Search This Blog


This is a photo of the National Register of Historic Places listing with reference number 7000063

Saturday, March 31, 2012

BRITISH VIRGIN ISLANDS CORPORATION AND RESIDENT OF SWITZERLAND SETTLE CHARGES OF INSIDER TRADING IN THE OPTIONS OF INTERMUNE, INC.

The following excerpt is from the SEC website:
March 30, 2012
The Securities and Exchange Commission announced that, on March 29, 2012, the Honorable George B. Daniels,U.S. District Judge for the Southern District of New York, entered a settled final judgment for insider trading in the options of InterMune, Inc. as to Michael S. Sarkesian, a Swiss citizen and resident, and Quorne Ltd., a British Virgin Islands limited liability company wholly owned by a Cyprus trust maintained for the benefit of a Sarkesian relation. The alleged illicit trading by Sarkesian and Quorne took place ahead of a December 17, 2010 announcement that the European Union’s Committee for Medicinal Products for Human Use, or CHMP, had recommended to the European Commission that it permit InterMune to market its developmental drug, Esbriet, in the European Union. Sarkesian and Quorne consented to the entry of the final judgment, which imposes injunctive and monetary relief. The Commission also announced that on March 27, 2012, it amended its complaint, filed on December 23, 2010 against one or more unknown purchasers of the options of InterMune, to name Sarkesian and Quorne as defendants.

In its amended complaint, the Commission alleges that Sarkesian was tipped to material non-public information concerning the CHMP’s recommendation in advance of the December 17 announcement and that, while in possession of this material non-public information, Sarkesian exercised his authority to manage and administer Quorne’s funds by recommending to Quorne that it purchase InterMune call options. As a result, Sarkesian caused Quorne to purchase 400 InterMune call options through a brokerage account in Switzerland on December 7 and 8, 2010. The market price of the 400 options rose over 500% following the December 17 announcement.

On December 23, 2010, on the same day that the Commission filed its initial complaint, the Court entered a Temporary Restraining Order freezing assets and trading proceeds from the alleged illicit trading and prohibiting the then-unknown purchasers from disposing of the options or any proceeds from the sale of the options. Quorne later sold the 400 options, the proceeds of which have remained frozen by Court order.
Without admitting or denying the allegations of the amended complaint, Quorne and Sarkesian consented to entry of a final judgment enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and ordering them jointly and severally to pay $616,000 in disgorgement and $93,806.17 in civil penalties pursuant to Exchange Act Section 21A. The monetary sanctions will be paid out of the frozen funds. See Litigation Release No. 21794 (December 23, 2010).

The Commission acknowledges the assistance of the Options Regulatory Surveillance Authority, the Swiss Financial Market Supervisory Authority, the Cyprus Securities and Exchange Commission, and the British Virgin Islands Financial Services Commission.

Friday, March 30, 2012

SERIAL FRAUDSTER BROUGHT TO JUSTICE

The following excerpt is from the SEC website:
March 27, 2012
SEC Obtains Summary Judgment against Serial Fraudster Matthew J. Gagnon
The Securities and Exchange Commission announced today that on March 22, 2012, the Honorable George Caram Steeh of the United States District Court for the Eastern District of Michigan granted the SEC’s motion for summary judgment and entered a final judgment against defendant Matthew J. Gagnon of Portland, Oregon and Weslaco, Texas. The Court found that Gagnon violated the registration, anti-fraud, and anti-touting provisions of the federal securities laws by promoting and operating a series of securities offerings through his website, www.Mazu.com, and ordered Gagnon to pay $4.1 million in disgorgement with prejudgment interest and a $100,000 civil penalty.

The SEC filed this action against Gagnon on May 11, 2010, alleging that since 1997, Gagnon had billed himself as an Internet business opportunity expert and his website as “the world’s first and largest opportunity review website.” According to the SEC’s complaint, from January 2006 through approximately August 2007, Gagnon helped orchestrate a massive Ponzi scheme conducted by Gregory N. McKnight and his company, Legisi Holdings, LLC, which raised a total of approximately $72.6 million from over 3,000 investors by promising returns of upwards of 15% a month. The complaint also alleged that Gagnon promoted Legisi but in doing so misled investors by claiming, among other things, that he had thoroughly researched McKnight and Legisi and had determined Legisi to be a legitimate and safe investment. The complaint alleged that Gagnon had no basis for the claims he made about McKnight and Legisi. Gagnon also failed to disclose to investors that he was to receive 50% of Legisi's purported "profits" under his agreement with McKnight. According to the complaint, Gagnon received a net of approximately $3.8 million in Legisi investor funds from McKnight for his participation in the scheme.

The SEC's complaint further alleged that beginning in August 2007, Gagnon fraudulently offered and sold securities representing interests in a new company that purportedly was to develop resort properties. The complaint alleged that Gagnon, among other things, falsely claimed that the investment was risk-free and "SEC compliant," and guaranteed a 200% return in 14 months. In reality, however, Gagnon sent the money to a twice-convicted felon, did not register the investment with the SEC, and knew such an outlandish return was impossible. Gagnon took in at least $361,865 from 21 investors.
The SEC's complaint also alleged that in April 2009, Gagnon began promoting a fraudulent offering of interests in a purported Forex trading venture. Gagnon guaranteed that the venture would generate returns of 2% a month or 30% a year for his investors. Gagnon's claims were false, and he had had no basis for making them because Gagnon never reviewed his friend’s trading records before promoting the offering, which would have shown over $150,000 in losses over the previous nine months.

The SEC's complaint charged Gagnon with violating Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief already obtained, the complaint sought preliminary and permanent injunctions, disgorgement, and civil penalties from Gagnon. On May 24, 2010, the SEC obtained an emergency order freezing Gagnon’s assets and other preliminary relief. Subsequently, on August 6, 2010, the Court granted an order of preliminary injunction against Gagnon pursuant to his consent.

