Saturday, January 17, 2009
I am not certain when it was posted, but I just discovered the SEC's 2008 Report posted on its website, to "celebrate" the 75th anniversary of the SEC. It's pretty much a fluff piece and nary a tone of defensiveness nor irony as the Report recounts the accomplishments of the agency during the time when its effectiveness is being seriously questioned and the issue at Mary Schapiro's confirmation hearing was how to restore the SEC's credibility as a tough regulator. But if you're wondering what the agency accomplished in 2008, here's the agency's account.
On January 14, the SEC issued an administrative Order against Michael K. Brugman. The Order finds that from mid-2001 through December 2002, Brugman, who was at the time a wholesaler for Invesco Funds Group, Inc. (IFG), accepted personal payments totaling over $3 million from various entities in exchange for procuring market timing capacity with the Invesco funds. Brugman never disclosed these payments to IFG. The Order bars Brugman from association with any broker, dealer, or investment adviser, and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. Additionally, the Order states that Brugman shall cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and shall pay disgorgement of $700,000.00. Brugman consented to the issuance of the Order without admitting or denying any of the findings in the Order.
The SEC's Office of Economic Analysis (OEA) has extended the deadline to January 31 for public companies’ participation in a Web-based survey about the costs and benefits of Section 404 of the Sarbanes-Oxley Act of 2002. The survey, which is available at https://404survey.sec.gov, will help inform the SEC’s ongoing cost-benefit study of Section 404 implementation with a focus on the consequences for smaller companies. More than 2,000 companies already have completed the voluntary survey, which is open to any company with Section 404 compliance experience in the U.S. and globally.
The SEC says that it wants to assess the effects of measures taken by both the SEC and the Public Company Accounting Oversight Board (PCAOB), including whether the measures have helped companies reduce their costs of compliance and whether the Commission should consider additional measures.
Thursday, January 15, 2009
The SEC filed a Complaint For Injunctive Relief today in the United States District Court for the Middle District of Florida against BarrierMed, Inc. (BarrierMed) and BarrierMed Glove Co. (BarrierMed Glove) (collectively, the Companies) and their founder and former chief executive officer and president Victor J. Ragucci. BarrierMed and BarrierMed Glove purported to develop and sell latex-free gloves for use in the medical industry. The Commission's complaint alleges that Ragucci and the Companies fraudulently raised over $11 million from hundreds of investors nationwide by offering and selling unregistered securities through a series of private offerings from at least 2003 through approximately February 2007. According to the complaint, Ragucci made materially false and misleading statements to investors concerning the Companies' operating results, revenues, future profits and the nature and impact of certain contracts. The Complaint also alleges that Ragucci misled investors regarding the Companies' production capabilities and announced product launches despite failing to obtain requisite United States Food and Drug Administration approvals to sell the gloves. The complaint further alleges that the defendants repeatedly misrepresented that the Companies were preparing to conduct an initial public offering, fabricated Ragucci's credentials, and misrepresented Ragucci's salary.
The Commission seeks permanent injunctions and disgorgement of ill-gotten gains with prejudgment interest against the defendants. The Commission also seeks the imposition of a civil money penalty and an officer and director bar against Ragucci.
The SEC has posted the record of proceedings of the TWENTY-SEVENTH ANNUAL SEC GOVERNMENT-BUSINESS FORUM ON SMALL BUSINESS CAPITAL FORMATION PROGRAM, held on November 20, 2008, at its website.
Another Day, another Ponzi scheme --
On January 15, 2009, the SEC filed a Complaint For Injunctive and Other Relief ("Complaint") in the United States District Court for the Northern District of Georgia against CRE Capital Corporation ("CRE") and James G. Ossie ("Ossie"). The Complaint alleges that, since at least early 2008, CRE and Ossie have raised at least $25 million from over 120 investors. As alleged in the Complaint, CRE offers "30 Day Currency Trading Contracts," which promise a guaranteed ten percent (10%) return (the "ROI") in thirty days. The Complaint also alleges that CRE and Ossie claim that they generate profits sufficient to pay these guaranteed returns by trading United States and Japanese currency contracts as the exchange rate fluctuates. Further, the Complaint alleges that CRE and Ossie told investors that the program involves very little risk because CRE has established a large, defensive reserve fund from which to pay back the 10% ROI, plus redeemed principal. In fact, as alleged in the Complaint, CRE does not generate sufficient returns from currency trading to pay the promised returns. The Complaint alleges that the defendants claim CRE and its program were audited by an outside accounting firm which concluded that the investment program was not a Ponzi scheme. In fact, according to the complaint, CRE operated as a Ponzi scheme by paying all returns to investors from funds contributed by new investors.
