2007-6-26 SEC Speech

Outline of Recent SEC Enforcement ActionsSubmitted by: 1 Joan McKown Chief Counsel Prepared by: 2 Michael Laskin Division of Enforcement U.S. Securities and Exchange Commission Washington, D.C. 1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or its staff. Parts of this outline have been used in other publications. 2 Table of Contents CASES INVOLVING FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS .................................................................................................................. 2 In the Matter of International Business Machines Corporation ........................................................................2 In the Matter of Hewlett-Packard Company .......................................................................................................3 SEC v. The BISYS Group, Inc. .............................................................................................................................4 In the Matter of Motorola, Inc. .............................................................................................................................4 In the Matter of Terry M. Phillips (Take-Two Interactive Software, Inc.).......................................................5 SEC v. Tenet Healthcare Corporation, David L. Dennis, Thomas B. Mackey, Christi R. Sulzbach, and Raymond L. Mathiasen ....................................................................................................................................6 SEC v. Nicor, Inc. and Jeffrey L. Metz.................................................................................................................7 SEC v. Collins & Aikman Corporation, David A. Stockman, J. Michael Stepp, Gerald E. Jones, David R. Cosgrove, John G. Galante, Elkin B. McCallum, Paul C. Barnaba, Christopher M. Williams and Thomas V. Gougherty ......................................................................................................................................8 SEC v. Conrad M. Black, F. David Radler and Hollinger Inc., .........................................................................9 SEC v. Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill (a.k.a. Mary Anne Poland) (Nortel Networks Corp.) ........................................................................................................10 SEC v. MBIA Inc. .................................................................................................................................................10 SEC v. Michael Moran, James Sievers, Martin Zaepfel, James Cannataro, John Steele, Michael Crusemann and Michael Otto........................................................................................................................11 SEC v. Delphi Corporation, J.T. Battenberg, III, Alan Dawes, Paul Free, John Blahnik, Milan Belans, Catherine Rozanski, Judith Kudla, Scot McDonald, B.N Bahadur, Atul Pasricha, Laura Marion, Stuart Doyle and Kevin Curry.......................................................................................................................12 SEC v. Pinnacle Development Partners LLC ....................................................................................................13 SEC v. Salvatore Favata ......................................................................................................................................13 Securities and Exchange Commission v. Doral Financial Corporation...........................................................14 SEC v. Jacob Jon W. James; J.W. James & Associates; J.W. James Borrowing Entity, LLC; J.W. James Investment Group Fund One, LLC; The James Company Fund I, LLC; The James Company Borrowing Entity, LLC; Virtual Cash Flow Corporation; The Cloaking Device, Inc.; and J.W. James Acquisitions, LLC ...........................................................................................................................................15 SEC v. Raytheon Company, Daniel P. Burnham, and Aldo R. Servello .........................................................16 In the Matter of Raytheon Company, Daniel P. Burnham, and Aldo R. Servello..........................................16 SEC v. Scientific-Atlanta, Inc. .............................................................................................................................17 In the Matter of Wallace G. Haislip....................................................................................................................17 In the Matter of Julian W. Edison ......................................................................................................................18 In the Matter of Tribune Company ....................................................................................................................19 SEC v. Federal National Mortgage Association.................................................................................................19 SEC v. Henry C. Yuen..........................................................................................................................................20 SEC v. Elsie M. Leung..........................................................................................................................................20 In the Matter of Jonathan B. Orlick, Esq...........................................................................................................20 SEC v. Tyco International Ltd. ...........................................................................................................................21 SEC v. American International Group, Inc. ......................................................................................................22 SEC v. Ronald Ferguson, et al.............................................................................................................................22 SEC v. John Houldsworth and Richard Napier.................................................................................................23 SEC v. Alan C. Goldsworthy, Walter T. Hilger, and Mark E. Sullivan ..........................................................24 SEC v. McAfee, Inc...............................................................................................................................................25 SEC v. Charles C. Conaway and John T. McDonald, Jr. .................................................................................26 SEC v. Fredrick S. Schiff and Richard J. Lane .................................................................................................27 SEC v. Bernard J. Ebbers....................................................................................................................................28 SEC v. HealthSouth Corporation et al. ..............................................................................................................28 SEC v. Roys Poyiadjis, Lycourgos Kyprianou et al. .........................................................................................29 SEC v. Time Warner, Inc.....................................................................................................................................29 In the Matter of James W. Barge, Pascal Desroches, and Wayne H. Pace .....................................................29 CASES INVOLVING STOCK OPTION BACKDATING ................................................ 30 SEC v. Brocade Communications Systems, Inc. ................................................................................................30 SEC v. Gregory L. Reyes, et al. ...........................................................................................................................30 SEC v. Mercury Interactive, LLC (f/k/a Mercury Interactive Corporation), Amnon Landan, Sharlene Abrams, Douglas Smith, and Susan Skaer ...................................................................................................31 SEC v. Nancy R. Heinen and Fred D. Anderson (Apple, Inc.) .........................................................................33 SEC v. Jacob (“Kobi”) Alexander, David Kreinberg, and William F. Sorin .................................................34 CASES INVOLVING REGULATION FD....................................................................... 36 SEC v. Flowserve Corporation and C. Scott Greer...........................................................................................36 In the Matter of Flowserve Corporation, C. Scott Greer, and Michael Conley..............................................36 CASES INVOLVING ACCOUNTANTS AND AUDITORS ............................................ 37 In the Matter of Clete D. Madden, CPA, and David L. Huffman, CPA..........................................................37 In the Matter of Aron R. Carr, CPA ..................................................................................................................37 SEC v. KPMG LLP ..............................................................................................................................................38 SEC v. KPMG LLP, et al. ....................................................................................................................................38 SEC v. KPMG LLP ..............................................................................................................................................38 In the Matter of KPMG LLP...............................................................................................................................38 In the Matter of KPMG LLP, Gary Bentham, C.A., and John Gordon, C.A.................................................39 In the Matter of Deloitte & Touche LLP, Steven H. Barry, CPA, and Karen T. Baker, CPA......................40 SEC v. Deloitte & Touche LLP ...........................................................................................................................40 In the Matter of Deloitte & Touche LLP............................................................................................................40 In the Matter of KPMG LLP...............................................................................................................................41 ii ..........50 In the Matter of 1st Global Capital Corp................... L..................61 In the Matter of J................................ ............ ............................................................... ...................................................47 In the Matter of Banc of America Securities LLC ....................46 CASES INVOLVING BROKER-DEALERS..............................................................................................................................................48 In the Matter of Goldman Sachs Execution & Clearing............................................. .................................. Inc........................................... Inc... et al....................................................... Billings........... L...................................43 SEC v..........................45 In the Matter of Diagnostic Products Corporation ...................... Inc.......................56 In the Matter of INET ATS........................................................................ Amore..42 In the Matter of Schnitzer Steel Industries..................................................................................... et al..........................P................ John J......................................... CIBC Mellon Trust Co.................................................................................................................58 In the Matter of Sanjay Singh ..57 SEC v.....................................46 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and the Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability.................................60 In the Matter of David A........................................... Watley Group.................................. Incorporated............ .........59 In the Matter of UBS Securities LLC (f/k/a UBS Warburg LLC) .....60 SEC v.................................... Inc...................P........................................................ The Titan Corporation ..............53 In the Matter of Bear...................... Inc............. Morgan Stanley & Co... Finnerty............B..............................62 iii ......... Inc...................54 SEC v............ et al..................................................................... Stearns & Co.................................................................................................................................................................................................................................... Statoil..................58 SEC v......61 CASES INVOLVING FAILURE TO SUPERVISE .................... Baker Hughes Incorporated and Roy Fearnley ...................................................................................... 47 In the Matter of Morgan Stanley & Co........................ A..................... American-Amicable Life Insurance Company of Texas...................... Ramsey & Co. Incorporated & Morgan Stanley DW Inc....................................... LLC and INET ATS......................53 In the Matter of Morgan Stanley & Co........................................................................................ f/k/a Spear....................................................... et al............. 42 SEC v...................................................................................... Morgan Securities Inc..........54 In the Matter of Crowell................. ASA ...................P............ .................................................................................................................................... Inc.....50 In the Matter of Friedman.......58 In the Matter of Instinet.......................................... ... Inc............................ Friedman.......................................................................................... Leeds & Kellogg......51 SEC v...................44 In the Matter of Oil States International............................... Inc......51 In the Matter of IFMG Securities.....................................................55 In the Matter of The Bank of New York ...................................................................61 In the Matter of CIBC Mellon Trust Company....................................................................................................... Weedon & Co......................45 SEC v......................... ............................... et al........... .....................................................................................................................................................................................................................49 In the Matter of Emanuel J............................ 62 In the Matter of Metropolitan Life Insurance Company........................................................................57 In the Matter of Michael Yellin....CASES INVOLVING FOREIGN PAYMENTS ................. ..................................................................75 In the Matter of Fred Alger ........... LLC...... Inc....... O'Meally......................................... K.................................................................................. Inc............................ Viper Capital Management....................................... .... Hoffmann and Kevin J..63 In the Matter of Salvatore F........................................................In the Matter of John B.................................. et al.............79 In the Matter of Prudential Equity Griup...................................................... Gilabert .......................70 SEC v......................................... Samuel Israel III... and Jeffrey K.......... .....................................................77 In the Matter of Deutsche Asset Management...... Arising Out of Investigation of Suspicious Trading Activity and Net Capital Violations By MarketXT ..........70 SEC v........ NASD...... ........ 75 A........................................................................ .............................80 SEC v... Sharon E.........................................64 In the Matter of Philadelphia Stock Exchange.................................. Inc.... Northshore Asset Management et al.....81 iv ....................... Sodano .............................72 SEC v.................................... HL Investment Advisors............................... Bridge......... .................................67 CASES INVOLVING MUNICIPAL BONDS ...........76 In the Matter of Deutsche Bank Securities. and Deutsche Investment Management Americas......................................................................... Inc....................................66 Report of Investigation Regarding NASDAQ.........71 SEC v.................................................... LLC and Hartford Securities Distribution Company.............................................................................................................. Inc................................... Inc...................................................................................65 SEC v.................80 In the Matter of Warwick Capital Management.... Frederick J........68 CASES INVOLVING HEDGE FUNDS .............................................................. LLC.................................................................................................................. Edwards & Sons....................................L.........G.. James D.............63 In the Matter of Richard Robinson.. et al............................................................................................... et al................................ LLC and Keith G....................................... Vaughn and Directors Financial Group.. ... LLC.......................................73 SEC v.......63 CASES INVOLVING SELF REGULATORY ORGANIZATIONS ............... & Carl Lawrence....................................................... Langley Partners......................................................................... McCaffrey .....................................................................................................................................................73 In the Matter of Won Sok Lee and Yung Bae Kim ....................74 SEC v................................................................................................. Inc...................................................... Inc...... et al.......................................66 In the Matter of New York Stock Exchange...... Ltd..........................66 In the Matter of National Stock Exchange and David Colker................................... ........................................... ..................................... Robles...............................75 In the Matter of Thomas C..................78 In the Matter of Hartford Financial Services........................................ California ..................................................... 69 SEC v.........................67 In the Matter of MarketXT and Irfan Amanat ............. Inc............................. 68 In the Matter of City of San Diego........... LLC..................78 In the Matter of BISYS Fund Services......................................... 63 In the Matter of American Stock Exchange LLC.... Group. Edge.......................................... as Overseen by Its Parent.............................................. CMG-Capital Management Group Holding Company....69 In the Matter of Evan Misshula ........................... et al..........74 CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS ........................................................................................................ David Colker ..... ...........................................................99 SEC v. Sonja Anticevic.............................. Stearns Securities Corp..........................................................93 In the Matter of Raymond L............................................ Hafiz Naseem and Francisco Javier Garcia ............................. Thomas J.................. ........................................................................................84 SEC v.............. BMA Ventures.......... Sunil Sehgal....................86 In the Matter of Veras Master Capital Fund...................................................................92 In the Matter of Smith Barney Fund Management LLC and Citigroup Global Markets................................................................................... et al............................... Obus.....................93 In the Matter of Charles J... et al...................... and William Robert Kepler ...... Jennifer Xujia Wang..........................................................................91 SEC v... Inc........... Inc................................... Jones and Lewis E............................ Stanyer ........................ 95 SEC v............................P.......... Pension Fund of America......................... Durgarian..................... ...................................... One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp.............................................................................................. Amerindo Investment Advisors Inc....................................................................................................................... Daniel Calugar and Security Brokerage...................87 In the Matter of Millenium Partners............93 In the Matter of Fiserv Securities.... .....96 SEC v....................................................................... LLC and Mark J............................................................... Karnig H.........84 SEC v. Inc.............................................. Lohmus Haavel & Viisemann...... Sonja Anticevic et al.. Daidone .....83 In the Matter of CapitalWorks Investment Partners........................................... ..........................95 SEC v.... Terry’s Tips and Terry F....................................................................92 SEC v..................... Seema Sehga..... .........................83 In the Matter of Bear..... .. Martin Weiss and Lawrence Edelson....99 SEC v..........................................89 SEC v..........................................85 SEC v. and CIBC World Markets Corp..................................................................................................................................................................... Martha Stewart and Peter Bacanovic .................. et al................................ Braun...... Donnelly.....................................................103 SEC v............... ........... Inc..................In the Matter of Weiss Research..................... .......................................................................................94 CASES INVOLVING INSIDER TRADING .. Philip Evans and Paul Evans .............. LC......................... Force.98 SEC v........................................................................ Correnti......................82 SEC v........... Stearns & Co........... et al...........................................................89 In the Matter of Legg Mason Wood Walker..................91 In the Matter of Canadian Imperial Holdings Inc............. et al.... Thomas W........................................................ Deephaven Capital Management.............................. Gerbasio.......... Christopher M..................... Jr.... L..........................102 SEC v.. Inc.............................................................97 SEC v.... and Dennis J..............88 In the Matter of Federated Investment Management Company............................................... ......... .........104 v ................................ Addeo ...........100 SEC v................. ................ Theodore Charles Sihpol III ........... and Bear................. LLC and Bruce Lieberman .........93 SEC v.... et al.............................. et al.... Balkenhol............................................................................................................. ........... et al................... Nelson J.............................. Inc.................................. et al.. et al......... .........................90 SEC v................................................103 SEC v.. Gary D................................................ Inc.................................................... Allen ............................ Jr..............101 SEC v...............................................89 In the Matter of Theodore Charles Sihpol III............... Gary Herwitz and Tracey A.... et al.......... ................ Utsick................. et al........... Pickens.... et al............ Guillaume Pollet.... and 12daily Pro ......110 SEC v..... and Gordon C................................................................... et al.................................................................................SEC v... Joshua Yafa............. Kirk S......................... Church Extension of the Church of God............ David E...................................................................................................................................... Michael O’Grady............................................................111 SEC v..........................107 SEC v................................ Inc..............................................105 In the Matter of Hilary L.108 Operation Spamalot ....... Whittemore .....114 SEC v................106 SEC v.113 SEC v.118 SEC v.......................... Faisal Zafar and Sameer Thawani ................................................................ Rebecca Parrett............. ..................................... Wright.................114 CASES INVOLVING SECURITIES OFFERINGS . 115 In the Matter of Amaranth Advisors L............................ ................................ Timothy M.. Allied Capital Management..................105 SEC v........................com..... ..............................................................................................C. Ernesto Sibal....117 SEC v...... Jaisankar Marimuthu.........................109 SEC v.. et al..112 SEC v....................................122 vi ... et al........................................................................................... Inc................................ PacketPort.... Malone....................117 SEC v... Compania Internacional Financiera S....................................... Pittsford Capital Income Partners...............115 SEC v.......................... Cantley. Roberts ............... and Joseph M............................ LLC..............................115 SEC v............................................. 107 In the Matter of Park Financial Group..................................................................... Renaissance Asset Fund................. Chockalingam Ramanathan and Thirugnanam Ramanathan ................................................ .......... Donald Ayers and Randolph Speer......C... et al............. International Management Associates....... Aleksey Kamardin ................................... Michael O....... Lance Poulsen...............................................................C..................................................................................... Lifeclicks...120 SEC v....................... Inc..............116 SEC v.................................................... and Yomi Rodrig................................... Shane..........................L.106 CASES INVOLVING MARKET MANIPULATION... .......... et al.....121 SEC v.......................................................... .................................................................119 SEC v............ ................................................................... Inc..........................................................109 Securities and Exchange Commission v............................... Inc....................... and Shea Silva..... John P.......... L........ Hilary L Shane ....................................................................... Nadel...............................................111 SEC v.. Ronald J..................................... et al............. Charis Johnson.........A............. Mervin George Fiessel and Robert Michael Doherty ...................................... After IBM's April 5 announcement. and litigation releases concerning the cases discussed below can be accessed through the Commission’s web site at www. Proc. issuer disclosure.pdf On June 5. The Commission's Order found that IBM did not disclose its expected stock options expense because it was concerned that analysts would add back to their EPS estimates any yearto-year reduction in the options expense instead of using the reduction to off-set an unrelated. IBM did not disclose this information. the majority of analysts reduced their EPS estimates by these amounts. the U. At the time.55 for FY05.14 for 1Q05 and $0. 2005 conference call with analysts. fraudulent securities offerings. IBM announced that beginning in 1Q05 it would report stock options as an expense in its financial statements and advised analysts to adjust their earnings models to account for the change.gov. File No.S. mutual funds and investment advisers. This outline will review some of the Division’s significant recent actions. and insider trading continue to form the core of the enforcement program.39 impact on FY05 EPS results. previously-announced increased pension expense. IBM included a misleading chart in its presentation which. and a transcript and the accompanying exhibits were filed with the Commission in a Form 8-K. to many analysts.10 impact on first quarter EPS results and estimated a $0.INTRODUCTION As our capital markets continue to experience unprecedented growth and expansion. 2007.sec. the Commission announced a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning the impact that the company's decision to expense employee stock options would have on its first quarter 2005 (1Q05) and fiscal year 2005 (FY05) financial results. During the call.gov/litigation/admin/2007/34-55858. administrative releases. According to the Order. 3-12652 (June 5. Copies of orders. financial fraud. The call was simultaneously webcast. IBM expected that its stock options expense for 1Q05 would have a $0. Securities and Exchange Commission’s enforcement program has been challenged to keep pace with market developments. conveyed that the EPS impact of IBM's stock options expense would be $0. The Commission found that IBM provided the misleading information during an April 5. However.sec. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company. CASES INVOLVING FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS In the Matter of International Business Machines Corporation Admin. Violations involving broker-dealers. 2007) http://www. management wanted to avoid this outcome because it would have increased the expected growth rate that analysts had 2 . 2006. 2007. which would have been difficult for the company to achieve because of the year-toyear increase in pension expense.94 the next day. or over 8%. which required IBM to cease and desist from committing or causing violations of these provisions. By April. fellow Board member Thomas Perkins (who was not the director asked to resign) voiced strong objections to the manner in which the leak investigation findings were presented to the Board and to the decision to ask the director to resign. 3-12643 (May 23. 2007) http://www. According to the Commission. The Commission’s Order charged HP with violating the public reporting requirements of the Securities Exchange Act of 1934. HP did not make the mandated disclosures. The Commission found Mr. 2005.gov/litigation/admin/2007/34-55801. Proc.pdf On May 23. or $0. IBM also disclosed that its equity compensation expense was $0.33. instead reporting only the fact that Mr.04 lower than what many analysts had understood IBM's April 5 misleading chart to have indicated it would be. closing at $76. For these reasons. the Commission filed settled administrative charges against HewlettPackard Company for failing to disclose the reasons for a director’s abrupt resignation in the midst of HP’s controversial investigation into boardroom leaks. As described in the Commission’s order. IBM's stock price dropped $6. HP consented to an order that it cease and desist from committing or causing violations of these provisions. Without admitting or denying the Commission's findings. the Board voted to ask the director to resign. policies or practices which was required to be disclosed. Perkins had stepped down. Federal securities laws require a public company to disclose – by making a public filing with the Commission – the circumstances of the disagreement if a director resigns because of a disagreement with the company on any matter relating to its operations. On April 14. Notwithstanding this requirement. Perkins’ disagreement related to HP’s corporate governance and HP’s policies regarding the handling of sensitive information. In the Matter of Hewlett-Packard Company Admin. During the course of a lengthy and heated Board meeting on May 18.05 less than the amount that many analysts were expecting following the April 5 presentation. policies or practices.sec. Perkins resigned from the Board and left the meeting. The Commission found that IBM violated Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 12b-20 thereunder.set for IBM. and the company’s Chairman and several senior executives decided to present the findings to the Board. and therefore was a disagreement related to HP’s operations. IBM announced its 1Q05 financial results and disclosed earnings of $0. which was $0. IBM consented to the issuance of the Order.10 per share for 1Q05. in early 2006 HP initiated an investigation into leaks of confidential information about HP Board meetings to the press. Without admitting or denying the Commission’s findings. 3 . File No. HP investigators had concluded one of HP’s directors was responsible.85 per share. The BISYS Group. and 2003 by roughly $180 million.pdf On May 8. but also occurred in other divisions of the company. Without admitting or denying the Commission's allegations. 2007) http://www. 3-12630 (May 8.sec. and Rules 12b-20. Under a purported marketing support agreement. 13a-11 and 13a-13 thereunder. and it agreed to pay disgorgement and prejudgment interest totaling approximately $25 million. Proc. and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 against Motorola. The improper accounting practices were primarily based in the company's Insurance Services division. in 2001. and offering documents including registration statements. Inc. BISYS agreed to settle the charges by consenting to a permanent injunction against further violations of the relevant reporting. a cable television systems operator. 2001.. and options at prices that were inflated as a result of its violations. 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Litigation Release No. Adelphia paid money to Motorola which was immediately returned to Adelphia in the form of marketing 4 . 20125 (May 23. press releases. The Order found that. Inc. violated the financial reporting. and internal controls provisions of the federal securities laws. the company's overstated financial results were incorporated in annual reports to shareholders. The Commission alleged that BISYS violated Sections 13(a). the Commission in a settled administrative proceeding issued an Order Instituting Cease-and-Desist Proceedings. stock.gov/litigation/admin/2007/34-55725. former BISYS officers and employees engaged in a variety of improper accounting practices that resulted in an overstatement of the company's reported financial results for the fiscal years ended June 30. BISYS filed annual and quarterly reports with the Commission that included financial statements that were inaccurate and misleading. As a result of these improper accounting practices. The Commission further alleged that BISYS received approximately $20 million in ill-gotten gains as a result of its issuance of convertible debt. Motorola. a vendor of digital cable television set-top boxes. entered into a round-trip cash transaction with Adelphia Communications Corporation. 2002. The Commission alleged that from July 2000 through December 2003. short-term earnings targets and a lax internal control environment. and internal control provisions of the Securities Exchange Act of 1934. 13a-1. Inc.gov/litigation/litreleases/2007/lr20125. books-and-records. File No. Admin. In the Matter of Motorola. Making Findings.sec. the Commission announced the filing and settlement of charges that The BISYS Group.. books-and-records. 2007) http://www. a leading provider of financial products and support services. The alleged improper accounting practices were a product of a corporate focus by former management on meeting aggressive. In addition. 2007. Inc. 2007. Inc.SEC v.htm On May 23. and fraudulently recorded those shipments as sales when. In the Matter of Terry M. Depreciation and Amortization. Inc.sec. and 13a-13 thereunder. without admitting or denying the allegations in the complaint. Proc. in actuality. The agreement. (Capitol) and one of its owners. consented to the entry of a final judgment permanently enjoining it from violating Section 10(b) of the Exchange 5 . Capitol only temporarily parked the games for TakeTwo and did not intend to sell them. Motorola agreed to the settlement without admitting or denying the findings in the Commission's Order. Instead. which was backdated and applied retroactively to the prior fiscal year. Adelphia did not use the marketing support payments to market Motorola's cable television set-top boxes. 3-12627 (May 2. the complaint alleged that Take-Two shipped to Capitol hundreds of thousands of video games. a privately-owned. Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product. thereby artificially reducing its marketing expense and increasing Earnings Before Interest. 2007) http://www. Phillips (Phillips). typically at the end of reporting periods.) Admin. Phillips (Take-Two Interactive Software. provided that Motorola would increase the price of digital cable television set-top boxes it was selling to Adelphia and pay the amount of the price increase back to Adelphia in the form of payments to market Motorola's cable television set-top boxes.support payments. with aiding and abetting video game publisher Take-Two Interactive Software. Specifically. The Commission charged Capitol.gov/litigation/admin/2007/34-55696.L. Virginia-based video game distributor. the Commission filed a settled civil action in federal district court against video game distributor Capitol Distributing. 2007. and recognized the marketing support payments as a contra-expense to marketing costs. Inc. 13a-1. L. File No. The Order also required Motorola to pay $25 million in disgorgement and prejudgment interest.pdf On May 2. Capitol. According to the complaint. The complaint alleged that in furtherance of the scheme Take-Two twice provided funds to Capitol or another Phillips-owned entity known as Phillips Land Company (PLC). The Commission ordered Motorola to cease and desist from committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20. reporting and recordkeeping provisions of the federal securities laws during fiscal years 2000 and 2001 through a fraudulent video game parking scheme. Adelphia recorded the price increase it paid Motorola as a capital expense. Taxes. for transmission to Take-Two to create the false appearance that Capitol or PLC were paying for the games. The Commission also charged Phillips with liability as a controlling person for Capitol's violations and instituted a settled administrative cease-and-desist order against Phillips.C. which found that Phillips was a cause of Capitol's violations." The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol. Terry M. (Take-Two) in Take-Two's violations of the antifraud. and Raymond L. the former general counsel and chief compliance officer. 20 percent owner. 13a-13 and 13b2-1. asking Phillips if he had another company that Take Two could issue a purchase order to for the games in lieu of Capitol sending the games back as a return. Tenet Healthcare Corporation. Thomas B. Mathiasen Litigation Release No. 2007) http://www. Phillips consented. Christi R.gov/litigation/litreleases/2007/lr20067. The complaint alleged that Phillips. Tenet's former chief operating officer and copresident. Mathiasen. Tenet engaged in an unsustainable strategy to reach its earnings targets by deliberately exploiting the Medicare reimbursement system. Dennis. David L. the Commission filed settled civil fraud charges against Tenet Healthcare Corporation for failing to disclose to investors that Tenet's strong earnings growth from 1999 to 2002 was driven largely by its exploitation of a loophole in the Medicare reimbursement system. In addition to Tenet. Dennis and Mathiasen each agreed to settle the charges against them. 2005. The Commission in its order found that Phillips and Take-Two began discussing Capitol's participation in the parking arrangement in July 2000. Phillips mentioned PLC. The Commission alleged that between 1999 and 2002. 20067 (April 2. and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b20. On June 9. David L. without admitting or denying the Commission's findings. Once Tenet finally revealed its scheme to the investing public and admitted that its strategy was not sustainable. 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5. In October 2000. 13a-1 and 13a-13. In a related administrative proceeding. Mackey. Tenet was based in Santa Barbara. Mackey. the former chief financial officer and co-president. the market value of Tenet's stock plunged by over $11 billion. 12b-20. Tenet's scheme involved a loophole in the Medicare reimbursement system related to 6 . 13a-1. and principal operator was a control person of Capitol within the meaning of Section 20(a) of the Exchange Act.htm On April 2. Dennis. and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20. and Raymond L. Take-Two discussed the first parking transaction with Phillips.000 as a control person of Capitol for its aiding and abetting violations of Sections 10(b). consented to entry of a final judgment ordering him to pay a civil money penalty of $50.sec.Act and Exchange Act Rule 10b-5. to the entry of a Commission order to cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act. the Commission filed and simultaneously settled civil charges against Take-Two and former and current members of senior management in connection with the parking scheme. Sulzbach. the SEC's complaint named Thomas B.. Calif. and was the second largest publicly traded healthcare company in the United States. without admitting or denying the allegations in the complaint. 2007. the former chief accounting officer. Sulzbach. During the relevant time. 13a-13 and 13b2-1. 13a-1. then instructed a Capitol employee to work out the details with Take-Two. SEC v. and Exchange Act Rules 10b-5 and 13b2-1. Phillips. as Capitol's founder. Christi R. These inappropriate reserves resulted in material misstatements to Tenet's financial statements for fiscal years 2000 through 2004. In part as a result of its outlier scheme.gov/litigation/litreleases/2007/lr20060. 13a-1. acting through Dennis.000 civil penalty. Mathiasen agreed to be permanently enjoined from violating Section 17(a) of the Securities Act and Sections 10(b). reporting. and recordkeeping provisions of the federal securities laws. to pay a civil penalty of $240. The penalties paid by Mathiasen and Dennis personally will also be added to the Fair Fund for investors along with Tenet's payment. A certified public accountant." which are designed to compensate hospitals for caring for extraordinarily sick Medicare patients. Dennis agreed to be permanently enjoined from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5. Nicor. The complaint sought permanent injunctions against future violations of these provisions. disgorgement of ill-gotten gains. Tenet. with prejudgment interest. and Sulzbach. misled the investing public by failing to disclose Tenet's strategy. and to be barred from serving as an officer or director of a public company for five years. Metz Litigation Release No. and 13a-13 thereunder. and 13(b)(2)(A) of the Exchange Act and Rules 10b-5. and aiding and abetting Tenet’s violations of Section 13(a) of the Exchange Act and Rules 12b20.sec. Mathiasen. 13a-1. 13(a). 20060 (March 29. Tenet also agreed to be permanently enjoined from violating the antifraud. SEC v. Mathiasen also agreed to be permanently denied the privilege of appearing or practicing before the Commission as an accountant under Rule 102(e) of the Commission's rules of practice. 12b-20. Without admitting or denying the allegations in the SEC's complaint. and its unsustainability in its public filings with the Commission."outlier payments. 12b-20. 13a-13. Tenet's management realized that Tenet could inflate its revenue from outlier payments by simply increasing the gross charges set by its hospitals. Tenet agreed to pay a civil penalty of $10 million. The complaint alleged that Tenet. and 13b2-1 thereunder. Mathiasen and Dennis each agreed to settle the Commission's charges without admitting or denying the allegations. and civil penalties.000. with Mathiasen's approval. and 13a-13 thereunder and to pay a $150. Tenet received enough income to set aside funds in improper general reserves. The SEC will seek to have these funds placed into a Fair Fund for distribution to harmed investors pursuant to the Sarbanes-Oxley Act. Mackey. created general reserves totaling approximately $107 million by the end of Tenet's 2002 fiscal year. To settle the charges.htm 7 . orders barring each of them from serving as an officer or director of a public company. The Commission's complaint charged Mackey and Sulzbach with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. 13a-1. 2007) http://www. Inc. and Jeffrey L. its impact on revenues and earnings. C&A's former Chief Executive Officer and Chairman of the Board of Directors. which included the surrender of bonuses and a civil penalty. McCallum. The SEC alleged that between 2001 and 2005. and failed to disclose material information regarding Nicor's gas inventory. In furtherance of those schemes. or its financial statements filed with those reports. Christopher M. including the Chief Financial Officer. a major Chicago-area natural gas distributor. the Commission filed civil fraud charges against auto parts manufacturer Collins & Aikman Corporation (C&A). 20055 (March 26. when aspects of the schemes were discovered in March 2005. These transactions allowed Nicor to ensure that it met its earnings targets by inflating its income for 2000 and 2001.gov/litigation/litreleases/2007/lr20055. and a former member of C&A's Board of Directors. Metz settled the civil action filed against him by consenting to a permanent injunction. are alleged to have participated in the accounting schemes or the campaign to mislead investors. Cosgrove. potential financiers and others by minimizing the extent of the fraudulent accounting and hiding C&A's dire financial condition. Inc. Collins & Aikman Corporation. 2007) http://www. would pay more than $10 million to settle charges that they engaged in improper transactions. devised a method by which it could enter into a series of improper transactions to shift inventory off of its books and profit by accessing a substantial portion of its low-cost.000. the Commission announced that Nicor. Elkin B. acting through Metz and other senior officers. John G. and Jeffrey Metz. Corporate Controller. Stockman embarked on a public campaign to mislead investors. made material misrepresentations. Stockman. Gerald E. Galante.sec. and a payment of more than $60.. Nicor also agreed to be permanently enjoined from violating the antifraud and reporting provisions of the federal securities laws. 2007. and eight other former C&A directors and officers. Stockman personally directed fraudulent schemes to inflate C&A's reported income by accounting improperly for supplier payments. David A. Nicor failed to disclose. Nicor. Williams and Thomas V. The other former officers. Jones. Stockman. David A. The funds Nicor and Metz agreed to pay in disgorgement and civil penalties were placed in a Fair Fund for distribution to affected shareholders. The Commission alleged that from 1999 to 2002. Gougherty Litigation Release No. J. and for each of the quarters within those years. lastin-first-out (LIFO) layers of inventory. its former Assistant Vice President and Controller. as reported in its financial statements for those periods.htm On March 26.On March 29. the complaint alleged that Stockman and other defendants obtained false documents from suppliers designed to mislead C&A's external auditors. Additionally. Paul C. a fiveyear officer-and-director bar. According to the complaint. Barnaba. SEC v. Michael Stepp. David R. 8 . and Treasurer. in either its Management's Discussion & Analysis section of its periodic reports. that it had recorded material non-recurring income resulting from LIFO liquidations. 2007. The complaint further alleged that in order to perpetrate their fraudulent scheme. and enjoined from violations of the antifraud. David Radler. 2007) http://www. 2007. through a series of related party transactions. Black. Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the 9 .. and. ordered to pay a $5 million civil penalty. by consenting to the entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b). The Commission's complaint alleged. 15. as a control person.. certification and lying to auditors provisions of the federal securities laws. alleging that from approximately 1999 through 2003. Radler. disgorgement of ill-gotten gains. consented to the entry of a final judgment which permanently enjoined him from violations of Sections 10(b). SEC v. On Nov. 20043 (March 16.. Conrad M. and internal control provisions of the federal securities laws. and Hollinger. barred from serving as an officer or director of a public company. David Radler and Hollinger Inc. 13a-11 and 13a-13 thereunder. Conrad M.7 million in disgorgement and prejudgment interest. C&A simultaneously settled the charges. and civil penalties. Under the terms of the settlement. reporting. The complaint also alleged that Black and Radler orchestrated the sale of certain of Hollinger International's newspaper publications at below-market prices to another privately-held company owned and controlled by Black and Radler. Black. officer-and-director bars. Litigation Release No. proxy. reporting. record-keeping. Inc. 13a-1.gov/litigation/litreleases/2007/lr20043. Inc. 13b2-1. Inc. Radler was ordered to pay approximately $23. 14a-3 and 14a-9 thereunder. 2004. 13(a).sec. approximately $85 million of the proceeds from Hollinger International's sale of newspaper publications through purported "noncompetition" payments. The case against the other defendants is ongoing. including the sale of one publication for $1. 13(b)(2)(A) and 13(b)(2)(B) of the Securities Act of 1934 and Exchange Act Rules 10b-5. Inc.00. The complaint sought permanent injunctions against future violations of these provisions. 12b-20. the Commission filed its action against Radler. without admitting or denying the Commission's allegations. the Commission announced that it settled its enforcement action against F. Hollinger International's former Chairman and CEO. the defendants engaged in a fraudulent and deceptive scheme to divert cash and assets from Hollinger International. 13(b)(5) and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5. Black and Radler misled Hollinger International's Audit Committee and Board of Directors concerning the related party transactions and also misrepresented and omitted to state material facts regarding these transactions in Hollinger International's filings with the Commission and during shareholder meetings.The Commission charged violations of the antifraud. books and records. the former Deputy Chairman and COO of Hollinger International.htm On March 16. that Black and Radler diverted to themselves. without admitting or denying the allegations in the complaint. F. among other things. Hollinger International's controlling shareholder. with prejudgment interest. other corporate insiders and Hollinger. pursuant to the Fair Funds provisions of Section 308 of the Sarbanes-Oxley Act of 2002. The Final Judgment also barred Radler from acting as an officer and director of a public company and orders Radler to pay a total of $23. The case against the other defendants is ongoing. Michael J. Named in the Commission's complaint are Frank A. and Pahapill as Assistant Controller and Vice President of Corporate Reporting.htm On March 12.000 civil penalty. the Commission filed civil fraud charges against four former senior executives of Nortel Networks Corporation for repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance. reporting.sec. Dunn. To avoid suffering a loss of $170 million resulting from the Allegheny Health. Dunn and Beatty were separately charged with violations of the officer certification provisions instituted by the Sarbanes-Oxley Act. maintained and released reserves to meet earnings targets. MBIA Inc. According to the Commission's complaint. Education and Research Foundation’s default on bonds guaranteed 10 . Gollogly as Controller. 2007) http://www.htm On January 29. Dunn. The complaint alleged that these individuals engaged in this misconduct while serving as top corporate executives of Nortel between September 2000 and January 2004. Inc. Beatty. from at least July 2002 through June 2003. Dunn served as Chief Financial Officer and Chief Executive Officer. Inc.a. Douglas C. books and records.. SEC v. 13a-1. During that time.695.695.sec.. 20036 (March 12. Pahapill (a. fabricate profits and pay performance-related bonuses. Pahapill.227 shall be distributed to The Sun-Times Media Group. Beatty and Pahapill allegedly altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts and. Frank A.227 in disgorgement and prejudgment interest and a $5.k. Beatty. The complaint charged Dunn. internal controls and lying to auditors provisions of the federal securities laws. Mary Anne Poland) (Nortel Networks Corp.. The $28. 2007. and disgorgement with prejudgment interest against all four defendants. the Commission announced that it filed a settled civil action in the Southern District of New York alleging securities fraud charges against MBIA Inc. SEC v. civil monetary penalties. Douglas C. and 13a-13 thereunder. formerly known as Hollinger International. Gollogly and MaryAnne E.000. 2007.gov/litigation/litreleases/2007/lr19982. Dunn. Michael J. Gollogly and MaryAnne E. Nortel is a Canadian manufacturer of telecommunications equipment. officer and director bars. Dunn.) Litigation Release No. one of the nation's largest insurers of municipal bonds. its internal targets and Wall Street expectations. Litigation Release No. Gollogly and Pahapill with violating and/or aiding and abetting violations of the antifraud. from late 2000 through January 2001.Exchange Act and Rules 12b-20. Beatty and Gollogly allegedly improperly established. Beatty. 2007) http://www. The Commission sought a permanent injunction.gov/litigation/litreleases/2007/lr20036. 19982 (Jan. 29. Beatty as Controller and Chief Financial Officer. by MBIA. SEC v. Sievers. without admitting or denying the Commission’s. 2002 deadline. 2. John Steele. In a related administrative proceeding. James Cannataro. without admitting or denying the Commission's findings.. and former CEO Martin Zaepfel in connection with the decision to withhold Spiegel's required financial reports to avoid issuance by its outside auditor of a "going concern" opinion. former CFO James Cannataro. Michael Otto.13a-13. Michael Crusemann and Michael Otto Litigation Release No. including an undertaking to retain an independent consultant to examine a number of specified transactions. 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act of 1934 and Rules 10b-5. the company 11 . MBIA had improperly obtained the coverage through retroactive contracts. plus $1 in disgorgement. In addition.sec. In connection with the settlement.gov/litigation/litreleases/2006/lr19897. The Commission alleges in its complaints that Moran. However. Cannataro and Steele improperly increased inter-company fees between Spiegel's retail subsidiaries and Spiegel's bank subsidiary. Spiegel owned and operated catalogue retailers Spiegel. The improper use of the reinsurance contracts enabled MBIA to convert what would otherwise have been the company's first-ever quarterly loss into a profit and reverse the decline in MBIA's stock price. When it failed to resolve those problems by the April 15. MBIA secretly entered a side agreement with one of the reinsurers whereby it orally agreed to re-assume virtually all of the risk given to the reinsurer on the future business. MBIA has agreed. 2006. During the relevant period.htm On November 2. Michael Crusemann. to the issuance of a cease-and-desist order that requires MBIA to cease and desist from further violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b). Michael Moran and James Sievers. and a former director. 12b-20. MBIA represented that it had obtained reinsurance coverage for the bonds. Inc. In addition. to pay a $50 million penalty. Zaepfel. the Commission filed settled enforcement actions against former officers and directors of Spiegel. Spiegel was thus able to benefit improperly from the securitization of that portfolio. 19897 (Nov. 13a-1. former CEO Martin Zaepfel. and former Treasurer John Steele. and to comply with various undertakings. in connection with the overstatement of the performance of Spiegel's credit card receivables portfolio. 13(a). The Commission also alleged that former Directors Otto and Crusemann and former CEO Zaepfel all participated in the decision to not file Spiegel's 2001 Form 10-K and first quarter 2002 Form 10-Q on a timely basis. Eddie Bauer and Newport News. an Illinois-based public company. and 13b2-1 thereunder. Spiegel's outside auditor informed the company that a "going concern" opinion would accompany the filing unless Spiegel was able to resolve its underlying financial problems. leaving the reinsurer with all the premiums and virtually no risk. Michael Moran. 13a-11. which had the effect of hiding the deteriorating performance of the company's credit card receivables portfolio. the Commission settled with the former Chairman of Spiegel's Board of Directors. James Sievers. Prior to the deadline for the filing of the Form 10-K. Martin Zaepfel. MBIA has agreed. The Commission filed settled charges against the former Co-Presidents of Spiegel. 