In granting the Commission’s motion and entering final judgment, the Court found that Gagnon “purposefully built up an image of trustworthiness in the on-line investing community and exploited this trust.” The Court also found that Gagnon “repeatedly committed egregious violations of the federal securities laws” and “has shown no remorse for his conduct.”

The Court’s final judgment against Gagnon permanently enjoins him from future violations of Sections 5(a), 5(c), 17(a) and 17(b) of the Securities Act of 1933 and Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and orders Gagnon to pay $3,613,259 in disgorgement, $488,570.47 in prejudgment interest, and a $100,000 civil penalty.

FEDERAL AGENCIES WANT REVISIONS TO LEVERAGED FINANCE GUIDANCE

The following excerpt is from a FDIC e-mail:
Agencies Propose Revisions to Leveraged Finance Guidance
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (the agencies) are seeking comment on proposed revisions to the interagency leveraged finance guidance issued in 2001. Transactions that are covered by this guidance are characterized by a borrower with a degree of financial or cash flow leverage that significantly exceeds industry norms as measured by various debt, cash flow, or other ratios.

The agencies observed tremendous growth in the volume of leveraged credit leading up to the crisis and in the participation of non-regulated investors.  While there was a pull-back in leveraged lending during the crisis, volumes have since increased while prudent underwriting practices have deteriorated.  As the market has grown, debt agreements have frequently included features that provide relatively limited lender protection, including the absence of meaningful maintenance covenants and the inclusion of other features that can affect lenders’ recourse in the event of weakened borrower performance.  In addition, capital structures and repayment prospects for some transactions, whether originated to hold or to distribute, have been aggressive.  Management information systems (MIS) at some institutions have proven less than satisfactory in accurately aggregating exposures on a timely basis, and many institutions have found themselves holding large pipelines of higher-risk commitments at a time when buyer demand for risky assets diminished significantly.

Leveraged finance is an important type of financing for the economy, and banks play an integral role in making credit available and syndicating that credit to investors.  It is important that banks help provide financing to creditworthy borrowers in a safe and sound manner.
In light of the market’s evolution, the agencies propose replacing the 2001 guidance with revised leveraged finance guidance that refocuses attention to five key areas:
Establishing a Sound Risk-Management Framework:  The agencies expect that management and the board identify the institution’s risk appetite for leveraged finance, establish appropriate credit limits, and ensure prudent oversight and approval processes.  
Underwriting Standards:  These outline the agencies’ expectations for cash flow capacity, amortization, covenant protection, and collateral controls and emphasize that the business premise for each transaction should be sound and its capital structure should be sustainable irrespective of whether underwritten to hold or to distribute.
Valuation Standards:  These concentrate on the importance of sound methodologies in the determination and periodic revalidation of enterprise value.
Pipeline Management:  This highlights the need to accurately measure exposure on a timely basis, the importance of having policies and procedures that address failed transactions and general market disruption, and the need to periodically stress test the pipeline.
Reporting and Analytics:  This emphasizes the need for MIS that accurately capture key obligor characteristics and aggregates them across business lines and legal entities on a timely basis.  Reporting and analytics also reinforce the need for periodic portfolio stress testing.
Although some sections of the guidance should apply to all leveraged transactions (for example, underwriting), the vast majority of community banks should not be affected as they have no exposure to leveraged loans.
Comments on the proposed guidance must be submitted to the agencies no later than June 8, 2012.

Thursday, March 29, 2012

SEC SAYS THERE ARE THREE NEW DEVELOPMENTS REGARDING SHAREHOLDER VOTING

The following excerpt is from the SEC website:
Voting in Annual Shareholder Meetings - What’s New in 2012
03/28/2012
Over the next few months, investors can expect to receive proxy materials for annual shareholder meetings or a related notice advising shareholders how they can access these materials. Shareholder voting typically takes place at the annual shareholder meeting, which most U.S. public companies hold each year between March and June.

There are three new or continuing developments this year:
Shareholder Proposals on Proxy Access. Shareholders may be asked to vote on shareholder proposals to establish procedures to include shareholder director nominations in company proxy materials.
Uninstructed Broker Votes. Restrictions have increased on the circumstances in which brokers may vote on behalf of clients who do not send in voting instructions. That means that brokers will be casting discretionary votes on a narrower range of items this year.

Say-on-pay Votes. Starting last year, most public companies were required to have advisory say-on-pay votes and to choose how often to hold such votes in the future. This year, shareholders will vote again to approve executive compensation at those companies that have chosen to hold annual advisory say-on-pay votes.

Shareholder Proposals on Proxy Access
Typically, the board of directors nominates board candidates, whose names appear in the company’s proxy materials for director elections. Shareholders do not have an automatic right to have their own director nominees included in these proxy materials. Where shareholders do have this ability, the names of director candidates nominated by qualified shareholders appear in the proxy materials alongside the names of the candidates nominated by the board of directors. This process gives shareholders direct access to the proxy materials for nominating directors and is often called “proxy access.”
This year, as a result of amendments to the shareholder proposal rule, eligible shareholders have the right to have proposals that call for the adoption of proxy access procedures included in company proxy materials. (Note that the right to submit shareholder proposals about proxy access procedures is different from the right to nominate director candidates.)Shareholder resolutions on proxy access may either be advisory or binding, and investors have filed both kinds this year. An advisory resolution approved by shareholders leaves the final decision to the company’s board of directors on whether to adopt a proxy access procedure. A binding resolution takes effect once it is approved by shareholders. (Depending on the company, approval may require more than a simple majority of votes.)
Court Decision on Proxy Access Rule

In August 2010, the SEC adopted a new rule that would have required companies to include eligible shareholders’ director nominees in company proxy materials in certain circumstances. The rule was contested in court, however, and in July 2011, the U.S. Court of Appeals for the D.C. Circuit struck down this rule.