The Complaint also alleges that CRE planned to launch a $100 million stock offering in early 2009, pursuant to which CRE intended to sell 50 million shares at $2 per share. In connection with that offering, the Complaint alleges that Ossie told potential investors that CRE business operations had been analyzed by an independent firm for estimation of stock value, and that the firm opined that CRE stock should be worth $40-$45 per share. The complaint alleges that these projections were misleading because CRE was insolvent.
On January 15, 2009, the defendants consented to the entry of an order granting the Commission's requests for (i) a temporary restraining order; (ii) an asset freeze; (iii) an accounting of all funds raised; (iv) the appointment of a receiver for defendant CRE; and (v) an order expediting discovery and preventing the destruction of documents. The Commission's Complaint also seeks (i) preliminary and permanent injunctions against future violations; (ii) disgorgement of ill-gotten gains plus prejudgment interest; and (iii) imposition of civil penalties.
The confirmation hearing of Mary Schapiro, currently FINRA CEO and President-Elect Obama's pick for SEC Chair, was held today. According to a Wall St. Journal blog, it was uneventful. When she was asked about FINRA's failure to uncover the Madoff fraud, she noted that the fraud was in his investment advisory operation, over which FINRA has no regulatory authority. The most animated exchange was elicited by a question about the WSJ's article today that was highly critical of Schapiro's performance at FINRA. Schapiro said that the article was unfair and enumerated FINRA's accomplishments during her tenure.
Wednesday, January 14, 2009
A SEC Administrative Law Judge has issued an Initial Decision in Steven Altman, Esq., finding that Steven Altman (Altman) committed improper professional conduct, violating Section 4C of the Securities Exchange Act of 1934 and Securities and Exchange Commission (Commission) Rule of Practice 102(e). The Initial Decision finds that Altman, while representing a witness in a Commission administrative proceeding, sought benefits for his client in exchange for behavior and/or testimony by the client that would have adversely impacted that proceeding. Based on the findings of improper professional conduct and public interest factors, Chief Administrative Law Judge Brenda P. Murray has suspended Altman from practicing as an attorney before the Commission for a period of nine months. (
SEC Commissioner Luis A. Auilar gave a speech, Empowering the Markets Watchdog to Effect Real Results, at the North American Securities Administrators Association's Winter Enforcement Conference on January 10, 2009. He addressed short-term internal fixes the SEC can make to improve its tarnished image as an effective law enforcement agency and also proposed some legislative reforms. As to the first, he stated:
As many of you know, I became an SEC commissioner just over five months ago. In my first speech after being appointed, I expressed concern with the potential drop off in large investigations and the dramatic decline in the past few years in the amount of penalties that the Commission seeks and collects. Recently, it has been nearly impossible to turn on a TV or pick up a newspaper without seeing headlines criticizing the SEC and questioning whether the SEC is committed to aggressive and robust enforcement. In my experience, this is not an accurate perception of the dedication of the SEC's staff. However, there is no question that the time is now for the SEC to answer its critics by demonstrating its commitment to be the markets watchdog. To effectively do this — the SEC should undertake some internal shifts in policy and practice.
In my view, in terms of immediate actions, the SEC should:
eliminate its penalty pre-authorization pilot program;
rebuild and empower its enforcement staff; and
concentrate its resources on cases with greater reach into the market.
On January 12, the SEC settled an enforcement action against investment adviser Gabelli Funds, LLC (Gabelli) for violations of Section 19(a) of the Investment Company Act of 1940 (Investment Company Act) and Investment Company Act Rule 19a-1. Section 19(a) of the Investment Company Act and Investment Company Act Rule 19a-1 require a fund to provide shareholders contemporaneous notices identifying the sources of shareholder payments if any portion of those payments is from sources other than the fund's accumulated net income. The Commission found that from January 2002 to December 2003, two publicly-traded, closed-end funds Gabelli managed, the Gabelli Utility Trust and the Gabelli Convertible and Income Securities Fund Inc., made a total of 31 shareholder distributions that were funded in part from shareholder capital and capital gains. None of those distributions to shareholders were accompanied by the required Section 19(a) notice. Pursuant to the settlement, Gabelli will pay a penalty of $450,000.
According to the New York Times' Dealbook (nothing posted on SEC website), Ramesh Chakrapani, a managing director in the London office of the Blackstone Group, was charged with running an insider trading scheme that netted $3.6 million in profits. According to the SEC complaint, Chakrapani leaked confidential information about the 2008 takeover of the supermarket Albertson's.