2006) http://www. improperly elected to withhold its filing rather than make the required disclosures to the investing public. In light of the above, the Commission alleged that Moran, Sievers, Zaepfel, Cannataro and Steele violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and violated and aided and abetted violations of various books and records and financial reporting provisions of the Securities Exchange Act of 1934. The Commission also alleged that Otto, Crusemann and Zaepfel aided and abetted Spiegel's violations of the financial reporting provisions of the Exchange Act. Without admitting or denying the Commission's allegations, Moran, Sievers, Cannataro, Steele, Otto, Crusemann and Zaepfel have consented to the Court's issuance of an order of permanent injunction enjoining them from future violations of the federal securities laws. In addition, Moran, Sievers, Cannataro and Steele have consented to each pay a civil penalty of $120,000. Otto and Crusemann have consented to each pay a civil penalty of $100,000. Zaepfel has consented to pay a civil penalty of $170,000. SEC v. Delphi Corporation, J.T. Battenberg, III, Alan Dawes, Paul Free, John Blahnik, Milan Belans, Catherine Rozanski, Judith Kudla, Scot McDonald, B.N Bahadur, Atul Pasricha, Laura Marion, Stuart Doyle and Kevin Curry Litigation Release No. 19891 (Oct. 30, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19891.htm On October 30, 2006, the Commission filed settled financial fraud charges in federal court in Detroit against Delphi Corporation, a Troy, Mich., auto parts supplier. In its complaint, the Commission charges Delphi with engaging in a pattern of fraudulent conduct between 2000 and 2004 that resulted in Delphi materially misstating its financial condition and operating results in filings with the Commission, offering documents, press releases, and other documents and statements. The Commission also charges thirteen individuals for their alleged roles in the fraudulent conduct and/or in related reporting and books-and-records violations by Delphi. The Commission’s complaint alleges that in 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which had the purpose of and ultimately resulted in Delphi hiding a $237 million warranty claim asserted by its former parent company and inflating its net income by $202 million. In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi providing new business to the IT company. However, in order to meet earnings forecasts for the quarter, Delphi improperly accounted for the $20 million payment as if it was a nonrefundable rebate on past business, rather than a liability. From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost non-GAAP, pro forma measures of Delphi's financial performance that were relied upon by investors, analysts and rating agencies. Delphi simultaneously settled the charges, without admitting or denying the Commission's allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. In addition to settling with Delphi, the Commission 12 simultaneously settled with six individuals, who also neither admitted nor denied the Commission's allegations, requiring payment of disgorgement, prejudgment interest, and civil penalties. Each of the settlements is subject to court approval, and Delphi's settlement is also subject to approval by the U.S. Bankruptcy Court overseeing Delphi's bankruptcy. SEC v. Pinnacle Development Partners LLC Press Release 2006-173 (Oct. 12, 2006) http://www.sec.gov/news/press/2006/2006-173.htm On October 11, 2006, the Commission filed a complaint in the Northern District of Georgia against Pinnacle Development Partners LLC, a Georgia limited liability company with its principal place of business in Atlanta, Ga., and Gene A. O'Neal, its managing member. The complaint was filed to halt a Ponzi scheme that raised at least $30 million from approximately 2,000 investors in fraudulent real estate development partnerships. The Commission alleges that, from at least October 2005 through the present, Pinnacle and O'Neal have fraudulently offered and sold interests in real estate development partnerships through a nationwide advertising campaign, which included general solicitations for investors in more that 40 magazines and newspapers. Pinnacle also sold notes to some investors. According to the complaint, Pinnacle promised investors a 25% return in 45 or 60 days, and a second 25% return and the return of investor capital after 90 days. Pinnacle represented that the profits would be earned by the respective partnership purchasing foreclosed real estate, making minor repairs and reselling the property within 45 to 60 days. The Commission alleged that, in fact, without disclosure to investors, Pinnacle itself, or O'Neal, purchased property from third parties and sold it to its investor partnerships at high mark-ups. The exorbitant returns promised to investors were generated by the respective partnership selling the property to other investor partnerships controlled by Pinnacle. The Court entered an order freezing the defendants' assets, appointing a receiver for Pinnacle and investor partnerships controlled by Pinnacle, imposing a preliminary injunction against the defendants enjoining future violations of the registration and antifraud provisions of the federal securities laws, and providing other relief. The defendants consented to the order without admitting or denying the allegations in the complaint. SEC v. Salvatore Favata Litigation Release No. 19861 (Oct. 10, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19861.htm On October 6, 2006, the Commission filed a settled securities fraud action in the United States District Court for the Central District of California against Salvatore Favata ("Favata"), the former President of National Consumer Mortgage, LLC ("NCM"), an Orange County, California company that purportedly brokered residential mortgages. The Commission's complaint alleges that from 2001 through 2006, Favata, acting through NCM, operated a massive 13 Ponzi scheme, which raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals. The Commission's complaint also alleges that Favata solicited investors in face-to-face settings, including church gatherings and investment seminars and persuaded mortgage refinance clients to take cash out of their refinancing and use that cash to invest in NCM investment notes. Favata falsely told potential investors that NCM would loan investor funds to homeowners who could not qualify for traditional mortgages. Investors were also told that the return on the notes would stem from the interest NCM received on the mortgage loans. Favata further claimed that the notes were guaranteed by the real estate securing the underlying residential loans and that NCM only lends on properties that have a 65 percent or lower loan to value ratio ensuring a low default rate and the investors' principal in the event of a foreclosure. Favata went so far as to represent that NCM maintained deeds of trust for the real estate securing the investments. Without admitting or denying the allegations of the Commission's complaint, Favata consented to the entry of final judgment permanently enjoining him from violating the antifraud and registration provisions of the federal securities laws. Specifically, Favata consented to the entry of a final judgment permanently enjoining him from violating Section 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Pursuant to Section 15(b) of the Exchange Act, Favata has also consented to the entry of an administrative order permanently barring him from associating with any broker or dealer in the future. On the same day the Commission filed its complaint, the U.S. Attorney's office for the Central District of California filed an information and plea agreement in which Favata agrees to plead guilty to one count of mail fraud, to pay restitution in excess of $20 million, and to forfeit his residence in connection with the same scheme. Pursuant to the plea agreement, Favata faces a possible 60month prison sentence. Securities and Exchange Commission v. Doral Financial Corporation Litigation Release No. 19837 (Sept. 19, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19837.htm On September 19, 2006, the Commission filed financial fraud charges against Doral Financial Corporation, a NYSE-listed Puerto Rican bank holding company. The Commission alleges that Doral Financial overstated income by approximately $921 million or 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that accounting irregularities enabled the company to report an apparent 28-quarter streak of "record earnings" and facilitated the placement of over $1 billion of debt and equity. Since Doral 14 James Borrowing Entity.htm On August 10. Calif. 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5. 2006) http://www. 13(a). The Commission further alleges that Doral Financial managed earnings through a series of contemporaneous purchase and sale transactions with other Puerto Rican financial institutions totaling approximately $847 million. SEC v. charges Doral Financial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b). According to the Commission's complaint. Doral Financial improperly recognized gain on sales of approximately $3. James Acquisitions. United States District Judge for the Central District of California. James. books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty.. Calif.W. the Commission filed an emergency action to halt an ongoing securities fraud targeted at retirement funds. and J. Second. Without admitting or denying the Commission's allegations. LLC. The Commission's complaint. The James Company Borrowing Entity. issued an order appointing a temporary receiver over the companies controlled by James and freezing assets. through JWJA. J. The James Company Fund I.W. Named in the Commission’s complaint are Jon W. James Investment Group Fund One. reporting. including Jon W.. Doral Financial has consented to the entry of a court order enjoining it from violating those antifraud. which was filed in the United States District Court for the Southern District of New York. The fraud has raised over $22 million to date. LLC. James & Associates. 12b-20 13a-1 and 13a-13. age 29 and a resident of Manhattan Beach. J.W. James & Associates (JWJA). James. a wholly owned banking subsidiary of First BanCorp. The Cloaking Device.gov/litigation/litreleases/2006/lr19801. LLC Litigation Release No. James. LLC. The Honorable Florence-Marie Cooper. since at least January 2004. J. Inc. Jacob Jon W. Doral Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. the market price of the company's common stock plummeted from almost $50 to under $10. These transactions were not true sales under generally accepted accounting standards because of oral agreements or understandings between Doral Financial's former treasurer and former director emeritus and FirstBank senior management providing recourse beyond the limited recourse established in the written contracts. and several companies that he controls. 10. has solicited investors with direct mail invitations to free dinner seminars focusing on retirement planning.sec. As alleged in the complaint.Financial's accounting and disclosure problems began to surface in early 2005. the invitations include statements such as “Retirement Secrets of the Rich: What your Accountant and Stockbroker don’t want you to know. thereby reducing equity market value by over $4 billion. First.9 billion in mortgages to FirstBank Puerto Rico. 19801 (Aug. Virtual Cash Flow Corporation. based in El Segundo.” The complaint further alleges that the invitations and seminars claim JWJA will help 15 . Doral Financial senior management significantly overvalued interest-only strips retained by the company in its mortgage loan sale transactions.W. LLC. 2006. According to the Commission’s complaint. Daniel P. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. (3) prohibiting the destruction of documents.htm In the Matter of Raytheon Company. and orders (1) freezing assets. and penalties against all defendants. The complaint also alleges that defendants fraudulently failed to disclose that they used new investor money to pay returns to previous investors.investors retire “in just seven short years” by investing their IRA funds “to take advantage of the booming real estate market” and “to produce double-digit returns. the Commission announced that it instituted settled enforcement proceedings against Raytheon Company. 2006. and 17(a) of the Securities Act of 1933. and Aldo R. Proc. throughout 2004 and 2005. Servello Litigation Release No. return of illgotten gains with prejudgment interest. The Commission’s complaint alleges that. its former Chairman and CEO. The Court issued an order temporarily enjoining defendants from future violations of the securities registration and antifraud provisions of the federal securities laws.sec. SEC v. Servello Admin. 3-12345 (June 28. in periodic reports filed with the Commission from 1997 to 2001. and the former Deputy CFO and Controller of Raytheon Aircraft Company (RAC). Burnham.gov/litigation/litreleases/2006/lr19747. The SEC’s Order found that. Raytheon Company.” As alleged in the complaint. defendants did not purchase any real estate or real estate related assets from which to pay investor returns. Raytheon. Burnham. Daniel P. The Commission also seeks preliminary and permanent injunctions. and (5) requiring accountings. between 1997 and 1999. Daniel P. Burnham. investors are falsely told that their funds will be used for profitable real estate transactions that will provide returns. (2) appointing a temporary receiver. Raytheon made false and misleading disclosures and used improper accounting practices that failed to adequately disclose the declining financial results and deteriorating business of Raytheon’s commercial aircraft manufacturing subsidiary. Without admitting or denying the SEC’s findings. which at times were represented to be as high as 24%. 19747 (June 28. 2006) http://www. These practices resulted in material overstatements of RAC’s reported 16 . The SEC also charged that certain of these disclosures and accounting practices were undertaken with the knowledge of Burnham and Servello. later. and Aldo R. File No. Burnham. 2006) http://www. Aldo R. RAC. The complaint alleges that the defendants offered and sold promissory notes and. Raytheon improperly recognized revenue on RAC’s sale of unfinished aircraft through “bill and hold” sales transactions that did not comply with GAAP. interests in limited liability companies.pdf On June 28. and Servello agreed to settle these charges by consenting to the entry of a Cease-and-Desist Order by the Commission. Additionally. The SEC charged that. 5(c). (4) expediting discovery.gov/litigation/admin/2006/33-8715. Sections 5(a).sec. the complaint alleges that the defendants misrepresented to investors that their investments would be secured by real property or by monies owed to JWJA from real estate transactions. Servello. District Court for the District of Columbia for the purposes of awarding civil monetary penalties and disgorgement. Without admitting or denying the SEC's allegations or findings. The SEC’s Order also found that.pdf http://www. Raytheon's former Controller and former lead auditor. On March 15. 2006) http://www. File No. and Gray agreed to pay more than $1. Burnham. Proc. Edward S. and uncertainties associated with that business line. Pliner. these practices resulted in the failure to recognize between $67 million and $240 million in losses. The SEC’s Order found that these losses were instead improperly taken during the third quarter of 2001. and that Raytheon’s third quarter 2001 commuter loss provision was overstated by 10 to 53 percent. 2006 in the U. which would have reduced Raytheon’s 2000 profit before taxes by 8 to 27 percent. 3-12339 (June 22. trends. and James E.344 and $34. and penalties in the total amounts of $1. As part of the settlement.htm In the Matter of Wallace G. the former CFO of Raytheon Aircraft Company (RAC).sec. Gray.S.sec. 2001. the former CFO of Raytheon. 2007. between 1997 and 2001. Pliner. According to the SEC’s Order. Raytheon.gov/litigation/admin/2006/34-54031.238. 19735 (June 22. Scientific-Atlanta.pdf 17 .annual net sales revenue and operating income in 1997 and 1998 and enabled both Raytheon and RAC to meet certain internal and external earnings targets. Raytheon consented to pay a penalty of $12 million and $1 in disgorgement. when Raytheon recorded a $693 million charge related to its commuter assets after September 11. Raytheon engaged in improper disclosure and accounting practices related to RAC’s commuter aircraft business. Caine. 2006) http://www. SEC v. Each respondent agreed to cease and desist from committing or causing the violations charged as well as any future violations of these provisions.gov/litigation/admin/2006/34-54030. the Commission announced that it instituted settled enforcement proceedings against three former financial officers of Raytheon. respectively. Caine. Burnham and Servello agreed to pay disgorgement of certain past bonus amounts. Named in the SEC's March 15th enforcement actions were Franklyn A. Inc.5 million combined to settle the Commission's charges.628. Litigation Release No. and Servello also consented to the entry of a final judgment in a related civil action filed on June 28. pre-judgment interest. The SEC also charged that each officer was involved in or aware of certain false and misleading disclosures in Raytheon's periodic reports. including the failure to adequately disclose in the company’s periodic reports material risks.gov/litigation/litreleases/2006/lr19735.sec. Haislip Admin. The SEC charged that they were allegedly each involved in or aware of certain improper accounting practices that operated as a fraud by failing to adequately and accurately disclose the deteriorating financial results and business of Raytheon's commercial aircraft manufacturing subsidiary. the Commission charged Scientific-Atlanta. Inc. The transaction did not affect Scientific-Atlanta’s public financial statements. The SEC’s complaint alleged that in August 2000. Scientific-Atlanta entered into a marketing support agreement with Adelphia in 2000 that Adelphia misused to inflate its earnings by approximately $43 million. Scientific-Atlanta has agreed to pay $20 million in disgorgement in settlement of the charges. 13a-1. 2006. Proc. subject to court approval. ScientificAtlanta’s Senior Vice President. thereby artificially reducing its marketing expense and increasing EBITDA. (ii) Adelphia’s request for a commercially unreasonable high dollar amount in marketing support payments.pdf On June 22.In the Matter of Julian W. 2006) http://www. Adelphia requested that ScientificAtlanta increase the price of digital cable television boxes it was selling to Adelphia and pay the amount of the price increase back to Adelphia in the form of marketing support for the stated purpose of marketing the Scientific-Atlanta cable television boxes. and 13a-13 thereunder. and 18 .sec. consented to the entry of a final judgment.gov/litigation/admin/2006/34-54031. Adelphia did not use the marketing support payments to market Scientific-Atlanta cable television boxes. that requires ScientificAtlanta to pay $20 million in disgorgement and enjoins Scientific-Atlanta from violating and aiding and abetting any violations and any future violations of Sections 13(a). and 13(b)(2)(B) of the Exchange Act. Scientific-Atlanta’s Senior Vice President. without admitting or denying the allegations in the Complaint. File No. (iv) knowledge that Adelphia’s request for the marketing support agreement was driven by its desire to obtain an accounting benefit. and Julian W. and (v) the inclusion of a false reason for the price increase in one of the contracts documenting the marketing support agreement. have consented to the issuance of cease-and-desist Orders for their respective roles in causing Adelphia’s violations. Those facts included. 13(b)(2)(A). The SEC also announced that Wallace G. (i) a retroactive price increase on set-top boxes previously delivered to Adelphia. Eidson. The complaint alleged that Scientific-Atlanta was aware of a number of facts that together demonstrated that Adelphia was misusing the marketing support agreement. The SEC’s Orders against Haislip and Eidson. the most senior Scientific-Atlanta executives responsible for approving the form of the marketing support agreement. Operations. with aiding and abetting certain of Adelphia Communications Corporation’s violations of the reporting. 3-154031 (June 22. and recognized the marketing support payments as a contra marketing expense. books and records. Haislip and Eidson were ordered to cease and desist from causing any violations and any future violations of Sections 13(a). found that they should have been on notice that Adelphia was unlikely to be using the marketing support agreement to market Scientific-Atlanta boxes. among others. and internal controls provisions of the federal securities laws. recorded the price increase as a capital expense. Haislip. and Rules 12b-20. (iii) repeated requests for higher levels of marketing support in later periods even though the major marketing push was to have occurred in earlier periods. Scientific-Atlanta. Edison Admin. 13(b)(2)(A). Tribune’s failure to detect the schemes led it to report inflated circulation figures and trends and misstate its circulation revenues and expenses in annual and quarterly reports it filed with the Commission from January 2002 to March 2004. The root cause of the accounting fraud.htm On May 23. and 13a-13 thereunder. nine former employees and contractors of Newsday and Hoy pleaded guilty to various criminal charges in connection with the same scheme. SEC v. without admitting or denying the allegations. as described in the Commission’s Complaint.sec. 19710 (May 23. Haislip and Eidson agreed to the settlements without admitting or denying the findings in the SEC’s Orders. In a separate proceeding. Proc. reporting. earnings conferences and other public statements that Newsday was successfully competing against other daily newspapers in its market and that Hoy was the largest Spanish-language newspaper in New York. books and records and internal controls provisions of the federal securities laws. as well as its circulation revenues and expenses. 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20. 3-12304 (May 30.pdf On May 30. Newsday and the Spanish-language Hoy. In the Matter of Tribune Company Admin. Tribune consented to the issuance of the order without admitting or denying any of the Commission’s findings. 2006) http://www. The Commission’s order directed Tribune to cease-and-desist from committing or causing any violations or any future violations of Sections 13(a).gov/litigation/admin/2006/34-53882.gov/litigation/litreleases/2006/lr19710.13(b)(2)(B) of the Exchange Act and Rules 12b-20. Fannie Mae agreed to the entry of a permanent injunction and to pay a $400 million penalty. to the entry of a final judgment that permanently enjoins the company from violations of the anti-fraud. the company agreed. Tribune misstated its accounts receivable and payable. File No. was a corporate culture that placed significant emphasis on stable 19 . Federal National Mortgage Association Litigation Release No. In its settlement with the Commission. Relying on the inflated figures. 2006 the Commission and the Office of Federal Housing Enterprise Oversight (OFHEO) announced that the Federal National Mortgage Association (Fannie Mae) agreed to settle charges relating to the misstatement of its financial statements from at least 1998 through 2004. because the company did not have sufficient internal controls to detect the circulation inflation schemes at Newsday and Hoy. 13a-1. Tribune also reported in press releases. 2006 the Commission charged publisher Tribune Company with reporting falsified circulation figures from at least January 2002 to March 2004 for two of its newspapers in New York. thereunder. In addition.sec. 13a-1 and 13a-13. 2006) http://www. the former chairman and chief executive officer of Gemstar-TV Guide International. premiums and discounts. it failed properly to consider whether the departures were material. was ordered to pay over $22 million for his role in a scheme to defraud investors by inflating Gemstar’s licensing and 20 . 26. without admitting or denying these allegations.sec.htm On May 10. As a result of the violations described in the Commission’s complaint. Fannie Mae expects to restate its historical financial statements for the years ended Dec. The Commission alleged that. namely rules relating to the amortization of loan fees. 2006 the Commission announced that Henry C. Inc. Yuen Litigation Release No. from at least 1998 through 2004. Fannie Mae agreed. Orlick.htm In the Matter of Jonathan B. 8. and 2002.gov/litigation/litreleases/2006/lr19694.gov/litigation/admin/34-51081.sec. 2005) http://www. 2006) http://www. SEC v. The Commission’s investigation is continuing. while Fannie Mae recognized that the company was departing from GAAP. 2003. the company’s financial results were smoothed as a result of the misapplication of certain GAAP. 2004. Yuen. Leung Litigation Release No. known as SFAS 133. 31. 2004.earnings growth and avoidance of income statement volatility and insufficient emphasis on ensuring compliance with applicable accounting regulations and federal securities laws. 19694 (May 10. 2006) http://www. In both instances. Elsie M.gov/litigation/litreleases/lr19558. Proc. known as SFAS 91. Esq. Henry C. 19558 (Feb. The terms of the settlement require Fannie Mae to pay a $400 million penalty that has been negotiated jointly with OFHEO and the SEC.. 3-11801 (Jan. to an injunction for violations of Section 17(a)(2) and (3) of the Securities Act of 1933. Admin.htm SEC v. and for the quarters ended June 30. and March 31. and rules relating to hedge accounting.sec. These failures to comply with SFAS 91 and SFAS 133 led to the Company publicly issuing materially false and misleading financial statements from at least 1998 through the second quarter of 2004. File No. The company currently estimates that its restatement will result in at least an $11 billion reduction of previously reported net income. Orlick also consented to a ten-year officer and director bar. COO. the court ordered Yuen to pay a total of $22.000 in disgorgement. from future violations or aiding and abetting violations of antifraud. a former deputy general counsel and senior vice president of Gemstar. Leung consented to the final judgment and Commission order without admitting or denying the allegations. that Yuen aided and abetted Gemstar’s primary violations of the periodic reporting and record keeping control requirements. who also served as co-president. causing a market loss in excess of $3 billion. and entered a permanent injunction against future securities law violations and a permanent bar from serving as an officer or director of a public company.advertising revenues.231 in disgorgement. On January 20. In a written decision filed on March 20. and other violations of the federal securities laws. After a three week trial in December 2005 in the Central District of California. 2006. Orlick was also ordered to pay $150. agreed to pay over $1. Gemstar repeatedly touted the IPG technology and IPG advertising revenues as the company’s future and as the “value driver” of the company’s stock. In a related administrative action.510. As part of the settlement. and interest. 2006. In addition. books and records. Leung consented to a Commission order barring her from appearing or practicing before the Commission as an accountant. Yuen was permanently barred from serving as an officer or director of a public company.3M to settle the Commission’s charges alleging that she participated in a scheme to defraud investors by inflating Gemstar’s licensing and advertising revenues.000 penalty for his role in the financial fraud. Orlick agreed to be suspended from appearing or practicing before the Commission as an attorney. and a member of the board of directors of Gemstar.577. Tyco International Ltd.Leung. the judge found in favor of the Commission and against Yuen on all of the SEC’s charges. the court entered a consent judgment permanently enjoining Jonathan B. Gemstar’s former CFO. The court found that Yuen received $10. and a $150. 2006. In statements to securities analysts and the investing public. Gemstar is a Los Angeles-based media and technology company that publishes TV Guide magazine and an interactive program guide (IPG) for televisions that enables consumers to navigate through and select television programs. and downplayed expected declines in revenue from TV Guide magazine. will be permanently barred from serving as an officer or director of a public company. and that Yuen lied to Gemstar’s auditors. On May 8. 2005. On February 8. In addition. its stock price declined by approximately 37%.692 in ill-gotten gains from his fraudulent conduct. Orlick. Leung. in a related proceeding. penalties. When Gemstar announced for the first time that certain of its IPG licensing and advertising revenue may have been improperly recorded. The court ordered Yuen to pay a civil money penalty equal to the amount of disgorgement. the court found that Yuen had committed securities fraud by making misrepresentations and omissions of material fact about certain Gemstar revenues. 21 .62 in prejudgment interest. $5. SEC v. reporting. the Commission announced that Elsie M.327. Orlick consented to the relief without admitting or denying the Commission’s allegations. gov/litigation/litreleases/2006/lr19657. Without admitting or denying the allegations in the Commission’s complaint. 9. from 1996 through 2002. Inc.” SEC v. which was provisionally negotiated in 2005. corporate recordkeeping.htm On April 17. utilizing various improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars. The Commission’s complaint alleged that. and related party transactions of its former senior management. the complaint alleged that Tyco violated the antibribery provisions of the Foreign Corrupt Practices Act when employees or agents of its Earth Tech Brasil Ltda. The Commission’s complaint alleged that Tyco inflated its operating income by at least $500 million as a result of improper accounting practices related to some of the many acquisitions that Tyco engaged in during that time. Tyco failed to disclose in its proxy statements and annual reports certain executive compensation. 2006 the Commission filed a settled civil injunctive action against Tyco International Ltd. 2002. Litigation Release No. by means of connection fees that Tyco’s ADT Security Services. The complaint alleged that Tyco inflated its operating income by $567 million from its fiscal year 1998 through its fiscal quarter ended Dec.sec. Tyco consented to the entry of a final judgment permanently enjoining it from violating the antifraud. from September 1996 through early 2002. The complaint further alleged that. was reviewed and approved by the Commission in light of the considerations set forth in “Statement of the Securities and Exchange Commission Concerning Financial Penalties. American International Group. Tyco improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance and smooth its publicly reported results and to meet earnings forecasts. as a result of these various practices. The proposed final judgment also ordered Tyco to pay $1 in disgorgement and a $50 million civil penalty. et al. apart from its acquisition activities. among other things. proxy disclosure. The penalty amount. 17. Ronald Ferguson. Finally. Tyco made false and misleading statements or omissions in its filings with the Commission and its public statements to investors and analysts. Tyco violated the federal securities laws by. 2006) http://www. 19560 (Feb. 22 . and antibribery provisions of the federal securities laws. subsidiary made payments to Brazilian officials for the purpose of obtaining or retaining business for Tyco. 31. Inc. Between 1996 and 2002. The complaint further alleged that. Tyco also incorrectly accounted for certain executive bonuses it paid in its fiscal years 2000 and 2001. periodic reporting.sec.Litigation Release No. thereby excluding from its operating expenses the costs associated with those bonuses.gov/litigation/litreleases/lr19560. executive indebtedness. 19657 (Apr. 2006) http://www.htm SEC v. subsidiary charged to dealers from whom it purchased security monitoring contracts. 2005) http://www. 2006) http://www.sec. the Commission also filed an enforcement action against five former senior executives of General Re Corporation (Gen Re) and AIG for helping AIG mislead investors through the use of fraudulent reinsurance transactions. Without admitting or denying the allegations of the complaint. The settlement is part of a global resolution of federal and state actions under which AIG will pay in excess of $1. bid rigging and practices involving workers’ compensation funds.htm Litigation Release No. Specifically. Graham.htm SEC v. and Milton. John Houldsworth and Richard Napier Litigation Release No.sec. The DOJ has also filed federal criminal charges against Ferguson. 2) engaging in a transaction with Capco Reinsurance Company. disgorgement of ill-gotten gains. On February 2. Although AIG controlled Union Excess. The Commission alleges that AIG’s reinsurance transactions with Gen Re were designed to falsely inflate AIG’s loss reserves by $500 million in order to quell analyst criticism that AIG’s reserves had been declining. 19264 (June 10. 19248 (June 6. 2. As a result of the restatement. Ronald Ferguson. and 3) establishing Union Excess Reinsurance Company Ltd. Robert Graham and Christopher Garand.sec. AIG commenced an internal investigation that eventually led to a restatement of its prior accounting for approximately 66 transactions or items. Inc. As to the individual defendants. civil money penalties. 19522 (Feb.6 billion to resolve claims related to improper accounting. 2004 by approximately $2. and 23 .gov/litigation/litreleases/lr19552. AIG has agreed to the entry of a Court order enjoining it from violating the antifraud. 2005) http://www. (AIG) committed securities fraud. the Commission is seeking permanent injunctive relief. Christian Milton. that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001. (Union Excess). 2006. to which it ultimately ceded approximately 50 reinsurance contracts for its own benefit.Litigation Release No. and orders barring each defendant from acting as an officer or director of any public company. an offshore reinsurer. Four of the former executives. was with AIG. between December 2000 and March 2001. were with Gen Re. the Commission announced the filing and settlement of charges that American International Group.gov/litigation/litreleases/lr19248. internal controls. the Commission alleges that AIG fraudulently improved its financial results by: 1) entering into two sham reinsurance transactions with Gen Re.gov/litigation/litreleases/lr19264. Elizabeth Monrad. and in fact took steps to conceal its control over Union Excess from its auditors and regulators.7%).26 billion (or 2. Ltd. prejudgment interest. (Capco) in 2000 to conceal approximately $200 million in underwriting losses in its general insurance business by improperly converting them to capital (or investment) losses to make those losses less embarrassing to AIG. AIG reduced its shareholders’ equity at December 31.htm On February 9. in 1991. Shortly after federal and state regulators contacted AIG about the Gen Re transaction. 2006. books and records. Monrad. while the fifth. it improperly failed to consolidate Union Excess’s financial results with its own. gov/litigation/litreleases/lr19521.sec. In connection with the same conduct.. In addition. The settlement is subject to court approval and takes into consideration AIG’s cooperation during the investigation and its remediation efforts in response to material weaknesses identified by its internal review. Hilger. AIG has also agreed to certain undertakings designed to assure the Commission that future transactions will be properly accounted for and that senior AIG officers and executives receive adequate training concerning their obligations under the federal securities laws. On February 28. In partial settlement of the Commission’s claims. 2006) http://www. Applix filed its Form 10-K for the 24 . Sullivan Litigation Release No. The complaint alleges that the three defendants engaged in two separate schemes to inflate revenue reported in Applix’s publicly-filed financial statements and heralded in press releases. on March 31. barring him from appearing or practicing before the Commission as an accountant. 2006. The Commission. 2002. Department of Justice. senior executives of Gen Re. The order requires AIG to pay a civil penalty of $100 million and disgorge ill-gotten gains of $700 million. Houldsworth and Napier have agreed to cooperate fully with the Commission in its continuing investigation of this matter. and Mark E. The Commission alleged that former CEO Alan C. in June 2005. Houldsworth has also agreed to a Commission administrative order. 2003. both Houldsworth and Napier consented to the entry of a partial final judgment which resolves all issues of liability against them but defers the determination of disgorgement and penalties until a later date.” The Commission alleges that Goldsworthy and Hilger both received bonuses based on the false ear-end revenue figures. By reporting this revenue. despite knowing that Applix was prohibited from doing so under generally accepted accounting principles. Alan C. 2001 and for the quarter ended June 30. causing Applix to report inflated revenue and understated net loss figures for the year ended December 31. Sullivan. the Commission brought civil fraud charges against two former officers and a current executive of Applix. and Mark E. former CFO Walter T. Goldsworthy. without admitting or denying the Commission’s allegations. Walter T. 19521 (Jan.S. Thereafter. 2003.periodic reporting provisions of the federal securities laws. 4. the settlement enjoins both Houldsworth and Napier from future violations of the above provisions and imposes a permanent officer and director bar against Houldsworth and a five-year officer and director bar against Napier. Applix’s current Director of World-Wide Operations participated in two fraudulent revenue recognition schemes. had previously filed an enforcement action against John Houldsworth and Richard Napier.htm On January 4. Applix was able to falsely trumpet a “74% improvement in Net Loss. Goldsworthy. both Napier and Houldsworth have also entered guilty pleas to criminal charges filed by the U. Inc. Applix announced that the company would restate its financial statements for the two periods involved and that Goldsworthy had resigned. Hilger. based on the injunction. for their role in the alleged fraud. As part of their settlement. SEC v. an Internet software company. the Commission’s complaint asks the court to impose civil monetary penalties and an order permanently barring the defendants from acting as officers or directors of any public company. the Commission requests that the court issue a final judgment permanently enjoining Goldsworthy. Hilger and Sullivan from violating or aiding and abetting violations of the antifraud.sec. SEC v.year ended December 31. including the hiring of an independent Financial Policies Consultant to review the company’s internal controls. Applix. the Commission filed securities fraud charges against McAfee. McAfee. a Santa Clara. Making Findings. 19520 (Jan. McAfee overstated revenues by $562 million (a misstatement of 131 percent).htm On January 4. Litigation Release No. California-based manufacturer and supplier of computer security and antivirus tools. The Order finds that Applix materially overstated net income in the two periodic reports and a registration statement filed with the Commission. consented to the entry of the Order and agreed to undertakings. In addition. while neither admitting nor denying the Order’s findings.). and restated Forms 10-Q for the first three quarters of 2002. 2003. including: 1) engaging in “channel stuffing” by offering its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile McAfee products and then improperly recording the sales to distributors as revenue. a restated Form 10-K for December 31. Inc. The Commission claims that McAfee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and Wall Street earnings estimates during the 1998 through 2000 period by using a variety of undisclosed ploys during the period to aggressively oversell its products to distributors in amounts that far exceeded the public’s demand for the products. In a related administrative proceeding. 2006. 2) secretly paying distributors millions of dollars to hold the 25 . and Imposing Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 against Applix. periodic reporting. board oversight and business practices. 4. 2006) http://www. Applix also filed a restated Form 8-K on April 4. McAfee inflated its cumulative net revenues by $622 million and that. Inc. Inc. In its complaint.gov/litigation/litreleases/lr19520. the Commission issued a settled Order Instituting Cease-and-Desist Proceedings. record keeping and internal controls provisions of the federal securities laws. for 1998 alone. The Commission alleges that from the second quarter of 1998 through 2000. 2002. Inc. The Commission also seeks disgorgement of the bonuses Goldsworthy and Hilger received based on the fraudulent financial statements. (formerly known as Network Associates. 2001. financial statements. Jr. rather than return it to McAfee for a refund and consequent reduction in McAfee’s revenues. Conaway and John T. 2001. improperly manipulating reserve accounts to increase inadequate sales reserves and cover the costs of the distributor payments. former Chief Executive Officer Charles C. 23. SEC v. a significant portion of the inventory buildup was caused by a Kmart officer’s reckless and unilateral purchase of $850 million of excess inventory. All of these actions were inconsistent with Generally Accepted Accounting Principles and led to McAfee’s October 2003 restatement of its financial results for 1997 through 2003. McDonald. McAfee has consented. wholly-owned subsidiary. and 3) using an undisclosed. without admitting or denying the allegations of the complaint. For example. to the entry of a Court order: 1) enjoining it from violating federal securities laws. in press releases.htm On August 23.. and 3) appoint an Independent Consultant to examine and recommend improvements to McAfee’s internal accounting controls and revenue recognition and reserves practices to better ensure compliance with the federal securities laws. Subject to court approval.” The Commission alleges that this disclosure was materially misleading because. Inc. McDonald are responsible for materially false and misleading disclosure about the company’s liquidity and related matters in the Management’s Discussion and Analysis (MD&A) section of Kmart’s Form 10-Q for the third quarter and nine months ended October 31. and reporting false and materially misleading financial and other information in periodic reports. Litigation Release No. The Commission further alleged that the 26 .gov/litigation/litreleases/lr19344. The Commission alleged that Conaway and McDonald failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company’s liquidity. which the Commission will seek to distribute to harmed investors pursuant to the Fair Funds provision of the SarbanesOxley Act of 2002. 2005. in reality. Net Tools. to repurchase inventory that McAfee had oversold to its distributors. 2) requiring McAfee to pay a $50 million civil penalty.sec. Charles C. and in other public statements. the MD&A disclosure attributed increases in inventory to “seasonal inventory fluctuations and actions taken to improve our overall in-stock position. According to the Commission’s complaint. 19344 (Aug. and securities registration statements that McAfee filed with the Commission. The complaint further alleges that McAfee took action to conceal the fraud from investors by wrongly recording in its books the payments and discounts that it offered to distributors.excess inventory. the Commission filed charges against two former top Kmart executives for misleading investors about Kmart’s financial condition in the months preceding the company’s bankruptcy. Conaway and former Chief Financial Officer John T. 2005) http://www. and in an earnings conference call with analysts and investors. The Commission’s Complaint alleged that Schiff and Lane participated in a fraudulent earnings management scheme by Bristol-Myers Squibb Company to deceive the investing public about the true performance. Bristol-Myers also underaccrued for Medicaid and prime vendor rebate liabilities. 19343 (Aug. medicines business. Lane.S. Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmart’s liquidity problems had on the company’s relationship with its vendors. and improperly recognized revenue from $1. and Rules 12b-20. Lane Litigation Release No. 13a-1. The Complaint charged Lane with violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rule 10b-5 thereunder. BristolMyers stuffed its distribution channels with excessive amounts of its pharmaceutical products ahead of demand to meet the Company’s internal earnings targets and the consensus estimate of Wall Street securities analysts. civil penalties and officer and director bars. SEC v. The Complaint also alleges that at Schiff’s direction. many of whom stopped shipping product to Kmart during the fall of 2001. Schiff and Lane also made misstatements in conference calls with securities analysts that concealed Bristol-Myers’ channel-stuffing activities and the extraordinary buildup in excess wholesaler inventory. at Schiff and Lane’s direction. 27 .defendants dealt with Kmart’s liquidity problems by slowing down payments owed vendors. and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act. Kmart filed for bankruptcy on Jan. disgorgement. The Commission’s Complaint also sought the entry of orders of permanent injunction. 13b2-1 and 13b2-2 thereunder. Schiff and Richard J. and 13a-13 thereunder. and as a result of the channel-stuffing. civil penalties and officer and director bars against Schiff and Lane. According to the complaint.sec. when BristolMyers’ results still fell short of its targets and the consensus estimate.htm On August 22. 22. The Commission seeks permanent injunctions. thereby withholding $570 million from them by the end of the third quarter. 2005. 2005) http://www. Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5. 22. The Complaint alleged that from the first quarter of 2000 through the fourth quarter of 2001. profitability and growth trends of the Company and its U. disgorgement with prejudgment interest. According to the Commission’s Complaint. and aiding and abetting violations of Sections 13(a). 13a-13 thereunder. Bristol-Myers reported results that met or exceeded the consensus estimate every quarter during the scheme. the Commission announced the filing of a civil fraud action against Frederick S.5 billion of such sales to its two largest wholesalers. at Schiff’s direction. The Commission’s Complaint charged Schiff with violations of Section 17(a) of the Securities Act of 1933. 2002. Schiff and Richard J. As a result of its channel-stuffing and improper accounting measures. 13a-1. 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20.gov/litigation/litreleases/lr19343. The Complaint alleged that Schiff signed numerous periodic reports and registration statements in connection with a $5 billion securities offering in September 2001 that failed to disclose the scheme. Fredrick S. the Company used “cookie jar” reserves to further inflate its earnings. Ebbers will be required to transfer substantially all of his assets either directly to the class in the private WorldCom Securities Class Action Litigation or to a liquidation trust that will be established to sell off his assets for the benefit of that class and WorldCom. to the entry of a final judgment enjoining him from violating the prohibition on lying to auditors and antifraud. 2003. without admitting or denying the allegations in the Commission’s complaint. 19280 (June 23. SEC v. HealthSouth systematically overstated its earnings by at least $1. Ebbers has agreed to settle the matter by consenting. Litigation Release No. 2005) http://www. Inc. 2005. The Commission’s action against Ebbers is its sixth civil enforcement action related to the WorldCom fraud. along with other WorldCom senior officers. In a parallel criminal proceeding. 19301 (July 13. alleged that shortly after the company became public in 1986. in furtherance of a scheme to make WorldCom’s publicly reported financial results appear to meet analysts’ expectations. a federal judge in Alabama entered a final judgment against HealthSouth Corporation. in some instances. SEC v.htm On June 22. and internal controls provisions of the federal securities laws. reporting.). 2003 and amended April 3. Bernard J. including the appointment of an independent adviser to review and monitor its accounting practices. the company began to artificially inflate its earnings to meet analysts’ expectations and maintain the market price for HealthSouth’s stock and that since 1999. 2005 and later sentenced to 25 years in federal prison. Inc. (now known as MCI. Bristol-Myers settled the Commission’s action against it by agreeing to pay $150 million dollars and perform numerous remedial undertakings. and signed multiple Commission filings that contained false and misleading material information.gov/litigation/litreleases/lr19301. Ebbers was found guilty of criminal charges on March 15.sec. filed on March 19. HealthSouth Corporation et al.htm On July 13. financial reporting and internal controls. on financial performance targets set by Ebbers that Ebbers knew could not be attained by legitimate means. The complaint alleged that Ebbers. Ebbers Litigation Release No. the Commission alleged that Ebbers made numerous false and misleading public statements about WorldCom’s financial condition and performance. Ebbers.sec. books and records.On August 4. The complaint further alleged that these market expectations were based.gov/litigation/litreleases/lr19280.4 billion. for his role in the WorldCom fraud. 2004. 2005) http://www. often in the hundreds of millions of dollars. the Commission filed a civil fraud action against Bernard J. In addition. caused numerous fraudulent adjustments and entries in WorldCom’s books and records. 2005. The Commission’s complaint. the former CEO of WorldCom. 28 . Litigation Release No. The Commission’s complaint alleged that. 19259 (June 9.gov/litigation/litreleases/lr19147. on May 15.sec. its co-chairmen and co-CEOs Poyiadjis and Lycourgos Kyprianou. The Commission also charged that the company violated a Commission cease-and-desist order issued against America Online. reporting. made fraudulent statements in public filings and press releases. The disgorged funds are to be distributed to defrauded investors.sec.sec. and other provisions of the federal securities laws and to a permanent officer and director bar. The Commission’s complaint. selling millions of shares of AremisSoft stock. SEC v. neither admitted nor denied the allegations of the complaint.htm On June 9. Roys Poyiadjis. the Commission charged Time Warner Inc. among other things. 2000. acting through offshore entities. 21. Pascal Desroches. Litigation Release No. Inc. and to comply with numerous undertakings. the company employed fraudulent round-trip transactions that boosted its online slow29 . In documents filed in federal district court. Lycourgos Kyprianou et al. Proc.gov/litigation/litreleases/lr19259. 19147 (Mar. Barge. and with aiding and abetting three other securities frauds. (formerly known as AOL Time Warner) with materially overstating online advertising revenue and the number of its Internet subscribers. 2005) http://www. 2005) http://www. Poyiadjis consented to disgorge approximately $200 million of unlawful profit from his trading in AremisSoft stock— among the largest recoveries the Commission has obtained from an individual. in consenting to the judgment. books and records. Time Warner. engaged in massive insider trading during the period of the fraud. HealthSouth. agreed to final resolution of fraud charges brought against him by the Commission in October 2001. to pay the costs of any distribution of disgorgement and penalties to investors. Poyiadjis consented without admitting or denying the allegations in the Commission’s complaint.htm In the Matter of James W. SEC v. Inc. reporting. Cyprus. The penalty amount will be distributed to defrauded investors. The Commission noted HealthSouth’s cooperation in this matter. and India. 2005. and internal controls provisions of the federal securities laws. and Wayne H. a former CEO at AremisSoft Corporation.gov/litigation/admin/34-51400. The judgment will also require HealthSouth to pay a civil penalty of $100 million and disgorge $100. Poyiadjis also agreed to a final judgment permanently enjoining him from future violations of antifraud. charged that AremisSoft. the Commission announced that Roys Poyiadjis. The complaint further alleged that Poyiadjis and Kyprianou.pdf On March 21. Pace Admin. 3-11862 (Mar. File No.The final judgment enjoins HealthSouth from violating antifraud. 2005) http://www. 21. which was a software company with offices in New Jersey. 2005. filed in the Southern District of New York. London. They consented. for falsifying its reported income from 1999 through 2004. Brocade Communications Systems. The Commission alleged that Time Warner violated antifraud. artificially inflated the number of AOL subscribers so it could report to the investment community that it had met its new subscriber targets. Time Warner consented to the entry of a judgment that. Litigation Release No.sec. and books and records provisions of the federal securities laws. President. Litigation Release No. In order to avoid reporting to investors the hundreds of millions of dollars in undisclosed compensation expenses.gov/litigation/litreleases/2006/lr19768. Barge. and concealed the conduct by falsifying documents. 2006) http://www. among other things.htm On May 31.down.sec. 19768 (July 20. Brocade agreed to pay a penalty of $7 million to settle the charges that it committed fraud through its former CEO and other former executives who repeatedly granted backdated stock options. and failed to properly consolidate the financial results of AOL Europe in its financial statements. Reyes. The Commission's complaint alleged that Brocade's former CEO. controller James W. 2007) http://www. the Commission charged Time Warner CFO Wayne H. reporting. The order directs them to ceaseand-desist from any future violations of the reporting provisions of the federal securities laws. Time Warner agreed to restate its historical financial results to reduce its reported online advertising revenues by approximately $500 million for the fourth quarter of 2000 through 2002 and to properly reflect the consolidation of AOL Europe in the company’s 2000 and 2001 financial statements. routinely provided extra compensation to employees by granting valuable "in-the-money" stock options for which a financial statement expense was required.. misstated compensation expenses. the Commission announced the filing of a settled civil action against Brocade Communications Systems. 2007. In a separate administrative proceeding. Gregory L. California computer networking company. Reyes. and deputy controller Pascal Desroches with causing reporting violations by the company. without admitting or denying the allegations. Gregory L. Without admitting or denying the allegations in the complaint.htm SEC v.gov/litigation/litreleases/2007/lr20137. Pace. and Chairman. a San Jose. to the entry of a Commission cease-and-desist order that finds that they caused reporting violations by the company based on their roles in accounting for $400 million paid to the company by Bertelsmann AG in two sets of transactions. As part of the settlement. Brocade's former executives allegedly concealed the fact that the 30 . CASES INVOLVING STOCK OPTION BACKDATING SEC v. enjoins the company from violating these provisions and orders it to pay $300 million in civil penalties. Inc. which the Commission will request be distributed to harmed investors. 20137 (May 31. et al. Inc. creating false paperwork to make it appear the employees had been hired months earlier. The SEC's complaint alleged that from 1997 to 2002. caused Mercury to fail to record over $258 million in 31 . Brocade backdated dozens of grants for tens of millions of stock options. SEC v.sec. the accounting consequences of these benefits were then concealed as Landan. Smith. Brocade agreed to settle the charges by consenting to a permanent injunction against further violations of Section 17(a) of the Securities.and resulted in artificially and fraudulently low exercise prices for those options. and former General Counsel Susan Skaer.former Chairman and Chief Executive Officer Amnon Landan. and former CFO Antonio Canova. On July 20. and at various times Abrams. 13(b)(2)(A). and 13a-13 thereunder.options had been granted "in-the-money" by creating records making it falsely appear that the options had been granted at a lower price on an earlier date. 12b-20. 13a-1. Without admitting or denying the Commission's allegations. 2006. Douglas Smith. that action is ongoing. former Chief Financial Officers Sharlene Abrams and Douglas Smith. backdating the grants by over four months and making the grants in-the-money from 44 cents to $60 on the date they were actually approved. Brocade personnel are alleged to have backdated large option grants for prized new hires to dates before the employees had even interviewed at the Company. The backdating made it appear that the options were granted at times corresponding to low points of the closing price of the company's stock -despite the fact that the purported grant date bore no relation to when the grant was actually approved -. and Susan Skaer Litigation Release No.gov/litigation/litreleases/2007/lr20136. 2007.htm On May 31. acting through Landan and at various times Abrams. 13a-11. 20136 (May 31. Sharlene Abrams. As the Commission alleged in its complaint against the Company. and 13(b)(2)(B) of the Securities Exchange Act. Smith and Skaer. When the stock option abuses surfaced. 13(a). Among other things. and Rules 10b-5. The case against Mercury is settled and remains ongoing against the other defendants. Mercury Interactive. The complaint alleged that from 1997 through 2005. The senior officers used hindsight to select the purported grant dates of the options. 2007) http://www. LLC (f/k/a Mercury Interactive Corporation). backdated the date on which stock options were granted to executives and employees. Skaer and others. the Commission filed civil fraud charges against California-based software maker Mercury Interactive. Sections 10(b). LLC (formerly known as Mercury Interactive Corporation) and four former senior officers of Mercury -. with fraud and other securities law violations. as well as former Vice President of Human Resources Stephanie Jensen. the Commission charged Reyes. Mercury. Amnon Landan. and payment of a civil monetary penalty of $7 million. as well as its earlier complaint against Reyes and other former executives. resulting in the resignation of Reyes and the restatement of the Company's previously-reported income. Brocade's audit committee conducted a thorough investigation. millions of dollars through the fraudulent scheme. it is alleged that this practice allowed the company to shift material amounts of revenue between reporting periods (from between $35 million to approximately $182 million in revenues). while Landan. As alleged in the complaint. Skaer. causing the company to fail to report approximately $24 million in required compensation expenses. According to the complaint. Mercury stopped the shipment of its products once revenue targets for a period had been achieved. Smith and Skaer each personally benefited by receiving backdated stock options that were in-the-money by. Abrams and others. secretly managed the company's reported earnings per share ("EPS") to meet or exceed financial analyst expectations by manipulating the recognition of revenue and making fraudulent disclosures concerning its sales orders. 