Uninstructed Broker Votes
The New York Stock Exchange (NYSE) allows brokers to vote on certain items on behalf of their clients, if the broker has received no voting instructions from those clients within 10 days of the annual meeting. These votes are called uninstructed or discretionary broker votes. Brokers are only allowed to cast uninstructed broker votes on “routine” items, and the scope of routine items has narrowed over the years. This year, the NYSE announced that brokers may no longer cast uninstructed votes on certain corporate governance proposals. These include proposals to de-stagger the board of directors (so that all directors are elected annually), adopt majority voting in the election of directors, eliminate supermajority voting requirements, provide for the use of consents, provide rights to call a special meeting, and override certain types of anti-takeover provisions. Previously, the NYSE had permitted a broker to cast uninstructed votes on these proposals if they had the support of the company’s management.

Two other important restrictions on discretionary broker voting have been in effect since 2010. First, brokers can no longer cast uninstructed votes in the election of directors (except for certain mutual funds). Second, brokers are prohibited from voting uninstructed shares on executive compensation matters, including say-on-pay votes.

As the ability of brokers to vote uninstructed shares shrinks, the importance of shareholder voting grows. If shareholders do not vote, they cannot expect their broker to vote for them on an increasing range of issues.
Say-on-pay Votes

The say-on-pay rules took effect last year for most companies with two exceptions. First, smaller reporting companies have until 2013 to comply. The second exception concerns companies that borrowed money under the Troubled Asset Relief Program (TARP) and have not yet paid it back. TARP companies are required to hold annual say-on-pay votes until they pay back all the money they borrowed from the government, at which time they will become subject to the say-on-pay rules applicable to other companies.
The rules require three non-binding votes on executive compensation:
Say-on-pay Votes. Companies must provide their shareholders with an advisory vote on the compensation of the most highly compensated executives. The votes are non-binding, leaving final decisions on executive compensation to the company and its board of directors. Companies are now required to disclose whether and, if so, how their compensation policies and decisions have taken into account the results of their most recent say-on-pay vote. This disclosure generally appears in the compensation discussion and analysis section of the proxy statement. Shareholders can review this year’s proxy statements to find out how companies have responded to last year’s say-on-pay votes.

Frequency Votes. Companies also were required last year to provide their shareholders with an advisory vote on how often they would like to be presented with the say-on-pay votes—every year, every second year, or every third year. Like say-on-pay votes, frequency votes are non-binding. After each advisory vote on frequency, companies must disclose their decision as to how frequently they will hold advisory say-on-pay votes. Companies would typically provide this disclosure either in a Form 8-K or Form 10-Q, both of which are filed with the SEC. Many companies provide this information shortly after their annual meeting. These forms are publicly available on the Commission’s website
atwww.sec.gov/edgar/searchedgar/webusers.htm. Companies typically file several 8-Ks in a year. Look for those referring to Item 5.07.

Golden Parachute Arrangements. The term, “golden parachute” generally refers to compensation arrangements and understandings with top executive officers in connection with an acquisition, merger or similar transaction. When companies seek shareholder approval of a merger or acquisition, they are required to provide their shareholders with an advisory vote to approve, in the typical scenario, the disclosed golden parachute compensation arrangements between the target company and its own named executive officers or those of the acquiring company. The company is not required to conduct such a vote, however, if the golden parachute disclosures were included in executive compensation disclosures subject to a prior say-on-pay vote.

ALLEGEDLY, GOLD COIN DEALER INVESTED MONEY AT A CASINO


The following excerpt is from the Securities and Exchange Commission website:
March 26, 2012
SEC Charges Operator of Gold Coin Firm with Conducting Fraudulent Securities Offering
The Securities and Exchange Commission today announced that it filed a civil injunctive action against David L. Marion of Minneapolis, Minnesota and his company, International Rarities Holdings, Inc. (“IR Holdings”), accusing them of conducting a fraudulent, unregistered offer and sale of approximately $1 million in securities.

The SEC’s complaint, filed in U.S. District Court in Minneapolis, alleges that from at least November 2008 through July 2009, Marion and IR Holdings raised approximately $1 million from at least 26 investors through the offer and sale of IR Holdings securities. According to the complaint, Marion represented to investors that they were purchasing shares of IR Holdings, which he said was the parent company and 100% owner of International Rarities Corporation (“IR Corp.”). The complaint alleges that IR Corp. is a privately held Minneapolis based gold coin and bullion sales and trading firm that Marion also owned and operated. The complaint further alleges that Marion told investors that their investments were to be used to expand IR Holdings’ business and eventually take it public. According to the complaint, Marion’s representations were false because IR Holdings never owned IR Corp. and thus Marion sold investors shares of a worthless shell company. In addition, the complaint alleges that Marion did not use the investors’ funds to expand IR Holdings’ business and instead diverted the majority of the funds for his own personal use, including for casino gambling.

The SEC’s complaint charges Marion and IR Holdings with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking a permanent injunction and disgorgement of ill-gotten gains with prejudgment interest, jointly and severally, against Marion and IR Holdings and a civil penalty against Marion.

Wednesday, March 28, 2012

SEC CHARGES BAY AREA INVESTMENT ADVISER FOR DEFRAUDING INVESTORS WITH BOGUS AUDIT REPORT


The following excerpt is from the U.S. Securities and Exchange Commission website:
March 21, 2012
On March 15, 2012, the Securities and Exchange Commission charged a San Francisco-area investment adviser with defrauding investors by giving them a bogus audit report that embellished the financial performance of the fund in which they were investing.

The SEC alleges that James Michael Murray raised more than $4.5 million from investors in his various funds including Market Neutral Trading LLC (MNT), a purported hedge fund that claimed to invest primarily in domestic equities. Murray provided MNT investors with a report purportedly prepared by independent auditor Jones, Moore & Associates (JMA). However, JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled. The phony audit report misstated the financial condition and performance of MNT to investors.

The U.S. Attorney’s Office for the Northern District of California also has filed criminal charges against Murray in a complaint unsealed yesterday.