Tuesday, January 13, 2009
The SEC issued its final rule adopting amendments to the form used by mutual funds to register under the Investment Company Act of 1940 and to offer their securities under the Securities Act of 1933 in order to enhance the disclosures that are provided to mutual fund investors. The amendments require key information to appear in plain English in a standardized order at the front of the mutual fund statutory prospectus. The Commission is also adopting rule amendments that permit a person to satisfy its mutual fund prospectus delivery obligations under Section 5(b)(2) of the Securities Act by sending or giving the key information directly to investors in the form of a summary prospectus and providing the statutory prospectus on an Internet Web site. Upon an investor’s request, mutual funds are also required to send the statutory prospectus to the investor. These amendments are intended to improve mutual fund disclosure by providing investors with key information in plain English in a clear and concise format, while enhancing the means of delivering more detailed information to investors. Finally, the Commission is adopting additional amendments that are intended to result in the disclosure of more useful information to investors who purchase shares of exchange-traded funds on national securities exchanges.
The effective date of the rule is March 31, 2009.
FINRA announced today that it has fined Leonard & Co. of Troy, MI, $225,000 for numerous violations, including the illegal sale of more than two million shares of penny stock on behalf of customers. FINRA also required the firm to retain an independent consultant to review its supervisory systems and procedures. In addition, FINRA has barred Robert J. Cole, formerly a registered representative with Leonard & Co., for his role in the illegal sales.
FINRA found that Leonard & Co. and Cole participated in an illegal distribution of a penny stock, Shallbetter Industries, by selling over 2.2 million unregistered shares of the stock into the public markets from three related customer accounts. Cole, who handled the accounts, was aware that trading in the accounts was directed by a "control person" of Shallbetter. Most of the shares were deposited into the accounts in certificate form with restrictive legends attached to the certificates. Cole arranged to have the restrictive legends removed from the stock certificates so the unregistered shares could be sold into the public markets.
Shallbetter is a thinly-traded penny stock. During the time of the sales activity, the company claimed in public filings with the Securities and Exchange Commission (SEC) that it owned mineral exploration licenses and interests in Outer Mongolia. The sales from the Leonard & Co. accounts occurred between August and November 2006 and generated over $3.1 million in proceeds for the accounts. FINRA found that the sales coincided with a campaign by third parties to promote Shallbetter through widespread spam e-mail and the issuance of numerous press releases.
FINRA also issued Regulatory Notice 09-05, Unregistered Resales of Restricted Securities, to remind firms and brokers of their obligations to determine whether securities are eligible for public sale before participating in what may be illegal distributions. It also discusses the importance of recognizing "red flags" of possible illegal, unregistered distributions and reiterates firms' obligations to conduct searching inquiries in certain circumstances to avoid participating in illegal distributions.
The SEC announced that the United States District Court for the Northern District of Illinois entered a Final Judgment as to defendant John Zeglis, in his capacity as Executor to the Estate of James D. Zeglis ("Zeglis, as Executor" or "the defendant") on January 7, 2009. James D. Zeglis died on August 15, 2008.
The SEC's Complaint, filed on September 16, 2008, alleged fraud by James D. Zeglis ("Zeglis"), Gautum Gupta ("Gupta") Jim W. Dixon ("Dixon") and Lance D. McKee ("McKee") in connection with insider trading in the securities of Georgia-Pacific Corporation. The Complaint alleged that Zeglis misappropriated material nonpublic information from his brother, a member of Georgia-Pacific's board of directors, and further alleged that on November 10, 2005, three days before a public announcement that Georgia-Pacific had agreed to be acquired by Koch Industries, Inc., Zeglis tipped Dixon and Gupta, both of whom purchased Georgia-Pacific securities. Gupta, in turn, tipped McKee, who also purchased Georgia-Pacific securities. Further, the Complaint alleged that on Sunday, November 13, 2005, Koch Industries, Inc. ("Koch") publicly announced a definitive agreement for a Koch subsidiary to make a cash tender offer for all shares of Georgia-Pacific. The following day, Georgia-Pacific's stock price increased 36% in response to the announcement. McKee then sold his Georgia-Pacific securities, realizing a profit of $7,157.60. Dixon also realized a profit of $116,000 from the sale of Georgia-Pacific options. Thereafter, over the course of several months, Dixon paid Zeglis kickbacks from his ill-gotten gains of approximately $25,000.
The Court ordered disgorgement and prejudgment interest against Zeglis, as Executor, in the respective amounts of $25,000 and $5,254.67. Zeglis, as Executor, consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's Complaint.
On October 9, 2008, final judgments were also entered against Dixon and McKee.
