October 2, 2009
Smallest Public Companies Will Begin Complying with SOX 404 in Nine Months
The SEC announced that the smallest publicly reporting companies will begin complying in nine months with the final portion of a key provision of a 2002 corporate governance law that requires companies to report to the public about the effectiveness of their internal control over financial reporting. Under the provisions of Section 404 of the Sarbanes-Oxley Act, public companies and their independent auditors are each required to report to the public on the effectiveness of a company’s internal controls. The smallest public companies with a public float below $75 million have been given extra time to design, implement and document these internal controls before their auditors are required to attest to the effectiveness of these controls.
This extension of time will expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. This expiration date previously had been for fiscal years ending on or after Dec. 15, 2009. The extension was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the study was published less than three months before the December 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.
While the reporting and auditor-attestation grew out of the 2002 law passed by Congress, all U.S. public companies have been required to maintain internal accounting controls since 1977.
FINRA's Special Review Committee Issues Report on Failures to Detect Madoff and Stanford Frauds
FINRA released on its website a Report of a Special Review Committee established to look into why FINRA did not protect investors against the Madoff and Stanford frauds, as well as the transmittal letter from Rick Ketchum to David Becker, General Counsel and Senior Policy Director of the SEC. In the cover letter, FINRA predictably makes reassurances that it is already doing better and has enhanced its examination programs and procedures for detecting fraud, as well as setting up an Office of the Whistleblower and an Office of Fraud Detection and Market Intelligence.
The Special Report includes a number of recommendations, including the sure-to-be-controversial finding that FINRA is "fundamentally hampered" because it does not have jurisdiction over investment advisory activities.
No New Proxy Access Rule Until 2010?The Wall St. Journal reports that the SEC will not decide on its proposed proxy access rule until early 2010, which means a new rule won't be in place for the next proxy season. No explanation is given for the delay -- the SEC had been expected to act promptly after the comment period ended -- but the article mentions U.S. Chamber of Commerce opposition. WSJ, SEC to Vote on Proxy Access in 2010.
October 1, 2009
Second Circuit Affirms Insider Trading Verdict Against Inhouse Attorney
On September 21, 2009, the United States Court of Appeals for the Second Circuit affirmed a jury verdict finding Mitchell S. Drucker, an attorney and former associate general counsel at NBTY, Inc. ("NBTY"), a nutritional supplements manufacturer and retailer, and his father, Ronald Drucker, liable for violating the antifraud provisions of the federal securities and affirmed the remedies imposed by the federal district court. The Court of Appeals also affirmed the District Court's order of disgorgement against relief defendant William Minerva ("Minerva").
The Commission had charged that, while Mitchell Drucker was a lawyer at NBTY, and had learned that NBTY was about to announce lower than expected quarterly earnings, he and his father, a former New York City police detective, sold their entire holdings of NBTY stock just before the negative announcement. Collectively, the defendants avoided $197,243 in losses by selling in advance of the announcement. On December 3, 2007, a federal jury in the United States District Court for the Southern District of New York found Mitchell Drucker and Ronald Drucker violated the antifraud provisions of the federal securities laws by committing insider trading.
FINRA Proposes Expansion of TRACE to All ABSs
FINRA is proposing the expansion of FINRA's Trade Reporting and Compliance Engine TM (TRACE TM) to include all asset-backed securities (ABSs), including mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs). As with the original implementation of TRACE in 2002, FINRA would initially only collect ABS transaction data. After detailed analysis and observation of the market, FINRA would determine whether dissemination of ABS data is appropriate.
TRACE reporting of ABS transactions would provide to FINRA trade prices, volume and other information. Generally, FINRA favors transparency in the debt securities markets. Indeed, real-time dissemination of transaction information is provided for nearly all TRACE-eligible securities. FINRA also believes that the transparency in corporate bonds provided by TRACE today has contributed to better pricing, more precise valuations and reduced investor costs.