According to the SEC’s complaint filed in federal court in San Francisco, Murray began raising the funds from investors in 2008. The following year, MNT distributed the phony audit report to investors claiming the audit was conducted by a legitimate third-party accounting firm. However, JMA is not registered or licensed as an accounting firm in Delaware, where it purports to do business. JMA’s website was paid for by a Murray-controlled entity and listed 12 professionals with specific degrees and licenses who supposedly work for JMA. However, at least five of these professionals do not exist, including the two named principals of the firm: “Richard Jones” and “Joseph Moore.” Murray has attempted to open brokerage accounts in the name of JMA, identified himself as JMA’s chief financial officer, and called brokerage firms falsely claiming to be the principal identified on most JMA documents.

The SEC alleges that the bogus audit report provided to investors understated the costs of MNT’s investments and thus overstated the fund’s investment gains by approximately 90 percent. The JMA audit report also overstated MNT’s income by approximately 35 percent, its member capital by approximately 18 percent, and its total assets by approximately 10 percent.

The SEC’s complaint charges Murray with violating Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, which prohibits fraud by investment advisers on investors in a pooled investment vehicle. The complaint seeks injunctive relief and financial penalties from Murray.

The SEC’s investigation was conducted by Karen Kreuzkamp and Robert S. Leach of the San Francisco Regional Office following an examination of MNT conducted by Yvette Panetta and Doreen Piccirillo of the New York Regional Office’s broker-dealer examination program. The SEC’s litigation will be led by Robert L. Mitchell of the San Francisco Regional Office. The SEC thanks the U.S. Attorney’s Office for the Northern District of California and the U.S. Secret Service for their assistance in this matter.

Tuesday, March 27, 2012

ACCOUNT CHURNING GETS FUTURES TRADER'S REGISTRATIONS REVOKED

The following excerpt is from the CFTC website:
March 21, 2012
CFTC Revokes Registrations of Richard Allan Finger, Jr. and his Company, Black Diamond Futures, LLC Based on Criminal Action
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a Notice of Intent to Revoke the Registrations (Notice) of Richard Allan Finger, Jr. (Finger), a resident of Washington State, and Black Diamond Futures, LLC (Black Diamond), a Washington State limited liability company. The CFTC simultaneously issued an Opinion and Order (Order) settling the action and revoking Black Diamond’s registration with the CFTC as a Commodity Trading Advisor (CTA) and Finger’s registration as its sole Associated Person (AP).

The Notice alleged that, pursuant to the Commodity Exchange Act (CEA), Finger was subject to a statutory disqualification of his registration based upon his plea of guilty to one count of wire fraud, in violation of 18 U.S.C. § 1343 in the criminal action, United States v. Finger, Crim. Case No. 11-mj-424 (W.D. Wash.). The Notice further alleged that Black Diamond was subject to a statutory disqualification pursuant to the CEA because Finger was the sole principal of Black Diamond and Finger’s registration is subject to revocation.

The Notice alleged that in the criminal action, Finger admitted to certain facts, including that:

 From late 2009 to August 2011, Finger was a registered securities representative in Washington State;
 In approximately February 2011, Finger started his own broker-dealer, Black Diamond Securities LLC;

 In order to induce his existing investors to transfer their accounts to his new company, Finger fraudulently inflated the values of their accounts in statements he made to them;
 Thereafter, Finger churned the securities accounts of at least 10 of his investors, despite telling them that he would use a conservative investment strategy. For example, with respect to one investor, Finger’s churning reduced the value of the investor’s account from approximately $1 million to less than $225,000 within two months; and
 In order to conceal his churning, Finger emailed false account statements to his investors.
The CFTC’s Order accepting the offer of settlement in the statutory disqualification proceeding finds that Finger and Black Diamond are subject to statutory disqualification from registration with the CFTC pursuant to Sections 8a(2)(D)(iii) and (iv) and 8a(2)(H) of the CEA, respectively, and revokes their registrations.
CFTC Division of Enforcement staff responsible for this case are Glenn Chernigoff, Alison Wilson, Gretchen L. Lowe, and Vincent A. McGonagle.

Monday, March 26, 2012

SEC CHARGES BIOMETINC., WITH BRIBING DOCTORES IN ARGENTINA, BRAZIL, AND CHINA


The following excerpt is from a Securities and Exchange Commission e-mail:
Washington, D.C., March 26, 2012 — The Securities and Exchange Commission today charged Warsaw, Ind.-based medical device company Biomet Inc. with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries and agents bribed public doctors in Argentina, Brazil, and China for nearly a decade to win business.

Biomet, which primarily sells products used by orthopedic surgeons, agreed to pay more than $22 million to settle the SEC’s charges as well as parallel criminal charges announced by the U.S. Department of Justice today. The charges arise from the SEC and DOJ’s ongoing proactive global investigation into medical device companies bribing publicly-employed physicians.

The SEC alleges that Biomet and its four subsidiaries paid bribes from 2000 to August 2008, and employees and managers at all levels of the parent company and the subsidiaries were involved along with the distributors who sold Biomet’s products. Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal practices.

“Biomet’s misconduct came to light because of the government’s proactive investigation of bribery within the medical device industry,” said Kara Novaco Brockmeyer, Chief of the Enforcement Division’s Foreign Corrupt Practices Act Unit. “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.”

According to the SEC’s complaint filed in federal court in Washington D.C., employees of Biomet Argentina SA paid kickbacks as high as 15 to 20 percent of each sale to publicly-employed doctors in Argentina. Phony invoices were used to justify the payments, and the bribes were falsely recorded as “consulting fees” or “commissions” in Biomet’s books and records. Executives and internal auditors at Biomet’s Indiana headquarters were aware of the payments as early as 2000, but failed to stop it.

The SEC alleges that Biomet’s U.S. subsidiary Biomet International used a distributor to bribe publicly-employed doctors in Brazil by paying them as much as 10 to 20 percent of the value of their medical device purchases. Payments were openly discussed in communications between the distributor, Biomet International employees, and Biomet’s executives and internal auditors in the U.S. For example, a February 2002 internal Biomet memorandum about a limited audit of the distributor’s books stated:

Brazilian Distributor makes payments to surgeons that may be considered as a kickback. These payments are made in cash that allows the surgeon to receive income tax free. …The accounting entry is to increase a prepaid expense account. In the consolidated financials sent to Biomet, these payments were reclassified to expense in the income statement.