32 . According to the complaint.compensation expenses and to provide false and misleading compensation disclosures to Mercury's shareholders in filings with the Commission. Abrams. including false written consents and meeting minutes. fraudulently backdated the date of option exercises of certain senior Mercury officers. Mercury. prepared false documentation memorializing the grants. For example. pushing the recognition of the revenue into subsequent periods. The company concealed from its shareholders the benefits reaped by these executives by making fraudulent proxy disclosures relating to officer stock option exercises. Abrams and Skaer. Landan and Abrams understood that the backlog of revenues was material information that was being concealed from analysts and investors. acting through Landan. . in the aggregate. The complaint also alleged that from 1998 through 2001. Mercury. the complaint alleged that during 1999 through 2005. In addition. at various times Abrams. The company concealed the effect of this stop-shipment practice from the public through fraudulent and misleading statements and omissions concerning the "backlog" of its product bookings. The complaint alleged that Landan. . Skaer. senior executives were given preferential treatment and on multiple occasions were permitted to backdate the date of exercise of stock options with the company. What Any Analyst Would Love to Get Their Hands On!" Finally. representing every grant made by the company to executives and employees during 1997 to April 2002. which materially overstated the company's reported pre-tax earnings during this period. The SEC alleged that the company backdated 45 different stock option grants to executives and employees. Between 1998 and 2001. and others participated in the fraudulent structuring of loans for stock option exercises by overseas employees of the company in order to conceal the variable accounting consequences of those transactions. through Landan. a 1999 PowerPoint presentation by Abrams to Landan and others concerning the company's financial picture stated in a slide: "Our Hidden Backlog . the complaint alleged that during at least 1997 through 2001. or others at her direction. Mercury and the senior executives continued the backdating for years in spite of a specific change mandated and approved by shareholders in 1998 that required the exercise price of all employee options to be 100% of the fair market value of the company's stock on the grant date. Abrams and Skaer also concealed the backdated exercises in Forms 4 filed with the Commission. internal controls. Anderson. 13(b)(2)(A). of Atherton. Apple was required to report a compensation charge in its publicly-filed financial statements.gov/litigation/litreleases/2007/lr20086.) Litigation Release No. As a result. Abrams. 13a-1. failed to disclose key information to Apple's auditors and neglected to ensure that the company's financial statements were accurate. The complaint also alleged that Landan and Smith violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 that were false and misleading concerning Mercury's 2002 through 2005 periodic reports. 13(a). Nancy R. The SEC's complaint sought against each of the individuals permanent injunctions. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. 2001. The complaint alleged that Landan. and 14a-9. who should have realized the implications of Heinen's actions. Anderson. The Commission accused former General Counsel Nancy R. It is alleged that both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating. Apple failed to record approximately $18. Anderson (Apple. could be exercised to purchase Apple shares at a below market price). equity transaction reporting and proxy provisions of the federal securities laws. in order to avoid reporting this expense.Without admitting or denying the SEC's allegations. 20086 (April 24. Apple granted 4.e. According to the Commission's complaint. and Exchange Act Rules 10b-5.9 million in compensation expenses associated with the option grant. and simultaneously settled. 13(b)(2)(B). Heinen caused Apple to backdate options to January 17. in a matter involving improper stock option backdating. 2007.sec. and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"). Inc. 13a-13. Because the options were in-the-money when granted (i. 12b-20. California. disgorgement with prejudgment interest. civil monetary penalties and officer and director bars.htm On April 24. SEC v. Mercury also agreed to an injunction that permanently enjoins it from violating Section 17(a) of the Securities Act of 1933. charges against former Apple Chief Financial Officer Fred D. In addition. the complaint sought against Landan and Smith reimbursement of bonuses and profits from stock sales pursuant to Section 304 of the Sarbanes-Oxley Act. when Apple's share price was substantially lower. The Commission also filed. financial reporting. Smith and Skaer violated or aided and abetted violations of the antifraud. the Commission filed charges against two former senior executives of Apple. alleging that Anderson should have noticed Heinen's efforts to backdate the Executive Team grant but failed to take steps to ensure that Apple's financial statements were correct.8 million options to six members of its executive team (including Heinen and Anderson) in February 2001. record-keeping. Heinen was also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. 2007) http://www. Mercury agreed to pay a $28 million civil penalty to settle the Commission's charges. The Commission alleged that. Sections 10(b). Heinen and Fred D. 33 . Inc. and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5.sec. The Commission sought injunctive relief. 13(b)(2)(B). agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 16(a) of the Securities Exchange Act of 1934 and Rules 13b2-2 and 16a-3 thereunder. later. 2001.5 million options to CEO Steve Jobs. and William F. As a result. Heinen — as with the Executive Team grant — allegedly caused Apple to backdate the grant to October 19. In addition. used these options. plus prejudgment interest of $528.gov/litigation/litreleases/2006/lr19878. some of which were made 34 .000. 19796 (Aug. Comverse’s former General and Senior General Counsel.3 million in compensation expense associated with the in-the-money options grant. and 14a-9 thereunder. 19878 (Oct. Inc. 13a-13. without admitting or denying the allegations in the Commission's complaint. the Commission alleged that Heinen caused Apple to improperly fail to record $20.htm Litigation Release No. Jacob (“Kobi”) Alexander. 13(b)(5). Sorin. and civil money penalties against Heinen.sec. 19964 (Jan.gov/litigation/litreleases/2006/lr19796.htm On August 9. (“Comverse”). disgorgement. and 14a-9 thereunder. and William F. 12b-20. 13b2-1. 2006. 2006) http://www. 13(a). and Heinen was charged with aiding and abetting violations of Sections 10(b). 13(b)(2)(B). in fact. alleging that they engaged in a decade-long fraudulent scheme to grant undisclosed. 13(b)(2)(A). 10. the Complaint alleged that Alexander and Kreinberg created a slush fund of backdated options by causing options to be granted to fictitious employees and.The Commission's complaint also alleged improprieties in connection with a December 2001 grant of 7.86 and will pay a civil monetary penalty of $150.125 in ill-gotten gains. Anderson. and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5. in addition to an order barring her from serving as an officer or director of a public company. and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20. Anderson also will disgorge $2.953. the Commission filed a civil injunctive action in the United States District Court for the Eastern District of New York against Jacob “Kobi” Alexander.sec. The Commission further alleged that Heinen then signed fictitious Board minutes stating that the Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that. the cofounder and former Chairman and Chief Executive Officer of Comverse Technology. 2006) http://www. David Kreinberg. 9.gov/litigation/litreleases/2007/lr19964. 13b2-2. and 16a-3 thereunder. 13a-13. Sorin Litigation Release No. in-themoney options to themselves and to others by backdating stock option grants to coincide with historically low closing prices of Comverse common stock. Although the options were in-the-money at that time. 13a-1. Comverse’s former Chief Financial Officer. 13a-1. when Apple's share price was lower. 24.107. and from aiding and abetting further violations of Section 13(a). Heinen was charged with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b). SEC v. never occurred. 13(b)(2)(A). David Kreinberg. 2007) http://www.htm Litigation Release No. and a former Comverse director. disgorgement with prejudgment interest. 13a-1. the former executives made material misrepresentations to Comverse investors regarding Comverse’s stock option grants and concealed from investors that Comverse had not recorded compensation expenses for option grants. and wire fraud. Kreinberg. Without admitting or denying the allegations of the Commission's complaint. As part of the settlement. to recruit and retain key personnel. 13b2-2.769.88 in prejudgment interest on the full disgorgement amount. Kreinberg realized an actual gain of nearly $13 million from the sales of stock underlying the exercises of backdated options granted during the 1994 to 2001 period. Sorin.394. and 13(b)(2)(B) of the Exchange Act and Rules 12b-20. officer and director bars. Kreinberg pled guilty to one criminal count of conspiracy to commit securities fraud. and from aiding and abetting violations of Sections 13(a).. 13(b)(2)(A). Sorin further agreed to refrain from acting as an 35 . for a total of $2. mail fraud. reporting. and 13a-13 thereunder.4 million of this gain represents the in-the-money portion of the options at the time of the grant to Alexander. and one criminal count of securities fraud. internal controls.661.917. The Complaint alleged that as part of the scheme. Without admitting or denying the Commission’s allegations. 13b2-1. majority-owned subsidiary of Comverse. In addition. On January 10. 14a-9. Sorin realized an actual gain of more than $14 million from the sales of stock underlying the exercises of backdated options granted during the 1991 to 2001 period. in the United States District Court for the Eastern District of New York. with at least $1 million of this gain representing the in-the-money portion of the options at the time of the grant to Kreinberg. He is required to pay $1. In a separate matter also filed on October 24. 2007. and 16a-3 thereunder. Inc.255. 13(b)(5). Sarbanes-Oxley certification. At least $6. and 16(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5. with Sorin’s knowledge. and civil money penalties. with approximately $1 million of this gain representing the in-the-money portion of the options at the time of the grant to Sorin. on October 24.00 represents the "in-the-money" benefit from exercises of backdated option grants. Comverse materially overstated its net income and earnings per share between 1991 and at least 2002. As a result. the Commission settled civil charges against William F. The settlement is subject to the approval of the United States District Court for the Eastern District of New York. Alexander.434. and securities ownership reporting provisions of the federal securities laws.68.80 in disgorgement. Kreinberg will pay $625. Kreinberg. record-keeping. initiated a similar backdating scheme at Ulticom.immediately exercisable. The Commission is seeking permanent injunctions. Alexander realized actual gains of nearly $138 million from sales of stock underlying the exercises of backdated options that were granted during the 1991 to 2001 period. of which $989. 2006. 14(a). and Sorin received undisclosed. Kreinberg consented to the entry of a final judgment permanently enjoining him from violating or aiding and abetting violations of the antifraud. From fiscal year 2001 to 2002. false statements to auditors. in-themoney options which had an immediate intrinsic gain because the exercise price of the option was lower than the market price of the underlying common stock on the date of the grant. Sorin consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933. As a result of the scheme. Sections 10(b). 2006. a publicly-traded. Kreinberg also has agreed to cooperate in the Commission's ongoing litigation. On November 19. Flowserve Corporation and C. 24. along with Conley. in a private meeting with analysts near the end of a reporting period. Sorin pleaded guilty to one criminal count of conspiracy to commit securities fraud.07 in prejudgment interest thereon. Regulation FD prohibits issuers from selectively disclosing material nonpublic information to certain persons—securities analysts. The Commission also charged its CEO. Scott Greer.pdf On March 24. investment advisers. with violating Regulation FD and reporting provisions of the federal securities laws. and Michael Conley Admin. 2006.509. and a $600. 24.sec. The plea was the result of an agreement between Sorin and the United States Attorney’s Office for the Eastern District of New York.officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.915.000 civil penalty. Sorin is required to pay $1. and institutional investors—before disclosing the same information to the public. met privately with analysts. Sorin will pay $817. Scott Greer. Scott Greer Litigation Release No. In a separate matter filed in the Eastern District of New York on November 2. a manufacturer of precision-engineered flow control equipment. This is the first Regulation FD case filed by the Commission involving a reaffirmation of earnings by an issuer and the first settled enforcement action against a director of investor relations for violating this rule. Greer. C.htm In the Matter of Flowserve Corporation. consented to the entry of an administrative order. which had been issued on Oct. 3-11872 (Mar.424. and director of investor relations. for a total of $3. forty-two days before the end of Flowserve’s fiscal year.10. and thus provided additional material nonpublic information.670. In response to the question.sec. 19154 (Mar. In addition. Proc. with causing Flowserve’s violations. According to the Commission’s order. suspending him from appearing or practicing before the Commission as an attorney. Pursuant to the order. broker-dealers. pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice. File No.gov/litigation/litreleases/lr19154. the company reaffirmed its previous earnings guidance. 2002. 22. mail fraud and wire fraud. At that meeting. The settlement is subject to the approval of the United States District Court for the Eastern District of New York. Greer reaffirmed the previous public guidance. 36 . one of the analysts asked about the Company’s earnings guidance for the year. Michael Conley.088.gov/litigation/admin/34-51427. 2005) http://www. Flowserve violated Regulation FD when. 2005. 2002. Sorin. CASES INVOLVING REGULATION FD SEC v. the Commission charged Flowserve Corporation.03 in disgorgement. C. 2005) http://www. the KPMG partner in charge of the Tenet audit. a senior manager. Further. a former KPMG manager.sec. and David L.On Nov. 30. Flowserve’s closing stock price was approximately 6% higher than the closing price the day before. 3-12252 (Mar. The Commission’s orders charged Clete D. Huffman.pdf On March 30. 2006) http://www. Carr. After the market closed on November 21. 37 .000 and $50. Huffman. and creating audit documentation after the fact. In all. 2002. Proc. 3-12251 (Mar. or should have known.gov/litigation/admin/34-53573.gov/litigation/admin/34-53574. Huffman. 30. The Commission found that the improper modifications included adding substantive comments to the working papers.000 respectively. and Carr engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by failing to complete the 2002 audit before the issuance of the audit report and by modifying working papers after the issuance of the audit report.sec. CPA. Madden. all three former auditors engaged in highly unreasonable conduct in circumstances in which they knew. File No. The audit team continued to alter the 2002 working papers even after receiving a Commission subpoena in July 2003. the KPMG senior manager on the Tenet audit. Proc. CASES INVOLVING ACCOUNTANTS AND AUDITORS In the Matter of Clete D. and a manager for failing to properly complete the audit of Tenet Healthcare Corporation’s fiscal year 2002 financial statements and for making after-the-fact modifications to the audit working papers. Carr.” Without admitting or denying the Commission’s allegations and findings. that heightened scrutiny was warranted. Greer and Conley also consented to the Commission’s issuance of a cease-and-desist order. by modifying the working papers after learning about the government investigations into Tenet. an analyst who attended the meeting issued a report stating that Flowserve had reaffirmed its earnings guidance.pdf In the Matter of Aron R. on November 21. The Commission’s orders found that Madden. the audit team spent over 500 hours altering more than 350 working papers. Madden. Flowserve furnished a Form 8-K to the Commission acknowledging that it had “reaffirmed its full year 2002 estimated earnings per share. File No. each resulting in a violation of applicable professional standards that indicate a lack of competence to practice before the Commission. backdating documents. CPA Admin. David L. which created the false impression that the audit had been adequately performed. Flowserve and Greer consented to the entry of a final judgment by the federal court that would require them to pay civil penalties of $350. and Aron R. 20. and volume increased 75%. The orders also found that Madden and Huffman engaged in repeated instances of unreasonable conduct. CPA Admin. The next day. 2006) http://www. Flowserve. 2006 the Commission announced settled administrative actions finding improper professional conduct by a former KPMG engagement partner. 2005) http://www. et al. Ronald Safran. Michael Conway. agreed to the entry of final judgments against them. and Carr settled the SEC’s charges by agreeing to be denied the privilege of appearing or practicing before the Commission as accountants.gov/litigation/litreleases/lr19573. issued unqualified audit reports asserting that Xerox’s financial statements were consistent with Generally Accepted Accounting Principles (“GAAP”) and that KPMG had conducted an audit each year in accordance with Generally Accepted Auditing Standards (“GAAS”). Litigation Release No. 2006.sec. the engagement partner on the Xerox audit for 1997. Proc. 6. and Thomas Yoho.gov/litigation/litreleases/lr19191. KPMG LLP. 19. Anthony Dolanski.htm SEC v. the Commission announced that the four remaining defendants in an action brought against them and KPMG LLP (“KPMG”) in connection with a $1. Without admitting or denying the SEC’s allegations or findings. Madden. The latest settlements relate to Xerox’s fraudulent scheme that involved various manipulations of accounting for leases of Xerox office equipment. KPMG LLP Litigation Release No. 19191 (Apr. the KPMG engagement partner on the Xerox audit for 1998 and 1999.gov/litigation/litreleases/lr19418.sec. The 38 . 3-11905 (Apr. File No. the senior engagement partner on the Xerox audit for 2000. SEC v. 2005) http://www.sec. The Commission alleged that the manipulations were necessary for Xerox to meet promises it made to Wall Street that its earnings would continue to grow by “clos[ing] the gap” between its actual performance and what it promised analysts.sec.gov/litigation/admin/34-51574. 2005) http://www. KPMG. 19. The orders provided that Huffman may apply for reinstatement after four years while Carr may apply for reinstatement after three years. KPMG LLP Litigation Release No. the SEC concurring review partner for KPMG on the Xerox engagement from 1997-2000. 19418 (Oct. 19573 (Feb. as Xerox’s independent auditor each of those years.2 billion fraudulent earnings manipulation scheme by the Xerox Corporation from 1997 through 2000 have agreed to settle the charges against them. 22.pdf On February 22. Huffman.htm SEC v.Without admitting or denying the Commission’s findings.htm In the Matter of KPMG LLP Admin. 2006) http://www. Commission further alleged that these statements were materially false and misleading and aided and abetted Xerox’s filing of false financial reports with the Commission. When Xerox retained new auditors in 2002, it restated $6.1 billion in equipment revenues and $1.9 billion in pre-tax earnings for 1997-2000. The Commission alleged that KPMG and its partners knew or should have known about the improper topside adjustments that resulted in $3 billion of the restated revenues and $1.2 billion of the restated earnings and failed to comply with GAAP. The final judgments, which are subject to approval by district court, order the engagement partners to pay civil penalties that are the largest penalties ever imposed by the Commission against an individual auditor: Safran and Conway must each pay a civil penalty in the amount of $150,000; Dolanski must pay a penalty in the amount of $100,000. All three are permanently enjoined from violating certain provisions of the federal securities laws and from aiding and abetting violations of other securities laws. Each engagement partner also consented to the issuance of an SEC Order based on the entry of the injunctions which will suspend them from appearing or practicing before the SEC as accountants. Safran will be suspended with a right to reapply in three years, Conway in two, and Dolanski in one. Yoho agreed to the entry of a Commission order imposing a censure pursuant to Rule 102(e) of the SEC’s Rules of Practice. The Commission previously announced settled enforcement proceedings against KPMG LLP, a KPMG relationship partner on the Xerox audit, Xerox and six former senior executives of Xerox, all in connection with the fraudulent manipulative accounting. The Commission obtained civil penalties and disgorgement in all of these actions in excess of $55 million. In the Matter of KPMG LLP, Gary Bentham, C.A., and John Gordon, C.A. Admin. Proc. File No. 3-11970 (June 30, 2005) http://www.sec.gov/litigation/admin/34-51946.pdf On June 30, 2005, the Commission instituted settled administrative proceedings against KPMG LLP (KPMG Canada), a Canadian audit firm, and two of its partners, Gary Bentham, the audit engagement partner, and John Gordon, the concurring and Commission reviewing partner. The Commission’s order found that KPMG Canada, Bentham and Gordon lacked independence when they audited the 1999 through 2002 financial statements of Southwestern Water Exploration Co., a now-bankrupt Colorado corporation. KPMG Canada provided bookkeeping services to Southwestern and then audited its own work. Specifically, after KPMG Canada prepared certain of Southwestern’s basic accounting records and financial statements, it issued purportedly independent audit reports on those financial statements. KPMG Canada’s audit reports were included in Southwestern’s annual reports that were filed with the Commission. The Commission found that KPMG Canada, Bentham and Gordon engaged in improper professional conduct by virtue of their violations of the auditor independence requirements imposed by the Commission’s rules and guidance and by GAAS in the United States. 39 KPMG Canada, without admitting or denying the Commission’s findings, consented to the issuance of the order, which censured KPMG Canada and required it to make a number of remedial undertakings and pay $73,682 which represents its fees from the audit and bookkeeping services it performed for Southwestern plus prejudgment interest. In determining to accept KPMG Canada’s offer of settlement, the Commission considered remedial acts promptly undertaken by KPMG Canada, cooperation afforded the Commission staff, and KPMG Canada’s undertakings. Bentham and Gordon, without admitting or denying the Commission’s findings, also agreed to settle the matter. The order bars Bentham from serving as an accountant for any publicly traded company for at least two years. Additionally, the order bars Gordon from serving as an accountant for any publicly traded company for at least nine months. In the Matter of Deloitte & Touche LLP, Steven H. Barry, CPA, and Karen T. Baker, CPA Admin. Proc. File No. 3-11911 (Apr. 26, 2005) http://www.sec.gov/litigation/admin/34-51607.pdf On April 26, 2005, the Commission instituted settled administrative proceedings against Deloitte & Touche LLP based upon its failed audit in 1999 of the fiscal 1998 financial statements of Just for Feet, Inc., a now-defunct shoe and sports apparel retailer, for which the firm received audit fees of approximately $361,000. The engagement partner, Steven H. Barry, CPA, and the audit manager, Karen T. Baker, CPA, were also charged. The order found that Just for Feet falsified its financial statements in numerous ways. These fraudulent financial statements were included in the company’s annual report for fiscal 1998 and in two registration statements for the offering of securities filed with the Commission in 1999. The order finds that Deloitte, Barry, and Baker reasonably should have known that Just for Feet’s 1998 financial statements had not been prepared in accordance with GAAP. The order further found that Deloitte, Barry, and Baker did not comply with GAAS in the conduct of their audit and engaged in improper professional conduct through repeated instances of unreasonable conduct. Without admitting or denying the order’s findings, Deloitte agreed to accept a censure and pay $375,000 to settle the charges, while Barry and Baker each consented to a bar from serving as an accountant for any publicly traded company. Barry can apply for reinstatement after two years; Baker can apply after one year. SEC v. Deloitte & Touche LLP Litigation Release No. 19202 (Apr. 26, 2005) http://www.sec.gov/litigation/litreleases/lr19202.htm In the Matter of Deloitte & Touche LLP Admin. Proc. File No. 3-11910 (Apr. 26, 2005) http://www.sec.gov/litigation/admin/34-51606.pdf 40 On April 26, 2005, the Commission charged Deloitte & Touche LLP with engaging in improper professional conduct and causing Adelphia’s violations of reporting, books and records, and internal controls provisions of the federal securities laws because it failed to detect a massive fraud perpetrated by Adelphia and certain members of the Rigas family, who were officers and/or directors of Adelphia. According to the Commission, Deloitte failed to implement audit procedures designed to detect the illegal acts at Adelphia and failed to implement audit procedures designed to identify material related party transactions or related party transactions otherwise requiring disclosure. According to the Commission, Deloitte engaged in improper professional conduct by failing to act in accordance with GAAS and by failing to detect a massive fraud perpetrated by Adelphia and the Rigases. Even though Deloitte identified Adelphia as one of its highest risk clients, Deloitte failed to design an audit appropriately tailored to address audit risk areas that Deloitte had explicitly identified. Among other things, Adelphia understated its subsidiary debt by $1.6 billion, overstated equity by at least $368 million, improperly netted related party receivables and payables between Adelphia and related parties, and failed to disclose the extent of related party transactions. In settling the case filed in the Southern District of New York, Deloitte violated audit requirements of the federal securities laws. Deloitte has consented to the entry of an order requiring the firm to pay a civil money penalty of $25 million, which will be deposited into a fund to compensate victims of Adelphia’s fraud. In separate administrative proceedings, the Commission also censured Deloitte for improper professional conduct, and Deloitte agreed to pay an additional $25 million, which will also be deposited into a fund to compensate victims of Adelphia’s fraud. Deloitte also agreed in the administrative proceedings to substantive undertakings designed to address its audit of high-risk clients in the future. In the Matter of KPMG LLP Admin. Proc. File No. 3-11905 (Apr. 19, 2005) http://www.sec.gov/litigation/admin/34-51574.pdf On April 19, 2005, the Commission announced that KPMG LLP has agreed to settle the Commission’s charges against it in connection with the audits of Xerox Corp. According to the Commission, from 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion “gap” between actual operating results and results reported to the investing public. The Commission alleges that Xerox used topside accounting actions at the end of financial reporting periods to increase equipment revenue and earnings through the improper acceleration of revenue from long term leases of Xerox copiers and through manipulation of excess or “cookie jar” reserves. Most of Xerox’s topside accounting actions violated GAAP and all of them inflated and distorted Xerox’s performance but were not disclosed to investors. These undisclosed actions overstated Xerox’s true equipment revenues by at least $3 billion and overstated its true earnings by approximately $1.5 billion during the four-year period. 41 with violating and aiding and abetting violations of the FCPA. and enjoins KPMG from future violations. paid one agent $4. for a total payment of $22. The final judgment orders KPMG to pay disgorgement of $9. a former business development manager for Baker Hughes.800. Baker Hughes paid over $1 million to the agent's Swiss bank account. The order censures KPMG and orders it to cease and desist from committing or causing these violations. The order also finds that KPMG violated its obligations to disclose to Xerox illegal acts that came to its attention during the Xerox audits. Texas-based global provider of oil field products and services. In the same complaint. 20094 (April 26. 2007) http://www. the Commission announced the filing of a settled enforcement action charging Baker Hughes Incorporated. and internal controls provisions of the federal securities laws.gov/litigation/litreleases/2007/lr20094.As part of the settlement. The complaint also alleged that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil. KPMG consented to the entry of a final judgment in the Commission’s civil litigation against it in the Southern District of New York finding that it violated audit requirements of the federal securities laws.htm On April 26. the SEC also charged Roy Fearnley.2 million to two agents while knowing that some or all of the money was intended to bribe government officials. certain of this conduct occurred after 42 . Angola. books and records. with violations of the Foreign Corrupt Practices Act (FCPA). a Houston.000. Baker Hughes made payments in Nigeria. 2007.000 civil penalty.475 million. In addition. Baker Hughes. The action against Fearnley is ongoing. Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services. and a $10.000 (representing its audit fees for the 1997-2000 Xerox audits). the Commission entered an order finding that KPMG caused and willfully aided and abetted Xerox’s violations of antifraud.000. despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil. or whether these payments would be accurately recorded in Baker Hughes' books and records.1 million to its bank account in London but received no identifiable services from the agent. In addition to violating the FCPA. the national oil transportation operator of Kazakhstan. whether the payments would be shared with government officials.675. The SEC alleged that Baker Hughes paid approximately $5. Between 1998 and 1999. KPMG consented to the entry of the order without admitting or denying the Commission’s findings. The SEC's complaint against Baker Hughes also alleged that between 1998 and 2005. Baker Hughes Incorporated and Roy Fearnley Litigation Release No. specifically officials of State-owned companies. reporting. prejudgment interest thereon in the amount of $2. Russia. Indonesia.sec. CASES INVOLVING FOREIGN PAYMENTS SEC v. in Kazakhstan. the complaint alleged. and one count of conspiracy to violate the FCPA. Baker Hughes also agreed to disgorge $19. File No. the company will retain for a period of three years a monitor to review and assess the company's compliance program and monitor its implementation of and compliance with new internal policies and procedures. the Commission alleges that from at least 1999 through 2004. Baker Hughes will also retain an independent consultant to review the company's FCPA compliance and procedures.133. the United States Department of Justice filed criminal FCPA charges against Baker Hughes and its wholly-owned subsidiary Baker Hughes Services International. 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. and 13(b)(5) of the Securities Exchange Act of 1934.. 2001). Under the terms of the final judgment. an Oregon-based steel company that sells scrap metal. a contested action against Roy Fearnley. Inc. one count of aiding and abetting the falsification of the books and records of Baker Hughes. Inc. the Commission instituted settled administrative cease-and-desist proceedings against Schnitzer Steel Industries. and to pay $10.. Schnitzer also paid bribes to managers of private steel mills in China and South Korea.41. No. In the order. seeking to permanently enjoin Fearnley from alleged violations of Sections 30A and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. The Commission 43 . 3-10572 (September 12.000. with an office in Atyrau. 2006) http://www. Baker Hughes Services International. agreed to plead guilty to one count of violating the anti-bribery provisions of the FCPA. and improperly concealed those payments in its books and records.September 12. Admin.pdf On October 16. 13(b)(2)(B). and to pay prejudgment interest thereon in the amount of $3.778. and seeking disgorgement. Admin Proc. The Commission alleges that Schnitzer made or authorized the making of illegal payments to foreign officials in violation of Section 30A of the Exchange Act. The Commission also filed. 16. prejudgment interest and civil penalties. 13(b)(2)(A). and to pay a criminal fine of $11 million. Baker Hughes consented to the entry of a final judgment permanently enjoining it from future violations of Sections 30A.000 as a civil penalty for the company's violations of the prior Commission cease-and-desist Order. and consequently violated the Commission's 2001 cease-and-desist Order. Schnitzer made the payments on its own behalf and as a broker for Japanese steel companies.944.237. Under the agreement. 2006. 3-12456 (Oct. Schnitzer paid cash kickbacks or made gifts to managers of government-controlled steel mills in China to induce those managers to purchase scrap metal from Schnitzer.gov/litigation/admin/2006/34-54606. Kazakhstan. The Department of Justice also entered into an agreement with Baker Hughes to defer prosecution for two years on charges of violating the anti-bribery and books and records provisions of the FCPA. In the Matter of Baker Hughes Incorporated. in the same complaint. Proc. and aiding and abetting Baker Hughes' violations of Sections 30A. 2001.sec. Inc. a former business development manager for Baker Hughes. In a related criminal proceeding. Without admitting or denying the SEC’s allegations. In the Matter of Schnitzer Steel Industries. Inc. During the relevant time period. Statoil paid bribes to an Iranian government official intending to (i) induce the Iranian Official to use his influence with the Iranian state-run oil company. File No. and (iii) secure improper advantage for Statoil by positioning it to obtain future business in Iran. 44 . In June 2002 and January 2003.gov/litigation/admin/2006/34-54599. Statoil employees circumvented Statoil's internal controls and procedures that were in place to prevent illegal payments. Statoil obtained the contract to develop a significant oil and gas field. In October 2002. potentially worth hundreds of millions of dollars.sec. by mischaracterizing the payments as legitimate consulting fees. Statoil. record-keeping. a Norway-based and New York Stock Exchange listed multinational oil company. Statoil violated the books and records provisions of the federal securities laws. England. ASA. Statoil made the initial payments of $5. Finally. the Iranian official used his influence to assist Statoil in obtaining business in Iran by. ASA Admin.also alleges that Schnitzer violated Section 13(b)(2)(A) by improperly recording in its books and records payments it made in the transactions involving its subsidiary in Korea. Schnitzer allegedly violated Section 13(b)(2)(B) by failing to devise and maintain an effective system of internal controls to prevent and detect violations of the Foreign Corrupt Practices Act. In addition. Schnitzer also agreed to certain undertakings including the retention of a compliance consultant for three years to review and evaluate Schnitzer’s internal controls. the Commission announced the institution of a settled enforcement action against Statoil. 3-12453 (Oct.446. and 30A of the Exchange Act. and financial reporting policies and procedures as they relate to Schnitzer’s compliance with the FCPA. but in June 2003. The consulting contract obligated Statoil to make initial payments of $200. 2006) http://www. and Statoil lacked sufficient internal controls.106. 13. which prohibits bribery of foreign government officials. for violations of the Foreign Corrupt Practices Act (FCPA).279. and ten subsequent annual payments of $1 million each.pdf On October 13. Schnitzer consented to the Commission’s order to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B). providing Statoil employees in Iran nonpublic information concerning oil and gas projects in Iran and showing Statoil copies of bid documents of competing companies that were otherwise not available to Statoil. 2006. Statoil suspended further payments. In return for the payments.095 and prejudgment interest of $1. Statoil agreed to pay the Iranian official through a vaguely defined consulting contract with an offshore intermediary company organized in Turks and Caicos and owned by a third party located in London. SEC v.000 and $5 million. The Commission's Order finds that Statoil paid bribes to an Iranian government official in return for his influence to assist Statoil in obtaining a contract to develop a significant oil and gas field in Iran and to open doors to additional projects in the Iranian oil and gas industry. Proc. for example.2 million to the Iranian official. The Commission further ordered Schnitzer to pay disgorgement of $6. Without admitting or denying the allegations. (ii) influence the Iranian state-run oil company's decision about whether to award Statoil a development contract. 2005. Without admitting or denying the findings in the Order. 2006 the Commission issued an Order against Oil States International. The Order found that from December 2003 to November 2004. Proc. an energy company owned by the government of Venezuela.gov/litigation/admin/2006/34-53732. provided approximately $348. pay 45 . The PDVSA employees proposed that the consultant submit inflated bills to HWC for his services and kickback the excess to the PDVSA employees. and ordered Diagnostic Products to cease and desist from such violations. the Commission instituted an Order against Diagnostic Products Corporation. HWC would improperly bill PDVSA for services on jobs. The Order also requires Statoil to cease and desist from committing violations of the antibribery.5 million penalty is deemed satisfied by a penalty previously paid to the Norwegian criminal authorities. and internal controls provisions of the Foreign Corrupt Practices Act. File No. Oil States consented to the entry of the Order. a specialty provider to oil and gas drilling and production companies. In a related criminal proceeding. Oil States. internal controls and books and records provisions of the FCPA and to retain an independent compliance consultant to review and report on Statoil's compliance with the FCPA. the PDVSA employees were capable of stopping or delaying HWC’s work.gov/litigation/admin/34-51724.5 million pursuant to a deferred prosecution agreement with the United States Department of Justice and the United States Attorney's Office for the Southern District of New York. 2006) http://www. After learning of the proposed scheme from the consultant. three HWC Venezuela employees acceded to and facilitated the improper activity. a medical equipment company. Statoil consented to entry of an administrative Order that requires Statoil to pay disgorgement of $10. In the Matter of Diagnostic Products Corporation Admin. The Order found that Diagnostic Products violated the anti-bribery. HWC employees incorporated these documents into HWC’s books and records and HWC passed on an undetermined amount of the improper payments in inflated invoices to PDVSA. 27. In December 2003.pdf On May 20. Inc. The Order found that Oil States violated the books-and-records and internal controls provisions of the Foreign Corrupt Practices Act. Statoil cooperated with the Commission's investigation and took a number of remedial steps as outlined in the Commission's Order. books-and-records. (PDVSA).. 3-12280 (Apr. Proc.350 in improper payments to employees of Petróleos de Venezuela.sec. a consultant for HWC was approached by three employees of PDVSA about a proposed kickback scheme. Inc. In the Matter of Oil States International. 2005) http://www. Admin. 3-11933 (May 20. Statoil has agreed to pay a criminal penalty of $10.Without admitting or denying the Commission's allegations. through certain employees of its wholly-owned subsidiary Hydraulic Well Control (HWC). and ordered Oil States to cease and desist from such violations.A. File No. If HWC did not comply with the proposed scheme. At the same time.sec. The consultant provided inflated invoices for his services and other documents inaccurately reflecting the services billable to PDVSA.5 million.pdf On April 26. Three million of the $10. S. 2003. its wholly-owned subsidiary in China. who was known at the time by Titan to be the business advisor of Benin’s president. that Titan affirmatively represented in a merger agreement with Lockheed Martin Corporation.htm Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and the Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability Release No. The Commission’s complaint alleges. SEC v. among other things. a San Diego based military intelligence and communications company. agent or employee of the Company or any of its Subsidiaries. Titan funneled approximately $2 million towards the election campaign of Benin’s thenincumbent President. The Titan Corporation Litigation Release No. with violating the anti-bribery. dated September 15. 2005. The Order finds that. 51283 (March 1. In 2001.gov/litigation/litreleases/lr19107. 19107 (March 1. Africa. Diagnostic Products. taken any action which would cause the Company or any of its Subsidiaries to be in violation of the FCPA.6 million to doctors and other individuals employed by hospitals which are owned by Chinese governmental authorities.sec. As the Report 46 . Without admitting or denying the findings in the Order. through DePu Biotechnological & Medical Products Inc. The Commission also issued a Report of Investigation to provide guidance concerning potential liability under the antifraud and proxy provisions of the federal securities laws for publication of materially false or misleading disclosures regarding provisions in merger and other contractual agreements. during the relevant period. Titan paid more than $3.038. that to its knowledge. The Report of Investigation states.5 million to its agent in Benin. .727 in disgorgement and $749. nor any director. 2005) http://www. neither the company “nor any of its Subsidiaries. The illegal payments were made with the purpose and effect of obtaining or retaining business with these hospitals.” which was disclosed in the proxy statement and the merger agreement. In addition. Diagnostic Products consented to the entry of the Order. has . internal controls and books and records provisions of the Foreign Corrupt Practices Act (FCPA).gov/litigation/investreport/34-51238. made improper commission payments totaling approximately $1. 2005) http://www. DePu improperly recorded the illegal payments as legitimate sales expenses in its books and records. Diagnostic Products did not have effective internal accounting controls to prevent or detect FCPA violations.sec. that from 1999 to 2001.$2. Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain an increase in the percentage of project management fees for it. and were made with the knowledge and approval of senior officers of DePu. from 1991 through 2002.htm On March 1. and retain an independent consultant to review and report on its compliance with FCPA policies and procedures for three years.. .895 in prejudgment interest. officer. the Commission announced the filing of a settled enforcement action charging The Titan Corporation. among other things. the Commission announced settled fraud charges against Morgan Stanley & Co. Inc. 2007. which will be deemed satisfied by Titan’s payment of criminal fines of that amount in parallel proceedings brought by the U. 24. Attorney’s Office for the Southern District of California and the U. Proc. and third party broker-dealers that routed orders to Morgan Stanley for execution. Department of Justice. All of Morgan Stanley's revenue from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan. 2001. Incorporated (Morgan Stanley) for its failure to provide best execution to certain retail orders for over-the-counter (OTC) securities. File No.S. In particular. 3-12631 (May 9.949. Morgan Stanley allegedly embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders. when an issuer makes a public disclosure of information.gov/litigation/admin/2007/34-55726. The Commission found that from Oct. Morgan Stanley willfully violated Section 15(c)(1)(A) of 47 . failed to seek to obtain best execution for certain orders for OTC securities placed by retail customers of Morgan Stanley.222 through its improper use of undisclosed mark-ups and mark-downs.957. As a result of this conduct. and retain an independent consultant to review the company’s FCPA compliance and procedures and to adopt and implement the consultant’s recommendations.2 million executions valued at approximately $8 billion. Morgan Stanley. The Commission found that Morgan Stanley failed to provide best execution to more than 1.sec.highlights. The Commission also found that Morgan Stanley recognized revenue of $5. for which Morgan Stanley had an obligation to execute without hesitation. pay a $13 million penalty. through Dec. 2004.200 in disgorgement and penalties to settle the Commission's charges.5 million in disgorgement and prejudgment interest. 2007) http://www. the Commission found that Morgan Stanley breached its duty of best execution with respect to these retail customers' orders. 8. The issuer cannot avoid this disclosure obligation simply because the information published was contained in an agreement or other document not prepared as a disclosure document. Titan consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA and requiring it to pay approximately $15. Morgan Stanley will pay $7. the issuer is required to consider whether additional disclosure is necessary in order to put into context the information contained or incorporated in that publication so that such information is not misleading. As a result.pdf On May 9. CASES INVOLVING BROKER-DEALERS In the Matter of Morgan Stanley & Co. Without admitting or denying the allegations in the complaint. a registered broker-dealer.S. Incorporated Admin. Fraud Section. The Report also states that the Commission will consider bringing an action if it determines that the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted. Morgan Stanley DW. and required it to cease and desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act. including analyst upgrades and downgrades. The Order issued found that BAS willfully violated Sections 15(f) and 15(c) of the Securities Exchange Act of 1934.222 and prejudgment interest thereon of $507. 2007) http://www. deceptive or fraudulent devices or contrivances to effect securities transactions.pdf On March 14. The Order also required Morgan Stanley to pay disgorgement of $5. This settled enforcement action ended the Commission's investigation. The Commission's Order also found that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts. including upgrades and downgrades. and for issuing fraudulent research. and E-Stamp Corp. the Commission announced a settled enforcement action against Banc of America Securities LLC (BAS) for failing to safeguard its forthcoming research reports. and imposed a civil money penalty of $1. In 2004. Under the terms of the settlement. Inc. in connection with this investigation. which will be put into a Fair Fund to benefit customers of the firm. In the Matter of Banc of America Securities LLC Admin.978. TelCom Semiconductor. The Commission censured the firm and ordered it to cease and desist from committing or causing violations or future violations of those provisions of the securities laws. in at least two instances. At the same time.the Securities Exchange Act of 1934.. BAS will retain an independent consultant to conduct a comprehensive review of the firm's internal controls to prevent the misuse of material nonpublic information concerning forthcoming BAS research. Without admitting or denying the Commission's findings. 2007. BAS traded before research reports were issued. Morgan Stanley also will retain an independent distribution consultant to develop and implement a distribution plan for the disgorgement ordered. 3-12591 (March 14. from January 1999 through December 2001. on multiple occasions during the period. BAS did not provide clear or effective policies and procedures regarding the handling or control of such information.949. Proc. File No. and will retain an independent compliance consultant to conduct a comprehensive review and provide a report on its automated retail order handling practices. which prohibits broker-dealers from using manipulative.gov/litigation/admin/2007/34-55466.5 million. Morgan Stanley consented to the entry of an Order by the Commission that censured Morgan Stanley. BAS sales and trading employees learned of forthcoming research changes. the Commission censured BAS and ordered the firm to pay $10 million for failing to produce documents and engaging in dilatory tactics. These conflicts resulted in the publication of materially false and misleading research reports on Intel Corporation. BAS experienced a breakdown in its internal controls designed to detect and prevent the misuse of forthcoming research reports by the firm or its employees. The firm also agreed to certify that it has implemented structural and other reforms of its investment banking and research departments to bolster the integrity of the firm's equity 48 . As a result.sec. The Commission's Order found that. BAS will pay $26 million in disgorgement and penalties. Admin. The NYSE Decision further found that Goldman failed to reasonably supervise its business activities. The SEC Order and NYSE Decision found that as a result of its failure to investigate the disparity between its customer's trading and the "long" designations on their sales orders. Both the SEC Order and the NYSE Decision found that. but rather. BAS consented to the entry of the Order without admitting or denying the Commission's findings. Goldman's records also reflected that its customers covered their short positions with securities purchased in follow-on and secondary offerings after executing their sales.research. had to borrow the securities from Goldman to settle all of their sales. thereunder.P. The Commission further found that had Goldman instituted and maintained procedures reasonably designed to detect these significant trading disparities. 2007. because the customers had sold the securities short and did not have the securities at settlement date. as described in the Order and Decision.Goldman's direct market access. it could have discovered the pattern of unlawful trades by its customers. 2007) http://www.sec. and Rules 200(g) and 49 . Goldman executed the transactions as long sales. L.P. Goldman's exclusive reliance on its customers' representations that they owned the offered securities was unreasonable. The SEC's Order and the NYSE Decision against Goldman found that for more than two years. The order and decision also found that Goldman was a cause of its customers' violations of the short sale rules. automated trading system and falsely marking the orders "long. Goldman delivered borrowed and proprietary securities to the brokers for the purchasers to settle the customers' purported "long" sales. The customers did not deliver to Goldman in time for settlement the securities they purported to sell long. Inc. the Commission and the NYSE Regulation.gov/litigation/admin/2007/34-55465. In the Matter of Goldman Sachs Execution & Clearing. 3-12590 (March 14. Proc. Goldman violated the Commission's short sale rules directly by allowing its customers to mark their orders "long" and lending them borrowed and proprietary securities to settle their sales. The SEC Order and the NYSE Decision censured Goldman for its conduct and compelled the firm to pay $2 million in civil penalties and fines. the customers' pattern of trading and Goldman's own records reflected that they were selling the securities short in violation of Rule 105 and Rule 10a-1(a). Leeds & Kellogg. L. for its violations arising from an illegal trading scheme carried out by customers through their accounts at the firm. settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group.pdf On March 14. File No. The SEC Order and the NYSE's Decision alleged that Goldman's customers carried out the illegal short-selling scheme by placing their orders to sell through the firm's REDI System© . Inc. The SEC Order also directed Goldman to cease and desist from committing or causing any violations or future violations of Section 10(a) of the Securities Exchange Act of 1934 and Rule 10a-1(a). In addition. f/k/a Spear." Relying solely on the way its customers marked their orders. beginning in March 2000. along with others. in January 2005. the Order bars Friedman from association in a supervisory capacity with any broker or dealer with a right to reapply after two years. Friedman Admin. Accordingly.. FBR is Delaware broker-dealer registered with the Commission. the Commission initiated administrative proceedings against Friedman. Friedman. In the Matter of Emanuel J. Billings.gov/litigation/admin/2006/33-8761. 2007. The Commission further alleges that Friedman. Inc. was a member of FBR’s underwriting committee. 2007) http://www. Billings.pdf On January 12. from violations of Sections 10(b) and 15(f) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Ramsey & Co. Ramsey & Co. (FBR). the District Court for the District of Columbia entered a final judgment by consent against Friedman permanently enjoining him from violations of Section 5 of the Securities Act of 1933 and. Ramssy & Co. Administrative Proceeding No.) Goldman consented to the order and decision without admitting or denying the findings made by the SEC or the NYSE.203(a) of Regulation SHO. 50 . 2007) http://www. is liable for the company’s misuse of material nonpublic information in connection with a PIPE offering. as a controlling person. Inc. In the Matter of Friedman. 12. Billings. Inc. Friedman consented to the issuance of the Order without admitting or denying the findings in the Order that set forth the allegations in the civil injunctive action. 3-12537 (January 12. had responsibility for. File No. 2006. The Commission alleges that in September and October 2001.sec. The SEC previously brought a settled civil injunctive action against two of Goldman's customers who had engaged in the illegal short sales and who. respectively.. actively participated in and directed or controlled the day-to-day management of Friedman.pdf On January 12. participated in meetings regarding the progress of investment banking transactions and supervised FBR’s compliance and trading departments. 2007. The Commission also alleges that FBR and Friedman engaged in unregistered sales of CompuDyne securities. The Order finds that on December 22. paid over $1 million in disgorgement and civil penalties. 34-55105 (Jan. the Commission alleges that Friedman was a controlling person of FBR pursuant to Section 20(a) of the Exchange Act. Proc. the Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 against Emanuel J. Friedman. FBR failed to establish.sec. among other things. Based on the above.gov/litigation/admin/2007/34-55104. In particular. the Commission alleges that Friedman.. (Rules 200(g) and 203(a) of Regulation SHO replaced Rule 10a-1(d) and Rule 10a-2. as a controlling person. pursuant to the settlement. maintain and enforce policies and procedures reasonably designed to prevent the misuse of material. The Commission alleges that in connection with a Private Investment in Public Equity (PIPE) offering by CompuDyne Corporation. by making unsuitable recommendations in connection with the offer and sale of 529 plan investments. FBR submitted an offer of settlement that the Commission accepted. 1st Global willfully violated Municipal Securities Rulemaking Board Rules G-17 and G-19. these procedures were not implemented with regard to the CompuDyne offering. in violation of the antifraud provisions of the federal securities laws. nonpublic information concerning the CompuDyne PIPE offering. will pay a $100. The order also finds that 1st Global's supervisory procedures were inadequate to determine whether its recommendations of particular classes of 529 plan units were suitable to investors.gov/litigation/litreleases/2006/lr19791. one 1st Global customer invested $11. to the extent the firm had procedures. or 9%.000 each for five-month old twins in Class C units of a popular 529 plan investment. commonly known as Section 529 College Savings Plans. FBR agreed to bear the costs of hiring an independent consultant to review its current procedures aimed at preventing information abuse. 2006. et al.nonpublic information and. improperly traded CompuDyne stock in its market making account while aware of material. 1st Global recommended and sold investments in 529 plan units without understanding and evaluating the comparative costs for its customers. For example. 2006) http://www.sec. assuming 10% growth. Proc. The order provides illustrations of the effects of comparative 529 plan unit costs over an anticipated lengthy holding period. and that. If he had purchased Class A units in the same investment. 1st Global consented to the entry of the Commission's order without admitting or denying the Commission's findings. 3-12479 (Nov.pdf On November 15. The order issued by the Commission finds that between 2001 and 2004.. In addition to imposing a $100. Despite having limited procedures intended to prevent information abuse. 15. 3.gov/litigation/admin/2006/34-54754. the order censures 1st Global and requires it to cease-and-desist from committing or causing any violations of those provisions.sec.htm 51 . Litigation Release No. 19791 (Aug.100. SEC v. In the Matter of 1st Global Capital Corp.000 penalty. The order also gives illustrations of the effects of unique 529 plan cost structures on comparative unit costs. they were ineffectively implemented. American-Amicable Life Insurance Company of Texas. the Commission announced that 1st Global Capital Corp. File No. his investment for each child would be worth an estimated $4. more than the value of Class C units when the children reach college age. a Dallas broker-dealer. The order finds that as a result of its conduct. and Section 15B(c)(1) of the Securities Exchange Act of 1934. Admin. The consultant would fashion reasonable recommendations for policy implementation subject to agreement by FBR and review by the Commission. 2006) http://www.000 penalty and consent to findings that it made unsuitable recommendations and sales of units of tax-advantaged qualified tuition savings plans. The vast majority earned little or nothing on their investment. the overwhelming majority of military personnel who purchased Horizon Life earned little or nothing from their investment. American-Amicable represented Horizon Life to military personnel as a security and a wealth-creating investment. which it called the “Building Success” system. In the agreed settlement. American-Amicable). with securities law violations. and Pioneer Security Life Insurance Company (together. all based in Waco.000 members of the United States military services purchased the product. an antifraud statute. American-Amicable agreed to settle the action by paying $10 million to the approximately 57. American-Amicable will discontinue sales of Horizon Life and will terminate the deceptive sales program. the company’s deceptive sales pitch did not. American-Amicable senior staff trained its sales agents to hold themselves out as “financial advisers” or “financial coaches.On August 3.” The settlement is part of a global settlement of claims brought by the Commission. the Commission sued a Waco. approximately 57. Horizon Life was targeted at military personnel who had little or no interest in insurance because they already were provided access to low-cost insurance sponsored by the government. the sales agents then misled military personnel to believe they could become millionaires if they invested in Horizon Life. At the same time. Instead. Without admitting or denying the allegations. Pioneer American Insurance Company. state insurance regulators led by the Georgia Department of Insurance and the Texas Department of Insurance. Texas. claiming that mutual funds. Texas. which the other regulators value at approximately $60 million. 