However, the characteristics of the ABS market differ sufficiently from the corporate debt market, to the extent that FINRA believes close study of ABS information and the broader market is required to determine if dissemination of ABS market data is beneficial. The plan for ABS disclosure to FINRA, filed as a rule change with the SEC, follows the SEC's approval earlier this week of TRACE reporting for debt issued by federal government agencies, government corporations and government-sponsored enterprises (GSEs), as well as primary market transactions in new issues. The reporting for the government agencies and the primary market goes into effect March 1, 2010.
September 30, 2009
SEC Charges Illinois Money Manager with Misappropriating Investor Assets
On September 29, 2009, the SEC obtained a court order freezing assets and halting a scheme in which Decatur, Illinois-based money manager, William A. Huber, falsely portrayed himself to investors as a successful money manager who managed three private investment funds with assets over $40 million, consistently beating market indices through skillful trading and shrewd investments. In reality, he managed just $3 million in investor assets, frequently lost money on his trading and misappropriated investor funds to pay for his lavish bi-coastal lifestyle.
The SEC alleges that William A. Huber reported false account balances to investors in three investment funds he controlled, stating that the funds held more than $40 million as of August 31, 2009. Huber's funds, however, held little more than $3 million in assets as of that date. Huber lost money on his trading throughout 2009, yet told investors that his trading had generated substantial returns. Huber collected performance fees he did not earn based on his false claims of returns in the funds he managed. Huber made Ponzi-like payments to investors by using newer investor funds to make investor redemption payments at inflated amounts. Huber also diverted investor funds for his personal benefit, including purchasing expensive homes for himself in Naples, Florida and La Jolla, California. The SEC further alleges that shortly after the arrest of Bernard Madoff, in an effort to conceal his fraud from investors, Huber sent his investors an email reassuring them that he managed his funds honestly and that his funds bore no resemblance to Madoff's scheme. Similarly, the complaint alleges that Huber lied to SEC staff members during their investigation of his activities, reporting false account balances to the SEC and claiming hedge fund investments that did not exist.
The SEC's complaint, filed in U.S. District Court in Chicago, alleges that Huber solicited investments in three different private funds he controlled: The Quarter Funds, L.P., The Symmetry Fund, L.P. and The Trimester Fund. Huber managed the funds through Hubadex, Inc., a Decatur, Illinois-based company that he controlled.
The SEC's complaint charges Huber and Hubadex with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and seeks injunctive relief, disgorgement, prejudgment interest, civil penalties and the appointment of a receiver. The SEC's complaint also names Huber's wife, Ruthann Huber, and Huber's investment funds, The Quarter Funds, L.P., The Symmetry Fund, L.P. and the Trimester Fund, as relief defendants based on allegations that they received ill-gotten gains from Huber's fraud.
The Honorable Ruben Castillo, U.S. District Court Judge for the Northern District of Illinois, granted the SEC's request for emergency relief, including an order permanently enjoining Huber and Hubadex from committing further violations of the antifraud provisions and an order freezing the assets of Huber, Hubadex and the relief defendants. Huber, Hubadex and the relief defendants agreed to the emergency relief requested by the SEC.
SEC Obtains Preliminary Injunction in Florida Against Microcap Offering Fraud
The SEC announced that, on September 29, the United States District Court for the Middle District of Florida entered preliminary injunction orders by consent against Stephen W. Carnes, Lawrence A. Powalisz, their companies K&L International Enterprises, Inc., Signature Leisure, Inc., and Signature Worldwide Advisors, LLC (collectively, the Stock Distributors), as well as Jared E. Hochstedler and Enzyme Environmental Solutions, Inc. (Enzyme Environmental). The orders enjoin the defendants from violating Sections 5(a) and (c) of the Securities Act of 1933 for the duration of the litigation and, with respect to the Stock Distributor Defendants, order an asset freeze and a preliminary penny stock bar. The Court had already issued a temporary restraining order on September 25.