According to the SEC’s complaint, two additional subsidiaries – Biomet China and Scandimed AB – sold medical devices through a distributor in China who provided publicly-employed doctors with money and travel in exchange for their purchases of Biomet products. Beginning as early as 2001, the distributor exchanged e-mails with Biomet employees that explicitly described the bribes he was arranging on the company’s behalf. For example, one e-mail stated:

[Doctor] is the department head of [public hospital]. [Doctor] uses about 10 hips and knees a month and it’s on an uptrend, as he told us over dinner a week ago. …Many key surgeons in Shanghai are buddies of his. A kind word on Biomet from him goes a long way for us. Dinner has been set for the evening of the 24th. It will be nice. But dinner aside, I’ve got to send him to Switzerland to visit his daughter.
The SEC alleges that some e-mails described the way that vendors would deliver cash to surgeons upon completion of surgery, and others discussed the amount of payments. The distributor explained in one e-mail that 25 percent in cash would be delivered to a surgeon upon completion of surgery. Biomet sponsored travel for 20 Chinese surgeons in 2007 to Spain, where a substantial part of the trip was devoted to sightseeing and other entertainment.

Biomet consented to the entry of a court order requiring payment of $4,432,998 in disgorgement and $1,142,733 in prejudgment interest. Biomet also is ordered to retain an independent compliance consultant for 18 months to review its FCPA compliance program, and is permanently enjoined from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Biomet agreed to pay a $17.28 million fine to settle the criminal charges.

The SEC’s investigation was conducted by Brent S. Mitchell with Tracy L. Price of the Enforcement Division’s FCPA Unit and Reid A. Muoio. The SEC acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the Federal Bureau of Investigation. The investigation into bribery in the medical device industry is continuing.

TRADER CHARGED WITH MANIPULATION FUTURES PRICES OF PALLADIUM AND PLATINUM


The following excerpt is from the U.S. Commodity Futures Trading Commission website:
CFTC Charges Joseph F. Welsh III, Former MF Global Broker, with Attempted Manipulation of Palladium and Platinum Futures Prices

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a federal court action in the Southern District of New York chargingJoseph F. Welsh III, of Northport, N.Y., with attempted manipulation of the prices of palladium and platinum futures contracts, including the settlement prices, traded on the New York Mercantile Exchange (NYMEX). The CFTC complaint alleges that Welsh engaged in this conduct from at least June 2006 through May 2008 and specifically on at least 12 separate occasions.

The complaint charges Welsh with directly attempting to manipulate the palladium and platinum futures prices and with aiding and abetting the attempted manipulations of Christopher L. Pia, a former portfolio manager of Moore Capital Management, LLC, a CFTC registrant.

According to the complaint, while working as a broker at MF Global Inc., Welsh employed a manipulative scheme commonly known as “banging the close.”

Welsh allegedly routinely received market-on-close orders to buy palladium and platinum futures contracts from Pia, either directly or through a clerk, and also allegedly understood that Pia wanted to buy at high prices. To accomplish that, Welsh intentionally devised and implemented a trading strategy to attempt to maximize the price impact through trading during the two-minute closing periods of the palladium and platinum futures contracts markets (Closing Periods), the complaint charges.

The CFTC complaint also states that to push prices higher, Welsh routinely withheld entering the market-on-close buy orders until only a few seconds remained in the Closing Periods and thereby caused the orders to be executed within seconds of the close of trading.

The CFTC seeks civil monetary penalties, trading and registration bans and a permanent injunction against further violations of the federal commodities laws, as charged.

The CFTC settled related actions against Moore Capital Management LLC’s successor, Moore Capital Management, LP (Moore), and its affiliates and against Pia. On April 29, 2010, the CFTC issued an order filing and settling charges of attempted manipulation and failure to supervise against Moore and its affiliates. The CFTC’s order imposed a $25 million civil monetary penalty, restricted Moore’s market-on-close trading in the palladium and platinum futures and options markets for two years and restricted Moore’s registration for three years (see CFTC Press Release 5815-10).

On July 25, 2011, the CFTC issued an order filing and settling charges of attempted manipulation against Pia. The CFTC order required Pia, among other things, to pay a $1 million civil monetary penalty and permanently bans him from trading during the closing periods for all CFTC-regulated products and permanently bans him from trading CFTC regulated products in palladium and platinum (see CFTC News Release 6079-11).

The CFTC thanks the CME Group, the parent company of the NYMEX, for its assistance.
CFTC Division of Enforcement staff responsible for this case are Melanie Bates, Kara Mucha, James A. Garcia, August A. Imholtz III, Kassra Goudarzi, Jeremy Cusimano, Janine Gargiulo, Stephen Obie, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.

Sunday, March 25, 2012

SEC HAS NEW SUPERVISORY COOPERATION ARRANGEMENTS WITH FOREIGN GOVERNMENTS


The following excerpt is from the SEC website:
SEC Establishes New Supervisory Cooperation Arrangements with Foreign Counterparts
Washington, D.C., March 23, 2012 — The Securities and Exchange Commission today announced that it has established comprehensive arrangements with the Cayman Islands Monetary Authority (CIMA) and the European Securities and Markets Authority (ESMA) as part of long-term strategy to improve the oversight of regulated entities that operate across national borders.

The two memoranda of understanding (MOUs) reached this month follow on a similar supervisory arrangement that the SEC concluded with the Quebec Autorité des marchés financiers and the Ontario Securities Commission in 2010 and expanded to include the Alberta Securities Commission and the British Columbia Securities Commission last September.

The SEC’s latest supervisory cooperation arrangements will enhance SEC staff ability to share information about such regulated entities as investment advisers, investment fund managers, broker-dealers, and credit rating agencies. The Cayman Islands is a major offshore financial center and home to large numbers of hedge funds, investment advisers and investment managers that frequently access the U.S. market. ESMA is a pan-European Union agency that regulates credit rating agencies and fosters regulatory convergence among European Union securities regulators.

