretionary Voting in Uncontested Elections

The New York Stock Exchange first filed its proposed rule change eliminating broker discretion in voting in uncontested directors' elections in October 2006.  It has just filed Amendment 4 with the SEC.  The NYSE is proposing to amend NYSE Rule 452 to eliminate broker discretionary voting for the election of directors. Rule 452, titled “Giving Proxies by Member Organizations,” allows brokers to vote on "routine” proposals if the beneficial owner of the stock has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. The proposal would also codify two previously published interpretations that do not permit broker discretionary votes for material amendments to investment advisory contracts.  SEC Rel. No. 34-59464; File No. SR-NYSE-2006-92.

March 2, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)