The Commission's complaint, filed on September 24, alleges that the defendants engaged in an ongoing scheme to evade the registration provisions of the federal securities laws by selling billions of shares of stock issued by microcap companies to the investing public without adhering to the registration requirements of Section 5 of the Securities Act. According to the complaint, the scheme involved a series of transactions between the Stock Distributors and the microcap companies, including Enzyme Environmental (the Issuers), with the same essential characteristics: First, a Stock Distributor either purported to lend money to an Issuer or the Issuer identified a "debt" owed to its officer that the Issuer and officer assigned to the Stock Distributor. Second, to reduce or eliminate the loan or the assigned debt, the Issuer issued shares of its stock to the Stock Distributor. Third, before or after the stock issuances, the Stock Distributor paid the Issuer or an affiliate of the Issuer. Finally, the Stock Distributor immediately sold the shares into the public market. In two years, the Stock Distributors generated approximately $7 million in illegal profits, the complaint alleged.
In addition to the emergency relief already obtained, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains, and civil penalties against all defendants. The Commission is also seeking penny stock bars against the Stock Distributors.
Update from SEC & CFTC on Harmonization
The chairmen of the SEC and the CFTC announced today that they anticipate, in two weeks, the two agencies will issue a report that will address key areas in which their regulatory schemes are different. The chairmen also expect the report will recommend legislative and regulatory actions to address those differences where appropriate.
On June 17, 2009, the White House released a White Paper on Financial Regulatory Reform calling on the CFTC and SEC to "make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities."
Subject to consideration of the Commissions, a report is expected to be issued on October 15 to address harmonization of futures and securities regulation. It is anticipated that the report will include discussion of the following issues:
Product listing and approval
Exchange/clearinghouse rule approval under rules- versus principles-based approaches
Risk-based portfolio margining and bankruptcy/insolvency regimes
Linked national market and common clearing versus separate markets and exchange-directed clearing
Market manipulation and insider trading rules
Customer protection standards applicable to broker-dealers, investment advisors and commodity trading advisors
Cross-border regulatory matters
In addition, the chairmen expect that the report will contain recommendations to Congress and the President designed to (1) strengthen their respective enforcement powers; (2) enhance and harmonize customer protection standards; and (3) establish an ongoing coordination and advisory process.
SEC & AGCO Corp. Settle FCPA Charges
The SEC settled another case involving Foreign Corrupt Practices Act books and records and internal controls charges, this time against AGCO Corporation, a manufacturer and supplier of agricultural equipment. The Commission’s complaint alleges that from 2000 through 2003, certain AGCO subsidiaries made approximately $5.9 million in kickback payments in connection with their sales of equipment to Iraq under the United Nations Oil for Food Program (the “Program”). The kickbacks were characterized as “after sales service fees” (“ASSFs”), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account; however, AGCO’s subsidiaries’ kickbacks diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in Jordan.
According to the SEC, AGCO failed to maintain an adequate system of internal controls to detect and prevent the payments and AGCO’s accounting for these transactions failed properly to record the nature of the payments. AGCO, without admitting or denying the allegations in the Commission’s complaint, consented to the entry of a final judgment permanently enjoining AGCO from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering AGCO to disgorge $13,907,393 in profits plus $2,000,000 in pre-judgment interest plus a civil penalty of $2,400,000. AGCO will also pay a $1,600,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. AGCO will also enter into a criminal disposition in which the Danish State Prosecutor for Serious Economic Crime will confiscate over $600,000.
GAO Testifies on Financial Reform before Senate Banking CommitteeRichard J. Hillman, Managing Director Financial Markets and Community Investment, GAO, testifed on Sept. 29 before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, on FINANCIAL REGULATION Recent Crisis Reaffirms the Need to Overhaul the U.S. Regulatory System (GAO-09-1049T).