“Supervisory cooperation arrangements help the SEC build closer relationships with its counterparts to cooperate and consult on each other’s oversight activities in ways that may help prevent fraud in the long term or lessen the chances of future financial crises,” said Ethiopis Tafara, Director of the SEC’s Office of International Affairs.
The SEC’s approach to supervisory cooperation with its overseas counterparts follows on more than two decades of experience with cross-border cooperation, starting in the late 1980s with MOUs facilitating the sharing of information between the SEC and other securities regulators in securities enforcement matters. The SEC’s enforcement cooperation arrangements — which now encompass partnerships with approximately 80 separate jurisdictions via bilateral MOUs and a Multilateral MOU under the auspices of the International Organization of Securities Commissions (IOSCO) — detail procedures and mechanisms by which the SEC and its counterparts can collect and share investigatory information where there are suspicions of a violation of either jurisdiction’s securities laws, and after a potential problem has arisen.

In contrast, the SEC’s supervisory cooperation arrangements generally establish mechanisms for continuous and ongoing consultation, cooperation and the exchange of supervisory information related to the oversight of globally active firms and markets. Such information may include routine supervisory information as well as the types of information regulators need to monitor risk concentrations, identify emerging systemic risks, and better understand a globally-active regulated entity’s compliance culture. These MOUs also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located abroad.

Although they are designed to achieve different things, enforcement and supervisory cooperation arrangements are complimentary tools. Supervisory cooperation involves ongoing sharing of information regarding day-to-day oversight of regulated entities. Enforcement cooperation MOUs, by contrast, help the Commission collect information abroad that is necessary to help ensure that the SEC’s enforcement program deters violations of the federal securities laws, while also helping to compensate victims of securities fraud when possible.
The SEC entered into its first supervisory cooperation MOU in March 2006 with the United Kingdom’s Financial Services Authority. Following the recent financial crisis, the Commission has expanded its emphasis on this form of continuous supervisory cooperation in an effort to better identify emerging risks to U.S. capital markets and the international financial system. As part of this effort, SEC commissioners and staff co-chaired an international task force in 2010 to develop principles for cross-border supervisory cooperation. These principles have since proven to be a useful guideline for structuring MOUs around the type of information to be shared, the mechanisms which regulators can use to share information, and the degree of confidentiality this information should be accorded.


INSIDE TRADER SETTLES 3COM CORP ACQUISITION CASE


The following excerpt is from the SEC website:
March 20, 2012
Defendant Michael Kimelman Settles SEC Insider Trading Charges
The U.S. Securities and Exchange Commission announced today that on March 16, 2012, The Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York, entered a final judgment against Michael Kimelman in SEC v. Cutillo et al., 09-CV-9208, an insider trading case the SEC filed on November 5, 2009. See Lit. Rel. No. 21283 (Nov. 5, 2009). The SEC charged Kimelman, who was a trader at Lighthouse Financial Group, LLC, with trading on inside information regarding the announced acquisition of 3Com Corp. in September 2007.

In its complaint, the SEC alleged that Arthur Cutillo, a former attorney with the law firm Ropes & Gray LLP, misappropriated from his law firm material nonpublic information concerning, among other things, the potential acquisition of 3Com, and tipped the inside information, through another attorney, to Zvi Goffer, in exchange for kickbacks. The SEC further alleged that Goffer tipped the inside information to a number of individuals, including Kimelman, who traded based on the information, realizing illicit profits of approximately $270,000 in two personal trading accounts.

To settle the SEC’s charges, Kimelman consented to the entry of a final judgment that: (i) permanently enjoins him from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders him to pay disgorgement of $273,255, plus prejudgment interest of $54,582. In a related SEC administrative proceeding, Kimelman consented to the entry of an SEC order barring him from association with any broker or dealer, investment adviser, municipal securities dealer or transfer agent, and barring him from participating in any offering of a penny stock. Kimelman previously was found guilty of securities fraud and conspiracy to commit securities fraud in a related criminal case, United States v. Michael Kimelman, 10-CR-0056 (S.D.N.Y.), and was sentenced to 30 months in prison and ordered to pay a criminal forfeiture of $289,079.

Saturday, March 24, 2012

FINAL JUDGEMENT AGAINST RELIEF DEFENDANT LANEXA MANAGEMENT LLC


The following excerpt is from the SEC website:
March 19, 2012
Lanexa Management LLC Agrees Disgorge $746,797 in Insider Trading Profits
The U.S. Securities and Exchange Commission announced today that on March 16, 2012, The Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York, entered a final judgment against Relief Defendant Lanexa Management, LLC in SEC v. Thomas C. Hardin and Lanexa Management, LLC, 10-CV-8599, an insider trading case the SEC originally filed on November 12, 2010. See Lit. Rel. No. 21741 (Nov. 15, 2010). As alleged in the SEC’s amended complaint, filed on March 16, 2012, Defendant Thomas C. Hardin, a former managing director at Lanexa Management, engaged in insider trading on behalf of a Lanexa hedge fund ahead of the announced acquisition of 3Com Corp. in September 2007, resulting in more than $600,000 in illegal trading profits.

The SEC’s amended complaint alleged that Arthur Cutillo and Brien Santarlas, two former attorneys with the law firm of Ropes & Gray LLP, misappropriated from their law firm material nonpublic information concerning the acquisition of 3Com, and tipped the inside information, through another attorney, to Zvi Goffer, a former proprietary trader at Schottenfeld Group LLC, in exchange for kickbacks. The SEC further alleged that Goffer tipped the inside information to, among others, Gautham Shankar, a fellow proprietary trader at Schottenfeld, who then tipped Hardin, a managing director at Lanexa. As alleged in the amended complaint, Hardin used the inside information to trade in the securities of 3Com on behalf of a Lanexa hedge fund.

To settle the SEC’s action, Lanexa agreed to a final judgment ordering it, as a relief defendant, to disgorge $612,190 in illicit trading profits, plus prejudgment interest of $134,607. Hardin previously consented to a judgment in this case and pled guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case, United States v. Thomas Hardin, 10-CR-339 (S.D.N.Y.). See Lit. Rel. No. 21999 (June 14, 2011).