The SEC issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities and Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions against Paul G. Risoli., a former registered representative associated with Banc of America Securities LLC. The Order finds that on Aug. 2, 2007, Risoli pled guilty to criminal charges of wire fraud and conspiracy to commit wire fraud and commercial bribery. The Order further finds that the criminal charges to which Risoli pled guilty, alleged that Risoli caused Banc of America to allocate stock from certain initial public offerings and secondary offerings to Q Capital Investment Partners, LP (Q Capital) in exchange for Q Capital paying Risoli cash kickbacks. Based on the above, the Order bars Risoli from association with any broker, dealer, or investment adviser, with the right to reapply for association after three years to the appropriate self-regulatory organization, or if there is none, to the Commission. Risoli consented to the issuance of the Order without admitting or denying the findings in the Order, except as to his guilty plea.
The SEC announced the issuance of an Order Instituting Administrative Proceedings Pursuant to 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanction (Order) against Joseph Lando, a former securities lending representative and head of sales for Janney Montgomery Scott, LLC. The Order finds that on Oct. 23, 2008, Lando pled guilty to one count of commercial bribery before the United States District Court for the Eastern District of New York. The count of the criminal indictment to which Lando pled guilty alleged, inter alia, that in or about and between January 2003 and November 2004, Lando, together with others, did knowingly and intentionally aid a manager at Van der Moolen Specialists USA, LLC in paying, and a stock loan trader at National Investor Services Corp. (NISC) in receiving, bribes to influence the NISC's trader's conduct in relation to NISC's affairs.
Based on the above, the Order bars Lando from association with any broker or dealer. Lando consented to the issuance of the Order without admitting or denying any of the Commission's findings, except he admits to the Commission's jurisdiction over him and the subject matter of the proceedings and his guilty plea.
The SEC announced that the United States District Court for the Eastern District of Pennsylvania entered a Final Judgment of permanent injunction and other relief, including a permanent officer and director bar against Kevin J. Heron ("Heron"), the former General Counsel of Amkor Technology, Inc. ("Amkor"). Without admitting or denying the Commission's allegations, Heron consented to the entry of the Final Judgment.
The judgment settles the Commission's claims against Heron in a civil action filed on April 18, 2007. The SEC alleged that from October 2003 through June 2004, Heron engaged in a pattern of insider trading by trading in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions. As alleged in the complaint, Heron executed more than fifty illegal trades in Amkor stock and options on the basis of material, nonpublic information that Heron had learned as a result of his position as general counsel.
In October 2007, in a parallel criminal proceeding, Heron was convicted of securities fraud. Heron was sentenced to, and is currently serving, fifteen months incarceration, and ordered to forfeit approximately $43,000 of illegal trading proceeds.
Monday, January 12, 2009
The SEC settled administrative charges against Mark E. Salyer, a registered representative for MetLife Securities, Inc. The SEC alleged that Salyer, from at least June 2005 through October 2007, fraudulently diverted approximately $6 million from the accounts of at least 33 MetLife customers to multiple entities, two of which he directly controls. According to the complaint, Salyer diverted the money by forging customer signatures on wire transfer forms and by convincing customers to invest in a company he controlled under the guise that it was a MetLife investment. The complaint further alleged that to facilitate and otherwise conceal his fraud, Salyer falsified customer brokerage account statements or provided customers with fraudulent explanations for discrepancies in the account balances reflected in their account statements.
Based on the above, the Order bars Salyer from association with any broker, dealer, or investment adviser. Salyer consented to the issuance of the Order without admitting or denying any of the findings in the Order except as to the jurisdiction of the Commission over him and the entry of the permanent injunction against him. (Rel. 34-59227; AAE Rel. 2826; File No. 3-13330)
Sunday, January 11, 2009
Punitive Damages in Securities Arbitration: An Empirical Study, by Stephen J. Choi, New York University - School of Law, and Theodore Eisenberg, Cornell University - School of Law, was recently posted on SSRN. Here is the abstract:
This article provides the first empirical analysis of punitive damages in securities arbitrations. We report that punitive damage awards occur in a non-trivial fraction of securities arbitrations. Using a data set of over 6,800 securities arbitration awards, we find that claimants prevailed in 48.9 percent of arbitrations, and that 9.1% of those claimant victories included a punitive damages award. We also report that the existence of a punitive damages award was associated with claims that suggested egregious misbehavior and with claims with higher compensatory awards. We test whether securities arbitration results in different punitive damages compared with litigation before juries and judges. The relation between punitive and compensatory awards did not differ substantially between securities arbitrators and data on juries available from periodic Civil Justice Surveys by the Bureau of Justice Statistics. The rate of punitive awards by arbitrators was higher than the overall rates for juries and judges and slightly lower than the rate of punitive awards by juries in cases lacking bodily injury.