September 29, 2009
SEC Bars Former A.G. Edwards Salesperson for Market-Timing Activities
The SEC found that Thomas C. Bridge, a salesperson formerly associated with broker-dealer A.G. Edwards & Sons, Inc., violated antifraud provisions in connection with trading in mutual funds on behalf of a client who engaged in market timing. The Commission found that Bridge "took various actions - such as establishing multiple accounts with different customer names and numbers, transferring assets between accounts, transferring accounts between branch offices, and linking activity in the accounts to other [salespersons] through the use of "split" [salesperson identification] numbers - in an effort to mislead mutual fund companies as to the identity of their market-timing clients." The Commission concluded that Bridge "deceived the funds into permitting trades that conflicted with fund restrictions" and thereby "employed a scheme to defraud and engaged in a practice that operated as a fraud upon the mutual fund companies."
The Commission also found that James D. Edge, former branch manager of A.G. Edwards' Boca Raton and Lake Worth offices and Bridge's direct supervisor, and Jeffrey K. Robles, former branch manager of A.G. Edwards' Boston (Back Bay) office and Sacco's direct supervisor, failed to exercise that supervision reasonably. The Commission noted that Edge "was fully aware of, and complicit in, the tactics Bridge used to continue trading in mutual funds that had placed restrictions on Bridge's trading." It also determined that Robles "knew Sacco's trading was aberrant and that Sacco was receiving correspondence from mutual fund companies placing restrictions on his trading." The Commission therefore concluded that "Robles' failure to respond adequately to indications that Sacco was engaging in questionable activity was at least unreasonable under the circumstances."
For these violations, Bridge was barred from association with any broker or dealer with a right to reapply after five years and ordered to cease and desist from committing future violations of the antifraud provisions, to pay disgorgement plus prejudgment interest, and to pay a civil money penalty. Edge and Robles were barred from association with any broker or dealer in a supervisory capacity with a right to reapply after five and three years, respectively, and were both assessed a civil money penalty.
SEC Censures United Global Securities for Annuity Switching
The SEC issued a cease-and-desist order against United Global Securities, Inc. and Richard D. Blair, finding that they engaged in the improper switching of variable annuities by convincing 17 customers to surrender variable annuities and repurchase new variable annuities twice within an 18 month period beginning in late 2004. Additionally, the Order finds that Blair caused United Global to maintain inaccurate books and records and operate with a net capital deficiency in January and February 2007.
SEC's Inspector General Issues Recommendations to Improve OCIE and Enforcement DivisionThe SEC's Office of Inspector General released two more reports stemming from its investigation into the agency's failures in connection with the Madoff ponzi scheme. One, entitled Review and Analysis of OCIE Examinations of Bernard L. Madoff Investment Securities, LLC, sets forth 37 recommendations for improving OCIE. The other, Program Improvements Needed Within SEC's Divsion of Enforcement, addresses deficiencies in the Enforcement Division and contains 21 recommendations. Both reports state that OIG expects written corrective action plans within 45 days.
NASAA Examinations Find Problem Areas for Investment Advisers
NASAA today released an updated series of recommended best practices that investment advisers should consider in order to improve their compliance practices and procedures. The best practices were developed after a series of coordinated examinations of investment advisers by 35 state and provincial securities examiners revealed a significant number of problem areas. The 2009 examinations were conducted under the guidance of NASAA’s Investment Adviser Operations Project Group. The top five categories with the greatest number of deficiencies involved registration, books and records, unethical business practices, supervision and financials.
SEC Charges Virtual Reality Company with Fraudulent Offerings
The SEC filed a civil injunctive action against a virtual reality technology company, its principals, and three former sales agents for conducting a fraudulent offering scheme that garnered investors primarily through telemarketer sales out of a boiler room in the company's Delray Beach, Fla., offices. The SEC alleges that 3001 AD, LLC and these individuals raised approximately $20 million from about 500 investors nationwide through a maze of unregistered offerings that hyped the company's supposedly promising virtual reality products, including a helmet system tracking players' head movements to provide a 360-degree view in a video game. Investors were told in the offering materials that the sales commissions paid on their investments were dramatically less than they actually were. An imminent Initial Public Offering (IPO) was repeatedly hyped to investors while no steps were actually being taken toward going public. Prestigious business relationships between 3001 AD and Microsoft, Apple, and former Disney CEO Michael Eisner were touted to investors even though such relationships never existed.