2006. 52 . the company neither admitted nor denied the Commission’s allegations. Pursuant to the settlement. and the United States Attorney’s Office for the Eastern District of Pennsylvania. insurance company and its affiliates for targeting American military personnel with a deceptive sales program that misleadingly suggested that investing in the company’s product would make one a millionaire. bank savings accounts and government bonds were not sensible investments compared to Horizon Life. As a material element of its marketing. Unlike insurance products legitimately offered to a wide range of potential buyers with a potential interest in the insurance features of those products. The Commission’s complaint charged American-Amicable with violating Sections 17(a)(2) and (3) of the Securities Act of 1933.” Purporting to play that role. Contrary to the representations. Since 2000.000 military personnel who invested in the product sold as an investment known as “Horizon Life. which will be distributed to the affected investors. and to pay disgorgement of $10 million. The settlement with the other regulators will provide additional relief. Although the written materials ultimately provided to investors apparently accurately described the Horizon Life product. American-Amicable agreed to be enjoined from further violations of these provisions. The Commission’s complaint charged affiliated entities American-Amicable Life Insurance Company of Texas. the agents denigrated other investment alternatives. the Order censured IFMG and required it to pay $2. Oxendine and Texas Insurance Commissioner Mike Geeslin announced a multi-state settlement with AmericanAmicable alleging violations of state insurance and consumer protection laws. IFMG provided financial incentives to its registered representatives. IFMG gave preferred sales treatment to certain mutual fund complexes and variable insurance product issuers participating in its revenue sharing program (the Preferred Program) in exchange for revenue sharing payments. Incorporated & Morgan Stanley DW Inc. settlement and proposed consent decree with American-Amicable alleging civil claims of wire and mail fraud. Proc. participated in IFMG’s Preferred Program. for failing to disclose adequately material information to its customers in the offer and sale of mutual fund shares and variable insurance products. Georgia Insurance Commissioner John W.. 3-12342 (June 27.827. and U. in which it consented to the entry of the Order without admitting or denying the findings contained therein.pdf 53 . a registered broker-dealer. Preferred Families received other forms of preferential sales treatment including placement on a preferred list. In the Matter of IFMG Securities. Making Findings. 3-12365 (July 13. File No. Attorney Patrick L.In related matters. prominent billing in new business presentations and enhanced access to its sales force. Meehan of the Eastern District of Pennsylvania announced the filing of a complaint. The Commission simultaneously accepted IFMG’s Offer of Settlement. the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings. The Order found that. and Imposing Remedial Sanctions and a Cease-andDesist Order Pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange Act against IFMG Securities. The Order also required IFMG to comply with certain undertakings including the retention of an independent consultant to conduct a comprehensive review of its revenue sharing program. File No. 2006) http://www. In the Matter of Morgan Stanley & Co. 2006. including reducing the commission paid for the sale of products whose advisers or insurers did not participate in its Preferred Program. Proc. Admin.S. Inc. the receipt of revenue sharing payments pursuant to the Preferred Program or the potential conflicts of interest created by these payments.408 in disgorgement and prejudgment interest and civil penalties in the amount of $1 million. from at least January 2000 through November 2003.sec.gov/litigation/admin/2006/33-8720.sec. 2006) http://www. to sell funds from the Preferred Families over other funds. Inc. IFMG did not adequately disclose the existence of its Preferred Program. Based on the foregoing conduct. Admin.pdf On July 13. at various times.gov/litigation/admin/2006/34-54047. Five mutual fund families and between six and twelve insurers offering variable insurance products (the Preferred Families). Proc.gov/litigation/admin/2006/33-8684. the firms violated Section 17(a)(2) of the Securities Act of 1933. 2006) http://www. which allowed the SEC to conserve resources. upon the staff’s request for information. and Other Relief against Morgan Stanley & Co. and more than $13 million in penalties. or vice versa. Admin. the firms voluntarily disclosed the practices they engaged in to the SEC. and to retain an independent consultant to review Morgan Stanley’s policies and procedures. the firms. Stearns & Co. File No. Based on the above. maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information. In particular. In the Matter of Crowell. Inc. Incorporated and Morgan Stanley DW Inc. since the firms were under no obligation to guarantee against a failed auction. In addition. Incorporated and Morgan Stanley DW Inc. undertakings. between January 2003 and June 2004. both of which are registered broker-dealers and investment advisers. Morgan Stanley consented to the issuance of the Order without admitting or denying any of the Commission’s findings.. in determining the structure of the settlement and the size of the penalties. By engaging in these practices.. failed to establish. investors may not have been aware of the liquidity and credit risks associated with certain securities. 2006. Some of these practices had the effect of favoring certain customers over others. The Order further finds that Morgan Stanley’s failures resulted in violations of Section 15(f) of the Exchange Act and Section 204A of the Advisers Act. Penalties. and Sections 203(e) and 203(k) of the Advisers Act. ordered Morgan Stanley to pay a $10 million penalty. Making Findings. the Commission issued an Order Instituting Proceedings Pursuant to Sections 15(b)(4) and 21C of the Exchange Act. which constituted violations of the securities laws.pdf On May 31. Simultaneously with the institution of the proceedings. 3-12310 (May 31. consented to the entry of an SEC cease-and-desist order providing for censures. and some had the effect of favoring the issuer of the securities over customers. The SEC. Auction rate securities are municipal bonds. which neither admit nor deny the findings in the order. and Imposing Cease-and-Desist Orders. The Order found that. 54 . Weedon & Co. 2006.On June 27.sec. The SEC order found that. the Order censured Morgan Stanley. et al. considered the amount of investor harm and the firms’ conduct in the investigation to be factors that mitigated the serious and widespread nature of the violations. Morgan Stanley & Co. ordered it to cease and desist from committing or causing any violations and any future violations of Section 15(f) of the Exchange Act and Section 204A of the Advisers Act. corporate bonds or preferred stocks with interest rates or dividend yields that are periodically re-set through Dutch auctions. the Commission announced the institution of proceedings against 15 broker-dealer firms for engaging in violative practices in the $200 billion plus auction rate securities market. each firm engaged in one or more practices that were not adequately disclosed to investors. In the Matter of Bear. for several years.. S. Without admitting or denying any of the findings. numerous back-up tapes from 1999 55 . File No. Weedon’s antimoney laundering manual required it to both check photo identification and perform an independent verification through a public database. Weedon consented to the issuance of an order that it cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8. Crowell relied on its registered representatives to verify the customer’s identifications. which seeks to protect the U. Specifically. Weedon failed to document its actual customer identity verification procedures in its written customer identification program (CIP).gov/litigation/admin/2006/34-53847. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley.gov/litigation/litreleases/2006/lr19693.. Despite Morgan Stanley’s assertion in both the IPO and Research Analyst investigations that it had not retained any 1999 tapes that backed-up e-mail. the Commission announced that it sanctioned broker-dealer Crowell. From October 2003 to at least late April 2004. for failing to comply with the record-keeping provisions of the Bank Secrecy Act. the unavailability of certain documents. as amended by the USA PATRIOT Act.htm On May 10. During this period. Weedon made an effort to verify the identities of customers. Instead. 2006) http://www. the firm opened approximately 2. Litigation Release No.sec. Crowell. SEC v. Crowell. 2006. By using materially different steps than those specified in its anti-money laundering manual. a regulated broker-dealer. Crowell. The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e-mails until 2005. Weedon thus did not comply with the recordkeeping requirements of the Bank Secrecy Act and therefore violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8. Weedon & Co. to timely produce its records and documents to the Commission. it did not take the steps specified in its anti-money laundering manual. 11. Crowell.Admin. 2006 the Commission filed a civil injunctive action against Morgan Stanley for failing to produce tens of thousands of e-mails during the Commission’s IPO and Research Analyst investigations from Dec. Inc. This was the Commission’s first-ever enforcement action under the USA PATRIOT Act. Crowell.pdf On May 22.sec. The complaint further alleged that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions. Morgan Stanley & Co. through at least July 2005. While Crowell. financial system from money laundering and terrorist financing by requiring broker-dealers to implement and document identity verification procedures for all new accounts. Weedon failed to accurately document is actual procedures. 2000.900 new accounts for customers. 19693 (May 10. Proc. Morgan Stanley also failed to produce responsive e-mails because it over-wrote back-up tapes. 2006) http://www. 3-12300 (May 22. and its efforts to preserve requested e-mail. Morgan Stanley’s continued over-writing destroyed at least two hundred thousand e-mails. 2006) http://www. Making Findings. BNY also agreed to certain voluntary undertakings. $5 million of which will be paid to NASD and the New York Stock Exchange. and escheated approximately $11.existed and were located by Morgan Stanley beginning in May 2004. BNY agreed to repay securityholders 56 . It also will hire an independent consultant to review these reforms. and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Exchange Act against The Bank of New York (BNY).gov/litigation/admin/2006/34-53709. from January 1998 to September 2004.112 in unnecessary fees to recover their lost assets. the Commission issued an Order Instituting Cease-and-Desist Proceedings. after the Commission began investigating Morgan Stanley’s e-mail production failures.159 securityholders from the required searches. a bank and registered transfer agent. Without admitting or denying the Commission’s findings. BNY failed to classify certain securityholders as lost despite the return of undeliverable correspondence. In addition. Inc. However. Morgan Stanley failed to produce responsive e-mails by over-writing back-up tapes after receiving Commission subpoenas and requests despite its repeated representations to the Commission and the staff that all over-writing had ceased in January 2001. Morgan Stanley agreed to settle this matter. BNY omitted approximately 14. The Order found that. Proc. File No.pdf On April 24. 2006. In the Order. In addition to the cease-and-desist order. including some e-mails that likely were responsive to the Commission’s subpoenas and requests in the IPO and Research Analyst investigations. which ordered BNY to cease and desist from violations of Section 17A(d) of the Exchange Act and Rule 17Ad-17 thereunder. procedures and training focused on the preservation and production of email communications. Morgan Stanley also failed for months to produce e-mails sought in the Research Analyst investigation because it delayed loading millions of e-mails into its e-mail archive database and searching them for responsive emails. in separate related proceedings. These securityholders were forced to pay third parties $743. The Order found that BNY violated Section 17A(d) of the Exchange Act and Rule 17Ad17 thereunder. Morgan Stanley also agreed to adopt and implement policies. 24.5 million in assets belonging to those securityholders to various states. As a result. Through at least December 2002. BNY consented to entry of the Order.sec. The Commission’s Order finds that BNY violated Section 17A(d) of the Exchange Act and Rule 17Ad-17 thereunder when it failed as a transfer agent to exercise reasonable care to ascertain the correct addresses of lost securityholders. coding errors affecting BNY’s system used for compiling lists of lost securityholders caused BNY to omit other eligible securityholders from searches. In addition. Morgan Stanley consented to a permanent injunction and payment of a $15 million civil penalty. In the Matter of The Bank of New York Admin. Morgan Stanley did not disclose its discovery of these tapes until late October 2004. 3-12269 (Apr. Without admitting or denying the allegations of the complaint. the fees paid to third parties. the Commission announced settled charges against a former Citigroup executive relating to Citigroup’s creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. the Commission finds that Yellin willfully aided and abetted and caused Citigroup’s violations of Section 206(2) of the Advisers Act by. Admin. and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Michael Yellin. In its Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act). among other things. 2006. Making Findings. 12. to pay a $350.sec. an alternative trading system (ATS) operated by Instinet Corporation (Instinet’s ATS) violated the fair access provisions of Regulation ATS by permitting some subscribers to provide to their customers Instinet ATS’s “BookStream” product—which allowed a subscriber the ability to view the full “depth of book” data contained in the ATS book—while prohibiting or limiting other similarly situated subscribers from doing so. Based on the above.pdf On April 10. the Commission announced an Order Instituting Administrative and Cease-and-Desist Proceedings. and will pay those securityholders whose assets were escheated the greater of the value of the asset at the time of escheatment or the asset’s current value. 2006) http://www. Proc. the successor entity to Instinet’s ATS. Inc.gov/litigation/admin/ia-2501. The fair access provisions require an ATS that meets certain threshold criteria to establish written standards for granting access to trading on its system and not unreasonably prohibit or limit access to services offered by the ATS by applying such standards in an unfair or discriminatory manner. Proc.gov/litigation/admin/2006/34-53631. File No. 57 . denials. Inc. 3-12246 (Mar.000 penalty and cease and desist from committing or causing violations of Regulation ATS. The Order further found that Instinet’s ATS violated the reporting requirements of Regulation ATS by failing to disclose all grants. The Commission’s Order also censured INET. a Commission rule that provides a framework for alternative trading systems. File No. INET consented to the issuance of the Order without admitting or denying any of the findings in the Order. 3-53631 (Apr. the Order required INET ATS. In the Matter of INET ATS. Inc.pdf On March 23. negotiating the self-interested transaction that permitted Citigroup to reap much of the profit that the funds’ third party transfer agent had been making. The Order found that between February 2002 and July 2003. 23. Making Findings. In the Matter of Michael Yellin Admin. and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 against INET ATS. (INET). 2006) http://www.sec. or limitation of access on its Form ATS-R. 2006. This was the Commission’s first enforcement action under Regulation ATS. .000. 58 . the Watley day traders traded ahead of customer orders they heard on the Citigroup. Merrill. institutional orders to buy and sell large blocks of securities. SEC v. 21. in addition to receiving a percentage of the profits generated by the Watley traders.sec.Yellin will pay a civil monetary penalty of $50. Jr. Casbarro. In exchange for live audio access to the squawk boxes. with the understanding that the prices of the securities would move in response to the subsequent filling of the customer orders. Kenneth E. Inc. Watley Group. et al. Amore. Watley. 2006) http://www. Yellin consented to the issuance of the Order without admitting or denying any of the allegations. Mahaffy. and Lehman squawk boxes on more than 400 occasions. “Squawk boxes” are devices that broadcast. Proc. Amore.gov/litigation/litreleases/lr19335. A. O’Connell. and Timothy J. In a separate action in August 2005. Ghysels.sec. John J. The Commission alleged that the Watley day traders asked retail brokers at Citigroup. File No. 3-12243 (Mar. David G. Ralph D.. within a securities firm.. formerly at Lehman Brothers. 19335 (Aug. 2006) http://www. 2005) http://www. making gross profits of at least $675. Lehman Brothers. Watley compensated the brokers with commission-generating trades and/or secret cash payments. a broker-dealer.htm In the Matter of Sanjay Singh Admin. The brokers then placed their telephone receivers next to the squawk boxes and left open phone connections to the Watley office in place for virtually entire trading days. et al. Between approximately June 2002 and January 2004.gov/litigation/admin/33-8673.000.B. Jr. to furnish access to their firms’ institutional equities squawk boxes. with participating in a fraudulent scheme that used squawk boxes to obtain the confidential institutional customer order flow of major brokerages. formerly at Merrill Lynch and Citigroup. 15.htm On March 21. formerly at Citigroup Global Markets. Inc.B. The Watley traders. listened for indications on the squawk boxes that these firms had received large customer orders and then “traded ahead” in the same securities.pdf SEC v. a day trader. and will be ordered to cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act. and Merrill Lynch. Litigation Release No. 19616 (Mar.. the Commission charged five individuals as part of this scheme.gov/litigation/litreleases/lr19616. Litigation Release No. The individuals charged were John J.sec. 2006 the Commission charged a former Merrill Lynch broker and ten former day traders and managers from A. 21. Watley made over $5 million in processing fees from the Watley day traders from June 2002 through August 2003. This broadcast information was used by traders to “trade ahead” of these large institutional orders. formerly at Merrill Lynch. Singh consented to the entry of the order without admitting or denying any of the findings.. for repeated violations of Rule 11Ac1-5 of the Exchange Act. from June 2001 through May 2004 Instinet and Inet repeatedly published monthly execution reports containing inaccurate order execution quality information. The errors in the reports included the misclassification of shares.sec. Admin. bars Singh from association with any broker or dealer. who facilitated the trading ahead scheme. and Section 15(c) of the Exchange Act. and orders Singh to pay disgorgement in the amount of $37. 59 . two electronic market centers.pdf On October 18. The order notes that Instinet and Inet’s Dash 5 reports served a particularly important function to all market participants due to the high percentage of Nasdaq volume handled by Instinet and Inet. inaccurate order execution information. LLC and INET ATS.By divulging confidential information concerning customer orders.gov/litigation/admin/34-52623. Instinet and Inet also agreed to pay a penalty of $350. improper categorizing of orders. and an injunction against future violations against the defendants. improper exclusion of orders. Inc. including retention of an independent third party to confirm the accuracy of their Dash 5 reports and retention of a third party regulatory auditor to conduct a comprehensive regulatory audit of their compliance programs relating to Rule 11Ac1-5. 18. Inc. miscounting of cancelled shares. and agreed to adopt a number of remedial undertakings. SEC staff and third parties detected repeated errors in the execution reports. the Commission issued an order against Sanjay Singh. File No. In a separate settled administrative and cease and desist proceeding instituted.500. Proc. 3-12088 (Oct.000 each. the Commission ordered Instinet and Inet to cease and desist from committing or causing any violations and any future violations of Section 11A of the Exchange Act and Rule 11Ac1-5 thereunder. In the Matter of Instinet. These brokers also violated their firm’s written policies requiring confidential treatment of customer information. The order finds that Instinet and Inet relied heavily on automated systems. the Commission announced a settled enforcement action against Instinet. improper calculations based on erroneous times. yet did not adequately test their systems and did not respond effectively after NASD staff. a manager of Watley’s day trading desk. LLC and Inet ATS. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. the brokers breached duties of confidentiality and trust they owed to their employers and to their employers’ customers. cooperation afforded the Commission staff and the undertakings. In determining to accept the Offers. This order required Singh to cease and desist from committing and/or causing violations of Section 17(a) of the Securities Act. the Commission considered remedial acts promptly undertaken by Instinet and Inet. 2005) http://www. The Commission’s complaint sought disgorgement of illegal profits. In settling the proceeding. penalties. As described in the SEC’s order. Rule 11Ac1-5 requires market centers to publish order execution quality reports (commonly referred to as “Dash 5 reports”) for each calendar month that provide detailed information about the price and speed at which market centers execute orders. incorrect calculation of spreads and other incorrect calculations. 2005. 2005) http://www. and NASD discovered these deficiencies during an inquiry into the supervision of UBS’s research and investment banking activities. including disgorgement.000 to the Commission. From 1999 through almost all of 2002.pdf On April 12. all electronic mail communications received and sent by its employees that related to its business as a member of an exchange. 3-11980 (July 13. UBS agreed to pay penalties and fines totaling $2. including “interpositioning” the firms’ dealer accounts between customer orders and “trading ahead” for their dealer accounts in front of executable agency orders on the same side of the market. 60 . 2005 the Commission instituted settled administrative proceedings against UBS Securities LLC.gov/litigation/admin/33-8566. In the Matter of David A. the NYSE failed to adequately monitor and police specialist trading activity.gov/litigation/admin/34-52022.1 million to resolve this proceeding and related actions by NYSE and NASD. The improper trading took various forms. UBS agreed to cease and desist from committing future violations. the Commission instituted administrative and cease-and-desist proceedings against 20 former NYSE specialists who engaged in fraudulent and improper trading practices. UBS will pay $700. The Commission’s orders found that from 1999 through 2003. File No. allowing the vast majority of this unlawful conduct to continue. prejudgment interest. In separate proceedings. The Commission alleges that through their fraudulent trading. 2005.sec.sec. 12. various NYSE specialists repeatedly engaged in unlawful proprietary trading. and lacked adequate systems or procedures for the preservation of electronic mail communications as required by the federal securities laws. et al. civil penalties. Finnerty. 3-11893 (Apr. In addition. the first two of which in an easily accessible place.In the Matter of UBS Securities LLC (f/k/a UBS Warburg LLC) Admin. the specialists willfully violated antifraud and proprietary trading provisions of the federal securities laws and rules of the NYSE. The proceedings will determine what relief is in the public interest against the specialists. Admin. NYSE.1 million. Proc. Of the $2. The Commission. broker or dealer. to review its procedures regarding the preservation of electronic mail communications for compliance with the federal securities laws and regulations. and other remedial relief. The Commission found that UBS failed to preserve for three years. and the rules of NYSE and NASD and to establish systems and procedures reasonably designed to achieve such compliance. Proc. Without admitting or denying the Commission’s findings. File No. the Commission charged the NYSE for failing to supervise the specialists. resulting in more than $158 million of customer harm. 2005) http://www.pdf On July 13. sec. 2005. procedures and internal controls in place.270 in prejudgment interest. one of its senior managers was bribed by two of Pay Pop’s officers and directors to assist them in obtaining a ready supply of Pay Pop stock for these officers and directors to illegally distribute to investors. for CIBC Mellon’s failure to cooperate in the investigation of this matter. By its failure to have sufficient policies. CIBC Mellon has agreed to pay $889.gov/litigation/admin/34-51297. in part. Morgan Securities Inc. File No. which have been placed in fair funds to be distributed to customers disadvantaged by improper specialist trading.. Admin. The complaint alleges that. Those enforcement actions resulted in payments of over $243 million in disgorgement and penalties. 2005) http://www. the Commission filed settled enforcement proceedings against CIBC Mellon Trust Company.gov/litigation/admin/34-51200. CIBC Mellon participated in a fraudulent scheme to promote. 2005) http://www. a now-defunct British Columbia-based telecommunications company.htm 61 . Proc. CIBC Mellon violated registration. Inc.htm In the Matter of CIBC Mellon Trust Company Admin. CIBC Mellon Trust Co. Canada. CIBC Mellon consented to the entry of a final judgment enjoining it from future violations of the foregoing provisions. the Commission brought settled enforcement actions against all seven specialist firms operating on the NYSE in connection with unlawful proprietary trading at the firms.Last year. Litigation Release No. and broker-dealer registration provisions and anti-transfer agent registration regulations of the federal securities laws.sec. In addition CIBC Mellon has agreed to the issuance of a settled administrative order requiring it to cease-and-desist from future violations of broker-dealer and transfer agent provisions of the federal securities laws. 16. File No. 19081 (Feb. during the period CIBC Mellon acted as Pay Pop’s transfer agent. antifraud. 3-11839 (Mar. Without admitting or denying wrongdoing.gov/litigation/litreleases/lr19081. headquartered in Toronto.sec. In addition. In its complaint.773 in disgorgement plus $140. and a $5 million civil penalty. distribute and sell the stock of Pay Pop. Proc. the Commission charged that. 14. 3-11828 (Feb.P. 2. The civil penalty was assessed. CIBC Mellon agreed to maintain its registration as a transfer agent for as long as it continues to act as a transfer agent for any publicly traded security and has retained a qualified independent consultant to conduct a comprehensive review of all aspects of CIBC Mellon’s business as a transfer agent and as a broker-dealer.htm On February 16. between July 1998 and September 1999. In the Matter of J. SEC v. 2005) http://www. The Commission. In addition. Morgan Securities Inc. however. separate and apart from his primary supervisor and without any heightened supervisory procedures. a censure. broker or dealer. took any steps to investigate or follow-up on these allegations of securities fraud. In its Order. UBS will pay $700.sec. No personnel at MetLife. 3-12257 (Apr.1 million. choosing instead to rely on the 62 . JPMSI agreed to cease and desist from committing future violations. MetLife simultaneously agreed to settle the proceedings by consenting to a cease-and-desist order. and lacked adequate systems or procedures for the preservation of electronic mail communications as required by the federal securities laws. Proc. Georgia Sheriff’s Office with respect to the investment of $7.2 million in public funds.gov/litigation/admin/2006/34-53624. File No.000 civil penalty. MetLife also failed to retain certain required books and records relating to those investments. MetLife permitted the registered representative to work at an offsite location.pdf On April 10. MetLife also previously undertook to return almost the entire amount invested to the Sheriff’s Office and to revise certain of its compliance policies and procedures. JPMSI agreed to pay penalties and fines totaling $2.P. and the rules of NYSE and NASD and to establish systems and procedures reasonably designed to achieve such compliance.000 to the Commission. CASES INVOLVING FAILURE TO SUPERVISE In the Matter of Metropolitan Life Insurance Company Admin. Despite ongoing compliance concerns.1 million to resolve this proceeding and related actions by NYSE and NASD. Without admitting or denying the Commission’s findings. The registered representative also caused bogus account statements to be sent to the Sheriff’s Office. and payment of a $250. Of the $2. to review its procedures regarding the preservation of electronic mail communications for compliance with the federal securities laws and regulations. the Commission found that MetLife had been on notice of compliance concerns concerning the registered representative from the time it first hired him in February 2000. Without admitting or denying the Commission’s findings. and NASD discovered these deficiencies during an inquiry into the supervision of JPMSI’s research and investment banking activities. 2006 the Commission issued an Order concerning an enforcement action against Metropolitan Life Insurance Company (MetLife) for failing to supervise reasonably a registered representative who defrauded the Fulton County. NYSE. the first two of which in an easily accessible place. In its Order. all electronic mail communications received and sent by its employees that related to its business as a member of an exchange.On February 14. 2006) http://www. 10. the Commission found that a registered representative of MetLife violated the antifraud provisions of the federal securities laws by falsely representing to the Sheriff’s Office that an entity receiving proceeds for investment from the Sheriff’s Office was an affiliate of MetLife when it was not. they revealed that the registered representative had recently been sued for securities fraud by a former customer. The Commission found that JPMSI failed to preserve for three years. After MetLife commenced an investigation. 2005 the Commission instituted settled administrative proceedings against J. Inc. e. In its April 2003 settled proceedings brought against Grubman and SSB as part of the Global Research Analyst Settlement. Proc. Hoffmann and McCaffrey were aware of potential conflicts of interest posed by Grubman’s involvement in the firm’s telecommunications investment banking activities and were aware of Grubman’s importance to the firm’s telecom investment banking franchise. formerly the Head of North American Equity Research at SSB. If MetLife had reasonably investigated and responded to the allegations of compliance violations against the registered representative. (SSB). but failed to respond adequately to specific evidence of investment banking pressure on Grubman not to downgrade SSB’s investment banking clients. 2005. dealer. Without admitting or denying the order’s findings. the Commission instituted administrative proceedings against John B. formerly the Global Head of Equity Research at Salomon Smith Barney. 2007) http://www. In the Matter of John B.000. Inc. File No. Proc.. Hoffmann and McCaffrey were supervisors of Grubman. Hoffmann and McCaffrey each consented to a fifteen-month bar from associating in a supervisory capacity with a broker. In addition. The order finds that during 2000 and 2001. and Kevin J.g. Grubman with a view to preventing him from aiding and abetting SSB’s violations of antifraud provisions by publishing fraudulent research. Hoffmann. or investment adviser and to each pay disgorgement of $1 and civil penalties of $120.sec. 3-12594 (March 22. File No. Hoffmann and Kevin J. CASES INVOLVING SELF REGULATORY ORGANIZATIONS In the Matter of American Stock Exchange LLC Admin.pdf In the Matter of Richard Robinson 63 .gov/litigation/admin/2007/34-55507. 2005) http://www. (CGM).gov/litigation/admin/34-51713.sec. McCaffrey Admin. based upon their failure reasonably to supervise former SSB equity research analyst Jack B. through heightened supervision and/or implementing procedures to review adequately his customer files and correspondence. During that period. now known as Citigroup Global Markets. 3-11930 (May 19.information provided by the registered representative. the Commission charged that Grubman issued fraudulent research reports and misleading or exaggerated research.pdf On May 19. they failed to respond adequately to red flags that Grubman had unrealistically bullish ratings and price targets on companies he covered. it is likely that the firm could have prevented and/or detected the registered representative’s fraud. McCaffrey. investigation. and (3) to retain an auditor to conduct three biennial audits of the Amex's surveillance. the Amex's former chairman and chief executive officer. When the Amex's surveillance programs detected rule violations. investigatory.pdf In the Matter of Salvatore F. File No. related proceeding against Sodano the SEC alleged that the Amex's regulatory failures resulted in large part from Sodano's failures to make regulation an Amex priority.sec. and enforcement programs. alleging that he failed to enforce compliance with federal securities laws and exchange rules by Amex members and persons associated with those members. investigatory. order that. and disciplinary programs related to trading. 2007) http://www.gov/litigation/admin/2007/34-55508. the Amex had similar deficiencies in its surveillance for equity order handling and floor broker violations. 3-12596 (March 22. Sodano Admin. 2000. The Commission also found that as late as June 2004. investigation. The Commission further ordered the Amex to comply with undertakings (1) to file a rule proposal with the Commission to enhance its trading systems so that specialists systemically will be prevented from violating the Amex's customer priority rules. examination. the Commission censured the Amex and ordered it to cease and desist from violating Sections 17(a)(1) and 19(g)(1) of the Exchange Act and Exchange Act Rule 17a-1. the Commission issued a settled cease-and-desist order against American Stock Exchange LLC for failing to enforce compliance with securities laws and rules and failing to comply with its record-keeping obligations. Pursuant to the order. directed the Amex to enhance and improve its regulatory programs for surveillance.Admin. Proc. 2007. In the separate. to pay adequate attention to regulation. and enforcement activities and further furnished the Commission with inaccurate documents. to put in place an oversight structure to monitor 64 . 3-12595 (March 22. and trade reporting. and regulation will be required to receive annual training related to compliance with federal securities laws and Amex rules. the Amex's surveillance programs for options order handling remained inadequate to detect violations of firm quote. and failed to pursue adequately disciplinary actions for rule violations. the Amex failed to investigate violations properly. limit order display. from at least 1999. the Commission instituted contested administrative proceedings against Salvatore F. and other rules. In its order against the Amex. and enforcement of the options order handling rules.sec. (2) to enhance the Amex's training programs so that floor members and members of the Amex's regulatory staff responsible for surveillance. the Commission found that. File No. 2007) http://www. In addition. the Commission found that the Amex failed to keep and furnish certain records relating to its surveillance. 11. Sodano. improperly excused violations. and enforcement programs were inadequate. in part. notwithstanding the September 2000 order.gov/litigation/admin/2007/34-55509. The Commission found that.pdf On March 22. The Amex previously had consented to the issuance of a Sept. the Amex was on notice that its surveillance. customer priority. Without admitting or denying the Commission's findings. investigatory. Proc. In addition to the deficiencies in the Amex's surveillance. the Amex consented to the issuance of the Commission's order. In a third. The Order found that Phlx had several deficiencies in its surveillance programs to assure compliance with its own rules and the federal securities laws in both its options and equities markets. investigation. and disciplinary programs relating to trading applicable to all floor members. to develop programs to detect violations or. Robinson consented to the issuance of an order directing him to cease-and-desist from causing violation of Sections 17(a)(1) and 19(g)(1) of the Exchange Act and Exchange Act Rule 17a-1. a former Amex vice president responsible for overseeing the Amex's regulatory surveillance programs for the derivatives and options markets. The Commission found that Robinson was a cause of the Amex's violations by failing to oversee properly the Amex's surveillance program for derivatives and options. The Commission also found that Phlx had similar deficiencies in its surveillance for order handling violations in its equities market and that Phlx inadequately surveiled for violations of equities trading rules relating to short sales. the Commission issued an order against Richard Robinson. to enforce compliance with the federal securities laws. and by signing and submitting an affirmation to the Commission on behalf of the Amex that contained inaccurate representations relating to the Amex's regulatory program. related settled proceeding.compliance. by members of the Amex and persons associated with those members. Phlx has also undertaken to implement annual training program for all floor members and certain members of Phlx’s regulatory staff.sec. and enforcement of the options order handling rules. investigation. and Amex rules. Phlx failed to detect violations by specialists.pdf On June 1. marking the close. Inc. Because of this inadequate surveillance. Without admitting or denying the Commission's findings. the Commission found that Phlx had failed. Admin. the Commission issued a settled cease and desist order against the Philadelphia Stock Exchange (Phlx) for its failure to enforce certain trading and order handling rule violations by its specialists from April 1999 through January 2002. Specifically. and regulations. and to dedicate sufficient resources to regulation. the SEC ordered Phlx to cease and 65 . File No. 2006) http://www.gov/litigation/admin/2006/34-53919. 2006. pursuant to Section 19(h) of the Exchange Act. 3-12315 (June 1. will determine whether Sodano failed. by failing to maintain properly Amex investigative files. that the programs in place were not adequate to detect such violations. In the Matter of Philadelphia Stock Exchange. and wash trades. rules. It is further alleged that these failures were particularly significant with respect to the Amex's options market because Sodano knew the Amex had been previously sanctioned by the Commission for its inadequate options regulation in the September 2000 order and that the Commission had ordered the Amex to enhance and improve its regulatory programs for surveillance. without reasonable justification or excuse. The proceedings instituted against Sodano. in other instances. examination. Proc. to ensure that regulatory staff was properly trained. Based on the above. Pursuant to the Commission’s Order Phlx has undertaken to retain in 2006 and 2008 a third party auditor to conduct a comprehensive audit of Phlx’s surveillance. front-running. in some instances. 2005) http://www. to cease and desist from committing or causing any violations and any future violations of certain rule filing.sec. who engaged in widespread and unlawful proprietary trading on the floor of the NYSE. and other SRO rules. 3-11931 (May 19. without admitting or denying the findings in the Commission’s order.gov/litigation/admin/34-51714.sec. 66 . NSX failed to detect hundreds of thousands of transactions in which NSX dealers traded ahead of customer orders. As a result. David Colker. As part of the settlement. over the course of nearly four years.gov/litigation/admin/34-51524. for his failure to enforce compliance with an NSX rule in violation of federal securities laws. and committing or causing any future violations of. Colker and his successors will have no future role in NSX’s regulatory functions. 12. In separate proceedings. Proc. to the imposition of a censure and to the entry of a final judgment ordering him to pay a $100. In the Matter of New York Stock Exchange. File No. Admin.gov/litigation/litreleases/lr19229. 2005) http://www. The Commission found that NSX failed.htm In the Matter of National Stock Exchange and David Colker Admin. to conduct surveillance for violations of its customer priority rule. Phlx consented to the issuance of the Order without admitting or denying any of the findings.pdf On April 12. failed to police specialists. as required by the federal securities laws. SEC v. without admitting or denying the findings in the Commission’s order and complaint. the Commission instituted a settled enforcement action against the New York Stock Exchange.sec. Colker consented.pdf On May 19. 3-11892 (Apr.000 civil penalty. consented to a censure. and to an order to undertake substantial remedial measures to bolster its regulatory and governance functions. recordkeeping. Inc. the Commission instituted a settled administrative proceeding and civil action against NSX’s president and CEO. NSX. 19229 (May 19. the Commission instituted a settled enforcement action against the National Stock Exchange (NSX) for its failure to enforce compliance by NSX dealers with certain exchange rules from 1997 through 2003. Under the terms of the Commission’s order.. David Colker Litigation Release No. Proc. the Commission charged the specialists who engaged in the fraudulent and improper trading practices. finding that the NYSE.desist from committing or causing any violations of. File No. Inc. until 2004. 2005. an important investor protection that prohibited NSX dealers from trading securities for their own accounts ahead of marketable customer orders. 2005) http://www. Section 19(g) of the Exchange Act. At the same time. 2005. The Report finds.sec. and administrative and ceaseand-desist proceedings against Irfan Amanat. 67 . various NYSE specialists repeatedly engaged in unlawful proprietary trading. 2005) http://www. and quarter ended June 30. 2005) http://www. as overseen by its parent. The improper trading took various forms. In response to the Commission’s investigation and the inspection from which it stemmed. NASD and Nasdaq have consented to the issuance of the report. File No. The illegal trading went largely undetected because the NYSE’s regulatory program was deficient in surveilling. among other things. the Commission alleges that Amanat executed thousands of wash trades and matched orders over a three-day period in March 2002 in order to improperly qualify MarketXT for a tape revenue rebate program offered by Nasdaq. the NYSE failed to adequately monitor and police specialist trading activity. In the order. as Overseen by Its Parent. all designed to strengthen the self-regulatory oversight of their market. 9. According to the Commission. Arising Out of Investigation of Suspicious Trading Activity and Net Capital Violations By MarketXT Press Release 2005-14 (Feb. From 1999 through almost all of 2002. in connection with an investigation and inspection of wash trades and net capital violations by MarketXT. a NASD member firm. the NYSE has agreed to a censure.sec.htm In the Matter of MarketXT and Irfan Amanat Admin Proc. Without admitting or denying the Commission’s findings. resulting in more than $158 million of customer harm. the NASD. MarketXT improperly received approximately $50. In the order.gov/litigation/admin/33-8533. Inc. The Commission also instituted administrative proceedings against MarketXT. 9. 3-11813 (Feb. 2001. allowing the vast majority of this unlawful conduct to continue.gov/news/press/2005-14. that Nasdaq employees observed suspicious trading by MarketXT and did not communicate their observations to NASD Regulation. but neither admit nor deny the findings or conclusions therein.. Inc. MarketXT’s de facto chief technology officer.The Commission’s orders found that from 1999 through 2003. MarketXT was operating without adequate net capital and did not maintain and preserve accurate books and records. investigating and disciplining the specialists’ trading violations. an Electronic Communications Network registered as a broker-dealer. 2002. and to implement certain remedial undertakings.000 in rebates from Nasdaq. the NYSE violated federal securities laws by failing to enforce compliance with the federal securities laws and NYSE rules that prohibit unlawful proprietary trading by specialists. including “interpositioning” the firms’ dealer accounts between customer orders and “trading ahead” for their dealer accounts in front of executable agency orders on the same side of the market. NASD. NASD and Nasdaq have implemented a number of remedial steps. an order to cease and desist from further violations of those enforcement compliance provisions. the Commission also alleges that for the year ended December 31.htm The Commission issued a Report of Investigation concerning Nasdaq. Report of Investigation Regarding NASDAQ. pension and health care benefits were reduced." which were intended to disclose material information to investors.pdf On November 14. and a cease-and-desist order and civil penalty against Amanat. the credit rating agencies lowered the city's credit rating. First. California Admin. 2006) http://www. File No.The Commission alleged that the respondents willfully violated antifraud provisions of the federal securities laws. 2006. Finally. The Order finds that the city failed to disclose that the city's unfunded liability to its pension plan was projected to dramatically increase." which were used to gauge investors' interest in a bond issuance. Proc. the Commission entered an order sanctioning the City of San Diego for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003. growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009. According to the Order. the city made misleading statements in its "continuing disclosure statements. according to the Order. CASES INVOLVING MUNICIPAL BONDS In the Matter of City of San Diego. and that it would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained. The Commission further alleged that MarketXT willfully violated reserve requirement and records and reports provisions of the federal securities laws by failing to maintain adequate net capital and by failing to maintain and preserve adequate books and records. 14. 68 . Second. and that the city's liability for retiree health care was another estimated $1. The city's enormous pension and retiree health liabilities and its failure to disclose those liabilities placed the city in serious financial straits. and the "preliminary official statements.gov/litigation/admin/2006/33-8751. The offering documents containing the misleading statements included the "official statements. the city also failed to disclose that it had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. When the city eventually disclosed its pension and retiree health care issue in fiscal year 2004.sec. 3-12478 (Nov. or city services were cut. The Commission sought disgorgement plus prejudgment interest and a civil penalty against MarketXT.1 billion. the city made misleading statements in the offering documents for five municipal offerings in 2002 and 2003 that raised over $260 million from investors." which described the city's financial condition and were provided by the city to the municipal securities market with respect to prior city bond offerings. The Order further finds that the city knew or was reckless in not knowing that its disclosures were materially misleading. the city made misleading statements to the agencies that gave the city its credit rating for its municipal bonds. The Order finds that the city made these misleading statements through three different means. in addition to any remedial sanctions appropriate in the public interest. The SEC issued an Order finding that the city's disclosures about its pension and retiree health care obligations and its ability to pay those obligations were misleading. LP and Viper Investments. In addition. Ehee provided one investor in early 2006 with supposedly audited financial statements showing the Viper Founders Fund held over $18 million in assets and had 10% annual returns. where it would be invested in accord with various securities trading strategies. The city consented to the issuance of the Order without admitting or denying the findings in the Order. the Commission considered various remedial measures that the city has already taken to detect and prevent future securities law violations. LP. CASES INVOLVING HEDGE FUNDS SEC v. Viper Founders Fund. The city agreed to adopt. using bogus account statements and phony financial reports showing millions of dollars in non-existent fund assets to lure new investments. by that time the fund was essentially defunct. Edward Ehee.The Order requires the city to cease and desist from committing violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. procedures.gov/litigation/litreleases/2006/lr19905.sec. implement. In addition. according to the Commission. 2006. Ehee used money raised from new investors to pay off previous investors. According to the Commission. In fact. 43. Ehee told investors that their money would be placed into the funds managed by the two fund management companies he controlled. and internal controls. Instead. accusing him of misappropriating millions of dollars from investors nationwide. of Oakland. and internal controls and to make recommendations with a view to assuring compliance with the city's disclosure obligations under the federal securities laws. Ehee converted money invested in Viper and Compass to personal use. as in a classic Ponzi scheme. 69 . significant sums were obtained long after Ehee had closed the Viper Fund's brokerage accounts and ceased any investment activity. as well as the city's agreement to retain an independent consultant. according to the Commission. and personal bank accounts. Yet. conduct annual reviews for a three-year period of the city's policies. procedures. LP diverting much of the money towards mortgage and car payments. In order to conceal his fraud and induce further investments. defrauded investors in the Compass West Fund. Among other things. 19905 (Nov. procedures. Ehee provided investors with account statements showing that their money was safe and continuing to generate positive returns. et al. the Commission filed fraud charges against the head of several San Francisco-based hedge funds. Litigation Release No. In deciding to accept the city's offer to settle this matter. including senior citizens. Viper Capital Management. 8. According to the Commission's complaint. and internal controls about its disclosures relating to municipal bond offerings. Ehee even fabricated an audit opinion letter from an accounting firm that had never actually audited the fund. 2006) http://www. The Order also requires the city to retain an independent consultant to review and assess its policies. and its adoption of the consultant's recommendations. and employ the independent consultant's recommendations or alternatives designed to achieve the same objectives. LLC. and assess the city's compliance with its policies. the Commission's complaint alleges that although the Viper Founders Fund essentially ceased operations by late 2002. vacations.htm On November 8. Ehee was continuing to raise money as recently as May 2006. 000 in Fund assets. Proc. 2006) http://www. misappropriated Fund assets by transferring them into his personal bank account. and Sections 206(1) and 206(2) of the Advisers Act). The Complaint also seeks to enjoin Ehee and Compass Fund Management from future violations of the federal securities laws governing reports filed with the Commission (Section 207 of the Advisers Act). Misshula consented to the issuance of the Order without admitting or denying any of the findings in the Order. 3-12338 (June 21. seeks to enjoin Ehee. the founder and manager of Sane Capital Partners. and father. New York and Greenwich. Compass Fund Management and Viper Capital Management to disgorge their ill-gotten gains plus prejudgment interest and to impose a civil monetary penalty.pdf On June 21. filed in federal district court in San Francisco. Based on the above. to disgorge their ill-gotten gains plus prejudgment interest. the Commission asks the district court to order the relief defendants. 2006) http://www.sec. which bore no relation to the true condition of the Fund’s investments or assets under management. To hide his fraudulent conduct. LLC and Keith G. From 2001 to 2004. Connecticut. Misshula materially misrepresented the performance of the Fund’s investments to investors.P. In addition. Misshula willfully violated Section 17(a) of the Securities Act. and barred him from association with any investment adviser. Gilabert Litigation Release No. SEC v. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. and Sections 206(1) and 206(2) of the Advisers Act.gov/litigation/admin/2006/33-8714. the Order required Misshula to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act. Evan Misshula. and Sections 206(1) and 206(2) of the Advisers Act.gov/litigation/litreleases/2006/lr19680. 2006. In the Matter of Evan Misshula Admin. including Ehee's wife. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Order found that beginning in January 2001. a hedge fund located in New York. During the course of his fraudulent conduct. as well as the funds. and Imposing Remedial Sanctions and a Cease-andDesist Order against Evan Misshula. brother. Making Findings. Misshula sent investors fictitious quarterly reports showing investment gains.The Commission's Complaint. The Commission requests that the district court order Ehee. The Order found that as a result of this fraudulent conduct. Compass Fund Management.htm 70 . Misshula misappropriated approximately $529. In July 2004. L. Section 10(b) of the Securities Exchange Act of 1934. the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings.sec. and Rule 10b-5 thereunder. the Fund collapsed when Misshula was unable to meet an investor’s redemption demand. File No. 19683 (May 1. and Viper Capital Management from future violations of the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933. CMG-Capital Management Group Holding Company.. 2006. and the defendants failed to disclose that CMG’s investment adviser registration was revoked in 2003 by the California Department of Corporations. Langley Partners agreed to disgorge $8. the Commission filed securities fraud and related charges against three hedge funds. 19607 (Mar.On May 1. from September 2001 to January 2005. the defendants offered and sold limited partnership interests in a purported hedge fund called The GLT Venture Fund. SEC v.P. Langley Partners and Thorp agreed to settle the Commission’s charges that they perpetrated an illegal trading scheme to evade the registration requirements of the federal securities laws in connection with twenty-three unregistered securities offerings.8 million in ill-gotten gains and prejudgment interest. The Commission’s complaint alleges that CMG and Gilabert claimed that. and Gilabert was CMG’s portfolio manager. seeking returns through long-term appreciation. and hedging strategies. et al. 71 . and Sections 206(1) and 206(2) of the Advisers Act. the Commission filed a complaint charging a hedge fund manager with misappropriating funds and misleading investors about the hedge fund’s returns. and civil penalties against each of the defendants. 5(c). 14. Sections 5(a). The complaint.gov/litigation/litreleases/lr19607. As part of the settlement. under their direction. They also claimed that GLT had generated average annual returns of 19% to 36% and that they would only receive performance-based compensation if GLT was profitable.6 million in new investor funds to pay existing investors. CMG was GLT’s investment adviser. and Langley Partners and Thorp agreed to pay civil penalties totaling $7 million.. Gilabert. operating a Ponzi-like scheme. The Commission’s complaint alleged that. that are commonly referred to as “PIPEs” (Private Investment in Public Equity). North Olmsted Partners and Quantico Partners (collectively. “Langley Partners”). Named in the complaint are CMG-Capital Management Group Holding Company. L. which was filed in the United States District Court for the Central District of California. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.7 million for their own personal purposes. Section 15(a) of the Exchange Act. GLT would use investor funds to establish a portfolio of stocks and options. disgorgement with prejudgment interest. Langley Partners. and their portfolio manager. raising $14. LLC and its principal. and engaged in insider trading. Keith G. alleged that CMG and Gilabert violated the securities registration and antifraud provisions of the federal securities laws. and 17(a) of the Securities Act. because GLT was never profitable. CMG and Gilabert misappropriated nearly $1. short-term trading.1 million from at least 38 investors.htm On March 14. Litigation Release No. 2006. The complaint further charged that Gilabert violated the broker-dealer registration provision. 