Friday, March 23, 2012

SEC COMPLAINT ALLEGES FRAUD SCHEME TO MISAPPROPRIATE CLIENT FUNDS


The following excerpt is from the SEC website:
March 22, 2012
The Securities and Exchange Commission (“Commission”) today announced the filing of a complaint alleging fraud charges against Andrew Franz (“Franz”), a resident of Aurora, Ohio. According to the Complaint, Franz operated a fraudulent scheme in which, through forgery and other fraudulent means, he misappropriated approximately $865,969 from clients of Ruby Corporation (“Ruby”), a registered investment adviser with which he was associated, including $779,418 from family members and $86,551 from other clients. The Commission’ complaint also alleges that Franz misappropriated approximately $172,000 from Ruby itself by stealing legitimate client fees payable to Ruby. The complaint also alleges that during this same time period, Franz returned approximately $684,000 to Ruby disguised as client fees to conceal the firm’s dwindling client base and revenues. The complaint alleges that Franz thus kept a net of approximately $354,000 in funds stolen from these sources.

In addition, the complaint alleges that in November 2011, despite no longer having access to Ruby’s client files or systems, Franz was able to successfully obtain a fraudulent distribution from a Ruby client account. The complaint alleges that Franz obtained this distribution check through two phone conversations during which he falsely identified himself to be the broker of record and then the chairman of the client corporation. The complaint also alleges that when Franz attempted to deposit the fraudulently obtained check, Franz’s bank stopped the transaction.

At the SEC’s request for emergency relief, the Hon. Benita Y. Pearson, United States District Court, Northern District of Ohio, issued an emergency injunction against Franz, an order freezing all assets under Franz’s control, and other emergency relief.

SEC CHARGES FIVE WITH INSIDER TRADING ON CONFIDENTIAL MERGER NEGOTIATIONS


The excerpt below is from the SEC website:
March 14, 2012
The Securities and Exchange Commission announced that, on March 13, 2012, it charged two financial advisors and three others in their circle of family and friends with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm.

The SEC’s complaint, filed in U.S. District Court for the Eastern District of Pennsylvania, charges Timothy J. McGee, of Malvern, Pa., Michael W. Zirinsky, of Schwenksville, Pa., Robert Zirinsky, of Quakertown, Pa. and Hong Kong residents Paulo Lam and Marianna sze wan Ho with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also names as relief defendants Michael Zirinsky’s wife Kellie F. Zirinsky, sister Jillynn Zirinsky, mother Geraldine A. Zirinsky, and grandmother Mary L. Zirinsky for the purpose of recovering illegal profits in their trading accounts. Lam and Ho have each agreed to settle the SEC’s charges and pay approximately $1.2 million and $140,000 respectively.

The SEC’s complaint alleges that McGee and Michael Zirinsky, who are registered representatives at Ameriprise Financial Services, illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on nonpublic information about the company’s impending merger with Tokio Marine Holdings. The complaint alleges that McGee misappropriated the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous (AA) about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement on July 23, 2008, and made a $292,128 profit when the stock price jumped 64 percent that day.

The complaint further alleges that McGee tipped Michael Zirinsky, who purchased PHLY stock in his own trading account as well as those of his wife, sister, mother, and grandmother. Zirinsky tipped his father Robert Zirinsky and his friend Paulo Lam, who in turn tipped another friend whose wife Marianna sze wan Ho also traded on the nonpublic information. The complaint alleges that the Zirinsky family collectively obtained illegal profits of $562,673 through their insider trading. Lam made an illicit profit of $837,975 and Ho profited by $110,580.

The complaint seeks a final judgment ordering disgorgement of ill-gotten gains together with prejudgment interest from the defendants and relief defendants, and permanent injunctions and penalties against the defendants.

Lam and Ho have each consented, without admitting or denying the SEC’s allegations, to the entry of a final judgment permanently enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5. Lam agreed to pay $837,975 in disgorgement, $123,649 in prejudgment interest, and a penalty of $251,392. Ho has agreed to pay $110,580 in disgorgement, $16,317 in prejudgment interest, and a penalty of $16,587. The settlements are subject to court approval.

The SEC’s investigation was conducted by Philadelphia Regional Office enforcement staff Brendan P. McGlynn, Patricia A. Paw and Daniel L. Koster. The SEC’s litigation will be led by Scott A. Thompson, Nuriye C. Uygur, and G. Jeffrey Boujoukos.

SEC SETTLES WITH FORMER VERITAS SOFTWARE CORPORATION VICE PRESIDENT


The following excerpt is from the SEC website:
March 22, 2012
SEC SETTLES LITIGATION WITH FORMER VERITAS SOFTWARE CORPORATION HEAD OF SALES
The U.S. Securities and Exchange Commission today announced that, on March 20, 2012, the United States District Court for the Northern District of California entered a settled final judgment against Paul A. Sallaberry, the former Executive Vice President of Worldwide Field Operations and head of sales of Veritas Software Corporation, in SEC v. Mark Leslie, Kenneth E. Lonchar, Paul A. Sallaberry, Michael M. Cully, and Douglas S. Newton, Civil Action No. 07 CV 3444 (JF) (PSG) (N.D. Cal. filed July 2, 2007).
The final judgment resolves the Commission’s case against Sallaberry. The Commission’s amended complaint alleges that certain former Veritas Software Corporation executives inflated Veritas’ reported revenues by approximately $20 million in connection with a software sale to America Online, Inc.

Without admitting or denying the allegations in the complaint, Sallaberry consented to entry of a final judgment permanently enjoining him from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 and ordering him to pay disgorgement and prejudgment interest of $75,000 and a civil penalty of $25,000.