The SEC's complaint, filed in U.S. District Court for the Southern District of Florida, charged 3001 AD, LLC; its principals Jimmy L. Barker, Robert J. Ladrach and Marc S. Rifkin; and three former sales agents Ronald B. Bowsky, Jack W. Maddock and Michael J. Weidgans with making several material misrepresentations and omissions to investors in the offer and sale of units of 3001 AD and a myriad of general partnerships.
The SEC's enforcement action charges 3001 AD and the defendants with violating 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, and charges Barker, Rifkin, Bowsky, Maddock and Weidgans with violating Section 15(a) of the Exchange Act. The SEC is seeking permanent injunctions, disgorgement and financial penalties against all defendants and the imposition of officer and director bars against Barker, Ladrach, and Rifkin
SEC Approves Expansion of TRACE to Agency Debt
FINRA announced today that the SEC approved a major expansion of FINRA's Trade Compliance and Reporting Engine (TRACE) to include debt issued by federal government agencies, government corporations and government sponsored enterprises (GSEs), as well as primary market transactions in new issues. Currently, TRACE reports real time pricing and trade volume information only on corporate bonds trading in the secondary market. The expansion into agency debt will become effective on March 1, 2010. Details about the expansion and its implementation are available at FINRA Regulatory Notice 09-57.
September 28, 2009
SEC Obtains Emergency Relief Against Distributors of Unregistered Microstock
The SEC announced that on September 25, it obtained emergency relief against Stephen W. Carnes, Lawrence A. Powalisz, their companies K&L International Enterprises, Inc., Signature Leisure, Inc., and Signature Worldwide Advisors, LLC (collectively, the Stock Distributors), as well as Jared E. Hochstedler and Enzyme Environmental Solutions, Inc. (Enzyme Environmental) The Honorable Gregory A. Presnell of the United States District Court for the Middle District of Florida entered a temporary restraining order (TRO) enjoining all defendants from violating Sections 5(a) and (c) of the Securities Act of 1933. Judge Presnell also ordered an asset freeze against the Stock Distributors and temporarily prohibited them from participating in any offering of penny stock.
The SEC’s complaint, filed on September 24, alleges that the defendants engaged in an ongoing scheme to evade the registration provisions of the federal securities laws by selling billions of shares of stock issued by microcap companies to the investing public without adhering to the registration requirements of Section 5 of the Securities Act. According to the complaint, the scheme involved a series of transactions between the Stock Distributors and the microcap companies, including Enzyme Environmental (the Issuers), with the same essential characteristics: First, a Stock Distributor either purported to lend money to an Issuer or the Issuer identified a “debt” owed to its officer that the Issuer and officer assigned to the Stock Distributor. Second, to reduce or eliminate the loan or the assigned debt, the Issuer issued shares of its stock to the Stock Distributor. Third, before or after the stock issuances, the Stock Distributor paid the Issuer or an affiliate of the Issuer. Finally, the Stock Distributor immediately sold the shares into the public market. In two years, the Stock Distributors generated approximately $7 million in illegal profits the complaint alleged.
In addition to the emergency relief already obtained, the SEC is seeking permanent injunctions, disgorgement of ill-gotten gains, and civil penalties against all defendants. The SEC is also seeking penny stock bars against the Stock Distributors.