2006) http://www. The Commission sought permanent injunctions. The complaint alleges that the defendants’ representations were false and misleading in that GLT actually lost $7. Langley Partners. the defendants misused $4.8 million rather than achieved the represented returns.sec. Jeffrey Thorp. typically sold short the issuer’s stock. Finally.The Commission alleged in its complaint that Langley Partners and Thorp. Ltd. Vaughn and Directors Financial Group.sec. Kocoras permanently enjoined DFG and Vaughn from violating antifraud provisions of the Securities Act. the final judgment ordered Langley Partners. the Exchange Act. a practice Thorp knew was prohibited by the registration provisions of the federal securities laws.000. Without admitting or denying the allegations in the complaint. with fraud and other securities violations. record keeping provisions of the Investment Adviser’s Act of 1940.000 civil penalty.528.htm On March 3. (b) the backgrounds of the Trading Program promoters. and used the PIPE shares to close out the short positions. Vaughn.300. Vaughn and DFG invested $25 million of the Fund’s assets in a fraudulent Prime Bank trading scheme (the “Trading Program”) contrary to the Fund’s disclosed trading strategy.048. in each of the transactions. L. a separate entity that had no formal relationship to the Fund and was owned and controlled in part by the Trading Program promoters. jointly and severally. 2006. (“DFG”). The Commission’s complaint also alleged that. The Judgment also enjoined DFG from violating. Litigation Release No. 3. The final judgment also required Thorp to pay a $2. Thorp also engaged in insider trading by selling the securities of PIPE Issuers on the basis of material nonpublic information prior to the public announcement of the PIPEs. DFG’s owner and operator.C. the Commission announced the filing of a civil action charging Directors Financial Group. The complaint also alleged that Vaughn and DFG entered into an undisclosed profit sharing agreement with one of the Trading Program promoters and that they transferred the Fund’s $25 million to Akela Capital. prejudgment interest of $1. after agreeing to invest in a PIPE transaction. and Sharon E. The Commission’s complaint alleged that Vaughn and DFG defrauded their private hedge fund clients in Directors Performance Fund. Judge Charles P.L. and (c) whether programs like the Trading Program are legitimate investments. In addition. In a Judgment dated March 2. and did not properly investigate (a) whether the Trading Program was a suitable investment. According to the complaint. and a civil penalty totaling $4.700.769. Ltd. Inc. 2006) http://www. frequently through “naked” short sales in Canada. an Illinois investment adviser registered with the Commission. North Olmsted Partners and Quantico Partners to pay. The Judgment required DFG and Vaughn to pay disgorgement and 72 . (the “Fund”). and the Investment Advisers Act of 1940.400. Sharon E. 19589 (Mar. disgorgement of $7. 2006. and Vaughn from aiding and abetting violations of. (“Akela”).gov/litigation/litreleases/lr19589. the Commission’s complain alleged that on seven occasions. Thorp made materially false representations to the PIPE Issuers to induce them to sell securities to Langley Partners. SEC v. Langley Partners and Thorp consented to the entry of a final judgment permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 5 and 17(a) of the Securities Act of 1933. 07. They also stole investor funds by annually withdrawing from the Funds “incentive fees” that they were not entitled to receive because the Funds never returned a yearend profit. et al. based in Stamford. SEC v. DFG and Vaughn consented to the Judgment without admitting or denying the allegations in the complaint. K. Connecticut. the Commission filed a civil injunctive action against Samuel Israel III. Group. prejudgment interest. among other things.820. In a separate Order dated March 2. the Funds had never posted a year-end profit. The United States Attorney for the Southern District of New York announced that it has filed criminal fraud charges against Israel and Marino. The Commission further alleges that. During this period.prejudgment interest totaling $808. Additionally. 2006. 2005) http://www. LLC. the investment adviser to the funds. and attracted new investors. Litigation Release No.htm On September 29. 29. Bayou Management. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct. Israel and Marino defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use. the chief financial officer of Bayou Management. Samuel Israel III. the founder of and investment adviser to the Funds. and Marino. The Commission’s complaint alleges that.6 million and authorized the distribution of over $20 million to Fund investors. by grossly exaggerating the Funds’ performance to make it appear that the Funds were profitable and attractive investments. investors deposited over $450 million into the Bayou Funds and a predecessor fund.L. the Commission requested that the court order disgorgement of the defendants’ ill-gotten gains. which allowed for a return of their principal investment and profits prior to investment in the Trading Program. Marino. in furtherance of their fraud. The requested relief is subject to court approval.sec. 73 . The Commission is seeking permanent injunctions for violations of the antifraud provisions of the federal securities laws against Israel. The Commission alleges that from 1996 through 2005. froze the Fund’s remaining assets including the $21.gov/litigation/litreleases/lr19406. Israel and Marino defrauded current investors. the managers of a group of hedge funds known as the Bayou Funds (Funds). and Daniel E. All of the defendants consented to the freeze of assets and appointment of a receiver. Judge Kocoras. SEC v. 19406 (Sept. and civil money penalties by freezing the defendants’ assets and appointing a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. et al. beginning in 1996 and continuing through the present. when in fact. Israel and Marino concocted and disseminated to the Funds’ investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. 2005. The Commission’s complaint alleges that from approximately 1999 to March 2005. KL Florida. and Shoreland Trading.gov/litigation/litreleases/lr19117. According to the complaint. on August 31. a registered broker-dealer and the principals that control these entities. 16. 3.htm Litigation Release No. KL Financial Group DB Fund. KL Financial Group DC Fund.htm In the Matter of Won Sok Lee and Yung Bae Kim Admin. KL Financial Group Florida. 19117 (Mar. 2005) http://www.sec. Based on the entry of the permanent injunctions. Acting on the Commission’s request for emergency relief. multiple hedge funds. 31. 2005) http://www.gov/litigation/admin/34-52368. Proc. 19084 (Feb. 2005.L. 2005) http://www. LLC. Litigation Release No. KL Group Fund. an Irvine. the principals of the investment advisers and hedge funds.sec. LLC (collectively. The court also appointed a receiver over all of the entities named in the Commission’s action.sec.gov/litigation/litreleases/lr19084. the Commission instituted administrative proceedings to determine whether any remedial action is appropriate in the public interest against Lee and Kim pursuant to Section 15(b)(6) of the Exchange Act and 203(f) of the Advisers Act. K. The complaint charges all the defendants with violating antifraud provisions of the federal securities laws. The Commission’s complaint names as defendants the hedge funds. 3-12025 (Aug.htm 74 . 19399 (September 29.gov/litigation/litreleases/lr19399.sec. the unregistered hedge fund investment advisers. LLC. LLC and KL Triangulum Management. 2005) http://www.htm Litigation Release No. The court entered an order of default judgment against Lee and Kim on August 15.pdf On March 2. 2005. KL Financial Group IR Fund. LLC. LLC (collectively. a federal district judge in southern Florida issued temporary restraining orders. California based broker-dealer that defendant Lee controlled and that conducted all of the trading for the various hedge funds. John Kim and Yung Bae Kim.sec. the Advisers). asset freezes and other relief against the defendants. Group. Won Sok Lee. SEC v. the hedge funds were suffering tremendous trading losses and only about $11 million remains of the more than $81 million that investors put into the hedge funds. the Funds). 31. LLC and KL Triangulum Group Fund. enjoining them from violations of antifraud provisions of the federal securities laws. Northshore Asset Management et al. LLC. 2005) http://www. 19449 (Oct.gov/litigation/litreleases/lr19449. the Commission filed an emergency enforcement action to halt an ongoing hedge fund fraud concerning three related hedge fund investment advisers. the defendants raised at least $81 million from investors nationwide by boasting annualized returns of 125 to 150 percent over the last several years and by sending false account statements to investors showing similar gains. with disgorgement and penalties to be determined upon motion of the Commission. LLC. LLC. 2005. File No.Litigation Release No. 2005. Northshore’s former CFO. the Ardent Funds. 2005. and Douglas Ballew. On February 25. the Ardent Funds. Additionally.P. Saldutti Capital Management.gov/litigation/admin/2007/33-8798. Bridge. adding defendants Francis J. and disgorgement and civil money penalties.gov/litigation/admin/2007/34-55692. and SCM. The complaint alleges that from April 2003 to February. Proc. The first amended complaint alleges that Saldutti made material misrepresentations and omissions to Ardent Funds investors regarding both Northshore’s relationship to the Ardent Funds and Saldutti’s transfers of tens of millions of dollars of Ardent Funds cash to Northshore and Northshore-related entities.G. Inc. Edwards & Sons.pdf In the Matter of Thomas C. Admin. In addition. Northshore and its principals diverted approximately $37 million of the Ardent Funds’ assets to their control and invested them in illiquid securities of. Edge. On October 31. and Jeffrey K.sec. the First Amended Complaint alleges a new offering fraud claim against Sherman. the Commission filed its first amended complaint. the court granted the Commission’s motion for a preliminary injunction enjoining Northshore. 2007) http://www. Kelley. SCM. entities in which Northshore and its principals have an interest. 2007) http://www. Ardent Research Partners.pdf 75 . The complaint charges all the defendants with violating antifraud provisions of the federal securities laws. CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS A. File No. LLC (Northshore). L. Robles Admin. “the Ardent Funds”). In addition to emergency relief. and Glenn Sherman. Saldutti. Ltd. 2005. (SCM). and appointing a receiver for Northshore. and Sherman from violating the federal securities laws. the defendants made numerous misrepresentations.On February 16. and Ardent Research Partners. The First Amended Complaint further alleges that Northshore CFO Ballew participated in the fraudulent scheme concocted by the previously-named defendants. the Commission seeks orders enjoining the defendants from committing future violations. Robert Wildeman. the Ardent Funds. Proc. the Commission announced that it filed an emergency enforcement action in the Southern District of New York to halt fraudulent conduct concerning two hedge funds. the Ardent Funds’ found and investment adviser. Named as defendants are Northshore Asset Management. 3-12624 (May 2. one of the originally-named defendants. freezing certain assets.P. 2005. 3-12626 (May 2. L. and made loans to. Kevin Kelley. 2005 and March 10. (collectively. Wildeman.sec. File No. James D. The Commission alleges that the defendants did not disclose to the Ardent Funds’ investors that Northshore had purchased SCM and that Northshore was managing a significant portion of the Ardent Funds’ assets. . Edwards failed to develop or adopt reasonable policies. Edwards failed reasonably to supervise some of its registered representatives who used deceptive means to place market timing trades on behalf of their customers.G. Edwards' Boca Raton.. Mass.86 million payment. and Fred Alger & Co. procedures or systems for monitoring and responding to red flags about its registered representatives' deceptive market timing on behalf of customers. a registered broker-dealer involved in a fraudulent trading scheme involving mutual funds in the Alger Fund group. the companies agreed to pay $30 million in disgorgement of ill-gotten gains and a $10 million penalty..G. a registered brokerdealer headquartered in St. 76 . A. As part of its settlement with the SEC. the Commission announced settled enforcement proceedings against A.36 million and civil penalties of $1.G.86 million.gov/litigation/admin/2007/34-55118. Inc. failed to disclose arrangements permitting market timing and late trading to the Board of Trustees of the Alger Fund. Edwards also agreed to certain undertakings. Edwards' Boston Back Bay. the Commission commenced administrative proceedings against Fred Alger Management.On May 2. The SEC also announced the institution of settled enforcement proceedings against a former registered representative in A. Edwards' branch offices engaged in illegal market timing schemes on behalf of their customers. paid disgorgement and prejudgment interest of $2. A. A. A. Edwards consented to the issuance of the SEC's Order without admitting or denying the findings contained therein. Edwards has made to its policies and procedures are reasonably designed to prevent and detect future market timing activity.G. These registered representatives engaged in deceptive practices designed to circumvent restrictions that mutual funds imposed on market timing. registered representatives in several of A.G. Edwards found that between January 2001 and September 2003. A.G. 2007.G.G. Mo. Fla. all of which will be used to compensate investors. A.G. branch office for engaging in a fraudulent market timing scheme and the institution of administrative and ceaseand-desist proceedings against a registered representative in A.G.. Inc.G. procedures or systems to monitor market timing in order to prevent and detect its registered representatives' misconduct. 3-12540 http://www.pdf On January 18. Edwards. alleging that A. The SEC's Order relating to A. (FAMI). Inc. including hiring an independent consultant to review whether the changes A. In the Matter of Fred Alger Administrative Proceeding No. Edwards also failed to develop or adopt reasonable policies. (FACI). an investment adviser of Alger mutual funds. In addition to the $3. branch office and two branch managers for their alleged involvement in the fraudulent market timing schemes.sec. Louis. 2007.5 million for a total payment of $3. Edwards & Sons.G. Without admitting or denying the Commission's charges.G. The Commission issued an Order that found Alger Management and Alger Inc.. Edwards agreed to be censured and to hire an independent consultant to review its policies and procedures related to market timing. close of the stock market. Neither Alger Management nor Alger Inc. Alger Inc. The market timing in the Alger Fund diluted the value of long-term shareholders' investments. because their trading model was based on a "signal" from the close of the futures market at 4:15 p. Administrative Proceeding No. consented to the issuance of the Order without admitting or denying any of the findings in the Order In the Matter of Deutsche Bank Securities. Alger Inc.sec. Veras' principals requested the ability to enter trades until 4:30 p. the Commission instituted administrative and cease-and-desist proceedings against Deutsche Bank Securities.m. began to demand that market timers make a 20% sticky asset investment in exchange for timing capacity. a registered broker-dealer and subsidiary of Deutsche Bank AG. (“DSBI”). and the Securities Exchange Act of 1934. Alger Management and Alger Inc. to engage in late trading of Alger Fund portfolios. 2006. Alger Inc.m. The Commission alleges that between March and September of 2003. the Order directs Alger Management and Alger Inc.The Commission's Order finds that from at least 2000 through October 2003. Alger Management and Alger Inc. also permitted at least one investor to late trade the Alger Fund. permitted select investors to market time the Alger Fund. benefited through advisory fees paid to Alger Management and distribution and servicing fees paid to Alger Inc. Further. market close. Veras Investment Partners. Alger's Vice Chairman James P. The representative executed trades on behalf of customers whose trades were rejected by the mutual funds.gov/litigation/admin/2006/34-54993. As a result of these activities. 34-54993 http://www. Alger Management and Alger Inc. which allowed Veras to trade shares of Alger Fund portfolios after both the stock and futures markets closed but still receive that day's NAV as if the orders had been timely entered before the 4:00 p. Inc. violated the antifraud and various other provisions of the Investment Advisers Act. Likewise. the Investment Company Act. At the same time.. Jr. The Commission previously brought a settled enforcement action against Connelly in October 2003. disclosed these market timing and late trading arrangements to the Alger Fund's Board of Trustees. The Commission charged the representative with violated section 17(a) of the Securities Act and sections 10b and 10b-5 of the Securities Exchange Act. also permitted one hedge fund customer.m.. jointly and severally to pay disgorgement of $30 million plus a civil money penalty of $10 million.pdf On December 21. The $40 million will be paid into a Fair Fund to be distributed according to a plan to be developed by an independent distribution consultant. despite the 4:00 p. Alger Inc.. DSBI was charged 77 . and in 2002. Connelly. Specifically. The funds were thus deceived into believing that the funds were initiated by DSBI customers rather than the rejected customers. approved the arrangement. a registered representative of DSBI defrauded mutual funds and fund shareholders by engaging in a scheme to conceal the identity of the representative’s trading customers. Inc.m. Alger also agreed to retain an independent compliance consultant to review various policies and procedures. The Order censures Alger Management and Alger Inc. and directs Alger Management and Alger Inc. to cease and desist from committing or causing any future violations of the provisions referred to above. pdf On November 8. Inc. The Commission alleged that contrary to notions of fair play and to DAMI and DIMA’s own policies.200. instigate a more appropriate compliance and ethics oversight system. a German bank and financial holdings company. registered advisory investment subsidiaries of Deutsche Bank AG.sec. the fraudulent transactions resulted in significant shareholder losses through diversion of shareholder gains and dilution of shareholder funds. between 2000 and 2003. Admin. IA-2575 http://www.pdf On December 21. the corporations were required to jointly pay $17. 2006) http://www. 2006.000 in disgorgement. DAMI and DIMA were ordered to cease and desist from fraudulent transactions and to employ independent consultants to advise the companies on internal management systems for prevention of future fraud. Inc.gov/litigation/admin/2006/33-8750. According to an Order issued by the Commission. LLC (HL Advisors) and Hartford Securities Distribution Company. LLC. HL Investment Advisors. the Commission initiated administrative proceedings against Deutsche Asset Management (“DAMI”) and Deutsche Investment Management Americas. Administrative Proceeding No. The three subsidiaries.with failure to protect its funds and fund shareholders through procedures reasonably designed to prevent fraud and misuse of funds thereby violating Securities Exchange Act section 15(b)(4)(E).sec.284 in prejudgment interest and a civil monetary penalty of $202. In the Matter of Hartford Financial Services. In the Matter of Deutsche Asset Management. DSBI was ordered to cease and desist current violations and to pay $202. the corporations were aware of and consented to at least three separate instances of market timing involving large companies. The entire $55 million will be distributed to the affected Hartford funds. Inc. 3-12476 (Nov. the Commission announced that three subsidiaries of Hartford Financial Services Group. Hartford Investment Financial Services. agreed to relinquish $40 million in ill-gotten gains and pay a $15 million penalty. (“DIMA”). 8. 2006. LLC (Hartford Investment).835. and Deutsche Investment Management Americas. will pay $55 million to settle charges that they misrepresented and failed to disclose to fund shareholders and the funds' Boards of Directors their use of fund assets to pay for the marketing and distribution of Hartford mutual funds and annuities. Inc. The Commission alleges that DAMI and DIMA violated sections 206(1) and 206(2) of the Advisers Act and section 34(b) of the Investment Company Act when it knowingly allowed hedge fund managers and representatives of broker-dealers to engage in “market timing” to the detriment of DIMA and DAMI shareholders. While generating substantial fees for the corporations. (Hartford Distribution) (collectively. Hartford). and submit to periodic procedural reviews. HL Investment Advisors. Inc.835 in disgorgement. LLC and Hartford Securities Distribution Company.gov/litigation/admin/2006/ia-2575. File No. Proc. Further. Hartford entered into arrangements with 61 broker-dealers pursuant to which it agreed to pay for special 78 . Inc. $37. The Commission's Order against BISYS finds that from July 1999 to June 2004. which enabled the advisers improperly to use investors' mutual fund assets to pay for marketing expenses rather than paying for those expenses out of their own assets. 3-12432 (Sept. In the Matter of BISYS Fund Services. the distributor and principal underwriter for some of the funds. (BISYS). Hartford Investment. Hartford failed to disclose that instead of using only its own assets. Inc. finding that BISYS aided and abetted over two dozen mutual fund advisers in defrauding fund investors. the Commission announced the institution of a settled enforcement action against BISYS Fund Services. 26. Inc. Proc. known as "shelf space.sec. The Commission's Order further requires Hartford Investment. Hartford Investment and HL Advisors were censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. to certain broker-dealers in order to satisfy some of Hartford's shelf space obligations. such as for check 79 . Hartford Distribution also failed to disclose these arrangements to the funds' Boards. Hartford Investment and HL Advisors breached their fiduciary duties to the funds' Boards and deprived the funds' Boards of the opportunity to determine the best use of fund assets. HL Advisors and Hartford Distribution have consented to the issuance to the Commission's Order.pdf On September 26. Section 206(2) of the Investment Advisers Act. Hartford Distribution was also censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and from causing violations of Section 206(2) of the Investment Advisers Act. aided and abetted Hartford Investment and HL Advisors violations.gov/litigation/admin/2006/ia-2554. a mutual fund administrator. On occasion. File No. Hartford also failed to disclose to the funds' Boards its practice of directing the funds' brokerage commissions to broker-dealers in exchange for shelf space.marketing and distribution benefits. Despite its duty to do so. The side agreements enabled the advisers to use mutual fund assets to pay for marketing expenses that were incurred by the advisers to promote the funds. Hartford Distribution. 2006) http://www. without admitting or denying the findings contained therein. the investment advisers also used the money dedicated by BISYS under these arrangements to pay expenses that were entirely unrelated to marketing. and Section 34(b) of the Investment Company Act. By failing to disclose this practice to the Boards. In addition to the $55 million payment." Hartford represented to shareholders in the funds' prospectuses that it used its own assets to pay for shelf space and that shareholders did not pay for shelf space. These side agreements obligated BISYS to rebate a portion of its fund administration fee to (or on behalf of) the investment advisers to the funds so that the advisers would continue to recommend that BISYS be retained as the fund administrator. BISYS entered into undisclosed side agreements with the advisers. HL Advisors and Hartford Distribution to undertake certain compliance reforms. BISYS provides numerous administration services to mutual fund families for a fee. Hartford directed approximately $51 million of the Hartford funds' assets. Admin. BISYS entered into side agreements with the investment advisers to 27 mutual fund families. in the form of brokerage commissions. 2006. Frederick J. LLC (PEG). fund accounting. seed capital for new mutual funds. alleging that former PSI registered representatives defrauded mutual funds by concealing their identities. et al.7 million. (PSI). consisting of disgorgement of $9. and a $10 million civil penalty. Litigation Release No. banks and any related entities for administrative. a wholly-owned subsidiary of The BISYS Group. PEG has been ordered to pay a total of $600 million pursuant to a global civil and criminal settlement with the United States Attorney's Office for the District of Massachusetts. 28. $325 million will be paid as a criminal penalty to the U. 19813 (Aug. the advisers would have had to pay the marketing and other expenses using their own assets. As part of its settlement. and Sections 12(b) and 34(b) of the Investment Company Act and Rule 12b-1(d) thereunder. File No. and distribution services to determine if the policies and procedures provide reasonable assurance that such disclosures comply with applicable securities laws. formerly known as Prudential Securities Inc. 3-12400 (August 28.htm On August 28. BISYS agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Investment Advisers Act. BISYS further agreed to retain the services of an independent consultant to conduct a comprehensive review of its current policies and procedures governing the receipt of revenue and payment of expenses associated with its administrative. The independent consultant will also review the accuracy of the disclosures to mutual fund boards concerning agreements between BISYS and the funds. 2006) http://www. If the investment advisers had not improperly used mutual fund assets to subsidize these expenses. These monies will be placed in a distribution fund to be administered by the Commission for the benefit of the harmed mutual funds. Without admitting or denying the findings in the Order.gov/litigation/litreleases/2006/lr19813..S.sec. and those of their customers.gov/litigation/admin/2006/34-54371. $270 million will be paid to a distribution fund administered by the Commission for the benefit of those harmed by the fraud. BISYS. and distribution services to determine if the policies and procedures provide reasonable assurance that the revenue is properly received and expenses are properly paid. O'Meally. Proc.sec. and $5 million will be paid as a 80 . the Commission announced the institution of settled enforcement proceedings against Prudential Equity Group. 2006) http://www. the Massachusetts Securities Division. In the Matter of Prudential Equity Griup. NASD.7 million in ill-gotten gains. agreed to pay a total of $21. LLC Admin. Department of Justice. advisers. the Commission. prejudgment interest of $1. the New York Attorney General's Office and the New York Stock Exchange. to evade mutual funds' prospectus limitations on market timing.fraud losses. Inc. The Order further finds that these side arrangements were not disclosed to the mutual funds' boards of trustees or shareholders. fund accounting. the New Jersey Bureau of Securities. and settlement of disputes with third parties. BISYS provided over $230 million from its administration fees for the benefit of the funds' advisers or third parties pursuant to these side agreements.4 million.pdf SEC v. 2006. Under the terms of the settlement. 2006) http://www. the use of accounts coded as "confidential" in PSI's systems. the registered representatives used deceptive market timing practices to evade the mutual funds' restrictions and continue to trade. PSI failed to curtail their deceptive market timing practices.Y.civil penalty to the Massachusetts Securities Division. on August 28. the New Jersey Bureau of Securities. at PSI. When the mutual funds succeeded in blocking certain FA numbers or customer accounts from further trading. the New York Attorney General's Office. Proc. The Commission's Order against PEG finds that from at least September 1999 through June 2003. Inc. Corbett. branch office for similar conduct. or FA numbers. Jason N. These deceptive practices included the use of multiple FA numbers and multiple customer accounts. or in certain customer accounts. Mass. simultaneous with the SEC's announcement of this action. Inc. the NASD. headquartered in New York. PEG is a registered broker-dealer and investment adviser subsidiary of Prudential Financial. Ginder. File No. & Carl Lawrence Admin. The SEC's Order also was filed contemporaneously with related. many of which bore fictitious names that had no relation to the actual customer's name. and Brian P. In a related matter.gov/litigation/admin/2006/ia-2530. In the Matter of Warwick Capital Management. As early as 2000. the registered representatives used other FA numbers and customer accounts that had not yet been blocked to evade the mutual funds' restrictions and continue to trade. The Order finds that on numerous occasions when mutual funds tried to prevent or block the registered representatives from market timing under certain broker identifying numbers. 2006. PEG has also agreed to be censured and to retain the services of an independent distribution consultant for the distribution of the $270 million disgorgement.sec. N.pdf 81 . Although the firm received hundreds of notices from mutual fund companies that complained about the registered representatives' conduct. known as Financial Advisor. Silver. the Commission filed an unsettled civil injunctive action in the United States District Court for the Southern District of New York against former PSI registered representatives Frederick J. and the use of "under the radar" trading to avoid notice by mutual funds. O'Meally. PEG has consented to the issuance of the SEC's Order without admitting or denying the findings contained therein.. and the New York Stock Exchange. the United States Attorney's Office for the District of Massachusetts announced that it had entered into an agreement with PEG concerning substantially the same conduct as identified in the SEC's Order. which brought civil charges against PSI in November 2003. PSI identified the registered representatives and monitored their revenues and ranks within the firm. The Commission previously sued five former PSI registered representatives and the former branch manager of PSI's Boston. former PSI registered representatives deceived mutual funds in order to engage in market timing in the mutual funds' shares. As part of the global civil and criminal resolution. 3-12357 (July 6. Michael L. In settling the Commission's charges.. settled orders against PEG by the Massachusetts Securities Division. (iv) falsely represented that Warwick was in compliance with the Association for Investment Management and Research Performance Presentation Standards. Additionally.On July 6. and to determine what sanctions. 2006. or willfully aided and abetted and caused Warwick’s violations of. if any. its owner. 2006) http://www. 2006.gov/litigation/admin/2006/ia-2525.. 206(2). (ii) overstated the number of Warwick’s clients. and (vi) overstated the length of time Warwick had been in the investment advisory business. The Division of Enforcement alleged that Warwick willfully violated Sections 203A. Inc. and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e). Inc. 3-12341 (June 22. The Order finds that Weiss Research. In the Matter of Weiss Research. the Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings. Making Findings. the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings Pursuant to against Warwick Capital Management. a Bronx. 204-2(a)(16) and 206(4)-1(a)(5) thereunder. File No. 206(4) and 207 of the Advisers Act and Rules 204-2(a)(11).pdf On June 22. and 207 of the Advisers Act and that Lawrence willfully aided and abetted and caused Warwick’s violations. 203(f). Weiss Research facilitated an “auto-trading” arrangement between its subscribers and their broker-dealers. the Division of Enforcement alleged that the Respondents distributed through third-party subscription services false and misleading information about Warwick that: (i) overstated Warwick’s assets under management. Martin Weiss and Lawrence Edelson Admin. Inc. Sections 206(1). Lawrence Edelson (Respondents). and 203(k) of the Investment Advisers Act of 1940 against Weiss Research. wherein Weiss Research sent its trading instructions directly to its subscribers’ broker-dealers for immediate and automatic execution in the subscribers’ brokerage accounts. Proc. (v) falsely claimed that Warwick was registered with the Commission. 206(1).000 and $5. a financial newsletter publisher. and that Lawrence willfully violated.. From September 2001 through March 2005. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true. Inc. In its Form ADV filings from 1998 through 2000.sec.000 for annual subscriptions to these newsletters. and one of its principal editors. New York based investment adviser and its owner Carl Lawrence. Martin Weiss. Weiss Research promised its subscribers personalized service through direct 82 . (iii) falsely represented performance returns that Warwick and Lawrence knew were false and misleading.. to provide the Respondents an opportunity to dispute these allegations. 206(2). unlawfully operated as an unregistered investment adviser and that the Respondents made materially false and misleading statements about the past performance and profit potential of the trading recommendations contained in their publications. Warwick and Lawrence also overstated the number of clients Warwick had and its assets under management. The Order finds that Weiss Research published several newsletters containing specific trading instructions for the purchase and sale of securities and charged between $1. In the Order. are appropriate and in the public interest. 204. Correnti. for making false and misleading representations to clients and potential clients about the results of a 2002 Commission inspection. The disgorged funds will be returned to investors. LLC. prejudgment interest. SEC v.gov/litigation/admin/2006/ia-2520. and civil penalties. The Respondents consented to the issuance of the Order without admitting or denying any of the findings in the Order.sec.000. Weiss Research was not registered as an investment adviser with the Commission or any state securities regulator.sec. Inc. LLC and Mark J. the United States District Court for the District of Vermont entered final judgments against Terry F. The Order required the Respondents to cease and desist from committing or causing any violations and any future violations of the applicable provisions of the Investment Advisers Act. Proc.pdf On June 6. and Mark J. 2006) http://www. respectively. In the Matter of CapitalWorks Investment Partners. Correnti Admin. Terry’s Tips and Terry F. File No. a cease-and-desist order. Allen Litigation Release No.000 and $25. a registered investment adviser. Terry’s Tips and Allen used false and misleading performance projections to encourage hundreds of subscribers to enroll in an autotrading program that allowed subscribers to designate Terry’s Tips to automatically direct trades in the subscriber’s personal brokerage account. In mid-2002. in the Commission’s pending civil action.000. Allen and Terry’s Tips.htm On June 13. its part-owner and director of client service and marketing. Terry’s Tips and Allen were permanently enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. and required the Respondents to pay approximately $2 million in disgorgement.000 and a civil penalty of $120. 2006) http://www.gov/litigation/litreleases/2006/lr19725. The Order also found that the Respondents made numerous materially false and misleading statements regarding the past performance and profit potential of their recommended trades in Weiss Research’s promotional materials. CapitalWorks and Correnti agreed to settle the charges. During this period. by agreeing to the issuance of a censure. The Complaint alleged that since mid 2003. Allen was also permanently enjoined from aiding and abetting violations of Sections 206(1) and 206(2) of the Investment Advisers Act and ordered to pay disgorgement of $100. the Commission sanctioned CapitalWorks Investment Partners. and payment of civil penalties of $40. 3-12324 (June 6. the Commission’s investment adviser inspection staff conducted an inspection of CapitalWorks and issued a “deficiency letter” to the firm which identified various 83 .contact with Martin Weiss and Lawrence Edelson regarding their investment advice and provided certain assistance with selecting the appropriate type of newsletter for a particular subscriber. without admitting or denying the Commission’s findings. 19725 (June 13. custody of client assets. Correnti. Proc. Inc. Admin. censured and fined Bear Stearns. (BS&Co. the Commission settled enforcement action against Bear. Pursuant to the Order. In the Matter of Bear.problems related to the firm’s advertising.000. The fine imposed by the NYSE will be deemed satisfied by the payment of the $250 million pursuant to the Commission’s Order.. 16. and internal controls. SEC v. He was fully aware of the deficiencies that had been identified in the Commission’s inspection but failed to ensure their disclosure. CapitalWorks and Correnti misrepresented facts to current and prospective clients in twelve responses to requests for information and requests for proposals (RFPs). and to pay civil penalties of $40. Inc.. These measures include retaining an independent consultant to review CapitalWorks’ written procedures for responding to requests for proposals. Stearns Securities Corp. and William Robert Kepler 84 . and Bear.gov/litigation/admin/33-8668. CapitalWorks will also provide a copy of the Commission’s order to all existing clients and prospective clients for one year.000 and $25. Inc. The Commission issued an Order finding that from 1999 through September 2003. consisting of $160 million in disgorgement and a $90 million penalty. marketing and performance. Inc. Bear Stearns will pay $250 million. the Commission considered the remedial acts undertaken by Bear Stearns and the cooperation afforded the Commission staff. In determining to accept the settlement.pdf On March 16. CapitalWorks and Correnti consented to the issuance of an order that censures them and orders them to cease and desist from future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. charging Bear Stearns with securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and the customers of its introducing brokers. advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds. File No.sec. The Commission’s order found that from August 2002 through December 2004. Bear Stearns provided technology. Stearns & Co.) and Bear. as CapitalWorks’ director of client service and marketing and head of compliance. BMA Ventures. CapitalWorks will also undertake compliance measures designed to prevent future violations. Stearns Securities Corp. 3-12238 (Mar. The money will be paid into a Fair Fund to be distributed to the harmed mutual funds and mutual fund shareholders. NYSE Regulation. (BSSC) (collectively. Stearns & Co. The Commission’s investigation is continuing. 2006. assignment of advisory contracts. respectively. Bear Stearns). Bear Stearns will also undertake significant reforms to improve its compliance structure. 2006) http://www. Simultaneously. had ultimate responsibility for the accuracy of the responses.. As part of the settlement. Inc.sec. 10.9 million in a fraudulent “scalping” scheme from January 2004 through March 2005. 19526 (Jan. SBI ceased to be a registered broker-dealer in November 2003. Inc. William Robert Kepler. 2006) http://www. These requirements prohibit registration unless the adviser has at least $25 million in assets under management or is an adviser to a registered investment company. 85 . alleging that they illegally obtained approximately $1.gov/litigation/litreleases/lr19606. penny stock bars. According to the Commission’s complaint. In every case. SEC v. The Commission also alleged that Kepler aided and abetted BMA Ventures’ violations of these provisions.htm On January 10. 10. Scalping is the illegal practice of recommending that others purchase a security and secretly selling the same security contrary to the recommendation.sec. the Commission announced that Daniel Calugar and his former registered broker-dealer. they did not disclose BMA Ventures’ intent to sell its stock holdings or its past stock sales in connection with its recommendations.htm On March 9. Security Brokerage. Each newsletter described a featured company and its earnings prospects in glowing terms while urging readers to buy the company’s stock. and its president. Calugar also consented to the issuance of a Commission order. Although the newsletters disclosed that BMA Ventures owned stock in the featured companies. agreed to settle the Commission’s charges alleging that they defrauded mutual fund investors through improper late trading and market timing. Calugar and SBI consented to the final judgment and Commission order without admitting or denying the allegations. The complaint further alleged that BMA Ventures violated the investment adviser registration provisions of the federal securities laws by registering with the SEC when it did not meet the minimum registration requirements. 2006. based on the entry of the injunction in the federal court action that will permanently bar him from association with any broker or dealer. The SEC’s action sought permanent injunctions for violations of the anti-fraud and investment adviser registration provisions of the federal securities laws. the Commission filed a lawsuit against registered investment adviser BMA Ventures. Calugar will disgorge $103 million in ill-gotten gains and pay a civil penalty of $50 million. however. Litigation Release No. disgorgement of ill-gotten gains plus prejudgment interest. 19606 (Mar. (SBI). BMA Ventures sold its stock in the featured company contemporaneously with the fax campaign or shortly afterward. and civil money penalties against BMA Ventures and Kepler.Litigation Release No.gov/litigation/litreleases/lr19526. 2006. Kepler acted through BMA Ventures to inundate fax machines across the country with newsletters touting the stock of 26 small companies whose stock traded on the OTC Bulletin Board or the PinkSheets. Daniel Calugar and Security Brokerage. Inc. 2006) http://www. the Commission filed a civil fraud action against six former officers of Putnam Fiduciary Trust Company (PFTC). Donald McCracken. a former managing director and head of global operations services for PFTC. and accounting machinations. a former managing director and director of defined contribution servicing. The six defendants are Karnig Durgarian. Kevin Crain. The Commission alleges that instead of informing Cardinal Health of the one-day delay and the missed trading gain. Jr. a former managing director who had overall responsibility for PFTC’s compliance department. the Commission filed an emergency action in federal court seeking an asset freeze. a Boston-based registered transfer agent. Section 10(b) of the Securities Exchange Act of 1934. The complaint alleges that Calugar routinely transmitted trading decisions for his own account through Security Brokerage one to two hours after 4:00 p. in January 2001. Calugar reaped profits of approximately $175 million through improper late trading and market timing. Calugar was the single largest timer at Alliance during the relevant period. Inc. Virginia Papa. EST (the close of the market) without any legitimate reason. Litigation Release No.In December 2003. The Commission alleges that the defendants’ misconduct arose out of PFTC’s one-day delay in investing certain assets of a defined contribution client. Calugar agreed to make longterm investments (referred to as “sticky assets”) in Alliance hedge funds in exchange for Alliance permitting him to engage in market timing in its mutual funds.. SEC v. causing Cardinal Health’s defined contribution plan to miss out on nearly $4 million of market gains. 2005. principally through mutual funds managed by Alliance Capital Management and Massachusetts Financial Services (MFS). EST. Karnig H. and Ronald Hogan.m. and that Security Brokerage created false internal records in which the order time for all trades was entered as 3:59 p. et al. 3. The Commission’s complaint further alleges that from at least March 2001 to September 2003. a former vice-president who had responsibility for new business implementation at PFTC. The complaint alleges that Calugar and SBI violated Section 17(a) of the Securities Act of 1933.sec.gov/litigation/litreleases/lr19517. The Commission also alleges that the defendants improperly allowed 86 . and Rule 10b-5 under the Exchange Act. and other relief against Calugar and Security Brokerage. preliminary injunction. the defendants decided to improperly shift approximately $3 million of the costs of the delay to shareholders of certain Putnam mutual funds through deception. The Commission’s complaint alleges that from at least 2001 to 2003. the defendants engaged in extensive market timing of Alliance and MFS funds despite knowing that the prospectuses for those funds either prohibited or discouraged timing and that timing was not available to most investors. The markets rose steeply on the missed day. as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004. Sandra Childs. 19517 (Jan. according to the complaint. a former senior managing director and chief of operations for PFTC.m. Durgarian. Cardinal Health. for engaging in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million. 2006) http://www. In the case of Alliance.htm On December 30. a managing director who had responsibility for PFTC’s plan administration unit.. illegal trade reversals. an independent internal investigation.pdf On December 22. Without admitting or denying the Commission’s findings. Larson and James R.903 in disgorgement and $645.m.585 in prejudgment interest. 2005. terminating and otherwise disciplining responsible wrongdoers. 2005) http://www. and implementing new controls designed to prevent the recurrence of fraudulent conduct. with the right to reapply for association after 18 months.000 penalty. Admin. PFTC’s cooperation consisted of prompt self-reporting. providing full restitution to its defrauded clients. $35. Veras investment Partners. Eastern Time and received the same day’s price. Proc.gov/litigation/admin/33-8646. sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff). The respondents were also ordered to pay. including creating legal entities with names unrelated to respondents to hide its true identity from mutual funds and then using those entities to open multiple accounts at multiple broker-dealers. Respondents used the multiple accounts to divide trades into smaller dollar amounts that would evade detection by the mutual funds. McBride. their investment adviser. The Commission is seeking injunctive relief and civil monetary penalties.Cardinal Health’s defined contribution plan to bear approximately $1 million of the loss without disclosing their actions. respondents used deceptive techniques to evade market timing restrictions. on a joint and several basis. In the Matter of Veras Master Capital Fund. 22. The Commission announced that it would not bring any enforcement action against PFTC because of its swift. LLC (VIP).sec. VEY Partners Master Fund (VEY). Kevin D. et al. the Commission instituted a settled enforcement action against Veras Capital Master Fund (VCM). Respondents also traded mutual fund shares after 4:00 p. The Commission found that from January 2002 through September 2003. 3-12133 (Dec. the respondents consented to entry of an order that requires the respondents to cease and desist from future violations of the federal securities laws and bars Larson and McBride from association with any investment adviser. The Commission found that the respondents engaged in a fraudulent scheme to market time and late trade mutual fund shares. extensive and extraordinary cooperation in the Commission’s investigation of the transactions that are the subject of the Commission’s complaint. 87 .554. Larson and McBride will additionally pay a $750. File No. paying for the attorneys’ and consultants’ fees of its defrauded clients. and its managing members. Millennium International Management. Prior to SOX. and (4) suspends Pillai from association with any investment adviser for a period of 12 months. 2007.000 accounts at various brokerage firms in order to further conceal Millennium’s market timing. Israel Englander. et al. 3-12116 (Dec.C.L.On March 21.P.. L. 2007. Millennium also deployed “sticky” assets. Millennium Management. 2005) http://www. The entities opened over 1. Without admitting or denying the Commission’s findings. and Kovan Pillai.. Feeney. to obtain timing capacity that the brokers had negotiated with the mutual funds. Additionally. through broker-dealers. 88 . and Stone from association with any investment adviser for three years. the Commission instituted a settled administrative and cease-anddesist proceeding against Millennium Partners. structured trading and omnibus account trading strategies were implemented to hide Millennium’s market timing activities.pdf On December 1. finding that they participated in a fraudulent scheme to market time mutual funds. Admin. 1. with unrelated names.P. L. L. L. Millennium also engaged in market timing trading through variable annuity contracts and used brokers with multiple registered representative numbers in order to evade certain mutual funds’ market timing restrictions. to hide its identity thereby executing market timing trades in mutual fund shares without detection.sec. only disgorgement could be returned to harmed investors.. Millennium’s deceptive market timing practices included the creation of approximately 100 new legal entities. The Commission found that from at least 1999 to 2003. With Englander and Feeney’s knowledge and approval. (3) denies Stone the privilege of appearing or practicing before the Commission as an attorney for six months. and Millennium agreed to undertake various compliance reforms to prevent recurrence of similar conduct. Proc. The Sarbanes-Oxley Act of 2002 gave the SEC authority to increase the amount of money returned to harmed investors by allowing civil penalties to be included in Fair Fund distributions. File No. As of March 21. The funds distributed reflect the entirety of the disgorgement and civil penalties paid by the Veras hedge funds and their principals to settle charges of unlawful market timing and late trading brought by the SEC. Fred Stone. the respondents consented to an order that requires them to pay a total of over $180 million in disgorgement and penalties. Stone and Pillai generated tens of millions of dollars in profits for Millennium by devising and carrying out various fraudulent means to conceal Millennium’s identity and thereby avoid detection and circumvent restrictions that the mutual funds imposed on market timing.C. Feeney.gov/litigation/admin/33-8639. the Commission announced the distribution of approximately $38 million in Fair Funds to approximately 810 mutual funds that were victims of fraudulent market timing and late trading by the Veras hedge funds.L.. In the Matter of Millenium Partners. 2005. The order also (1) requires the respondents to cease and desist from future violations of the fraud provisions of the federal securities laws. (2) prohibits Englander. the SEC had distributed over $1 billion in Fair Funds. Englander. Terence Feeney. 2005. distributor for the Federated funds. a registered investment adviser.sec. Without admitting or denying the Commission’s findings. the Commission instituted a settled administrative and ceaseand-desist proceeding. In addition. and two existing Federated investors to market time high yield bond funds. 2005. respectively.gov/litigation/admin/33-8624. FIMC. In the Matter of Theodore Charles Sihpol III Admin. The proceedings had been instituted on September 16. finding that Federated Investment Management Company (FIMC). and perform services for the Federated mutual fund complex.sec. 28. in addition to $8 million they previously paid to the Federated funds that were harmed by the wrongful conduct. between July 1998 and March 2003. a registered broker-dealer. 3-11261 (Oct. or the associated conflict of interest between FIMC and the funds involved in the arrangements.In the Matter of Federated Investment Management Company. File No. 2005) http://www. File No. Proc. et al. a hedge fund managed by Edward J. Admin. the investment adviser to the Federated funds. harmed long-term mutual fund shareholders by allowing undisclosed market timing and late trading by favored clients and an employee. From January 2003 through July 2003. producing advisory and other fees for FIMC. and Federated Shareholder Services Company (FSSC). the Commission settled an administrative and cease-and desist proceeding against Theodore Charles Sihpol III. to engage in late trading in shares of mutual funds sold by BAS 89 . cease-and-desist orders. formerly a broker at Banc of America Securities LLC (BAS). Federated Securities Corp.sec. 3-12111 (Nov.pdf SEC v. FSC. formerly a registered transfer agent. 12. headquartered in Pittsburgh. FSSC allowed a customer and a Federated employee to late trade. The Commission found. FIMC and FSC entered into market timing arrangements with Canary Capital Partners LLC. 19422 (Oct.. and FSSC agreed to disgorge $27 million in ill-gotten gains and pay a $45 million civil penalty. a hedge fund customer of BAS.gov/litigation/litreleases/lr19422.htm On October 12. The two Federated clients used over $18 million and $11 million. The companies also agreed to censures. 12. The Commission found that Sihpol played a key role in enabling Canary Partners LLP. Inc. Canary Capital used almost $125 million in timing capacity in six Federated domestic equity funds and invested $10 million in an off-shore Federated fund. and to undertake mutual fund governance and compliance reforms. among other things. 2005) http://www. FSC and FSSC. The firms are affiliated with Federated Investors. committed securities fraud by approving—but not disclosing to Federated funds’ shareholders or the funds’ Boards of Trustees—three market timing arrangements. Proc. that FIMC.pdf On November 28. Stern. 2005) http://www. 2003.gov/litigation/admin/34-52839. Theodore Charles Sihpol III Litigation Release No. (FSC). and FSC. Although the violative trading was not the result of any improper agreements between Legg Mason personnel and their customers. that same day. rather than the price determined as of 4:00 p. 2002. the Commission instituted a settled administrative and cease-anddesist proceeding against Legg Mason Wood Walker. 2005) http://www.. regardless of their time of receipt. Inc. and 90 .gov/litigation/admin/34-52478. a registered broker-dealer. which censures Legg Mason. In the process.pdf On September 21. The Commission also found that Legg Mason failed to comply with the Exchange Act’s recordkeeping requirements relating to the original time of order entry for mutual fund transactions and the time it received the orders from customers. The order also barred him for five years from association with any broker. He also consented to the entry of a judgment in federal court. 21. in the Southern District of New York. Proc. The judgment resolves similar allegations contained in an SEC complaint filed in federal court.m. ET. Sihpol falsified. books and records and other provisions of the federal securities laws. or were the result of discretionary investment decisions made by Legg Mason registered representatives after 4:00 p.. maintain and preserve. Inc. Legg Mason consented to the entry of the order. The Commission also found that Sihpol enabled Canary to place orders to buy or redeem mutual fund shares that were received by and cleared through BAS after 4:00 p. which charged Sihpol with violating the antifraud provisions and with aiding and abetting BAS’s violations of the broker-dealer record-keeping provisions of the federal securities laws. However. altered. The Commission further found that Legg Mason had minimal written procedures governing the timing and pricing of mutual fund orders and.m. through Oct. destroyed.000 mutual fund orders after 4:00 p. or evaded the creation of. Sihpol consented to an order to cease-anddesist from committing or causing any violations and any future violations of the antifraud.and others. dealer. In the Matter of Legg Mason Wood Walker.m. Hundreds of these orders were either received by Legg Mason after 4:00 p. Legg Mason’s system had been failing to block certain trades processed by Legg Mason registered representatives after 4:00 p. Admin. the next day. but received the price previously determined as of 4:00 p.sec.m. or investment adviser.. and receive the current day’s net asset value (NAV) without regard for the time the orders were placed. Without admitting or denying the Commission’s findings.m. Shareholders in the mutual funds could have been harmed through dilution of their share values if Legg Mason personnel attempted to capitalize on postmarket information by processing mutual fund orders after hours based on stale prices. relied almost exclusively on its mutual fund order entry system to block any orders from being processed after 4:00 p. 3-12048 (Sept. 1.m. books and records that BAS was required accurately to create. Legg Mason’s flawed mutual fund order processing system enabled Legg Mason registered representatives to process more than 18. Without admitting or denying the allegations.000 penalty. The Commission found that from at least Sept. since 1997.m. 19. Filing No. 2003. imposing a $200. this practice had the potential to affect shareholders in the mutual funds sold by Legg Mason. instead..m. Proc. participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds’ boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds’ best interests. 2005) http://www. in which Citigroup agreed to pay $208 million. The actions against the individuals follow the Commission’s settlement in May. The Commission alleged that CIHI financed hedge fund customers while knowing the hedge funds would use the leverage to late trade and deceptively market time mutual funds. 2005) http://www. The complaint also alleges that Daidone. According to the Commission’s order. the Commission instituted administrative proceedings against Canadian Imperial Holdings Inc. 8. Thomas W. Inc.sec. Rather than passing the substantial fee discount on to the mutual funds. Jones and Lewis E. 2005. In its complaint. 2005. the Commission alleges that Jones and Daidone were two of the officers principally responsible for the fraud. a senior vice president of the Adviser and the funds’ treasurer and chief financial officer. that CIHI provided. participated in a scheme to defraud numerous mutual funds and their shareholders through late trading and deceptive market timing. Jones and Lewis Daidone aided and abetted Citigroup’s fraud in the creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates.000. comply with certain undertakings. Admin. reaping tens of millions of dollars in profit at the expense of mutual fund shareholders.sec.000 civil penalty. and disgorgement of any ill-gotten gains and civil penalties. The complaint alleges that Jones. the Commission filed a civil injunctive action alleging that former Citigroup executives Thomas W.orders Legg Mason to cease and desist from violations of the charged provisions. 19330 (Aug.htm On August 8. CIHI and World Markets.pdf On July 25. and CIBC World Markets Corp. and World Markets arranged. (CIBC). the former chief executive officer of the asset management division: (1) directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds’ third party transfer agent had been making. and (4) approved the presentation delivered to the funds’ boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading. Daidone Litigation Release No.gov/litigation/admin/33-8592. 3-11987 (July 20. In the Matter of Canadian Imperial Holdings Inc. (CIHI) and CIBC World Markets Corp. (3) intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds’ independent directors were fully informed of the details of the proposal. which was not true. File No.gov/litigation/litreleases/lr19330. The complaint seeks permanent injunctions against future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. which are subsidiaries of Canadian Imperial Bank of Commerce. SEC v. and pay a $1. improper financing for market timing hedge fund customers in violation of the 91 . Citigroup took most of the benefit of the discount for itself. (2) approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work. and permanent injunctions from future violations of the antifraud provisions of the federal securities laws. Admin. Amerindo Investment Advisors Inc.htm On June 1. for a total payment of $125 million. Without admitting or denying the Commission’s findings. File No. Proc. upon emergency motion by the Commission. Vilar said the license was still pending. for misappropriating at least $5 million from an Amerindo client. The Commission’s complaint alleges that in approximately June 2002. The Commission found that CIHI violated antifraud provisions. The Commission seeks disgorgement of the defendants’ ill-gotten gains.sec. the respondents agreed to pay. civil penalties. a limited partnership that was purportedly being organized to qualify and be operated as a Small Business Investment Company. 2005) http://www. and Alberto William Vilar and Gary Alan Tanaka. disgorgement and prejudgment interest in the amount of $100 million. Inc. In the Matter of Smith Barney Fund Management LLC and Citigroup Global Markets. and net asset value pricing requirements of the federal securities laws. SEC v.margin and extension of credit requirements.sec. the court granted a preliminary injunction against Amerindo prohibiting it from future violations of the federal securities laws and appointed a temporary monitor over Amerindo. et al. In addition.gov/litigation/admin/34-51761. a registered investment adviser.pdf 92 . and a civil money penalty in the amount of $25 million. records and reports. 19245 (June 2. Vilar solicited an Amerindo client and close personal friend to invest $5 million in the Amerindo Venture Fund LP. margin requirements. on a joint and several basis. and that a team of World Markets registered representatives enabled numerous customers to late trade and market time mutual funds. Inc. the Small Business Administration had never approved a license for any Amerindo affiliated fund or received any deposits for that purpose. The Commission also found that World Markets violated regulations promulgated by the Federal Reserve Board regarding the extension of margin credit. and margin and credit provisions of the federal securities laws. Tanaka then transferred the investor’s funds to accounts held by Vilar and Amerindo. 2005.. and violated rules promulgated by the Municipal Securities Rulemaking Board regarding the extension of margin credit. Amerindo’s co-founders and principals.gov/litigation/litreleases/lr19245. 3-11935 (May 31. the Commission filed a civil injunctive action alleging securities fraud charges against Amerindo Investment Advisors. 2005) http://www.. when in fact. The respondents also agreed to cease and desist from committing or causing any violations and any future violations and to comply with certain undertakings. When the investor inquired about the status of her investment. Litigation Release No. The Commission found that World Markets violated net asset value pricing requirements and antifraud. including making a donation to his alma mater. Vilar used the funds he received for various personal expenses. to the Commission’s order.sec. Proc. SEC v. Jr. 2005) http://www. the respondents. two former employees of Fiserv Securities. The Commission found that the respondents recommended that the mutual funds contract with an affiliate of Smith Barney to serve as transfer agent without fully disclosing to the mutual funds’ boards that most of the actual work was to be done under a subcontract arrangement that respondents had negotiated with the mutual funds’ existing third party transfer agent at steeply discounted rates.sec. Inc.gov/litigation/admin/34-51588. Inc. Inc. 21. Addeo Admin.sec.On May 31. File No. Thomas J. Braun. Fiserv’s former COO. reaping nearly $100 million in profit at the funds’ expense over a five-year period. The Commission’s investigation regarding individuals is continuing.. through the affiliated transfer agent. Gerbasio. Dennis J. Donnelly. $80 million in penalties.sec. The remedial measures include a requirement that respondents put out for competitive bidding certain contracts for transfer agency services for the mutual funds. which requires payment of $128 million in disgorgement and interest. File No. Inc. Addeo. 3-11961 (June 23. 2005) http://www. Gerbasio.gov/litigation/admin/34-51589. and Dennis J. File No. This matter involved 93 . The Commission found that the respondents violated antifraud provisions of the federal securities laws.htm In the Matter of Charles J. Braun. et al. a vice president for mutual funds at Fiserv. The Commission also instituted settled administrative proceedings against Fiserv. 2005. and compliance with substantial remedial measures.gov/litigation/litreleases/lr19197. The Commission found that rather than passing the substantial fee discount on to the mutual funds. In settling this action. without admitting or denying the findings. Jr.pdf In the Matter of Fiserv Securities. Proc. took most of the benefit of the discount for themselves. 2005. Proc. 2005) http://www. 3-11907 (Apr. the Commission settled fraud charges against two subsidiaries of Citigroup. The two subsidiaries named as respondents in the action are Citigroup Global Markets.. (CGM) and Smith Barney Fund Management LLC (Smith Barney). 19197 (April 21. the Commission filed a civil action in federal district court in Pennsylvania against Thomas J. Donnelly Admin. a broker-dealer headquartered in Philadelphia.pdf On April 21. the respondents consented. 3-11908 (April 21. and Charles J. the investment adviser to the mutual funds. 2005) http://www.gov/litigation/admin/34-51914. Admin. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999.pdf In the Matter of Raymond L. Litigation Release No. and Raymond L. including “kick-out letters” rejecting market timing trades. The final judgment as to Braun waives payment of all but $20. According to the Commission’s complaint.965 market timing trades. SEC v. 19161 (Mar. PFA). prejudgment interest. Fiserv has agreed to a censure.htm On March 28. and civil penalties against Gerbasio and Braun. and a 12-month suspension from associating with any broker or dealer. The Commission alleged that in response to hundreds of notifications from mutual funds monitoring and restricting excessive trading. 2005. Pension Fund of America. Litigation Release No. Donnelly agreed to pay a $50.000. based on Braun’s sworn financial statements submitted to the Commission. Between August 2002 and October 2003. a federal district court issued temporary restraining orders. As a result of their conduct. the two hedge fund customers placed 37. respectively. including misrepresenting the nature of their trades to the funds and opening dozens of accounts under different names to conceal the customers’ identities from the funds. Without admitting or denying any wrongdoing.000 civil penalty. Gerbasio and Braun received at least $454. and Addeo. This matter further involves Fiserv’s and Donnelly’s failure to supervise those who engaged in the illegal conduct. to pay $5 million in disgorgement and a $10 million civil penalty. and other relief against the defendants— Pension Fund of America. disgorgement. Braun has consented to a permanent injunction as well as payment of disgorgement and prejudgment interest for a total of $133. Inc. 30. LC and PFA Assurance Group.gov/litigation/litreleases/lr19161.000 penalty. with a view to preventing their violations of the federal securities laws. and to undertake measures to prevent future misconduct. The court also appointed a receiver over all of the entities named in the Commission’s complaint. PFA and its principals raised approximately $127 million from over 3. Braun also agreed to a three-year bar from associating with any broker or dealer based on the entry of the injunction. from October 1999 to the present. LC. through the sale of 94 .illegal market timing schemes engaged in by Gerbasio. and Addeo employed a variety of deceptions and evasions on behalf of the hedge fund customers. The Commission’s enforcement proceedings against Fiserv and Donnelly found that Fiserv and Donnelly failed reasonably to supervise Gerbasio and Braun.sec. Ltd. Gerbasio. Florida. and Addeo violated antifraud provisions of the federal securities laws. Braun. Braun. On the same day. asset freezes. (collectively. Without admitting or denying the Commission’s findings. and does not impose a civil penalty. 2005) http://www. Braun.400 investors. the Commission filed an emergency civil action to halt an ongoing offering fraud that targeted Latin American investors. unregistered investment advisers operating in Coral Gables. The Commission seeks permanent injunctions. in ill-gotten gains. as well as a to nine-month suspension from association in a supervisory capacity with any broker or dealer. and their principals Luis Cornide and Robert de la Riva.797 and $125. Addeo agreed to a permanent injunction.318.576. et al. The Commission alleged that Gerbasio. TPA. a $30. affiliated entities PFA International. and Claren. Christopher M. The defendants failed to disclose to investors that their money was used to pay exorbitant commissions. Balkenhol sold his entire position for approximately $82.” and other costs. Again. and an order imposing civil money penalties. and perpetuated those misrepresentations by creating false certificates bearing unauthorized seals. From June to September. Immediately after Oracle's September 12. Additionally. during Oracle's negotiations to acquire the company in 2005.htm On May 14. when he invested $85.gov/litigation/litreleases/2007/lr20115.000 in alleged unlawful profits. the day after Oracle executives began considering a tender offer for Retek. Balkenhol's wife had access to detailed inside information relating to each such advance. Cornide and de la Riva have misappropriated at least $15 million of investors funds for themselves.000 in Minneapolis-based Retek Inc. When Oracle announced the tender offer the following week. among other things.sec. The complaint alleged that Balkenhol breached a duty not to misuse confidences gleaned from his wife for his own gain. Inc. Balkenhol made three additional purchases of Siebel stock. an order that the defendants disgorge all illgotten gains. On June 9. the Commission’s civil action is seeking. 2005. Balkenhol bought over $270. who worked at Oracle as the lead executive assistant to Oracle's CEO and two co-Presidents. The Commission alleged that Christopher Balkenhol learned about secret merger negotiations from his wife.000 worth of Siebel's stock. 2005 announcement of its acquisition of Siebel. the day after Oracle's two co-Presidents secretly met with Siebel's CEO to initiate merger discussions. 95 . The Commission’s complaint alleges that defendants violated antifraud provisions of the federal securities laws and that Cornide and de la Riva further violated registration provisions. an “administrative fee.000 shares of Siebel stock for a total of approximately $448. Balkenhol Litigation Release No. Balkenhol ultimately purchased over 50. each following a critical advance in the confidential negotiations. Over the next three months. the Commission filed settled insider trading charges against a former Oracle Corporation vice president who allegedly traded on confidential information about Oracle acquisition targets gleaned from his spouse. 2007) http://www. Retek's stock price jumped and Balkenhol sold the shares for approximately $15. who was also employed by Oracle. In addition to the emergency relief obtained. CASES INVOLVING INSIDER TRADING SEC v.“retirement trust plans” that purportedly combine life insurance and investments in mutual funds. Balkenhol allegedly continued his pattern of insider trading with a series of stock purchases in another acquisition target.000 in unlawful profits. Siebel Systems.000. 2005.. 20115 (May 14. preliminary and permanent injunctions. Balkenhol's first profitable trade came on March 1. The complaint alleged that Balkenhol engaged in pattern of insider trading by purchasing stock in Oracle acquisition targets before any public announcement of Oracle's interest. 2007. with pre-judgment interest. the Complaint alleges that defendants have misrepresented their relationship with financial institutions and broker-dealers. and Rules 10b-5 and 14e-3 thereunder. 20112 (May 10.282 civil penalty.Without admitting or denying the Commission's allegations. China. Feng.k. Ruopian Chen.htm On May 10. Jennifer Xujia Wang. it is alleged that most of the logins to the brokerage accounts were from Internet Protocol addresses at ING and from Chen and Wang's home in New Jersey.000 by trading on the basis of material nonpublic information before the public announcements of three acquisitions. Ruben Chen a. $4. Wang has been employed as a Vice President of Morgan Stanley in a group that supported the Principal Transaction Group. a former employee of ING Investment Management Services. Litigation Release No. it is alleged that it was funded with money from a checking account in Wang and Chen's name. 2007) http://www.115 in prejudgment interest and a $97. et al. 2005.gov/litigation/litreleases/2007/lr20112. the Court issued a temporary restraining order which. Acting on the Commission's request. 29. among other things. Since Aug. In addition. In this position. Balkenhol agreed to pay in settlement of the Commission's action $97. When Feng's first brokerage account was opened. The Commission charged Chen and Wang with using online brokerage accounts in Wang's mother's name. As a result of the conduct described in the complaint. the Commission charged Jennifer Xujia Wang.282 in disgorgement. The Commission's complaint alleged that Chen and Wang funded and exercised control over Feng's online brokerage accounts.. Wang and Chen allegedly used material non-public information from Wang's employer. which was contacted to provide services in connection with the acquisitions.sec. Rather.. Balkenhol also agreed to a permanent injunction from further violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934. and her husband. froze the defendants' assets and ordered repatriation of funds taken out of the United States. did not access the two online brokerage accounts that were opened in her name on the days of the relevant trading. which provides financing for MSRE and other entities' potential acquisitions. LLC. The Commission's complaint alleged that Wang and Chen obtained illegal profits of more than $600. SEC v. 2007. with insider trading. The complaint further alleged that Wang was privy to material nonpublic information concerning each of these pending acquisitions. to purchase securities of three companies on the verge of announcing they would be acquired. Wang received documents via e-mail and had access to documents on a shared network drive which demonstrated that the firm was providing financing on certain acquisitions before they were publicly announced. who lives in Beijing. an employee of Morgan Stanley & Co. the Commission alleged that Chen and Wang violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 96 .a. Zhiling Feng. Inc. Hafiz Naseem and Francisco Javier Garcia Litigation Release No..gov/litigation/litreleases/2007/lr20105. alleging insider trading ahead of the TXU buyout against Certain Unknown Purchasers of TXU Call Options. business combinations and deals involving eight other issuers: Hydril Company. telephoned the Pakistani banker on several occasions in February 2007 and disclosed non-public.700 TXU call option contracts with March 2007 expiration dates through UBS AG London. Jacuzzi Brands. which served as a financial advisor to TXU in connection with the buyout. and made profits of approximately $5 million following public announcement of the buyout.. The Commission originally filed a complaint in the U. and civil penalties. the SEC alleged that Naseem tipped the Pakistani banker and possibly others concerning eight additional mergers or business deals since joining Credit Suisse's New York office in March 2006. 2007) http://www. District Court for the Northern District of Illinois on March 2. Seema Sehga. and Northwestern Corporation. Inc. The Commission's Second Amended Complaint alleged that Naseem. The complaint noted that Credit Suisse served as an investment banker or financial advisor in all of these deals.. Trammell Crow Co. The Commission amended its complaint to name Naseem as a defendant. The complaint named Feng as a relief defendant and sought disgorgement of Chen and Wang's ill-gotten gains.. John Harland Co. The SEC's complaint further alleged that Naseem also divulged pending.sec. Caremark Rx. after receiving the insider information from Naseem. disgorgement of all ill-gotten gains. the Commission charged Hafiz Naseem. 20105 (May 4. 2007. plus prejudgment interest from her. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp. Naseem allegedly misappropriated the information from his employer. Sunil Sehgal.htm On May 2. as permanent relief.. prejudgment interest.thereunder and. Energy Partners Ltd. According to the SEC's complaint. SEC v. the Pakistani banker purchased 6. with illegally divulging non-public information to a person believed to be a banker in Pakistan concerning the leveraged buyout of TXU Corp. 2007. by an investor group led by Kohlberg Kravis Roberts & Co.S. The Pakistani banker allegedly traded on the inside information provided by Naseem and reaped millions of dollars in profits when the buyout was publicly announced. in breach of his duty to Credit Suisse and its client TXU. and Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. Veritas DGC Inc. but unannounced. sought permanent injunctions against future violations. and Texas Pacific Group. The complaint alleged that the 97 . material information about the proposed but unannounced TXU buyout. an investment banker with Credit Suisse (USA) LLC. Credit Suisse. In addition to tipping at least one of the traders in the TXU case. Stewart. the Commission filed a settled insider trading action against Martha Stewart and Peter Bacanovic relating to Stewart's sale of ImClone Systems stock in December 2001. 98 . Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.gov/litigation/litreleases/2006/lr19794. 2006. purchased TXU securities through an omnibus account at Fimat Frankfurt and is believed to have done so on inside information. Bacanovic will pay disgorgement of $510.000. and his daughter were selling their ImClone stock. believed to be a resident of Switzerland. filed in June 2003. The Commission's complaint.sec. 2006) http://www. illegally tipped his client. representing three times the amount of the losses avoided. and a civil penalty of $75. financial disclosure. obtaining additional profits of more than $2.062. plus prejudgment interest of $12.4 million. and ImClone's stock price dropped 16%. including financial reporting. According to the SEC's complaint. The SEC alleged that Francisco Javier Garcia. Stewart and Bacanovic have agreed to consent to the judgments without admitting or denying the allegations in the complaint. representing the losses avoided from her insider trading. and a five year limitation on her service as an officer or employee of a public company by prohibiting her from participating in certain activities. dealer or investment adviser. 2001.019. and a civil penalty of $137. Waksal. charges Stewart and Bacanovic with violations of Section 17(a) of the Securities Act of 1933. disgorgement. with the nonpublic information that the then CEO of ImClone Systems. then a broker. ImClone announced that the FDA had refused to file ImClone's license application for a new cancer drug. Stewart will pay disgorgement of $45. and money penalties against Naseem. internal controls. 19794 (Aug.htm On August 7. for a total of $58. The next day.389. the SEC also identified another previously unidentified trader who purchased in advance of the public announcement regarding TXU. the Commission barred Bacanovic from associating with a broker. Martha Stewart and Peter Bacanovic Litigation Release No. audits or Commission filings. Based on this information. 7. The complaint alleges that on December 27. In August 2004. Erbitux. Stewart sold all of her ImClone stock. Stewart has also agreed to a five year bar from serving as a director of a public company. The Commission sought injunctive relief. SEC v. monitoring compliance with the federal securities laws. for a total of $645. representing the commissions he earned as a result of the Stewart's ImClone stock sale. Bacanovic. Samuel D. plus prejudgment interest of $135.673. In its complaint.Pakistani banker also purchased securities in those companies in advance of public merger announcements. Naseem opened a brokerage account in Pakistan in May 2006 and granted the Pakistani banker trading authority over that account to conceal his personal financial benefit from his misappropriations. Stewart and Bacanovic have agreed to settle the Commission's enforcement action by consenting to final judgments that impose permanent injunctions prohibiting them from violating the antifraud provisions of the federal securities laws and imposing the following relief against each defendant. without admitting or denying the allegations in the complaint. the three funds — Wynnefield Partners Small Cap Value L. and Thomas Bradley Strickland in connection with trading for three hedge funds in advance of the June 19. LLC. and to pay a $2.700. 25.sec.htm On April 25. profiting from the price decline when the PIPE offerings were publicly announced. Peter F.sec. LLC and Bruce Lieberman Litigation Release No. Black.The proposed judgments provide that.gov/litigation/litreleases/2006/lr19667. Wynnefield Partners Small Cap Value Offshore Fund. LLC and its former portfolio manager Bruce Lieberman. (“Wynn”). Obus. 2006) http://www. public announcement of a merger agreement between SunSource. Ltd. In each case. 19683 (May 2. Litigation Release No. the disgorgement and penalties will be deposited with the Court and added to the disgorgement fund for the benefit of the victims of this case. and other sanctions. the Commission filed a contested insider trading action against Nelson J. Lieberman agreed to pay a $110.418 prejudgment interest. to final judgments permanently enjoining them from violating Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Nelson J.htm On May 2. plus $343. and Allied Capital Corporation.D. The defendants consent to the judgments without admitting or denying the allegations in the complaint.335.270 civil penalty. charging them with insider trading from August 2001 to March 2004 on the information that 19 private investment in public equity (PIPE) stock offerings were about to be publicly announced.gov/litigation/litreleases/2006/lr19735.N.000 civil penalty and to a Commission order barring him from associating with any investment adviser. SEC v. Deephaven Capital Management. in an administrative proceeding to be instituted based on entry of the anticipated final judgment. disgorgement. The Commission sought injunctions. Inc.200 shares of SunSource stock in accounts of three hedge funds he managed after being tipped by Black. 2001.P. 19667 (Apr.270 in unlawful profits. In a complaint filed in the S. The defendants learned confidential nonpublic details about the upcoming PIPE offerings from placement agents for the companies and sold short the company shares on behalf of the Deephaven Small Cap Growth Fund. the Commission alleged that Obus directed the purchase of 287. The three funds are named as relief defendants. the company’s stock price fell on the announcement of its PIPE offering. pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002. SEC v.683. Obus. the Commission filed a civil injunctive action against hedge fund adviser Deephaven Capital Management. with the right to reapply after three years. Wynnefield Partners Small Cap Value L.Y. As a result of the trading. 2006. Deephaven and Lieberman each consented.P. Deephaven also agreed to disgorge $2. (“Wynn II”) — had illicit gains of $1. 2006. who had been tipped by Strickland. et al. I (“Wynn I”). 2006) http://www..683. 99 . the relief defendants had profits of $1. learned material. 2006 the Commission announced new charges against individuals involved in international schemes of serial insider trading that yielded at least $6. Sonja Anticevic. a research analyst at Goldman Sachs.7 million of illicit gains. ordering disgorgement of $1. Inc. This complaint follows two prior complaints filed by the Commission in August 2005 charging insider trading in Reebok securities and successfully freezing over $6 million in trading proceeds. which the Commission submitted to the Court in a pending action charging insider trading in advance of the August 2005 Reebok-adidas-Salomon AG (adidas) merger announcement. On June 19.. In total. The charges were made in a Second Amended Complaint. 2001. repeatedly learning of mergers and acquisitions transactions before they became public.700 in illicit gains jointly and severally from the individual defendants and relief defendants. who was a founder and principal of Wynnefield Capital. The shares were deposited into accounts of relief defendants Wynn. This was the largest purchase of SunSource stock that Obus had ever made and comprised more than 99% of SunSource stock that was traded that day. and David Pajcin. In its complaint. 19650 (Apr.5% over the prior day’s closing price.gov/litigation/litreleases/2006/lr19650.700. and based on this. Black then tipped his boss. The schemes were orchestrated by two individuals: Eugene Plotkin. et al. 2006) http://www. an analyst at Merrill 100 . Obus and Black each had an interest in two of the relief defendant funds.The Commission alleged that Strickland. The Commission’s complaint charged 13 individuals in the United States and Europe for their roles in the scheme. The complaint alleged that Plotkin and Pajcin infiltrated the investment banking unit of Merrill Lynch. Obus.335. Strickland called his close friend Black. Stanislav Shpigelman. a former employee of Goldman Sachs. SEC v.htm On April 11. Wynn I. imposing a civil money penalty on the individual defendants. the Commission sought a final judgment enjoining Obus. The Commission also alleged that on June 8.335. and prohibiting Obus and Black from serving as an officer or director of a public company. and Strickland from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5. and Wynn II. who was an analyst for Wynnefield Capital.sec. 2001. According to the complaint. an increase of 91. In exchange for a share of the illegal profits. an employee of GE Capital Corporation.200 shares of SunSource stock at $4. Obus directed the purchase of a block of 287.50 per share. Litigation Release No. shortly thereafter. SunSource’s stock closed that day at $9. after being assigned to work on the deal and attending a meeting with members of SunSource’s management. Plotkin and Pajcin traded in at least 25 stocks within one year based on inside information obtained through these schemes.75 per share. nonpublic information about the proposed acquisition of SunSource by Allied in mid-May 2001. SunSource and Allied jointly announced that they had signed a definitive merger agreement. and tipped him about the upcoming merger. 11. Black. According to the complaint. and orders requiring the defendants to repatriate to the United States proceeds of the fraud in accounts outside the United States. the Commission announced that it filed a settled insider trading action against Gary D.htm On December 19. 18. Inc. The complaint alleged that Shuster and Renteria provided Plotkin or Pajcin with insider information concerning at least twenty companies that were featured in the IWS column. SEC v. for the sole purpose of stealing copies of upcoming editions of the magazine. prior to the time the deals became public. and Tracey A. — to obtain employment at Quad/Graphics. repeatedly obtaining advance copies of the market-moving Inside Wall Street (IWS) column in BusinessWeek. Plotkin and Pajcin traded on the insider information and passed the insider information on to individuals in the United States and Europe (Traders) who traded on it. 2005. The BusinessWeek Scheme yielded over $345. within 48 hours after the announcement of the Reebok-adidas merger. 2005. 5. Gary Herwitz and Tracey A. and later Juan C.. and calling Plotkin or Pajcin to read them key portions of IWS before the column became available to the public. Nickolaus Shuster. The complaint further alleged that Plotkin and Pajcin also infiltrated one of the printing plants utilized by BusinessWeek. 19499 (Dec. one of four printing plants that print BusinessWeek magazine. Pajcin’s aunt. Pajcin. Among other things. who traded on the insider information. the complaint sought permanent injunctive relief. the Court ultimately entered preliminary injunction against all of the defendants. 2005) http://www.Lynch. 19. As a result. and the Commission obtained Court orders freezing over $6 million in illegal profits stemming from insider trading in Reebok securities. non-public information related to a cash tender offer for such company’s stock. Renteria. leaked confidential information to defendants Plotkin and Pajcin concerning at least six mergers or acquisitions that Merrill Lynch was working on. In addition. Jr. Plotkin and Pajcin then either traded on the IWS insider information or passed the information to some or all of the traders. the imposition of civil monetary penalties. former executive vice 101 .sec. the disgorgement of all illegal profits plus prejudgment interest. On Aug.gov/litigation/litreleases/lr19499. the Commission alleges that defendants Plotkin. a certified public accountant and former president of the accounting firm Mahoney Cohen & Company. Stanyer Litigation Release No. and Shpigelman violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder by trading in the stock of a company while in possession of material. The Commission alleged that the defendants engaged in illegal insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Plotkin and Pajcin had an agreement with the Traders. Stanyer. The Commission sought additional emergency relief on Aug. related to the Reebok trading against 8 additional defendants. pursuant to which they were to receive a percentage of the illicit profits made by the Traders. Herwitz. the Commission obtained a court order from the United States District Court for the Southern District of New York freezing a securities account in the name of Sonja Anticevic.000 in illicit trading profits. 2005. Plotkin and Pajcin recruited two individuals — first. the defendants bought long or sold short the stocks of the companies from which they stole confidential press release information. The Commission alleges that.gov/litigation/litreleases/lr19450. alleges that the defendants engaged in illegal insider trading when they purchased Sirius stock in advance of the October 6. 2005) http://www. and antifraud injunctions. based on this conduct. after learning in confidence from his Mahoney Cohen colleague. Lohmus made at least $7.897 to disgorge fully his profits plus prejudgment interest and to pay civil penalties in the amount of $17. In the complaint.president of Sirius Satellite Radio Inc. The Commission obtained a temporary restraining order which. 102 . for the sole purpose of gaining access to Business Wire’s secure client website. charging Lohmus Haavel & Viisemann (Lohmus). that Stern had received an offer from Sirius and that the parties were negotiating. the Commission alleges that Herwitz purchased Sirius stock on September 30. Herwitz and Stanyer violated Section 10(b) of the Securities Exchange Act and Rule 10b-5. which provided unauthorized access to confidential information contained in impending nonpublic press releases of other Business Wire clients. Once defendants had access. the Commission alleges that. they surreptitiously utilized a software program. earnings.S. the Commission filed an emergency federal court action. Oliver Peek and Kristjan Lepik. 2004. and purchased options to increase their profits.htm On November 1. Both Herwitz and Stanyer have consented to full disgorgement plus prejudgment interest. Finally. together with prejudgment interest.sec. and regulatory actions. Lohmus became a client of Business Wire. freezes the defendants’ assets and orders the repatriation of funds taken out of the United States.1. 2004 announcement that radio broadcaster Howard Stern had signed a $500 million agreement with Sirius. The complaint seeks permanent injunctive relief. Using several U. Since January 2005. Stanyer has also consented to a bar from serving as an officer or director of a public company.163 to disgorge fully his profits plus prejudgment interest and to pay civil penalties in the amount of $34.S. Similarly. an Estonian financial services firm. The Commission alleges that Stanyer purchased Sirius stock on October 5. penalties. mergers. The complaint further alleges that the information fraudulently stolen by the defendants allowed them to strategically time their trades around the public release of news involving. among other things. after learning in confidence from a senior Sirius executive that Sirius had signed an agreement with Stern.8 million in illegal profits. The complaint. 2005. et al. filed in the Southern District of New York. in June 2004. public companies. and two of its employees. The judgment against Herwitz orders him to pay $18.000. who is Stern’s longtime accountant. and the imposition of civil monetary penalties. 19450 (Nov. the disgorgement of all illegal profits. a leading commercial disseminator of news releases and regulatory filings for companies and groups throughout the world.357. 2004. Litigation Release No. including the expected time of issuance. among other things. Lohmus Haavel & Viisemann. the judgment against Stanyer orders him to pay $17. with conducting a fraudulent scheme involving the electronic theft and trading in advance of more than 360 confidential press releases issued by more than 200 U. SEC v. brokerage accounts. a so-called “spider” program. 19327 (Aug. 2005) http://www.htm Litigation Release No. and certain unknown persons trading in an account at an Austrian broker.htm On July 26.sec. the Commission obtained a court order freezing a securities account in the name of Sonja Anticevic. 2005) http://www.SEC v. collectively netting a profit of over $6 million by placing the Reebok trades of “out of money” Reebok call options . Also on August 18. Monika Vujovic. 18. an Oregon circuit board manufacturer.gov/litigation/litreleases/lr19312. 2005) http://www. with trading on inside information and tipping his brother. in which a series of highly profitable and timely trades of “out of the money” Reebok International Ltd. among other relief.$4 million through domestic trading. SEC v. Croatia and Germany. in a second emergency action alleging insider trading in the securities of Reebok. Litigation Release No. placed or directed some of the Reebok trades. Among other things. the disgorgement of all illegal profits. continues the asset freeze. The Commission obtained temporary restraining orders that freeze the proceeds of trading in Reebok securities in the domestic accounts and require the repatriation and freezing of the proceeds in the foreign accounts. Sonja Anticevic et al. 103 . Perica Lopandic. a former broker and Anticevic’s nephew. The Commission also alleges that the defendants acted in concert or under a common direction. the Commission charged a financial analyst for Merix Corporation. Elvis Santana. In addition to the Reebok trading. and tipped other defendants who placed Reebok trades. the Commission alleged.S. David Pajcin. On August 18. Zoran Sormaz. Philip Evans and Paul Evans Litigation Release No. Direktanlage. the complaint seeks permanent injunctive relief. 5. $2 million from foreign trading. the Court entered a Preliminary Injunction against Anticevic which. The amended complaint alleges that Pajcin.htm On August 5.. The illegal trading took place in domestic and offshore brokerage accounts held by residents of the U.gov/litigation/litreleases/lr19327. 19312 (July 26.sec. 2005. overlapping trades were placed at the same time in both the domestic and foreign accounts in the securities of other companies.gov/litigation/litreleases/lr19340. Henry Siegel. a Croatian national and resident. 2005. and the imposition of civil monetary penalties. 19340 (Aug. 2005.at AG. (Reebok) call options occurred in the two days prior to an August 3 announcement that Reebok had agreed to be acquired by adidas-Salomon AG.sec. the Commission also charged eight additional individuals who reaped illegal profits from the trades: Ilija Borac. Force also shared some of the recommendations with his daughter. The Commission alleges that Philip Evans avoided losses and made profits of over $30. disgorgement of all ill-gotten gains as well as the gains of the people they tipped plus pre-judgment interest and civil monetary penalties. Force made more than $1. The Commission’s complaint alleged that Force’s trading was part of a broader insider trading scheme that was launched on the Internet and ultimately involved more than twenty individuals located in and around New York City and Bowling Green.htm On June 8. Force has agreed to settle the charges against him by consenting. the Commission filed an insider trading action against Gary D. Eighteen individuals have been convicted criminally for their roles in the scheme and the Commission has also obtained civil judgments against those eighteen individuals.gov/litigation/litreleases/lr19252. to the entry of a final judgment ordering him to pay a total of $4.213. 2005.000 in illegal profits. According to the Commission. Paul Evans made profits in excess of $400. The Commission alleges that Philip E. Kentucky. Force traded based on inside information he received from his broker about seven upcoming mergers or acquisitions. SEC v.709. 2005) http://www.152. who avoided losses of over $3. The Commission seeks injunctive relief. The Commission’s complaint alleged that from June 1998 through December 1999.5 million in profits from his trading. 104 .062. Evans sold Merix stock in May 2004 after learning from his boss that the company was preparing to report disappointing financial news. Philip and Paul Evans violated antifraud provisions of the federal securities laws. Gary D. When the public announcement drove down Merix’s stock price.000 by trading Merix securities. Force Litigation Release No.sec. who purchased stock in advance of four deals and reaped more than $220.197.515.213 and disgorgement of his daughter’s profits in the amount of $221.515. the owner of automobile dealerships in Kentucky and Tennessee. Force.000. and a civil penalty of $1. without admitting or denying the findings in the Commission’s complaint.000. The Commission’s complaint alleges that through their fraudulent trading and tipping. and that Paul Evans shared the nonpublic information with a friend who profited approximately $14. This amount includes disgorgement of Force’s profits in the amount of $1. The final judgment also enjoins Force from future violations of antifraud provisions of the federal securities law. Philip Evans also passed the information to his brother Paul Evans who bought Merix put options.000. The Commission also alleges that Philip Evans shared the nonpublic information with his mother.000 in profits. prejudgment interest in the amount of $900.allowing the pair to net over $400. 19252 (June 8. the Commission announced that it filed a complaint in the Southern District of New York against Hilary L.sec. The Commission’s complaint alleged that Shane’s short selling violated antifraud provisions of the federal securities laws. Shane also consented to be barred from the broker-dealer industry and suspended for twelve months from the investment advisory industry. Proc. Shane alleging that Shane committed insider trading and registration violations by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering and prior to the effective date of the resale registration statement for the PIPE shares. Without admitting or denying the allegations in the Commission’s complaint. Shane continued short selling CompuDyne shares until she had sold the same number of shares she had been allocated in the PIPE offering.pdf On May 18. Hilary L Shane Litigation Release No. Shane was asked to participate in a PIPE offering by CompuDyne. 3-11951 (June 14.sec.075. Before the public announcement of the PIPE offering. This case represents the first settlement of insider trading charges against a hedge fund manager in connection with a PIPE offering. 105 . The Commission’s complaint alleged that.gov/litigation/litreleases/lr19227. Shane covered all of her short sales with the shares she obtained in the PIPE offering making substantial profits for both accounts.gov/litigation/admin/34-51839.015. Shane Admin. Shane agreed to keep information about the PIPE offering confidential. Shane consented to the entry of a final judgment in which she is permanently enjoined from further violations of the antifraud and registration provisions of the federal securities laws and agreed to pay disgorgement of the trading profits. 2005) http://www. File No.htm In the Matter of Hilary L. In separate administrative proceedings. Shane began short selling CompuDyne securities in both her personal account and the hedge fund’s account. plus prejudgment interest and a civil penalty totaling $1. 19227 (May 18. in September of 2001. 2005) http://www. The complaint also alleged that Shane’s short selling of CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the shares she obtained in the PIPE offering violated registration provisions. 2005. The Commission’s complaint also alleged that Shane agreed to purchase shares in the PIPE offering for her personal account and for one of the hedge fund accounts she managed.SEC v. After the PIPE was announced and caused CompuDyne’s share price to drop. Chin. Sibal. Shin and Joo misappropriated material nonpublic information from the investment banks where they worked and tipped Sibal. Pollet was in charge of investing SG Cowen proprietary funds in PIPE transactions. Without admitting or denying the Commission’s allegations. disgorgement of ill-gotten gains. the Commission announced that it has charged Guillaume Pollet.” and. The private offerings are often referred to as “PIPEs” for “private investment in public equity. 19199 (Apr.htm On April 28. for their participation in fraudulent insider trading schemes that yielded collective profits in excess of $970. 19210 (April 28. because they dilute the pool of shares. Litigation Release No. and Pejman Sabet and an unsettled action against a sixth individual. the Commission filed settled enforcement proceedings against five individuals. Chae Hyon Chin. Chiu. 2005. and Chiu each have agreed. to the issuance of a settled administrative order finding that each has violated antifraud provisions of the federal securities laws. Ernesto Sibal. The complaint against Joo seeks a permanent injunction against future violations. Chiu. dealer or investment adviser. the Commission alleged that. the individuals who executed the trades shared their illegal profits with Shin and/or Joo.gov/litigation/litreleases/lr19199. SEC v. Chiu and Sabet have consented to the entry of a permanent injunction prohibiting them from further violations of antifraud provisions of the federal securities laws.gov/litigation/litreleases/lr19210. including offerings in which SG Cowen invested. 2005) http://www. and Sabet in advance of one or more of four separate merger transactions.SEC v.000. Joo. and civil penalties. Related criminal actions are pending against all six defendants. they typically drive a share’s price down. Robert Y. based upon the court’s anticipated entry of the final judgment. These settling defendants have agreed to pay a total of $1. Sibal. In addition. prejudgment interest. 21. prejudgment interest. during 2002 and 2003. In its complaint. Benjamin Y. Joo has not settled with the Commission. a former managing director of SG Cowen & Co.515. Shin. Shin. 2005. Ernesto V. and penalties. Sibal. At the time of the misconduct.23 in disgorgement.111. The Commission’s order will bar Sibal and Shin from associating with any broker or dealer. and will bar Chiu from associating with any broker. 106 . without admitting or denying the Commission’s findings. Doseph J. 2005) http://www.htm On April 21. The complaint alleges that during the course of these insider trading schemes.. with insider trading and fraud for short selling the stock of companies prior to the companies’ closing on a private offering of stock. Shin.sec.sec. Guillaume Pollet Litigation Release No. Chin. et al. disgorgement of all ill-gotten gains plus prejudgment interest.gov/litigation/admin/2007/34-55614. The Complaint alleges that through his fraudulent trading Pollet violated antifraud provisions of the federal securities laws. The Commission is seeking injunctive relief. Park. after receiving confidential non-public information about the upcoming PIPE transaction. Inc. in a settled proceeding. Pollet’s short selling was directly contrary to representations that SG Cowen made to PIPE issuers in connection with the PIPE transactions. Proc. As a result of Pollet’s illicit trading. and Gordon C. 2005 (http://www. the Division of Enforcement alleged that Park and Cantley aided and abetted and caused a pump-and-dump scheme involving the securities of Spear & Jackson. for three companies located in the British Virgin Islands (BVI Companies). and Cantley executed numerous trades in Spear & Jackson stock. Gordon Cantley. The Complaint alleged that between February 2002 and July 2003. in several instances.-based broker-dealer Park Financial Group. Specifically. and Crowley was not an authorized signatory. often buying and selling shares on a daily basis. which were rare for Park. It is further alleged that Park and Cantley executed Crowley's trades knowing that he was the chief executive officer of Spear & Jackson and that the BVI Companies' accounts traded exclusively in Spear & Jackson stock. which 107 .sec. In several instances.htm). required the written approval of at least two authorized individuals before any transaction could occur. File No. 19072.The Commission’s complaint alleges that during 2001 Pollet. and its principal. and civil penalties. SG Cowen also acted as the PIPE issuer’s investment banker. Crowley gave Park and Cantley sell orders for the BVI Companies' accounts.gov/litigation/litreleases/lr19072. the former chief executive officer of Spear & Jackson. 2007) http://www. CASES INVOLVING MARKET MANIPULATION In the Matter of Park Financial Group. the Commission announced the institution of administrative and cease-and-desist proceedings against Winter Park. Cantley Admin. Inc. registration and reporting provisions of the federal securities laws in connection with his role in the pump-and-dump scheme. See Litigation Release No. for alleged violations of the antifraud. 3-12614 (April 11. or were contemplating engaging in. Park and Cantley filled these orders even though each of these foreign-based accounts. Fla.sec.pdf On April 11. traded in the shares of ten public companies that either engaged in. in addition to other gains SG Cowen made on the transactions. 2007. despite obvious red flags. a registered broker-dealer with a disciplinary history. and failed to file Suspicious Activity Reports (SARs) reporting suspicious transactions. had already obtained injunctive relief against Dennis P. Inc. Park and Cantley also knew that the BVI Companies were transferring large amounts of Spear & Jackson stock to a stock promoter. it is alleged that on several occasions. The Commission’s complaint also alleges that. PIPE financings. which Crowley secretly controlled. Crowley. In the Order Instituting Proceedings. Feb. in violation of the firm's record-keeping obligations. The Commission. SG Cowen locked in over $4 million in trading profits. 10. which generated approximately $2.htm On March 12. Prior to intruding into these accounts. without the account holders' knowledge. After these unauthorized buy orders were placed. The complaint further alleged that on several occasions. 20037 (March 12.500. Chockalingam Ramanathan and Thirugnanam Ramanathan hijacked the online brokerage accounts of unwitting investors using stolen usernames and passwords. disgorgement and civil penalties. During the relevant time period. the Defendants placed scores of unauthorized buy orders at above-market prices.was actively promoting Spear & Jackson. The proceedings instituted will determine whether Park and Cantley should be ordered to cease and desist from committing or causing violations of and any future violations of Sections 10(b) and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 17a-8 thereunder.sec. Additionally. Park and Cantley allegedly executed more than 200 trades in Spear & Jackson stock for the BVI Companies' accounts. The Commission's action charged the Defendants with violations of Section 17(a) of the Securities Act of 1933. and then funded these accounts using funds taken from the unknowing account holders' own bank accounts.gov/litigation/litreleases/2007/lr20037. the Defendants realized unlawful trading profits of at least $121. remedial action is appropriate in the public interest against Park pursuant to Section 15(b)(4) of the Exchange Act and against Cantley pursuant to Section 15(b)(6) of the Exchange Act including. and using the victims' own accounts and funds. Online broker-dealers whose customers' accounts were compromised suffered losses of least of $875. the Defendants sold the positions held in their own accounts at the artificially inflated prices. the proceedings will determine what. the Defendants acquired positions in the securities of at least thirteen issuers and options on shares of another issuer. 2007) http://www. Section 10(b) of the 108 . 2002. and Spear & Jackson's stock price was sharply increasing. Jaisankar Marimuthu. Then. SEC v. the Defendants opened new online brokerage accounts using stolen personal information. The Commission's Complaint also alleged that Park failed to report suspicious transactions in Spear & Jackson stock by filing SARs with the Financial Crimes Enforcement Network as required by regulations implementing the Bank Secrecy Act. These transactions created the appearance of legitimate trading activity and pumped up the share price of the fourteen securities. but not limited to. the Commission filed a complaint in the United States District Court for the District of Nebraska charging three Indian nationals with participating in a fraudulent scheme to manipulate the prices of at least fourteen securities through the unauthorized use of other people's online brokerage accounts. between July and November 2006. This was the first Commission enforcement action alleging violations due to a broker-dealer's failure to file a SAR. if any. Chockalingam Ramanathan and Thirugnanam Ramanathan Litigation Release No. The Commission's complaint alleged that. In total. Jaisankar Marimuthu.000 as a result of the Defendants' fraudulent conduct. 31. which was amended by the USA Patriot Act and became effective Dec. 2007.5 million in proceeds. two counts of computer fraud. Operation Spamalot Securities Exchange Act of 1934 Release No. "Ready to Explode. 2007.sec. 2007.sec. with at least one of those terms running consecutively with the sentences for the other charges.htm http://www.Securities Exchange Act of 1934 and Rule 10b-5 thereunder.m.gov/news/press/2007/2007-34. and sought permanent injunctive relief. meaning that the brokers posting quotations for the purchase and sale of the securities are not required to conduct due diligence regarding the issuers. The conspiracy and computer fraud charges each carry a maximum sentence of five years in prison. six counts of wire fraud.htm On January 25. The trading suspensions are part of a stepped-up SEC effort. Each count of aggravated identity theft adds two years in prison.gov/litigation/suspensions/2007/34-55420. 109 ..sec. 2007. The 35 suspensions involve companies that are not subject to the reporting requirements of the Securities Exchange Act of 1934. code named "Operation Spamalot" . 19981 (Jan.gov/litigation/litreleases/2007/lr19981. The companies' securities have been quoted on the Pink Sheets quotation service on an unsolicited basis. 55420 (Mar.. The trading suspensions commenced on March 8. at 9:30 a. eight counts of computer fraud.pdf On March 8. The indictment also charged Thirugnanam Ramanathan with one count of conspiracy. triggering dramatic spikes in share price and trading volume before the spamming stops and investors lose their money. 2007) http://www. the Commission filed a complaint in the Middle District of Florida charging twenty-one year old Aleksey Kamardin with participating in a fraudulent scheme to manipulate the prices of numerous stocks through the unauthorized use of online brokerage accounts. In a related criminal action. EDT. EDT. 2007. the Commission suspended trading in the securities of 35 companies that have been the subject of recent and repeated spam email campaigns. Wire fraud and securities fraud carry maximum sentences of twenty and twenty-five years. The trading suspensions will last for ten business days.to protect investors from potentially fraudulent spam email hyping small company stocks with phrases like." "Ride the Bull. 2007) http://www. and six counts of aggravated identity theft. Aleksey Kamardin Litigation Release No. and two counts of aggravated identity theft. respectively. a federal court in Nebraska unsealed a twenty-three count indictment charging both Marimuthu and Chockalingam Ramanathan with one count of conspiracy." and "Fast Money. 25. disgorgement and civil money penalties. on March 21. SEC v. and terminate at 11:59 p.m. 8. two counts of securities fraud." It's estimated that 100 million of these spam messages are sent every week. 634.60 plus prejudgment interest of $7. Doherty consented to liability for disgorgement of $26.sec. 8. in a market manipulation scheme involving a Nevada company. 42. Kamardin commandeered the online trading accounts of unwitting investors at various broker-dealers. and Robert Doherty. The Complaint alleges that Fiessel. creating the false appearance of market activity. the Commission and the British Columbia Securities Commission (BCSC) simultaneously announced settled cases against British Columbia residents Mervin Fiessel. the original shareholders of Greyfield complained that the identity of their company had been stolen. its management and the Autorama. reincorporated the company in Oregon ("Greyfield Oregon"). Kamardin realized a profit from his trading. (2) officer and director bars. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.32 was waived and no penalty was imposed based on his sworn Statement of Financial Condition. In all but three of these instances. 2006. and (3) penny stock bars. The Commission further alleges that in seventeen instances. Securities and Exchange Commission v. Kamardin sold all of his shares at the inflated prices. As a result.960.. Fiessel also consented to liability for disgorgement of $147. 2006. 61.486. Kamardin bought shares in the thinly traded issuer in his own account just prior to or at the same time that compromised accounts were made to buy shares.htm On November 8. The Commission's action charges Kamardin with violations of Section 17(a) of the Securities Act of 1933. over-the-counter market and was quoted on the pink sheets.S. 5(c) and 17(a) of the Securities Act of 1933. purchased thinly traded stocks in order to create the appearance of trading activity and pump up the price of the stocks.40. and a British Columbia car dealership called the Autorama. 2006) http://www. disgorgement and civil money penalties. The BCSC simultaneously announced settlements with Fiessel and Doherty pursuant to which Fiessel also agreed to pay an additional monetary 110 . Shortly after the intrusions.gov/litigation/litreleases/2006/lr19902. The Greyfield Promoters then improperly issued hundreds of millions of new shares of Greyfield Oregon and conditioned the market with false and misleading publicity about Greyfield Oregon.626. Inc. Mervin George Fiessel and Robert Michael Doherty Litigation Release No. Fiessel and Doherty consented to: (1) injunctions against future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5(a). and claimed that Greyfield Oregon had acquired the Autorama. liquidated existing equity positions and. Without admitting or denying the allegations in the complaint. 19902 (Nov. Doherty's obligation to pay prejudgment interest of $1. Doherty and others (either collectively or individually the "Greyfield Promoters") misappropriated Greyfield Nevada and its trading symbol GRYF through a series of unauthorized corporate actions. and seeks permanent injunctive relief. using the resulting proceeds.The Commission alleges that between July 13 and August 25.125. Greyfield traded under the symbol GRYF on the U. Almost immediately thereafter. Greyfield Capital. Fiessel and others began selling tens of millions of Greyfield Oregon shares. netting a total profit of $82. 2005. among other things.gov/litigation/litreleases/2006/lr19642. Zafar and Thawani used online aliases to post messages touting the stock and containing phony press release excerpts or other fake “news” about the issuer to deceive investors. anonymously disseminating false information about the companies on popular Internet message boards. the complaint sought disgorgement of all illegal profits and the imposition of civil monetary penalties. 20. The defendants made over $873. 19501 (Dec.000 by purchasing the stocks. The BCSC did not impose a monetary sanction on Doherty based on his sworn Statement of Financial Condition. The BCSC imposed additional non-monetary sanctions on the two British Columbia residents.sec. The Commission’s complaint further alleged as follows: after buying shares at prevailing market prices. 111 .A. The complaint alleges that since late 2004 and as recently as March 2006.$144. Kmart and Sun Microsystems -. and Yomi Rodrig Litigation Release No. 19642 (Apr. a European investment vehicle. Compania Internacional Financiera S.A. mergers and strategic alliances between these little-known issuers and an array of major corporations -such as Google. 6. and then selling the stocks at artificially inflated prices. The complaint charged Zafar and Thawani with violations of the antifraud provisions of the federal securities laws.and other dramatic developments designed to make the targeted stocks appear to be surefire investment opportunities.. charging them with violating Rule 105 of Regulation M and Section 10(a) of the Securities Exchange Act of 1934.445 to the BCSC. 2005) http://www.htm On December 19. Zafar and Thawani have engaged in a “pump and dump” scheme to manipulate the market for at least 24 thinly traded “microcap” or “smallcap” stocks. Faisal Zafar and Sameer Thawani Litigation Release No. which prohibits covering a short sale with securities obtained in a public offering when the short sale occurs during a specific restricted period (usually five business days) before the pricing of the offering and effecting a short sale of a security registered on a national securities exchange in contravention of the Commission’s rules and regulations. the Commission filed a settled civil action against Compania Internacional Financiera S. In addition to permanent and preliminary injunctive relief. the phony headlines concocted by the defendants have also included false claims of huge business contracts. Acting on the Commission’s application for emergency relief. froze the defendants’ assets and set a date for a hearing on the Commission’s motion for entry of a preliminary injunction against further violations and other relief while the action is pending. SEC v.htm On April 6.sanction of Cdn. SEC v. In addition to capitalizing on actual events in the news.sec.gov/litigation/litreleases/lr19501. 