SEC Announces Speakers at Securities Lending and Short Sales Roundtable
On Sept. 29-30, the SEC will host a one and a half day roundtable to solicit the views of investors, issuers, financial services firms, self-regulatory organizations and the academic community regarding securities lending and short sales. The roundtable will include a comprehensive overview of securities lending and also analyze possible short sale pre-borrowing requirements and additional short sale disclosures. The roundtable discussion will be available via webcast on the Commission's Web site.
The roundtable will consist of panels focused on securities lending and possible short sale pre-borrowing requirements and additional short sale disclosures. The panelists (their bios are here) will consider a range of securities lending topics, such as current lending practices and participants, compensation arrangements and conflicts, the benefits and risks of securities lending, risks related to cash collateral reinvestment, improvements to transparency, and consideration of whether the securities lending regulatory regime can be improved for the benefit of investors. The panelists will also consider short sale disclosure topics, such as whether investors would benefit from adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities, and requiring public disclosure of individual large short positions. In addition, the panelists will evaluate the potential impact of imposing a pre-borrow or enhanced “locate” requirement on short sellers, potentially on a pilot basis, as a way to curtail abusive “naked” short selling.
The Commission will accept comments regarding issues addressed in the roundtable discussion until October 30, 2009.
Ohio Attorney General Amends Complaint in Class Action Against BofA
Ohio Attorney General Richard Cordray announced today that the Lead Plaintiff group in a securities class action lawsuit against Bank of America has filed a consolidated amended complaint. The complaint alleges that statements made in 2008 by Defendants regarding the Bank of America merger with Merrill Lynch failed to disclose billions of dollars in known losses at Merrill Lynch and Bank of America and billions more in accelerated agreed-upon bonuses to be paid to Merrill Lynch executives and employees.
The Lead Plaintiff group includes: the State Teachers Retirement System of Ohio; the Ohio Public Employees Retirement System; the Teacher Retirement System of Texas; Stichting Pensioenfonds Zorg en Welzijn, represented by PGGM Vermogensbeheer B.V.; and Fjärde AP-Fonden.
The lawsuit alleges that Bank of America, during merger negotiations, agreed to allow Merrill Lynch to pay up to $5.8 billion in discretionary year-end bonuses to its executives and employees, but failed to disclose that material information important to shareholders. Additionally, in the two months just prior to the shareholder vote on the merger, Merrill Lynch suffered billions in losses. The complaint alleges that senior executives at both Merrill Lynch and Bank of America were aware of these massive and highly material losses but did not disclose the information to investors prior to the vote.
SEC Charges Detroit Broker with Participating in Ponzi Scheme
The SEC charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into refinancing the mortgages on their homes in order to fund their investments in a $250 million Ponzi scheme. The SEC alleges that Bluestein acted as the single largest salesperson in the Ponzi scheme operated by Edward May and his company, E-M Management Company LLC (E-M). The SEC previously filed charges against May and E-M in connection with the fraudulent scheme. The SEC alleges that Bluestein specifically targeted potential investors who were retired or elderly and conducted so-called “investment seminars” in Michigan and California to lure them into investing in E-M securities.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of Michigan, alleges that Bluestein facilitated May’s fraudulent scheme by raising approximately $74 million from more than 800 investors through the sale of E-M securities over a five-year period. Bluestein, through his company Maximum Financial, conducted numerous investment seminars to find new E-M investors.
The SEC’s complaint alleges that Bluestein misrepresented to investors that the investments were low-risk and that he had conducted adequate due diligence with respect to the investments when, in fact, he did little to investigate the legitimacy of the E-M offerings even when confronted with serious red flags about the existence of some transactions. Bluestein also misled investors about the compensation he was receiving from the offerings by failing to disclose that he received at least $2.4 million in commissions from May and E-M in addition to the $1.4 million in disclosed compensation he received from investor funds.
The SEC complaint alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 thereunder by Bluestein. As part of this action, the SEC seeks an order of permanent injunction against Bluestein as well as the payment of disgorgement of ill-gotten gains, prejudgment interest and financial penalties.