2006 the Commission filed an emergency enforcement action charging Faisal Zafar and Sameer Thawani with perpetrating an ongoing securities fraud over the Internet. 2006) http://www. the United States District Court for the Eastern District of New York issued a temporary restraining order that. and its sole owner Yomi Rodrig. com. Inc.” Durando then paid IP Equity. then called Linkon. If the settlement is approved by the Court. by short selling just before pricing. under the control and at the direction of Rodrig. to publish false publicity and bogus recommendations about PacketPort. the offering price was set on the pricing day. Durando.com. The Complaint alleges that Ronald Durando privately acquired a majority stake in an insolvent public company. Jaffe. ordering them to disgorge more than $4. the Commission filed an enforcement action charging six individuals and four companies with securities fraud and other violations in connection with a scheme to pump and dump the stock of PacketPort. Connecticut. without admitting or denying the allegations in the Commission’s complaint. and its principals. Durando became president and CEO.com in order to pump up the stock price. and was usually set at a discount to the last reported sale price of the stock on the pricing day. Durando took control of Linkon and changed its name to PacketPort. which obtained more than $9 million in illicit proceeds. 19465 (Nov. 2005) http://www. Compania and Rodrig agreed to settle the lawsuit by consenting. 16. 2005. Inc. The Commission further alleges that in connection with at least forty-nine of the eighty-five offerings. Jaffe. aided and abetted by a registered representative..htm On November 15. Accordingly. His stake in Linkon consisted of restricted shares. Gustave Dotoli and attorney Robert H.7 million from these short sales. In each offering. SEC v. Compania often sold shares short at prices higher than the price it would later pay for the shares in the offering. Jaffe. and IP Equity dumped PacketPort. executed the pump and dump. and imposing a civil money penalty of $1. M. Dotoli. Compania’s illegal trading involved exchange traded securities and violated Section 10(a) of the Exchange Act..75 to a high of about $19. to the entry of an order permanently enjoining them from future violations of federal securities laws. beginning as early as January 2002 through at least March 2005. Litigation Release No. obtaining 112 .50. rising from about $4. a private California corporation that operated an Internet-based stock newsletter.According to the Commission’s complaint. and Dotoli laundered restrictive legends from Durando’s share certificates so that the restricted shares could be passed off to the public as “free trading.4 million.gov/litigation/litreleases/lr19465.com. while Jaffe and Dotoli became directors.8 million in trading profits plus prejudgment interest. PacketPort. used securities purchased from underwriters participating in at least eighty-five (85) public offerings to cover shares Compania had sold short during the restricted period set by Rule 105. The Complaint alleges that Durando. Compania. Christopher Agarwal and Theodore Kunzog. Compania typically conducted its short selling on the day of the pricing of the public offering or one or two days earlier.com shares into the pumped-up market in an unregistered distribution.sec. et al. The share price more than quadrupled following the false publicity.com officials and two stock touters. The Commission alleges that Compania made profits of more than $4. With the help of his colleagues. a company based in Norwalk. The Commission alleges that three PacketPort. the disgorgement and penalty would be the largest ever recovered in a SEC enforcement action involving violations of Rule 105. alleges that Yafa drafted the fax that urged “Dr. The Complaint further alleges that Durando. and netting Pickens over $300. The Commission’s complaint. neither the financial planner nor “Dr. 2005.more than $9 million in illicit proceeds. Inc. 2) failing to file required forms reflecting changes in ownership. Pickens. et al. to acquire stock and transfer shares to other defendants. a company which had hired Yafa and paid him in stock. a salesman at Miamibased Vision Lab Telecommunications. According to the Commission’s complaint. Durando used his wholly-owned company. In fact. as his nominee in the illegal sales. Mitchel” to buy shares of AVL Global. Pickens replaced AVL’s ticker symbol with the symbols of three different microcap companies Pickens had been promoting.gov/litigation/litreleases/lr19305. the “fax blasting” company that transmitted both sets of “Dr. The Commission alleges that Pickens sent out nearly a million of the modified “Dr.. 2005) http://www. Sierra learned of Yafa’s scam. including forms that would have revealed their short-swing profits. of which he is COO. in a scam designed to mislead investors into believing they had inadvertently received a confidential stock tip faxed from a stockbroker to his client. Mitchel” faxes causing the share price of the three stocks to climb by as much as 100% on significantly increased volume. Mitchel” fax to his customer Pickens. Durando concealed the fact that he. The Commission also charged Pickens with hatching a copycat scheme. Pickens. Michael O. “Dr. Inc. According to the Commission’s complaint. was dumping stock.000.” urging the purchase of a stock that was about to triple in price. reaping more than $300. and forwarded a copy of the original AVLL “Dr. Mitchel” exists.000. 19305 (July 18. Registered representative William Coons III was Durando’s and IP Equity’s broker and was the principal outlet for the fraudulent sales. Dotoli. PacketPort. The fax was sent to more than one million recipients across the country by stock promoters who made over half a million dollars unloading their shares on duped investors. The handwritten fax had the appearance of an urgent message from a financial planner intended only for his client. and 3) causing PacketPort. Litigation Release No. Mitchel. 113 . SEC v. Inc. PacketPort’s CEO and majority shareholder. facilitating Pickens’ copycat scheme.. Joshua Yafa and Michael O. Yafa sent the supposedly misdirected fax to more than 150. Durando used Microphase.. The Commission also brought fraud charges against Serafin Sierra.000 fax machines causing AVL’s stock price to soar by 25% the next day. By selling through Microphase. filed in the Southern District of New York. The Complaint also names as defendants two corporations that Durando controlled and used in executing the fraud. Joshua Yafa.htm On July 18. Inc. Mitchel” faxes.com to file quarterly and annual reports that contained false financial information and that failed to report the insiders’ beneficial ownership or past failures to report beneficial ownership. after which Yafa sold his shares of AVL. the Commission filed charges against two stock promoters.sec. and Jaffe concealed the fraud and their short swing profits by: 1) failing to make required disclosures and selling through nominees. were designed to make each recipient believe the caller had dialed the number by mistake. the Commission filed two complaints in federal district court against two voicemail broadcasters and their associates for broadcasting hundreds of thousands of fraudulent “wrong number” stock tip messages. 2005) http://www.786 in disgorgement and prejudgment interest and a $25. M3. generating proceeds of $508. Also charged in that complaint were Peter S. In one action.sec. The complaint also charges Sierra with aiding and abetting Pickens’s violations of antifraud provisions. with broadcasting hundreds of thousands of similar fraudulent “wrong number” voicemail messages. thinly traded companies. 19213 (May 3. LLC and Telephony Leasing Corporation. and M3 Research LLC. Whittemore Litigation Release No. O’Grady used his knowledge of the “wrong number” tips to trade in three of the touted companies. O’Grady consented to a final judgment ordering him to pay $50. The Commission seeks civil penalties. O’Grady has pled guilty to obstruction of justice charges stemming from the message scheme.. Telephone Broadcasting Company. Inc. 2005. with broadcasting “wrong number” stock tips touting the stocks of six small. In addition to the Commission’s civil action. SEC v. the Commission charged David E. Without admitting or denying the allegations made in the Commission’s complaint. Inc.. disgorgement of all ill-gotten 114 . and their affiliated companies.415.The Commission’s complaint charges Yafa. In the second action. Michael O’Grady. Many of the messages were left by a woman calling herself “Debbie. Global Media Marking. The Commission charged all four defendants with violating antifraud provisions of the federal securities laws and charged Whittemore and WMI with aiding and abetting Cahill and Clearlake’s violations. which were left on telephone voicemail recording machines throughout the country. with violating antifraud provisions of the federal securities laws. The Commission alleges that Whittemore Management received cash and stock payments for broadcasting the messages. Cahill and Clearlake Venture Group. et al. realizing a profit of $9.” and sounded as if she had misdialed when calling a friend to pass along a hot stock tip.gov/litigation/litreleases/lr19213. and all three defendants consented to being permanently enjoined from violating antifraud provisions of the federal securities laws. Inc. SEC v. Pickens. David E. LLC.000 penalty.. the United States Attorney’s Office for the Southern District of New York has announced the initiation of a related criminal action.htm On May 3.000. and Cahill sold approximately 680.000 shares of one of the touted stocks while the messages were being broadcast. The messages. Whittemore of Dallas and his privately held corporation Whittemore Management. the Commission charged Michael O’Grady and two affiliated Georgiabased telemarketing companies. In a related criminal proceeding. . SEC v.gov/litigation/litreleases/2006/lr19764.gains plus prejudgment interest. paying earlier investors with funds raised from later investors. Admin. Ronald J. many investors reinvested their principal and purported profits in other Renaissance projects. and censured Amaranth. Making Findings. The defendants also sent quarterly account statements to investors setting forth the fictitious profits their investments had purportedly earned. and others were unsuccessful. Malone. These transactions violated Rule 105 of Regulation M and allowed Amaranth to make profits of $507. in which it sold securities short during the restricted period before the pricing of those offerings and then covered the short positions with securities purchased in those offerings. 19764 (July 17. including country club memberships. an international currency exchange.C.627 plus prejudgment interest of $59. 2006. an outlet mall. Based on the representations in these account statements. Some of the purported projects did not exist. Amaranth consented to the issuance of the Order without admitting or denying any of the Commission's findings. The Order finds that Amaranth participated in five follow-on offerings between November 2004 and February 2005. 2007) http://www.000.627 for certain funds it advised. Nadel. pay disgorgement of $507.L. According to the complaint. car leases. File No. Based on the above. Many of the victims were elderly and were solicited through Jehovah’s Witnesses congregations. the defendants raised funds for multiple purported projects. and Joseph M.sec.C. 2007. the Commission filed civil fraud charges against Renaissance Asset Fund.pdf On May 9. Proc. in a settled proceeding. Inc. from at least March 1999 through April 2004. and a Swiss bank. and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940 (Order) against Amaranth Advisors L.. Ronald J. Malone Litigation Release No.gov/litigation/admin/2007/34-55728.192. Nadel also used investor funds to pay for lavish expenses. including a general fund. the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings. and permanent injunctions barring future violations against all four defendants. 3-12632 (May 9. The majority of investors 115 . The defendants operated Renaissance’s programs as a Ponzi scheme. pay a civil money penalty of $150. Nadel. Inc.htm On July 17. 2006) http://www. CASES INVOLVING SECURITIES OFFERINGS In the Matter of Amaranth Advisors L. The defendants misrepresented to investors that their investments would earn returns ranging from 10% to 25% in as little as four months. and Joseph M. and retail purchases.sec. (Amaranth). The Commission’s complaint alleged that Renaissance and its principals raised over $16 million from more than 190 investors nationwide. Renaissance Asset Fund. the Commission ordered Amaranth to cease-and-desist from committing or causing any violations of Rule 105 of Regulation M.C. in which they made numerous misrepresentations and omissions to investors. the “Defendants”) and Michael Latini.. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. 5(c) and 17(a) of the Securities Act of 1933. Pittsford Income Partners III. The complaint also alleged that Nadel and Malone violated Section 15(a) of the Exchange Act.C. Pittsford Income Partners V. SEC v. L.L. Inc.. and (ii) appointing a temporary receiver over the real estate investment companies and affiliated entities. the complaint alleged that Defendants Renaissance. the Commission also sought orders enjoining the Defendants. L. including many senior citizens. L. L.C. Pittsford Capital Group. Pittsford Income Partners II. Pittsford Capital Mortgage Partners. Pittsford Capital.gov/litigation/litreleases/2006/lr19761. Pittsford Capital Income Partners. 2006.C.C. an accounting. L.L. Pittsford Capital Income Partners. including a $2. The Complaint charged the Defendants with violating Section 17 (a) of the Securities Act of 1933. The Commission also sought disgorgement of ill-gotten gains with prejudgment interest. Litigation Release No.L.sec. the Commission announced that it filed an emergency enforcement action to halt fraudulent conduct against Edward “Ted” Tackaberry.L. Nadel and Malone violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 5(a).. Jefferson Income Partners (collectively.. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. L.htm On July 14..4 million payment to an entity that Tackaberry and Palazzo had significant personal interests in.L. 2006) http://www. The complaint sought final judgments permanently enjoining the defendants from violating or aiding and abetting violations of the antifraud and registration provisions of the federal securities laws. L. L. (ii) making undisclosed transfers of money to Palazzo. by issuing promissory notes in various real estate investment companies owned and managed by Tackaberry and Palazzo. Communicate Wireless. from 116 . 19761 (July 14.C.. and (iv) falsely claiming that certain of the real estate companies would retain an independent third-party agent to represent investors’ interests.L.C. the Commission sought a temporary restraining order (i) freezing the Defendants and Relief Defendants’ assets. Tackaberry and Palazzo raised. L. Based on this conduct. preliminarily and permanently. and civil penalties. et al.C. The Complaint alleged that from approximately 1996 to 2004. In addition to this emergency relief.. The Complaint further alleged that the Defendants engaged in a fraudulent scheme. (the “Relief Defendants”).. in unregistered transactions. (iii) failing to disclose that they commingled the real estate investment companies’ assets in one bank account to fund operations.in Renaissance never received the interest or return of their principal the defendants had promised. at least $15 million from at least 275 investors.C..L. and Monroe Wireless..L. In its emergency enforcement action. including: (i) making undisclosed transfers of money.C. and then misappropriated their funds.C.L. Mark Palazzo. L. Pittsford Income Partners IV. The Defendants targeted senior citizens and retirees when soliciting investments in these real estate investment companies.L. Utsick.000% in the coming weeks. However.committing future violations of the foregoing federal securities laws.sec. The faxes also included baseless stock price targets. The Commission alleged that Timothy M. Inc. 2006) http://www. SEC v. predicting that Infinium Labs’ stock price would rise as much as 3. and bar him from participating in penny stock offerings and from serving as an officer or director of a publicly-traded company. Utsick.htm On April 17. the Commission announced that it filed a civil injunctive action charging Worldwide Entertainment. and ownership disclosure provisions of the federal securities laws. John P. Litigation Release No. Inc.sec. impose a civil money penalty. for his role in a fraudulent “junk fax” scheme to promote the company’s stock. Timothy M.gov/litigation/litreleases/2006/lr19659. and American Enterprises. the Commission requested that the District Court order Roberts to disgorge his ill-gotten gains plus prejudgment interest. Inc.. The faxes made it appear as if Infinium Labs was on the verge of launching its flagship product. 2006 the Commission charged the former CEO of video game developer Infinium Labs. The Commission’s complaint also alleged that Roberts paid the promoter with four million shares of his own Infinium Labs stock in violation of the registration provisions of the federal securities laws. over the four months of the fax campaign. and Entertainment Group Fund. 19659 (Apr. SEC v. Roberts took advantage of the increased trading volume in Infinium Labs stock to sell approximately $422.htm On May 16. Roberts Litigation Release No. Inc. According to the Commission’s complaint. Roberts hired a stock promoter to send faxes to tens of thousands of potential investors. a home videogame system. The Commission sought to enjoin Roberts from future violations of the antifraud. 19701 (May 16. and Entertainment Funds. In its complaint. 2006) http://www. and their principal John (Jack) P. Infinium Labs lacked the financial resources to overcome the significant technological and manufacturing hurdles preventing it from marketing the game system to consumers.gov/litigation/litreleases/2006/lr19701. 2006. et al. 17. Roberts authorized the fax promotion and reaped more than $400. stock registration. and a final judgment ordering the Defendants to disgorge ill-gotten gains and assessing civil penalties. at the time of the fax campaign. and their 117 . The Commission alleged that.000 by unloading his Infinium Labs shares in the ensuing run-up in trading volume.500 of his personal stock holdings. Inc. principals Robert Yeager and Donna Yeager, in connection with a fraudulent offering that raised over $300 million from over 3,300 investors nationwide. The Commission also requested the appointment of a receiver over all four corporate defendants. Simultaneously with the complaint, the Commission filed consents executed by all the defendants, with proposed judgments. Defendants, without admitting or denying the allegations of the complaint, consented to the entry of a permanent injunction, an asset freeze, repatriation order, repayment of amounts they received, and penalties. The Commission’s complaint alleged that from at least 1998 through late 2005, the defendants sold unregistered securities in the form of loan agreements or units in special purpose LLCs to raise funds for a variety of entertainment ventures produced and/or promoted by Jack Utsick, the third-largest independent entertainment promoter in the world according to Billboard Magazine. Defendants told prospective investors that their investments would earn annual returns ranging from 15% to 25% and, in some in instances, an additional 3% of the profits generated by Jack Utsick and his companies. In truth, most of the entertainment projects lost money and, as a result, Utsick and his companies paid earlier investors with funds raised from new investors. The defendants also made material misrepresentations and omissions to investors about, among other things, the profitability of their investments, the use of proceeds, the payment of commissions, and the existence of state disciplinary actions. The complaint charged the defendants with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and, as to Robert and Donna Yeager, American Enterprises and the Entertainment Funds, with violations of Section 15(a) of the Exchange Act. The complaint seeks permanent injunctions prohibiting future violations of the securities laws, an accounting and disgorgement of ill-gotten gains, with prejudgment interest, imposition of civil penalties, and an asset freeze through the conclusion of the litigation. SEC v. Kirk S. Wright, International Management Associates, et al. Litigation Release No. 19581 (Feb. 28, 2006) http://www.sec.gov/litigation/litreleases/lr19581.htm On February 27, 2006, the Commission filed complaint and an emergency application for a temporary restraining order and other relief in the Northern District of Georgia to halt an ongoing offering fraud involving the sale of investments in seven hedge funds by an Atlantabased promoter and investment advisers controlled by him. The defendants are Kirk S. Wright (Wright); International Management Associates, LLC (IMA) and International Management Associates Advisory Group, LLC (IMA Advisory) and seven hedge funds; International Management Associates Platinum Group, LLC (Platinum I), International Management Associates Emerald Fund, LLC (Emerald Fund), International Management Associates Taurus Fund, LLC, International Management Associates Growth & Income Fund, LLC, International Management Associates Sunset Fund, LLC; Platinum II Fund, LP (Platinum II), and Emerald II Fund, LP. IMA and IMA Advisory are investment advisers in Atlanta, Georgia, owned and operated by Wright and others. 118 The Complaint alleges that from February 1997 to the present, approximately $115 million, and as much as $185 million, was raised from up to 500 investors through the fraudulent investment scheme. IMA and IMA Advisory, through Wright, have been providing investors with quarterly statements that misrepresented both the amount of assets in the respective funds and the rates of return obtained by them. In fact, by 2005, the assets of the funds had been largely dissipated, and this fact was not disclosed to the investors of the funds. The Complaint further alleges that Wright produced for certain investors account statements purportedly from a securities broker-dealer, showing over $155 million in securities in four accounts for August 2005, when in fact the first three accounts did not exist, and the fourth account number pertained to an account unrelated to the defendants. The Complaint also alleges that account statements and summaries which Wright displayed to an investor’s representative reflecting the balances of Platinum I, Platinum II and Emerald Funds as of December 30, 2005 were fabricated and reflected assets which the funds did not possess at that time. The district court entered an order temporarily restraining and enjoining the defendants from future violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and enjoining Wright, IMA, and IMA Advisory from future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The order also appointed a receiver for all of the entity defendants. SEC v. Charis Johnson, Lifeclicks, LLC, and 12daily Pro Litigation Release No. 19579 (Feb. 27, 2006) http://www.sec.gov/litigation/litreleases/lr19579.htm On February 27, 2006, the Commission announced the filing of securities fraud charges against the operators of www.12dailypro.com, a “paid autosurf program” that in fact was a massive Ponzi scheme which raised more than $50 million from over 300,000 investors worldwide. As a result of the Commission’s charges, the defendants, Charis Johnson, age 33, of Charlotte, N.C., and her companies, 12daily Pro and LifeClicks, LLC (“LifeClicks”), ceased their solicitation of investors and agreed to a freeze of all their assets and the appointment of a receiver to take control of the companies’ operations. According to the Commission, www.12dailypro.com claimed to be a paid autosurf program - a form of online advertising program that purportedly generates advertising revenue by automatically rotating advertised websites into a viewer’s Internet browser. Advertisers purportedly pay “hosts,” which in turn pay their members to view the rotated websites. The Commission alleges that 12daily Pro’s sale of membership units constituted the fraudulent and unregistered sale of securities under the federal securities laws. The website, recently ranked as the 352nd most heavily trafficked website, allegedly solicited investors to become “upgraded members” by buying “units” for a “fee” of $6 per unit, with a maximum of 1,000 units. 12daily Pro promised to pay each upgraded member 12% of his or her membership fee per day for 12 days, at the end of which, the member purportedly would have earned a total of 144% of his or her original membership fee, 44% of which would be profit on the membership fee. To receive the promised payment, a member purportedly must view at least 12 web pages per day during the 119 12 day period. The amount of returns that 12daily Pro would pay its members, however, was in fact dependent solely on the amount of the member’s investment, not on the amount of websiteviewing or any other services rendered. The Commission alleges that the defendants defrauded investors by operating 12daily Pro as almost a pure Ponzi scheme - using new investor monies to pay the promised returns to existing investors - violating federal securities laws. The defendants falsely represented that upgraded members’ earnings “are financed not only [by] incoming member fees, but also with multiple income streams including advertising, and off-site investments.” In fact, at least 95% of 12daily Pro’s revenues came from new investments in the form of membership fees from new or existing members. The other “multiple income streams” from advertising revenues or off-site investments touted by the defendants were either negligible or non-existent. In addition, undisclosed to investors, Johnson transferred more than $1.9 million in investor funds to her personal bank account since mid-2005. Johnson and her companies have consented to the entry of a court order that permanently enjoins them from future violations federal securities laws, imposes a freeze on their assets, prohibits the destruction of documents, and appoints Thomas F. Lennon as permanent receiver over the assets of 12daily Pro and LifeClicks, LLC. The order is subject to approval by the district court. Johnson and her companies consented to the order without admitting or denying the allegations in the complaint. The Commission’s complaint also seeks repayment of ill-gotten gains and civil money penalties; the amounts to be sought will be determined at a later date. SEC v. Allied Capital Management, Inc. and Shea Silva Litigation Release No. 19513 (Dec. 22, 2005) http://www.sec.gov/litigation/litreleases/lr19513.htm On December 22, 2005, the Commission announced that it filed a civil action against Shea Silva of Costa Mesa, California, and Allied Capital Management, Inc., a California corporation under his control, for violations of the antifraud and registration provisions of the federal securities laws. On the Commission’s application, the Court issued a Temporary Restraining Order; Order Freezing Assets, and Prohibiting the Destruction of Documents; and Order to Show Cause why a Preliminary Injunction Should Not Issue (“Order”). In its Complaint, the Commission alleges that from approximately November 2001 through the present, Silva, Allied, and two defunct entities known as Sunrise Energy, Inc. and Blue Marlin Energy, Inc., defrauded investors of over $5 million through the sale of unregistered securities. The securities were purportedly sold to invest in oil and gas operations. According to the Complaint, Silva, Allied, and others acting at their direction engaged in high pressure cold call campaigns and solicited investments from hundreds of individuals nationwide. However, the defendants misrepresented the nature of the investments, the risks involved in the investments, and the potential return on the investments. The Commission also alleges that Silva misappropriated a large portion of investor funds and acted as an unregistered broker-dealer. The Complaint claims that, through these activities, Silva and Allied violated federal securities laws. Among other things, the Court’s Order prohibits the defendants, pending a hearing, from disposing of any assets and prohibits financial institutions holding the defendants’ 120 principal and former Chief Operating Officer of NCFE. principal and former Director of NCFE’s Accounts Receivable Service Department. Poulsen. and Randolph H. Donald Ayers and Randolph Speer Litigation Release No.2 billion from the Programs’ funds to health-care providers without receiving eligible receivables in return. The Commission already obtained judgments against three other former NCFE executives: Sherry Gibson. and Brian Stucke.sec. Ohio. Each of these individuals consented to a permanent injunction prohibiting them from violating federal securities laws. an 121 . Parrett. the Commission filed a civil injunctive action against Lance Poulsen. former Executive Vice President of Compliance of NCFE.assets from allowing any withdrawals. Lance Poulsen. 19509 (Dec. investors. 21. SEC v.many of which were wholly or partly owned by NCFE. former Chief Financial Officer of NCFE. Ayers. Speer.6 billion and approximately 275 healthcare providers to file for bankruptcy protection. former Associate Vice-President for Business Services. former Vice President and Controller.htm On December 21. the defendants concealed their fraud from investors and others by: (1) repeatedly transferring funds between the subsidiaries’ bank accounts to mask cash shortfalls of as much as $350 million. Donald S. and a civil monetary penalty. 2005. The Commission further alleged that pursuant to the representations in the offering documents and the Program agreements. Poulsen. Inc.gov/litigation/litreleases/lr19509. and (4) misrepresenting the status of the Programs’ cash accounts and collateral base to investors and others. NPF VI and NPF XII (“the Programs”). (NCFE). prejudgment interest. (2) recording $1 billion or more in non-existent or ineligible medical accounts receivable on the subsidiaries’ books. NCFE. According to the complaint. used wholly owned subsidiaries to purchase medical accounts receivable from health-care providers and issued notes that securitized those receivables. Rebecca Parrett. 2005) http://www. from at least February 1999 to October 2002. and (3) order each Defendant to pay disgorgement. false monthly investor reports. In October 2002. principal and former Chief Executive Officer of National Century Financial Enterprises. The subsidiaries offered and sold at least $3. in amounts to be determined. The Order also requires that the defendants notify the Court of each account they hold with a financial or brokerage institution. The advances were essentially unsecured loans by the Programs to distressed or defunct health-care providers . for scheming to defraud investors in securities issued by subsidiaries of NCFE. NCFE suddenly collapsed when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors. potential investors. The Commission alleged that. and false accounting records to trustees. Parrett. and auditors.25 billion in total notes through fifteen private placements to institutional investors. Nevertheless. (3) creating and distributing false offering documents. Rebecca S. Parrett and/or Ayers. (2) permanently bar each Defendant from serving as an officer or director of a public company. John Snoble. the Programs were required to maintain certain reserve-account balances and medical accounts receivable as collateral to secure the notes. The Commission seeks to: (1) permanently enjoin each Defendant from violating federal securities laws. Ayers and Speer depleted the Programs’ reserve accounts and collateral base by “advancing” at least $1. a private corporation located in Dublin. causing investors to lose over $2. defendants repeatedly made material misrepresentations and omitted to state material facts in Church Extension’s solicitation and offering circulars. The Commission continues to investigate this matter. the Commission announced that in two separate rulings entered on December 14 and 15. Litigation Release No. District Court Judge David F. through which Church Extension raised $85 million from the sale of investment notes to thousands of individuals throughout the country. and disgorgement. each of these three former NCFE executives has pled guilty in federal district court to criminal charges arising from the scheme.000 plus interest by Mr. in amounts to be determined. Grubbs and $90. 2005) http://www. Grubbs and $37. and determined that Grubbs and Jackson violated federal securities laws. concerning.000 on Mr. 19.S. The Commission also alleged that Grubbs and Jackson caused Church Extension and UMS to overstate dramatically the company’s financial condition in its offering circulars through the overvaluation of properties it received in connection with these real estate transactions that were used to give Church Extension a misleading appearance of solvency. U. prejudgment interest.htm On December 19. (UMS) and the former presidents of those entities.sec. 2005. Inc. SEC v. Indiana. and imposed monetary and injunctive remedies against each of them..000 on Mr. Church Extension of the Church of God. and a civil penalty.order barring him or her from serving as an officer or director of a public company. but was actually insolvent. charging Church Extension of the Church Of God. Inc. ordering disgorgement of $44. a Christian denomination headquartered in Anderson. Hamilton affirmed a jury verdict reached in July 2004 finding James Perry Grubbs and Shearon Louis Jackson liable for violating the antifraud provisions of the federal securities laws. most of whom were members of the Church of God. and imposing third tier civil penalties of $120. Moreover. with engaging in a fraudulent scheme from approximately 1996 to the time of the lawsuit. the jury found in favor of the Commission on all of its claims. 19500 (Dec. among other things. The Commission commenced this action on July 22. The Court also entered separate final judgments against Grubbs and Jackson. Grubbs and Jackson. 2002.gov/litigation/litreleases/lr19500. After an eight-day trial in 2004. instead of using investment note proceeds primarily to fund church loans as stated in the offering circulars. The Commission alleged that in connection with the offer and sale of investment notes. Jackson.500 plus interest by Mr. Church Extension was a not-for-profit corporation set up by the Church of God to help finance the construction and expansion of local churches. By the spring of 2001. Inc. Jackson. and United Management Services. the primary use of investment note proceeds and the financial conditions of Church Extension and UMS. Church Extension owed noteholders more than $80 million. et al. permanently enjoining both from future violations of federal securities laws and from service as officers or directors of issuers of federally registered securities and federally regulated broker-dealers. Church Extension departed from its original focus and instead used the note proceeds to fund speculative non-church real estate transactions and to make interest and principal payments to prior noteholders. The disgorgement amounts ordered by the Court represent one-half of each defendants’ base salaries 122 . The complaint alleged that during the period from 1996 to 2002. the Court appointed Jeff J. Church Extension and UMS previously settled the Commission’s charges against them on July 31. In connection with this settlement. Marwil. and has also commenced independent lawsuits against various officers. In consenting to the entry of the civil injunctions and disgorgement. Illinois. based on the Court’s reasoning that. a partner at the law firm of Jenner & Block in Chicago. At the trial. Marwil has liquidated and distributed to investors assets totaling in excess of $25 million. 123 . Mr. directors and third parties who were involved in the transactions giving rise to the SEC’s lawsuit. Church Extension and UMS also agreed to pay disgorgement of approximately $81 million. on July 31. Church Extension and UMS neither admitted nor denied the allegations of the Commission’s Complaint. Since his appointment. as an independent Conservator in this case.for 2001. 2002. Church Extension would have collapsed earlier. 2002. the Conservator estimated that investor losses will exceed between $20 million and $40 million. The Conservator’s mandate is to protect the interest of investors who invested or reinvested in the note program. but for the securities violations. so the violations enabled defendants Grubbs and Jackson to continue their employment. consenting to the entry of permanent injunctions prohibiting future violations of federal securities laws. Stanford. my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. Ever not sleep one wink? Neither did Pisanio in Cymbeline. I suspect. Or declare that something was too much of a good thing? As You Like It. from the perspective of this particular shrew. said by William Shakespeare.S. For example. You can thank the play Julius Caesar for that expression. 2007 From time to time.htm (1 of 11)10/19/2007 4:29:57 PM . second. Eventually. especially as to the last point. And speaking of perspective. that discretion is the better part of valor? Also. The Merchant of Venice brings us love is blind. 2007 Home | Previous Page Speech by SEC Staff: Remarks Before the Stanford Law School Directors' College 2007 by Linda Chatman Thomsen 1 Director. as I often do. California: June 26. my. Or declare. usually said better than I can manage and often. just as Kate did in The Taming of the Shrew.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. Ever give the devil his due? Henry IV. I have three simple objectives when I agree to do so: first. Indeed. to say something that is fresh. someone’s oyster has its roots in The Merry Wives of Windsor. and third. I know that some of you in the private sector have gotten worked up into a lather—not Shakespearean. to talk about something I know something about. he or she did budge some. his. the fact that there really is nothing new to say is downright http://www. Anyway. we often say it’s Greek to me. When clueless. Henry IV.gov/news/speech/2007/spch062607lct. Kate budged way too much and I wouldn’t put her on any enforcement negotiating team. by the way.sec. Remember wearing your heart on your sleeve? I was going to say you were in good company until I discovered it was the not so wonderful Iago who declared that he had in Othello. The world is your. many of my favorite expressions are ones I have stolen from Shakespeare. California June 26. It turns out that I am too ambitious. For the record. as far as I can tell—because some government bureaucrat wouldn’t budge an inch. I am honored by being asked to speak to a group such as this one. it turns out. ever see a method in some madness? Hamlet. Division of Enforcement U. I have found that everything worth saying has already been said. Securities and Exchange Commission Stanford. to say something that is relevant to the audience. and Michael Milken in the 1980s. Only one guy got it right and he was Canadian. one of the very valuable things you do is remember and retell the stories of your experience. I’d like to talk for a moment or two about some of the recent stories in our experience in enforcement. In Sonnet 59 he wrote: “there be nothing new. but it sure does rhyme a lot. 2007 depressing to all of us who are called upon from time to time to say something to groups such as this one. but that which . the perspectives you bring are some of the most valuable assets you contribute in your board service.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. [h]ath been before. or repeating ourselves. there is nothing new under the sun. Whether that experience is deep or different or both. California: June 26. let me remind you.” Two out of the three contestants in this. Dick Walker. was concerned about insider trading making a comeback from Main Street to Wall Street. we filed the largest insider trading case against Wall Street professionals since the days of Ivan Boesky. we have sued about twice that number of professionals for insider trading. these challenges are new variations on old themes. 4 In March of this year. roundabout way of getting to my point: not that Shakespeare plagiarized the Bible or that we all plagiarize Shakespeare but that. to a certain extent.sec. Walker’s concern arose from the fact that in the last half of the 1990s. it turns out there is nothing new here either. Roll forward to today: in the past four months. Dennis Levine. Our complaint alleged two overlapping insider trading schemes: One involved trading ahead of upcoming UBS analyst 5 http://www. because collectively we have really lousy longterm memories. There is a corollary to this point which. you patient souls are quietly asking yourselves.htm (2 of 11)10/19/2007 4:29:57 PM . is she carrying on about all this? Simply this: as directors. my penultimate predecessor. the SEC had no such cases in the first half of the 1990s.” 3 One current example of the rhyming of history is insider trading by Wall Street professionals. it was a Tournament of Champions and the final Jeopardy answer was: “CEOs must personally certify their corporate books following a July 2002 law named for these two men. So that is a long. I take some comfort that this very idea was also recognized by Shakespeare. 2 Why. as Mark Twain said. Tournament of Champions. and the Bible and whatever else was handy: “History may not repeat itself. In the late 1990s. Or. . If we consider these challenges in light of history. . This would probably be a good time to confess that I have seen many more episodes of Jeopardy than plays by Shakespeare.gov/news/speech/2007/spch062607lct. answered McCain and Feingold. Stanford. in the words of Ecclesiastes.” And the very best thing about that phrase is that Shakespeare stole it from Ecclesiastes. Broadly viewed. the SEC charged a total of ten Wall Street professionals with insider trading. Anyway. My favorite example of our leaky memories comes from a 2005 episode of Jeopardy. After bringing many cases against Wall Street professionals in the massive insider trading scandals of the 1980s. takes some of the sting out: it’s okay that we are constantly repeating what someone else has done or said. undoubtedly stealing from Shakespeare. she stole it and passed it on to others. the complaint alleged that the New York analyst misappropriated confidential information about the TXU buyout and eight other upcoming transactions from his employer. almost all of them were made during blackout periods he was supposed to be administering. in the course of the scheme. To round out this ugly picture. in that case two professionals were charged—an analyst in New York and an investment banker in Pakistan. and cash payoffs. According to our complaint. Far from safeguarding the company’s confidential information. California: June 26. all of whom were Wall Street accountants or lawyers. He tipped traders outside the firm regarding upgrades and downgrades before they were publicly announced. Just a month before. Stanford.htm (3 of 11)10/19/2007 4:29:57 PM 8 . their scheme was a “family business” in which the father regularly tipped his sons with confidential information misappropriated from his employer. 2007 upgrades and downgrades. The sons then traded on the information and tipped others as well. we sued a corporate executive who served as both general counsel and chief insider trading compliance officer of a public company. when other Wall Street professionals happened upon the scheme. May was professional couples month. according to our complaint. thousands of trades and millions of dollars in illegal profits. discreet meeting places. their instincts were not to stop it but instead to find ways to personally profit from it. In April. in February. All told. coded messages. At the center of this scheme was a senior UBS professional who served on a powerful internal committee dedicated to reviewing and approving proposed analyst recommendations. including numerous Wall Street professionals.gov/news/speech/2007/spch062607lct.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. We alleged that he traded in his company’s stock in advance of five corporate announcements. The conduct alleged in these two schemes included carefully planned efforts to conceal the behavior: use of disposable cell phones. we filed a case alleging insider trading related to the TXU buyout. Credit Suisse. Now I ask you: What kind of a genius do you have to be to know that being paid in cash in an empty Cheetos bag is probably a bad thing? Discouragingly. the pharmaceutical company. At the center of that scheme was a lawyer in Morgan Stanley’s global compliance department whose duties included safeguarding confidential information. The other scheme involved trading ahead of corporate acquisition announcements on information stolen from Morgan Stanley. we brought an insider trading action against a pharmaceutical company executive and his three sons. And.sec. We further alleged that the analyst passed the information along to the Pakistani investment banker. the family created a hedge fund to conduct the trading and further obscure their identities. We alleged that. Some of these attempts were more creative than others--you may have seen press reports that cash was passed in empty snack bags. We obtained a TRO and asset freeze in connection with our allegations that a http://www. 7 6 We also brought insider trading cases against other corporate professionals not technically employed on Wall Street. who traded on it for total profits of over $7 million. We alleged conduct occurring over five years and involving hundreds of tips. Fifty trades. Also in March. the SEC’s complaint alleged unlawful conduct by 14 defendants. In the TXU case. and his signature line: “Greed is good. There was also questionable conduct involving an investment venture set up by company officers for their own personal benefit that. but they don’t remember the demise of Drexel. the private investment partnerships set up by Enron insiders for their personal profit.sec. In the two weeks immediately before the News Corp.” 15 14 But I’m not sure everyone remembers. who was a resident of Beijing. They have seen Enron collapse.htm (4 of 11)10/19/2007 4:29:57 PM 16 . California: June 26. Many of you probably remember them too.” Thieves. Speaking of corporate collapses. made an acquisition bid for Dow Jones. both Wall Street professionals. in the enforcement business. I recently read a “post-mortem” sort of law review article describing one such case.” and Tom Wolfe is once again writing about barely fictional Wall Street traders. this couple conducted their trading in an account in the name of the wife’s mother. but were also criminally charged and went to prison. We. and the creatively-named transactions between those partnerships and the company through which the insiders realized that profit.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. bid. It was about a big corporate collapse 37 years ago that I would bet few of you http://www. was inextricably involved in its affairs (and privy to non-public information). Marshals. will remind them. as I said.” Apparently. this couple allegedly bought $15 million worth of Dow Jones stock and sold it all a few days after the announcement for a profit of about $8 million. Levine and Milken. was sued for allegedly trading in advance of corporate acquisitions the wife learned about through her employment. you may be thinking about the collapse of Enron. of Ivan Boesky.” 12 11 10 9 I remember reading the aptly-titled best seller “Den of 13 And I also remember the barely fictional “masters of the universe” in Tom Wolfe’s “Bonfire of the Vanities. 2007 Hong Kong couple engaged in insider trading in advance of the announcement that News Corp. such as “[u] nique and delusive accounting practices [that] painted a rosy picture of success” while the company was in fact losing millions of dollars a year. Stanford. many of these new insider traders are literally too young to have learned the lessons of Boesky. They don’t remember that some of the insider traders of the 1980s not only paid record penalties to the SEC. I’m told that Hollywood is now planning a sequel to the movie “Wall Street” titled “Money Never Sleeps. Listed among the contributing factors was “questionable business activity” by the corporation’s officers.S. I remember Michael Douglas’s portrayal of Gordon Gekko in the movie “Wall Street” (a character said to be based on Boesky). But the law review article wasn’t about Enron.gov/news/speech/2007/spch062607lct. Many of the new defendants are young enough that they weren’t around for the headlines or the movies or books that chronicled them. Another couple. Dennis Levine and Michael Milken— infamous Wall Street professionals who were at the center of similar insider trading scandals in the 1980s. As a result. According to our complaint. This new wave of insider trading cases gives me a weird sense of déjà vu. courtesy of the U. described by his publisher as the new “masters of the universe. They weren’t on trading floors from which colleagues were removed. I’m not alone in this sense of déjà vu. At this point. I am reminded. while legally separate from the company. 000 employees of Penn Central. Douglas was talking about the corporate scandals of the late 1920s that led to the enactment of the 1933 and 1934 Acts some 70-odd years ago. . Stanford. The historians among you will recall that the 1933 Act. in the author's view. who experienced mass layoffs.S.. emphasizing form over substance on a number of major transactions .just a few months after its passage. The Fortune article railed against newly enacted securities legislation that. . the Commission’s Chairman decried the types of conduct that characterized some of the recent corporate scandals: “secret loans to officers and directors. The company’s stock price plummeted from $86 ½ in July 1968 to $8 a share a few days after the bankruptcy. But these statements were not made by our present Chairman. would increase the cost of capital. make independent directors reluctant to sit on corporate boards. 120. like Sarbanes-Oxley.” as well as its use of subsidiaries to engage in what “were essentially paper transactions which should not have been recorded as profit. But the Fortune article was not about SarbanesOxley. also went on to become the longest-serving Justice on the U. markets’ global competitiveness. Along with these reports. Adelphia. In his 1934 law review article.sec. The author was discussing the Securities Act of 1933 -. undisclosed profit-sharing plans. the SEC detailed the causes of Penn Central’s demise in a report to the Senate subcommittee investigating the collapse. and the like.gov/news/speech/2007/spch062607lct. . push companies offshore and away from U.S. and the loss of their pensions. . Three reports authored by various business interests have recently predicted that the requirements of Sarbanes-Oxley and excessive securities litigation will cause U. incidentally. WorldCom. was passed with resounding support in the wake of a http://www. including the University of Pennsylvania and the Philadelphia Museum of Art. William O. Tyco.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. 2007 remember: the bankruptcy of Penn Central Railroad in the summer of 1970.S. timely contracts unduly favorable to affiliated interests. I recently read an article from Fortune magazine that reached the same conclusions. The victims also included the 94. California: June 26.” 17 Sounds just like Enron.htm (5 of 11)10/19/2007 4:29:57 PM 18 19 20 . worthless payroll checks. and increase the number of shareholder strike suits brought as a form of legal blackmail. and trading in securities of the company by virtue of insider information. Douglas. which were heavily invested in the stock of Penn Central and companies tied to its board members. Chris Cox – they were made in 1934 by a highly respected professor at Yale Law School. doesn’t it? In a Harvard Law Review article. Supreme Court).000 shareholders bore the brunt of those losses. dividend policies based on false estimates. Perhaps short memories have also been contributing to some of the gloomy views about the Sarbanes-Oxley Act with respect to the U. Those causes included its “stretch[ing] of accounting principles to cover novel situations. manipulations of credit resources and capital structures to the detriment of minority interests .” I think we would all agree that the Chairman’s statements provide a fairly accurate depiction of the corporate scandals that rocked our financial markets a few years ago –Enron. markets to lose their competitive advantage over other major market centers like London and Hong Kong. who later became the Commission’s third Chairman (and. In 1972.the key law governing our securities offering process -. regulatory requirements.S. to mention only a few. Directors created the corporate internal investigation as we know it today. system of securities regulation creates significant advantages for the U. Joseph Grundfest. They respond to this new regime like rational economic actors: If you increase the penalties for engaging in fraud then you reduce the incentives to commit fraud. 24 23 This brings me to yet another enforcement story of the day—internal investigations. Under this theory. Executives are acutely aware that a major accounting or disclosure fraud is more likely than ever to leave them fired or indicted. Stanford. system of securities regulation creates a substantial and permanent “corporate governance premium” for initial public offerings listed on U. After discussing and dismissing some explanations for the recent drop in class action filings. The academic evidence shows that U.S. the government's aggressive criminal and civil enforcement strategy following the Enron and WorldCom frauds has caused corporate boards and management to "get religion" when it comes to complying with the securities laws. Given all the talk about them of late. an independent receiver was formally http://www. I would be remiss if I didn’t mention a recent Wall Street Journal editorial by one of our hosts. But the sky was not falling in 1933. Professor Grundfest writes: The remaining explanation is more interesting and profound: Perhaps fewer companies are being sued for fraud because there is less fraud. 2007 financial crisis and subsequent Congressional findings of corruption and wrongdoing in the securities markets. regulatory standards. It is worth noting that even now. It will be interesting to see how history judges Sarbanes-Oxley 75 years out. capital markets. but because of our high standards.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. In these settlements. The investigation of corporate wrongdoing by an independent third party originated as a sanction that was occasionally imposed by the SEC in settling enforcement actions. Just last month.S. to thank for that. and it is not falling now. markets that cannot be found in similar public offerings listed on foreign exchanges.S. 22 21 On a related topic.htm (6 of 11)10/19/2007 4:29:57 PM . securities markets over their international competitors. And we have one of today’s speakers.S. which discusses data showing a dramatic decrease in the number of securities class action suits. you would think they were newly invented by today’s defense counsel.S. The existence of the “corporate governance premium” is directly related to our strong system of securities regulation. California: June 26. Nothing complicated here at all. But they’re not at all new and I think it’s fair to give most of the credit for them to directors. The predictions of disaster made in the Fortune article nearly 75 years ago are eerily similar to the recent reports’ dire predictions about the effects of Sarbanes-Oxley and the purported doom of the U. numerous academic studies conducted after the passage of Sarbanes-Oxley have concluded that the U. yet another academic study concluded that the U.sec. Stan Sporkin.S.gov/news/speech/2007/spch062607lct. financial markets are robustly competitive not in spite of U.S. outside directors who were not involved in the payment practices came to have a central role in overseeing companies’ internal investigations and the resulting reports. You are warranted in having confidence in our plans and purposes -confidence . . .[O]ur job will be better done and your interest will be better protected if. the directors realized that their investigative work would be reviewed and tested by the SEC. .SEC Speech: Remarks Before the Stanford Law School Directors' College 2007.sec. . you [in the business community] . That is why I appeal so frankly to you [in the business community] . .You can help us. . .an SEC enforcement action. 2007 appointed to investigate the wrongdoing at issue and to ensure that sufficient remedial steps were taken by the corporation. . the SEC acknowledged outside directors’ initiative in taking responsibility for internal investigations. . and that the independence of the investigation was crucial to its credibility. the internal investigation continues to play a key role in our enforcement efforts. . Outside directors who had no role in the questionable payments were appointed to a committee that would conduct a thorough and independent investigation of the practices at issue. During the voluntary disclosure program. . these outside directors reportedly [were] instrumental in initiating internal investigations and requiring more stringent auditing controls. the evolution of the internal investigation has been an overwhelmingly positive development for shareholders and for our enforcement program. California: June 26. The SEC found that outside directors “increase[d] their involvement and knowledge of corporate affairs . . We continue to encourage and reward cooperation from the business community for very important reasons. by alert and vigilant cooperation. However. More than 30 years after the initiation of the Commission’s voluntary disclosure program.” and that “[i]n many cases. . Have no fear that Government supervision will destroy honest enterprise. Of course. share our task. Stanford. In reporting to Congress on the questionable payments scandal. Thus. the Commission adopted a voluntary disclosure program in response to the questionable payments scandal in which some of America’s best-known corporations were found to have used slush funds to make illegal campaign contributions in the United States and to bribe foreign officials for business. the “special committee” was born.htm (7 of 11)10/19/2007 4:29:57 PM . institute remedial measures and report their findings to the SEC.rather than after -. 25 To their credit. . . As our Chairman has said: The danger is not that we will interfere too often but that we may act too late. “that if business does the right thing it will be http://www. .” 26 From my perspective. rather than by a third-party receiver. . This Commission will destroy nothing in our business life that is worth preserving.gov/news/speech/2007/spch062607lct. the institution of receivership proceedings was extremely disruptive and costly. They also realized that an investigation would be more productive and might result in lesser sanctions if it was conducted before -. In the 1970s. directors came to realize that an internal investigation could be made more efficient and less disruptive if it was conducted by the board. htm (8 of 11)10/19/2007 4:29:57 PM . who is believed to have borrowed the quote from Thomas Jefferson or Patrick Henry (or possibly from an 18th century Irish statesman who may have gotten the idea from an ancient Greek orator). quoted it in one of his recent speeches. and not forget the rhyming of the past.” is inscribed with one of my favorite quotations: “Eternal Vigilance is the Price of Liberty. the grand edifice that houses the National Archives was built to serve as a “temple of our history. the Commissioners. and their many predecessors. let’s look to the past one last time this afternoon – this time to the four allegorical sculptures that frame the entrances to the National Archives building in Washington. One. on November 15.” So. Stanford. It is inscribed with a line from Shakespeare’s The Tempest: “What is Past is Prologue. “Guardianship. “Heritage. The remaining two sculptures speak to the future and its relationship to the past. According to Herbert Hoover.” which brings us back to the beginning of my remarks today.” While I often borrow this line in talking about securities enforcement.sonypictures. it seems the author may have borrowed it himself. Mark Twain. “The Past.” Honest business needs nothing more.” instructs us that “The Heritage of the Past is the Seed that Brings Forth the Harvest of the Future. 2 http://www. I should note that I found this speech because our current Chairman. Chris Cox. This speech expresses the author's views and does not necessarily reflect those of the Commission.” is inscribed “Study the Past. 27 I expect by now you have figured out my gimmick.php?t=14978.” Another. with apologies and thanks to William Shakespeare. and helping the country. the cornerstone of the building was laid in 1933. and grow. make profits. let’s discharge our duties to shareholders with vigilance. California: June 26.sec. at a meeting of the Boston Chamber of Commerce. One sculpture. Endnotes 1 The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. helping itself. the last one is “The Future.gov/news/speech/2007/spch062607lct. 1934 in one of his first speeches. “what to come [i]n yours and my discharge. 2007 protected and given a chance to live.” And finally. Before I end. but our first Chairman. Joseph Kennedy. See http://boards. the Commission promises nothing less. Thank you.” What that leaves off is the next. I said these were the remarks of our Chairman. Wendell Phillips. the year of enactment of the first federal securities law.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. but they were the words not of our current Chairman.com/boards/showthread. or other members of the staff. very important line. The quote is attributed to the 19th century abolitionist Wendell Phillips.” Coincidentally. 2007). Rel. Wang et al. SEC v. 2007) (adding Pakistani investment banker Ajaz Rahim to third amended complaint). 20113 (May 11. Fox Heads Back to ‘Street. See http://www.. 394. 19995A (Feb.gov/news/speech/2007/spch062607lct. 16 Daniel J. 45 UMKC L. 20022 (Mar. Den of Thieves (1991).sec. Staff Report of the Securities and Exchange Commission to the Senate Special Subcommittee on Investigations 4. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp. 2007). available at http://www. 16. No. James B. 2007. The Pirate Pose (Apr. 20079 (Apr.brainyquote.com/drupal/node/3833. 20112 (May 10. Lit. No. No. 17 http://www. 20106 (May 8. 2007). Stanford. Rev. Rel. Rel. available at http://variety.com/ quotes/t/tomwolfe166712. http://www. California: June 26. 2007). 14 Dave McNary. http://www. No.com/article/VR1117964380. 6 (Aug... The Financial Collapse of the Penn Central Company. 1972). Lit. Rel. No. Lit. portfolio. 2007 3 See. et al.’ Variety (May 6. Stewart.html. 2007). Rel. SEC v. 20105 (May 4. SEC v. Lit.com/executives/features/2007/04/16/The-Pirate-Pose. 7 8 9 10 11 12 13 Tom Wolfe. SEC v.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. Aragon Capital Management LLC et al. 398 (1976-77). Bonfire of the Vanities (1987).brainyquote. 2007).g. No. Wong et al. 2007). Rel. Bloomberg. html. Lit. Lit.imdb. 2007). Rel. e. June 20. No.htm (9 of 11)10/19/2007 4:29:57 PM . http://www. 5 6 SEC v. Penn Central: A Case Study of Outside Director Responsibility Under the Federal Securities Laws. 15 Tom Wolfe. Lit. 4 Bob Drummond.. 1. Schwartz. Heron..com/title/tt0094291/quotes. 13. 18.com/quotes/quotes/j/jdhaywor374057.insidevandy. Guttenberg et al. SEC v.html?categoryid=13&cs=1.. Insider Trading Makes Comeback in Options 20 Years After Boesky. McKinsey & Company. 47 Harvard L. and Florencio Lopez de Silanes. Dean. S. See. Robert W.. The Inevitability of a Strong SEC. Law and Finance. Grundfest. 213 (R. Commission on the Regulation of U. Rev. J.g.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. National Bureau of Economic Research Working Paper No. Arthur H. Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listings Over Time. and Rene M. Enforcement and Its Impact on Cost of Equity and Liquidity of the Market (Indiana University. Capital Markets in the 21st Century—Report and Recommendations (Mar. 2007) (U. Kraakman et al. 2006) (Scott Report).sec. 2004)). 2003). available at http://nber. 2007) (Schumer-Bloomberg Report). 1933).. In general. 1306 (June 1934). See Joel Seligman. The Transformation of Wall Street 540- http://www. The Class Action Market. Prentice. Stanford. 2007 at A15. Robert A. 836 (2005-2006) (citing Gerard Hertig et al. Stulz. Issuers and Investor Protection in The Anatomy of Corporate Law: A Comparative and Functional Approach 193. 1998). 2007 18 William O. 775. Luzi Hail and Christian Leuz. Sustaining New York's and the US' Global Financial Services Leadership (Jan. Wall St. Further evidence of the positive economic effects of a strong regulatory and enforcement environment has been found by numerous empirical studies concluding that in countries with stricter enforcement of securities laws there is a lower cost of equity and more liquid capital markets. 1305. Rev. Working Paper. 19 Committee on Capital Markets Regulation. Chamber of Commerce Report). International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? (The Wharton Financial Institutions Center.. The Federal Securities Act: I. Nov. G. Working Paper. 106 J. e. 20 21 22 23 24 25 The SEC brought 62 enforcement actions in connection with the questionable payments scandal. 22. 13079 (May 2007). Utpal Bhattacharya. United States Chamber of Commerce.gov/news/speech/2007/spch062607lct.htm (10 of 11)10/19/2007 4:29:57 PM . Joseph A. May 2006). transnational studies have found a strong correlation between the maturity and size of financial markets and the aggressiveness of the enforcement efforts on behalf of investors. eds. Interim Report of the Committee on Capital Markets Regulation (Nov. California: June 26. 30.org/papers/w13079?sfgdata=4. Id.S. Douglas. 2 Fortune 50. Andrei Shleifer. Vishny. of Political Economy 1113 (Dec. Craig Doidge. Rafael La Porta. 91 Cornell L.. 7. Directors Who Do Not Direct. while about 400 more firms self-reported under the Commission’s voluntary disclosure program. 104 (Aug. Andrew Karolyi. in exchange for more lenient treatment. Feb. sec. 26 Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices. 27 Remarks of Joseph P. Arthur F.gov/news/speech/2007/spch062607lct. 15. L. California: June 26. 1934).pdf.sec. 662-70 (1984). available at http://www. Chairman.sechistorical.J. Mathews. Stanford. 2007 44 (1995). Internal Corporate Investigations. 45 Ohio St.S.org/collection/ papers/1930/1934_11_15_Kennedy_Boston_Sp.SEC Speech: Remarks Before the Stanford Law School Directors' College 2007. U.htm Home | Previous Page Modified: 07/05/2007 http://www. Housing and Urban Affairs 44 (May 1976).gov/news/speech/2007/spch062607lct.htm (11 of 11)10/19/2007 4:29:57 PM . Kennedy. http://www. Before the Boston Chamber of Commerce (Nov. Report to the Senate Committee on Banking. Securities and Exchange Commission. large fries. the Federal Bar Association's Manuel F. Cohen Younger Lawyer Award. As a counsel to President Reagan at the time. And the mantel over her fireplace bears the honors she won in the process: the Distinguished Service Award. as she is today. 2007 (Christopher Cox) Home | Previous Page Speech by SEC Chairman: Address to the Mutual Fund Directors Forum Seventh Annual Policy Conference by Chairman Christopher Cox U. and a Diet Coke. where she was a dedicated advocate for the protection of investors.sec. April 13. The Forum is truly fortunate to have such an outstanding Executive Director. By the time of his appointment.htm (1 of 10)10/19/2007 4:35:06 PM . he'd spent more than eight years working on the ALI project to codify the six statutes then administered by the SEC.S. D. I also know that David Ruder very much wanted to be here today. 2007 Thank you.on three separate occasions . Susan was tenacious in advancing the Commission's mission. and . The incongruity would probably be too much for them.C. and so I'd like to say how honored I am to be here at his invitation.the Commission's Law and Policy Award. the Stanley Sporkin Award. Whether it was through investor education or leadership of the Commission's regulatory program. I had the privilege of knowing first hand how the President came to make such an outstanding choice. April 13. It was my privilege to work with Susan at the Commission. Sort of like the way we feel when we watch someone order a double cheeseburger.not to mention having served as dean of Northwestern University's School of Law for eight years. they'd wonder if it's the same person. It's really astonishing to consider how much David Ruder must know now. If my kids could hear you talk about their Dad. given that when he was nominated..gov/news/speech/2007/spch041207cc. Washington. he'd already written more than 40 articles and led more than 150 educational programs for corporate and securities practitioners . Executive Director of the Mutual Fund Directors Forum] for that kind introduction. nearly 20 years after President Reagan named him to be Chairman of the Securities and Exchange Commission. And if that weren't http://www. D. Susan [Wyderko. Seventh Annual Policy Conference. So let me take a minute to sing Susan's praises.SEC Speech: Address to the Mutual Fund Directors Forum. Securities and Exchange Commission Washington.C. D." The transformation of the 12b-1 fee from a distribution subsidy to a sales load in drag is now so nearly complete that the primary purpose to which the $11 billion in 12b-1 fees last year were put was to compensate brokers. As independent directors. Another way that 12b-1 fees have veered away from their conceptual basis as distribution subsidies has been using them to pay for administrative expenses in connection with existing fund shareholders. 2007 (Christopher Cox) enough. And indeed.not least of all with respect to 12b-1 fees. Specifically. There was a very real concern that if funds were not permitted to use at least a small portion of their assets to facilitate distribution.gov/news/speech/2007/spch041207cc. Washington. many of them might not survive.are very fortunate to have both Susan Wyderko and David Ruder applying their extraordinary talents and energies to your critical agenda. our premise was that 12b-1 plans would be relatively short lived.. the Commission is closely examining this year. In this way. April 13.and more importantly. in the early going. The idea was that 12b-1 fees would be used to solve specific distribution problems. instead of paying for distribution. No-load funds used 12b-1 fees of 25 basis points or less to offset the costs of advertising.SEC Speech: Address to the Mutual Fund Directors Forum.htm (2 of 10)10/19/2007 4:35:06 PM . I greatly appreciate and thank you for your commitment to the important work of protecting mutual fund investors. 1987. the Commission's action came at a time of net redemptions. With more than $10 trillion in assets. Even some funds http://www. however. You have helped us in so many different areas that are critical to investor protection .C. So the Forum . as they arose. And as Susan well knows. at a time when nurturing mutual fund growth was an SEC priority. All of this was consistent with the Commission's purposes in adopting the rule. good governance of the mutual fund industry has never been more important. insuring that investors can have confidence in the way their mutual funds are managed is key to maintaining confidence in our financial system. during his tenure as Chairman.sec. which. and of printing and mailing sales literature. Most notably. that was our experience. Very quickly. 12b-1 plans came to be used for other reasons. David's campaign against penny stock fraud is alive and well at the SEC in the Internet era. mutual funds have replaced the savings accounts of old as the primary long-term savings vehicle for almost half of all American households. they became a substitute for frontend loads. Eight years into your mission. and showed great foresight in expanding the international reach of the Commission. the investors you serve . he dealt with Black Monday on October 19. of printing and mailing prospectuses. as you know. Seventh Annual Policy Conference. led the Commission through the Milken/Drexel Burnham era. As a result. more substantial sales loads could be collected while the fund could still advertise itself to investors as "no load. you play a critical part in the stewardship of this industry. When the Commission adopted Rule 12b-1 more than a quarter century ago. It is worth revisiting.C. the Commission noted in our adopting release that we and our staff would monitor the rule's operation closely. The considerable distance that 12b-1 fees have strayed from the rule's paradigm isn't just occasion for the Commission to take a hard look at current practices. with nearly three decades of experience under our belts . April 13. by far the lion's share of mutual funds' 12b-1 fees are used for these two purposes. and in applicable state law.SEC Speech: Address to the Mutual Fund Directors Forum. but a majority of the independent directors have to agree to the 12b1 plan. therefore. Washington.htm (3 of 10)10/19/2007 4:35:06 PM . It's also a reason for independent directors to take a fresh look at the way this use of investors' funds has evolved.and to satisfy yourself as to the reasons for those expenses. So it is that today. and considering its meaning in light of today's market realities and current practice.. And the rule imposes additional oversight duties on fund directors. is that it may be terminated at any time by vote of a majority of the independent directors. And if experience suggested that the rule's restrictions on the use of fund assets were insufficiently strict. Rather obviously. Now.and with today's uses of 12b-1 fees barely recognizable in the light of the rule's original purpose .sec. the Commission had you in mind when the rule was devised. including that each year. or change. we made it clear we would be prepared to act to remedy the situation. Seventh Annual Policy Conference. That's because Rule 12b-1 places considerable burdens on independent directors. without fail.gov/news/speech/2007/spch041207cc. And if that weren't enough to make you feel intimately involved with the decision to collect 12b-1 fees. and also proportionally reduce the burden of administrative costs that might now be http://www. the original intent of Rule 12b-1. 2007 (Christopher Cox) which are closed to new investors continue to collect 12b-1 fees. One element of the plan you cannot leave out. not just the fund's board. What the SEC had in mind in 1980 is that requiring current investors to subsidize the sale of fund shares to new investors could be a good thing even from the standpoint of the current investors . without whose approval no payment may be made by a fund in connection with the distribution of its shares. both we and you together have to tackle head-on the problem of brokers' sales commissions masquerading as fund marketing costs. fund directors are held to the fiduciary standards set out in both Section 36 of the Investment Company Act.it is high time for a thorough re-evaluation.because increasing overall fund size could help better diversify their holdings. Specifically. Given that the Commission has so thoroughly bound the decision to charge 12b-1 fees to the independent judgment of the fund's disinterested directors. you are also required to periodically review all of the amounts that are spent in the name of the plan for which you are so personally responsible . you're required to approve your fund's 12b-1 plan. In doing all of this. D. Back in 1980. http://www. independent directors have to focus on the investors whose interests they represent. the strongest case for saying yes might well be when the 12b-1 fee is used to pay not for distribution. and mailing account statements.SEC Speech: Address to the Mutual Fund Directors Forum. higher expense ratios reduce investors' returns percentage point for percentage point. but for administrative services that are far afield from the kinds of costs that the original rule had in mind. the survival of the mutual fund industry is plainly no longer at issue. as a percentage of total fund assets. as was the case years ago when rule 12b-1 was adopted. with the result that investors get lower returns.htm (4 of 10)10/19/2007 4:35:06 PM . Washington. has risen or fallen as the fund has grown.not potential new ones. there is no question that processing shareholder transactions.C. but the expense ratio isn't falling. in fact. There are other reasons to question the continued vitality of Rule 12b-1. maintaining shareholder records.sec. a fund's current investors are getting a break depends upon how the investment advisory contract is written. If increasing the size of the fund simply enlarges the fees earned by the investment adviser. Collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers. And it has a basis in some of the exemptive orders that have been issued over the years. not helping.. fund communications. So one of the things that independent directors must concern themselves with in reviewing the propriety of any 12b-1 fees used for distribution is whether the fees paid to the management company and other vendors. the current investors. and payments out of fund assets made pursuant to the plan. of course. Indeed. D. But whether. Ironically. But to the main point.gov/news/speech/2007/spch041207cc. Seventh Annual Policy Conference. April 13. the original premises of Rule 12b-1 seem highly suspect in today's world. and reports to shareholders are services delivered to current investors . we have learned by this point in the 21st century that it can be just as big a problem for investors when a fund grows too large as when it is too small. At more than $10 trillion and counting. And so the independent directors' decision whether to approve a 12b-1 plan. After all. 2007 (Christopher Cox) spread over a wider pool of investors. If the size of the fund is increasing. then using a 12b-1 fee for marketing and distribution expenses is very likely harming. After all. In meeting the fiduciary standards of the Investment Company Act and state law. The assumption can't always be made that growth in total assets inevitably assists existing investors. it is a very different something than the rule itself contemplated when it was first adopted. When funds grow too big. For all of these reasons. the supposed benefits from economies of scale are undone. as opposed to paying a commission to a broker. If ever it was justified to indulge an irrebuttable presumption in favor of using fund assets to compensate brokers for sales of fund shares. Today the mutual fund industry is no longer at risk of suffering crib death. That is at least a tangible something. they can lose flexibility. that time surely has passed. has to be no unless existing shareholders will benefit. we're confident we can achieve a great deal in the coming months . The historic shift from company-guaranteed pension plans to investordirected vehicles such as 401(k) plans and other defined contribution retirement plans has put this issue at the center of our radar. whose responsibilities and sensitivities to the fund's investors are thought to be particularly acute. As you know.htm (5 of 10)10/19/2007 4:35:06 PM . and those yet to be received. April 13. the comment period recently ended on the economic studies that were done in connection with the rule as it was first proposed . Defined benefit plans are going the way of the 8-track tape. Every American worker and every American family potentially are affected. We will punctiliously observe the procedural requirements to which the court directed us. Americans no longer can count on conventional pensions for support during their increasingly long retirement years. 2007 (Christopher Cox) That is why Rule 12b-1 is an issue the Commission will address this year. Our current arrangements. Washington. we've got to get this right. Seventh Annual Policy Conference. fall tragically short.000 letters -including the thoughtful comments submitted by the Forum.before its invalidation in the court of appeals. and the resulting problems will manifest themselves in countless dysfunctional ways. analyzing them in the context of a comment file that now spans almost four years and includes more than 14. We are reviewing these comments carefully.and that the effort is supremely worthwhile. as a nation. To far too great a degree. D. and the aggregate disclosures by the plan. Even though this will require collaboration with the Department of Labor and other investment regulators. We intend to re-propose and then finalize our mutual fund governance rule.SEC Speech: Address to the Mutual Fund Directors Forum. and we will complete that important business with due regard for the comments already submitted. So applying yourself diligently all of your working life won't mean retirement. and the after-tax. our financial services industries are able to skim off much more of the assets they handle than would be the case in a well-functioning market. however. because an America burdened by large numbers of elderly living in straitened circumstances will not be a happy place. We are also in the midst of a broad initiative to examine the adequacy of investor disclosures by mutual funds and other investment vehicles in a typical 401(k) plan. And. we aim to make it far easier for busy Americans to understand the expenses they're being charged in connection with their investments. we will have the interests and concerns of independent directors. It will mean a new career as a do-it-yourself money manager.. and in substantial part because of a regulatory cumbersomeness that obscures the real numbers. after-inflation returns they're actually getting compared to an appropriate index. given what's at stake. Nor is that all that the Commission will be doing this year that will be of direct interest to you.sec. The difference materially http://www.C. uppermost in our minds. With an emphasis on both the disclosures by the constituent investments in the 401(k).gov/news/speech/2007/spch041207cc. And as we do so. That. So to insure we get the job done sooner rather than later. And at the same time.even ordinary English often needs improvement.sec. Americans already invest well over $3 trillion through these defined contribution retirement plans. easy-to-understand disclosure documents for investors that highlight the key information about mutual funds that is most important to investors. is guaranteed to be far longer than their parents'. and tomorrow's. Nor will we stop there. we'll be examining the different types of disclosure that 401(k) participants receive. in the coming months we'll hold roundtable discussions with the nation's leading experts. April 13.SEC Speech: Address to the Mutual Fund Directors Forum. fund directors such as yourselves. Along with the improved presentation. We want to be sure that today's retirees. strategies. 2007 (Christopher Cox) burdens an investor's annual expected returns. and others. risks. of course.C. Seventh Annual Policy Conference. these already eye-popping numbers will grow further still. Getting rid of gobbledygook is no easy task. actuarially speaking. And as I'm sure you know. it isn't just legalese that has problems . The Commission's staff is already working on proposals to create this streamlined disclosure document for investors. And while we're doing this we'll continue to work to purge all of the legalese from these disclosures.gov/news/speech/2007/spch041207cc. and the http://www. Washington. Just ask yourself: why is "abbreviated" such a long word? So we'll stay at it. And with the number of elderly Americans expected to grow 80% within the next 25 years. those proposals may also call for better and more detailed information about investment objectives. That's why you can be sure that the "investors advocate" will be tackling this issue for the benefit of not only our senior citizens. we'll be building on a substantial record that has already been compiled. D. Your organization has consistently focused on the significant conflicts of interest that fund directors face in connection with soft dollars. And compounded over the retirement time horizon of even someone in his or her 50s. have the information they'll need to successfully manage their savings through a retirement that. in turn. as the investor prefers. a strong consensus emerged for the creation of more succinct. will pave the way for a formal rule proposal later this year. but today's young savers as well. including at our SEC Roundtable last June. which today vary from full prospectuses and shareholder reports to one-page charts that contain extremely limited information. which could be made available online or in writing. third-party users of fund disclosure. Our goal. After all. is to develop an approach to 401(k) disclosures that permits each investor to obtain the information necessary to inform a sound investment decision. and costs. and convert them into plain English. working with our fellow regulators. this can result in truly astronomical shortfalls. This is happening even now on a nationwide basis.htm (6 of 10)10/19/2007 4:35:06 PM . From the input of investor advocates. and publish a concept paper outlining the issues we're addressing and the solutions that have been suggested. nearly half of that is in mutual funds. In this process.. I look forward to our continued work together. 2007 (Christopher Cox) Commission plans more work here. The very concept of soft dollars may be at odds with clarity in describing fees and costs to investors. was probably thought to be a useful legislative compromise when it was packaged with the abolition of fixed commissions.even though. In particular. The 30-year old statutory safe harbor. Seventh Annual Policy Conference. it doesn't interfere with the full disclosure of actual management costs. D. As you almost certainly know by now.C. So while the Commission's soft dollar release was important. entertainment and travel expenses. as well. And we're looking to ensure that when soft dollars are used to pay for research. but it may not be enough to wipe out the abuses that the Commission has discovered. such as soft dollars used to pay for membership dues. If directors are able to compare the broker's execution-only commission rate with its bundled rate. in the end. Soft dollars can serve as an incentive for fund managers to disregard their best execution obligations. An agency focused on ensuring full disclosure to investors has to be very concerned about this. for your leadership in this area. because soft dollars make it more difficult for investors to understand what's going on with their money. Hard dollars eventually end up being reported as part of the management fee the fund charges its investors. That is why the Commission is continuing to examine the potentially distortive effects that soft dollars can have on what should be the normal market incentive to seek best execution.gov/news/speech/2007/spch041207cc. The total of soft dollars runs into the billions each year for all investment funds in the United States. Soft dollars also represent a lot of investors' hard cash. But soft dollars provide a way for funds to lower their apparent fees . even though it isn't reported that way. and lavish expenditures for interior decorators and beachfront villas.. you can rest assured it won't be our last word on this subject. they could make more meaningful inquiries into the value of the additional services that the fund shareholders are getting. But surely in enacting Section 28(e) Congress meant to promote competition in research.sec. investors pay for the expense anyway. no speech of mine. and this organization. I want to commend each of you. carpeting. April 13. Again.htm (7 of 10)10/19/2007 4:35:06 PM . the Commission will consider whether fund boards could better assess soft dollar arrangements if the Commission were to mandate better disclosure of the research and brokerage services that the adviser gets in return for a bundled commission. whether short or long. Our recent interpretive guidance was a step forward in this area. would be complete without a mention of interactive data. And because http://www. in Section 28 (e) of the Exchange Act. Washington.SEC Speech: Address to the Mutual Fund Directors Forum. not to create conflicts of interest by permitting commission dollars to be spent in ways that benefit investment managers instead of their investor clients. and also to trade portfolio securities inappropriately in order to earn credits for research and brokerage. The truth is. no case is filed.SEC Speech: Address to the Mutual Fund Directors Forum.gov/news/speech/2007/spch041207cc. we want them to know they have the full backing of the Commission. An article in today's paper reminded me that not only are we partners in our mission of investor protection.vigorous Commission action is necessary to ensure that a culture of ethics and compliance operates throughout a fund complex for the benefit and protection of the funds' investors.that Commission approval be obtained before settlement discussions are commenced. you share more than just our goals at the Commission. Our staff will have the strongest negotiating position. no formal investigation is initiated. Earlier this year. as independent directors. So in a handful of cases where the need for national consistency is greatest. like you. letting investors and analysts easily use and compare this data has the potential to vastly improve the quality of information that's provided to mutual fund investors.C. 2007 (Christopher Cox) of the leadership that the mutual fund industry has shown. Each of us has been appointed by the President and confirmed by the Senate with the express understanding that. they will be eligible for summary approval through the http://www. Washington. costs. if the Commission has reviewed the proposed range of outcomes before the offers in settlement are made. but also the way the law expects us to execute our roles gives us similarly weighty responsibilities. Like you. my mentioning it in this context is a very pleasant opportunity.htm (8 of 10)10/19/2007 4:35:06 PM . each of the five Commissioners of the SEC shares the duty of overseeing and monitoring the operations and activities of our organization. Seventh Annual Policy Conference. the Commission issued a proposing release requesting comment on whether mutual funds should now begin to use interactive data to report the information in the risk/return summaries. with only the welfare of the nation's investors and markets as our special interest. no settlement is agreed to without Commission approval. that has posed a genuine tradeoff for Commissioners seeking to fulfill their fiduciary duty. What full Commission review should provide is a guarantee of fairness and of horizontal equity in a nationwide program. April 13. As both the Commission's caseload and its staff have grown in recent years.as we saw in the mutual fund scandals of 2003 and 2004 . D. When enforcement lawyers in settlement discussions sit eye-to-eye across the table from counsel for the defense. of course. Under procedures established long before I became Chairman. and historical performance. Since these summaries include a fund's investment objectives as well as its strategies.. risks. we're reviving what had been a long standing policy of the SEC for all cases for many years . At the same time. Your industry's participation in the Commission's interactive data initiatives has been truly exemplary. Nowhere is this more important than in the area of enforcement. Commission review of enforcement actions shouldn't slow down the process. And it should be the wind at the backs of our staff across the country as they seek to obtain the best possible results for America's investors. But we'll do so with a difference: When cases are settled within the range of guidance provided by the Commission. where . we will be independent in our actions and our judgments.sec. the penalties you will see imposed in future cases will be stiffer . and we at the SEC have every confidence that you are up to the challenge..C. to our nation and its citizens. It will also give each of the Commissioners a better opportunity to do our jobs. our cases. That is why we need you to partner with us to make sure the mutual fund industry meets the highest possible standards for investors. the precedents we establish are clear. very recently the Commission adopted new guidelines for cases of this kind.sec. And because the key to any good partnership is communication. As you know. and more importantly. We at the SEC are proud to be your partners. of course. We're confident that this new approach will give them more flexibility and better tools to do their jobs more effectively and more quickly. Ultimately. We need you to help us in constantly enhancing oversight. investors are depending on you to get the answers. Seventh Annual Policy Conference.htm (9 of 10)10/19/2007 4:35:06 PM . not slow down.gov/news/speech/2007/spch041207cc.because the staff lawyers negotiating them won't have to hedge their bets.SEC Speech: Address to the Mutual Fund Directors Forum. which require of us the same oversight responsibilities that each of you must constantly exercise as independent directors. or rather cut them off at the knees. you routinely interact with fund management and have intimate knowledge of not only the funds. We should never put our staff in such a position. You best understand the funds you oversee and your shareholders' expectations. you are the ones who are called upon to make determinations about fund fees and operations. But if I had to hazard a guess. to require accountability. You have a truly important responsibility. http://www. because you know from first-hand experience what SEC regulators can do that would make a positive impact in your work. I and each of the Commissioners have been actively reaching out to fund directors to engage in a dialogue. Washington. consistent. wondering whether the Commission will later on back them up. thank you for what you do every day. It is. Their investments are in your hands. it would be that if anything. there's been speculation whether this procedural change portends a shift to higher or lower penalties. I plan to continue to meet personally with members of mutual fund boards. We have much to learn from working with you. Thank you for inviting me. designed to do neither. but also their service providers and personnel. D. and every Commissioner is extremely proud of the work they do. but rather to ensure that the laws are vigorously enforced with the benefit of full Commission review. They are America's finest. And I and each of the Commissioners are committed to seeing to it that this procedure works to speed up. The category of cases we've selected consists of those in which a monetary penalty against a company might be involved. and we are anxious to ensure that in the early days of its implementation. 2007 (Christopher Cox) Commission's seriatim procedure. April 13. Already. and in accordance with the instructions of Congress in the Remedies Act. and to ensure fairness and integrity in the conduct of the funds' business. SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox) http://www.sec.gov/news/speech/2007/spch041207cc.htm Home | Previous Page Modified: 04/13/2007 http://www.sec.gov/news/speech/2007/spch041207cc.htm (10 of 10)10/19/2007 4:35:06 PM SEC Speech: Remarks Before the 27th Annual Ray Garrett, Jr. Corporate an...w Institute 2007; Chicago, Illinois; May 4, 2007 (Linda Chatman Thomsen) Home | Previous Page Speech by SEC Staff: Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007 by Linda Chatman Thomsen1 Director, Division of Enforcement U.S. Securities and Exchange Commission Chicago, Illinois May 4, 2007 'Not often in the story of mankind does a man arrive on earth who is both steel and velvet—who holds in his heart and mind the paradox of terrible storms and peace unspeakable and perfect.' What Carl Sandburg, the prairie poet, said of Abraham Lincoln, the prairie lawyer and politician might just as well apply to the rabbi's son from Chicago who has been called, justifiably, the greatest lawyer of his time. The law is a paradoxical discipline, both absolute and flexible, fixed and evolving. Conservative as precedent, and liberal as compassion, it demands respect for institutions. Yet it relies upon imperfect individuals to give them life.2 So said Gerald Ford in the opening paragraph of his eulogy to Edward Levi, legendary lawyer who, in 1975, left the presidency of his beloved University of Chicago to serve as the 71st Attorney General of the United States. I couldn't resist sharing President Ford's words with you because they reflect so well on two Illinois lawyers and I thought as a guest in your wonderful city it was the polite thing to do. Also, while I know few will ever declare the eloquence of our 38th president to rival that of our 16th president, on this one, I think President Ford did pretty darn well. More to the point of gathering here today it speaks of our profession in a way that should cause all of us to walk a little taller. It is that profession I'd like to talk about today. Before I go any further I should remind you that my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. My views are also affected by my view, and while these days I see the world through glasses, I guarantee you they are not rose-colored. Consistent with that, I'll start with the bad news about our profession and talk briefly about behaviors that, rather than causing us to walk taller should have all of us slinking around looking at our shoes. http://www.sec.gov/news/speech/2007/spch050407lct.htm (1 of 8)10/19/2007 4:30:59 PM SEC Speech: Remarks Before the 27th Annual Ray Garrett, Jr. Corporate an...w Institute 2007; Chicago, Illinois; May 4, 2007 (Linda Chatman Thomsen) A few too many recent examples come to mind. The conduct of several inside lawyers in the recent options backdating scandals should make us all pause. In recent months, the Commission has sued the former General Counsels of four publicly traded companies: Apple, McAfee, Monster Worldwide and Comverse Technology for allegedly backdating undisclosed in-the-money options to themselves and to others.3 Sadly, in each of the four cases we alleged that to further the respective scheme, the company's inside counsel altered or fabricated company records to advance or conceal the fraud. According to our allegations, the former General Counsels collectively made millions by exercising their own options and then selling shares. The Comverse and Monster lawyers have settled, each agreeing to monetary sanctions, permanent officer and director bars and suspensions from practicing as attorneys before the Commission.4 In another arena, the Commission has charged inside counsel with insider trading. Ironically, each had substantial compliance responsibilities. In the first case, we charged Randi Collotta, a Morgan Stanley compliance officer — who was also a lawyer — along with 13 others, for her role in one of the largest insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. In the complaint, we allege that Collotta and her husband, Christopher Collotta, also an attorney by the way, provided material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients to a registered representative at a Florida broker-dealer. The broker-dealer then traded on the information and shared his illicit profits with the Collottas.5 Just two weeks ago, the Commission sued Kevin Heron, the former General Counsel and chief insider trading compliance officer of Amkor Technology. The Commission's complaint alleges that over a two-year period, Heron illegally traded in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions. Heron executed more than fifty illegal trades in Amkor stock and options based on information Heron had learned as a result of his position as general counsel. Heron executed nearly all of these illegal trades while he and other company employees were subject to company blackout periods that prohibited them from trading in Amkor stock.6 Lest we forget one of the events that has had such a profound impact on the securities world, this spring, the Commission sued two former high-ranking Enron in-house lawyers for fraud.7 But all this depressing news about our profession is not what I want to focus on this morning. Instead, I'd like to spend time on the tremendous power of lawyers to do good. Especially in their roles in helping clients work through a crisis or better still working to help clients avoid a crisis all together. And happily, the cases I noted earlier really are not the norm. Society has long recognized the very effective role lawyers play in preventing terrible conduct and in ensuring fair process. It was, after all, the plotting http://www.sec.gov/news/speech/2007/spch050407lct.htm (2 of 8)10/19/2007 4:30:59 PM because such an internal investigation gives the company a valuable opportunity to stay ahead of regulators and to propose realistic remedies that the company can live with in a case of securities law violations. 2007 (Linda Chatman Thomsen) tyrant Dick the Butcher who said "The first thing we do. especially in the context of privilege.SEC Speech: Remarks Before the 27th Annual Ray Garrett. Mathews details a very interesting history. think about what Adolph Hitler said during his rise to power: "I shall not rest until every German sees that it is a shameful thing to be a lawyer. Jr. May 4. one of the important roles for corporate lawyers is helping companies unscramble the various messes they find themselves in." In that article. by the way.w Institute 2007. Many times that cooperation and http://www. scene 2). internal investigation would be in their best interest.. In one example. Corporate an. a history that he noted went back to the 1960s. But first. of what he described then as the "ever-increasing frequency" of internal investigations. Not. Commissioner Sommer's words are reported in a 1984 law review article by former SEC official and private practitioner Art Mathews. and I'd like to discuss it in more detail in a minute. Most companies are anxious to eliminate the uncertainty of a pending Commission investigation.gov/news/speech/2007/spch050407lct. independent. A third reason Mathews argues that conducting internal investigations is good counsel is that it has the power to restore confidence in the investing public that a company is back on track.sec. As one former commissioner said about internal investigations: "There is a broad common-law basis for the proposition that if a corporation senses there has been wrong-doing. Illinois. Chicago. And finally. management has an obligation to ascertain the extent of it and to pursue a remedy… Wherever management finds a problem it wants to eradicate effectively and in an objective fashion. at the SEC. it may resort to this new technique of internal investigation. a concept which dates back to Cicero. A second reason defense counsel may advise internal investigations is that providing such information to the staff can result in significant resource savings for the company by limiting the number of executives and other employees whose testimony must be taken by the staff and reducing the length of the investigation. for our part. Mathews noted that by conducting an internal investigation and proactively proposing to pay full restitution. let's kill all the lawyers" in Shakespeare's Henry VI (Part 2. First. the company likely avoided a receivership that would have placed the company in bankruptcy.11 Perhaps the most interesting thing about Mathews' research was the unmistakable conclusion that increasingly defense counsel were counseling their clients that conducting a thorough. Act IV."8 It is not surprising that the law itself recognizes and protects the attorney role. which of course can benefit companies significantly. titled "Internal Corporate Investigations.htm (3 of 8)10/19/2007 4:30:59 PM ."10 The former commissioner? Al Sommer who served on the Commission over thirty years ago from 1973 to 1976 and who made these remarks over two decades ago in 1983.9 We've heard a lot lately about the attorney-client privilege. I'm talking about the internal investigation that companies often undertake when they become aware of potential bad conduct.. as is so often suggested because lawyers were bad guys but rather because they were effective at fighting tyranny. And if you want a positively chilling acknowledgement of the power of good lawyers to advance the greater good. we credit cooperation and the provision of useful information. extensive. the sharing of the results of that investigation with the government.12 Among the steps was its cooperation. even though it had the law and evidence to do so.gov/news/speech/2007/spch050407lct. We have supported rule amendments that would similarly protect information provided to us. and extraordinary cooperation in the Commission's investigation. Why is that? A variety of reasons. which again reconfirms cooperation. Corporate an. To cite just two examples. We have consistently advocated legislation that would permit provision of information to us without otherwise waiving the privilege. is a factor the Commission considers in determining the propriety of sanctions. For years. First. The principal of crediting cooperation has been part of our process for years. advice of counsel is often used as a defense.htm (4 of 8)10/19/2007 4:30:59 PM . Do we discuss waiver issues with counsel? Of course. especially for companies with http://www.. sharing the results of that investigation with the Commission (notwithstanding applicable privileges and protections). paying the related attorney and consultant fees incurred by its defrauded clients. Those who practice before us know we work with counsel to find ways to provide information to us that protects the privilege.sec. we have affirmatively taken steps to protect the attorney client relationship by filing amicus briefs supporting selective waiver. In connection with that matter. and the implementation of new controls designed to prevent the recurrence of fraudulent conduct. and that precedent continues to today.. providing full restitution. Jr. but more often than not it is the company or individual or their counsel who raise the issue. earlier I mentioned our recent action against two former Apple executives. because of the steps the company had taken in response to the illegal behavior that had occurred. terminating and otherwise disciplining responsible wrongdoers. Illinois. a little history is in order.15 On the topic of waiver of attorney client privilege and work product protection. It was explicitly expressed by the Commission in October 2001 in a report commonly referred to as the Seaboard Report. long before Enron or WorldCom or the Thompson memo and certainly before the McNulty memo. among others. an independent internal investigation. prompt self-reporting.SEC Speech: Remarks Before the 27th Annual Ray Garrett.w Institute 2007. That report was issued by the Commission in connection with an enforcement matter where the Commission decided not to sue a company. The decision to reward cooperation in the Seaboard matter was consistent with historical precedent. May 4. Apple's cooperation consisted of.13 Another explicit example can be found in the January 2006 action charging six former officers of Putnam Fiduciary Trust Company (PFTC) with defrauding clients of $4 million. 2007 (Linda Chatman Thomsen) information comes to us via an internal investigation. among other things.14 The PFTC action was announced the day before the Commission announced broader penalty guidance. Chicago. the Commission said it would not bring any enforcement action against Apple — based in part on its swift. an independent internal investigation. Second. The Commission simultaneously announced that — even though the alleged conduct was "egregious" — the company would not be charged because its cooperation and the remedial steps taken were "extraordinary. Do we raise the topic? Sometimes." PFTC's cooperation consisted of prompt self-reporting. and implementing new controls designed to prevent future fraudulent conduct. On to our process. So what do we do when we initiate these conversations? We have a process. to do more than keep people happy. a means to that end but are not an end in and of themselves. as a society. The credit given is based on. we do so at the Assistant Director level or higher. we distinguish between facts and core attorneyclient communications and opinion work product. we do not — indeed we cannot — require waiver of the attorney/client privilege. or doctors. It is the former we are interested in. Second. when confronted with a big problem. his colleagues and his client. we must be — and we are — judicious in requesting waivers. We are ever mindful that the request alone may have a chilling effect. Illinois.htm (5 of 8)10/19/2007 4:30:59 PM . the state of the law may not support maintaining confidentiality after information has been shared with us.gov/news/speech/2007/spch050407lct. Corporate an. It is.. the timeliness of the provision of information and the usefulness of the information. Underlying the privilege is the assumption that attorneys will advise and advance compliance with the law. we respect the legitimate assertions of the attorney client privilege and the attorney work product protection. are disfavored at law. As to the latter. and this is an important but. 2007 (Linda Chatman Thomsen) serious issues. to coin a phrase from another current discussion in the securities world. we are candid about the existing state of the law and let people know that while we will do our best to protect the confidentiality of information provided to us. Jr. not worse.w Institute 2007. But. http://www. the factual information given. Fourth. It is the factual information from the former we are most interested in. Finally. Chicago. principles based. First and foremost. That somehow — by protecting these relationships with priests. waiver of a privilege or protection is not a pre-requisite to obtaining credit in a Commission investigation. Second..sec. we can not talk about the attorney-client privilege without talking about and embracing the reason for that protection. recognizing the importance of this issue. for the simple reason that they interfere with fact-finding — is the idea that there is an offsetting benefit that justifies the cost to the truth-seeking process. stay up nights trying to think of ways to cooperate. but first two important notes. Our approach is based on the fact that we respect the role of good lawyers. or lawyers — we. I have heard one defense counsel say that. Society expects lawyers to be more than hired guns. if we initiate these conversations. which I will describe. Third.SEC Speech: Remarks Before the 27th Annual Ray Garrett. he. they want to do whatever they can to distinguish the company from its employees who have engaged in serious law breaking. we think about alternatives for obtaining the information we seek. and therefore. Waivers may be. May 4. We also recognize the difference between work associated with an internal investigation and work done at the time of the events at issue. We want to encourage parties to consult counsel both regarding potential violations of the securities laws and regarding how best to rectify bad behavior. we often get it but not at our request but rather as a result of someone advancing an advice of counsel defense or argument. First. and often are. We expect that they can and will make uncomfortable decisions and that they can and will deliver unwanted advice and bad news. among other things. end up encouraging better conduct. Underlying all evidentiary privileges — which let me remind you. Corporate an. and one non-attorney who has served on audit committees. 2007 (Linda Chatman Thomsen) On this point.htm (6 of 8)10/19/2007 4:30:59 PM ."16 The task force. Thus. one general counsel to an auditing firm. both in-house and outside.) Within this report there is one truly remarkable section. page 95 is the shortest lettered subsection in the report. the question of what role lawyers can and should play to minimize wrongdoing by their public company clients is an important one. Chicago. can injure many thousands of investors and employees. paraphrase. whether in-house or outside counsel.sec. as Enron.. which included four current or former public company general counsel. in November of 2006 the New York City Bar Association issued its Report of the Task Force on the Lawyer's Role in Corporate Governance. one federal judge. was charged with examining "all aspects of the role of individual lawyers and law firms by examining recent failures to perform that role effectively as alleged by government agencies. May 4.gov/news/speech/2007/spch050407lct. Lawyers are often in a position to influence or facilitate the conduct of their corporate clients. In March of 2005. I do find it an extremely thoughtful analysis." And therein lies the need for professional courage.. should be sufficient to address and redress nearly every instance of actual or potential wrongdoing. sixteen law firm lawyers. The report finds that when lawyers are faced with unlawful corporate conduct "[f]irm advice to clients. three government lawyers. the report acknowledged that "it may take genuine professional courage to provide unwelcome advice and stick to it. two law professors."20 http://www."17 In the introduction to the report.. with respect to counseling about corporate conduct.SEC Speech: Remarks Before the 27th Annual Ray Garrett. Congress and the courts. The task force found that "[t]he essential need is for lawyers to give that advice clearly… and not waver when the advice is unwelcome."19 Given the economic and financial pressures to maintain relationships with major corporate clients and powerful officers and directors.w Institute 2007. WorldCom and other recent scandals have dramatically emphasized. While I don't necessarily agree with everything in the report. can be more effective in helping the public companies they advise avoid problematic conduct that. It runs barely one page. But to my mind it may be the most important. and perhaps understated. including directly to the Board if necessary. subsection capital E. two plaintiffs class action attorneys. including litigators and transactional lawyers. Illinois."18 The report reasks the question Judge Sporkin asked in connection with the savings and loans crisis: Where were the lawyers? (I should note that is not the precise way the opinion reads but it is a fair. and the fact that the answers to legal questions are rarely beyond dispute. Roman numeral section II. the then-president of the New York City Bar appointed a task force to "examine the role of counsel. the task force said it had "addressed itself generally to the question of how lawyers. no matter how important the client or how powerful the officer or director resisting the advice. and the title says it all: Professional courage: the indispensable element. Jr. Q Capital Investment Partners. 20056 (March 27. 1 Gerald Ford. 20004 (February 15. the quieter questions. L. Levi (1912-2000). 67 U. May 4. 2007). 975 (2000). but just as important. 2007). Olesnyckyj. opportunities for lawyers to effect good. Heron. David Kreinberg. Roberts. there will be less dramatic. right there.w Institute 2007. Robert D. Litigation Release No. 3 See SEC v. Jordan H. I was reminded of what Aristotle said about courage—it is the first virtue. a discussion of a virtue. Kent H. SEC v. So. David Kreinberg. Myron F. Litigation Release No. C. Olesnyckyj. Illinois. Lenowitz. See SEC v. the Commissioners. 2007 (Linda Chatman Thomsen) These acts of courage can be dramatic—resigning for example.gov/news/speech/2007/spch050407lct. Sorin.htm (7 of 8)10/19/2007 4:30:59 PM . 20058 (March 28. Once you've figured out whether a particular course of conduct can be taken. Guttenberg. Litigation Release No. 20022 (March 1. Randi E. 5 6 SEC v. Collotta. 2 See SEC v. because it makes all other virtue possible. LP. Mark E. is it in the business's long term interest? Is it behavior we want to encourage? Is it something we should be proud of? As I'm sure you can tell. Heinen and Fred D. Rogers. SEC v. I love the fact that the New York City Bar's report talks about courage. and Jasper Capital LLC. Endnotes The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. 4 See SEC v. (d/b/a Chelsey Capital).sec.A. In Memoriam: Edward H. 20079 (April 18. Kevin J. Babcock. 2007). Rev. encouraging everyone to think about whether it should be taken. 2006). Sorin. 20086 (April 24. or other members of the staff. Nancy R. David M. Litigation Release No. Jurman. Ken Okada. When going through the process of looking back over events. Chi. 7 http://www. This speech expresses the author's views and does not necessarily reflect those of the Commission. 19796 (August 9. and SEC v. 2007). Litigation Release No.. Srebnik. and William F. Anderson. and William F. Mintz and Rex R. Collotta. 19964 (January 10.. There it is. But more often. Chicago. Corporate an. Jacob ("Kobi") Alexander. Christopher K. 2007). DSJ International Resources Ltd. Jacob ("Kobi") Alexander. 2007) and SEC v. Litigation Release No. Litigation Release No. Tavdy. Marc R. 2007). David A. Andrew A. not only figuring out whether the conduct is legally defensible but also asking.. Jr. Litigation Release No. Mitchel S. 2007). Myron F. Encouraging a client to step back from a line rather than help the client squeeze as close to it as possible. whether in an internal investigation or otherwise. here's to the courage in all of us. Glass. Litigation Release No. Franklin. Erik R.SEC Speech: Remarks Before the 27th Annual Ray Garrett. 20020 (February 28. Id. 2006). L.gov/news/speech/2007/spch050407lct. Id. 16 Cal. at 95. 2006).sec.J. 11 12 See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions. 44969 (October 23. Internal Corporate Investigations. 13 14 15 16 17 18 19 20 http://www. Reflections From Embassy Lakes. 2007 (Linda Chatman Thomsen) Charles I.sec. Release No. Report of the Task Force on the Lawyer's Role in Corporate Governance at 1 (November 2006). Louis U. Jr. Press Release 2006-4 (January 4. Press Release 2007-70 (April 24. Chicago. Corporate an. See SEC Charges Six Former Officers of Putnam Fiduciary Trust Company with Defrauding Clients of $4 Million. Florida: The Effective Teaching Of Criminal Law. 2001).htm Home | Previous Page Modified: 05/17/2007 http://www. May 4. Id. The Privilege of Confidential Communication Between Lawyer and Client. Id.gov/news/speech/2007/spch050407lct. 9 10 Arthur F. 48 St.. See SEC Charges Former Apple General Counsel for Illegal Stock Option Backdating. L.htm (8 of 8)10/19/2007 4:30:59 PM . 2007). 1350 (2000). Illinois.w Institute 2007. L.SEC Speech: Remarks Before the 27th Annual Ray Garrett. at 3. 487 (1927). Mathews. Press Release 2006-2 (January 3. Ohio St. See Statement of the Securities and Exchange Commission Concerning Financial Penalties. 8 Max Radin. Id.. 655 (1984).J. Rev. The Association of the Bar of the City of New York. Lugosi.