Thursday, March 22, 2012

FORMER CFO TBW PLEADS GUILTY TO FRAUD


The following excerpt is from the Department of Justice website:
Tuesday, March 20, 2012
WASHINGTON – Delton de Armas, a former chief financial officer (CFO) of Taylor, Bean & Whitaker Mortgage Corp. (TBW), pleaded guilty today to making false statements and conspiring to commit bank and wire fraud for his role in a more than $2.9 billion fraud scheme that contributed to the failures of TBW and Colonial Bank.

 The guilty plea was announced today by Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride for the Eastern District of Virginia; Christy Romero, Deputy Special Inspector General, Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP); Assistant Director in Charge James W. McJunkin of the FBI’s Washington Field Office; David A. Montoya, Inspector General of the Department of Housing and Urban Development (HUD-OIG); Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC-OIG); Steve A. Linick, Inspector General of the Federal Housing Finance Agency (FHFA-OIG); and Rick A. Raven, Acting Chief of the Internal Revenue Service Criminal Investigation (IRS-CI).

De Armas, 41, of Carrollton, Texas, pleaded guilty before U.S. District Judge Leonie M. Brinkema in the Eastern District of Virginia.  De Armas faces a maximum penalty of 10 years in prison when he is sentenced on June 15, 2012.

“As TBW’s chief financial officer, Mr. de Armas concealed a massive $1.5 billion deficit in TBW’s funding facility and another large deficit on TBW’s books,” said Assistant Attorney General Breuer.  “He tried to conceal the gaping holes by falsifying financial statements and lying to investors as well as the government.  Ultimately, Mr. de Armas’ criminal conduct, along with that of his co-conspirators, contributed to the collapse of TBW and Colonial Bank.  With today’s guilty plea, Mr. de Armas joins seven other defendants – including the former chairman of TBW Lee Bentley Farkas – who have been convicted of participating in this massive fraudulent scheme.”

“When Mr. de Armas learned of a hole in Ocala Funding’s assets, he used his position as CFO to cover it up and mislead investors,” said U.S. Attorney MacBride.  “Today’s plea is the eighth conviction in one of the nation’s largest bank frauds in history.  As CFO, Mr. de Armas could have put a stop to the fraud the moment he discovered it.  Instead, the hole in Ocala Funding grew to $1.5 billion on his watch, and as it grew, so did his lies to investors and the government.”

According to court documents, de Armas joined TBW in 2000 as its CFO and reported directly to its chairman, Lee Bentley Farkas, and later to its CEO, Paul Allen.  He admitted in court that from 2005 through August 2009, he and other co-conspirators engaged in a scheme to defraud financial institutions that had invested in a wholly-owned lending facility called Ocala Funding.  Ocala Funding obtained funds for mortgage lending for TBW from the sale of asset-backed commercial paper to financial institutions, including Deutsche Bank and BNP Paribas. The facility was managed by TBW and had no employees of its own.

According to court records, shortly after Ocala Funding was established, de Armas learned there were inadequate assets backing its commercial paper, a deficiency referred to internally at TBW as a “hole” in Ocala Funding.  De Armas knew that the hole grew over time to more than $700 million.  He learned from the CEO that the hole was more than $1.5 billion at the time of TBW’s collapse.  De Armas admitted he was aware that, in an effort to cover up the hole and mislead investors, a subordinate who reported to him had falsified Ocala Funding collateral reports and periodically sent the falsified reports to financial institution investors in Ocala Funding and to other third parties.  De Armas acknowledged that he and the CEO also deceived investors by providing them with a false explanation for the hole in Ocala Funding.

De Armas also admitted in court that he directed a subordinate to inflate an account receivable balance for loan participations in TBW’s financial statements.  De Armas acknowledged that he knew that the falsified financial statements were subsequently provided to Ginnie Mae and Freddie Mac for their determination on the renewal of TBW’s authority to sell and service securities issued by them.

In addition, de Armas admitted in court to aiding and abetting false statements in a letter the CEO sent to the U.S. Department of Housing and Urban Development, through Ginnie Mae, regarding TBW’s audited financial statements for the fiscal year ending on March 31, 2009.  De Armas reviewed and edited the letter, knowing it contained material omissions.  The letter omitted that the delay in submitting the financial data was caused by concerns its independent auditor had raised about the financing relationship between TBW and Colonial Bank and its request that TBW retain a law firm to conduct an internal investigation.  Instead, the letter falsely attributed the delay to a new acquisition and TBW’s switch to a compressed 11-month fiscal year.

“With our nation in a housing crisis, de Armas, as chief financial officer of TBW, one of the country’s largest mortgage lenders, papered over a gaping hole in the balance sheet of TBW subsidiary Ocala Funding and lied to regulators and investors to cover it up,” said Deputy Special Inspector General Romero for SIGTARP.  “The fraud provided cover to others at TBW to misappropriate more than $1 billion in Ocala funds and sell fraudulent, worthless securities to conspirators at Colonial BancGroup.  SIGTARP and its law enforcement partners stopped $553 million in TARP funds from being lost to this fraud and brought accountability and justice that the American taxpayers deserve.”
“Mr. de Armas has admitted that, during his tenure at TBW, he purposefully misled investors in a massive scheme to defraud financial institutions,” said FBI Assistant Director in Charge McJunkin.  “The actions of Mr. de Armas and his co-conspirators contributed to the financial crisis and led to the collapse of one of the country’s largest commercial banks.  The FBI and our partners remain vigilant in investigating such fraudulent activity in our banking and mortgage industries.”

“The guilty plea of Mr. de Armas is one small measure in our continued efforts to restore the trust and confidence of the general public and of investors in our financial system,” said HUD Inspector General Montoya.  “In response to the many recent articles of mortgage fraud and misconduct, the mortgage industry needs to do much to rethink their values and their idea of client service in order to help rebuild a stronger economy and to restore the confidence of American homeowners.”

“The Federal Deposit Insurance Corporation Office of Inspector General is pleased to have played a role in bringing to justice yet another senior official in a position of trust who was involved in one of the biggest and most complex bank fraud schemes of our time,” said FDIC Inspector General Rymer.  “The former chief financial officer of Taylor, Bean & Whitaker is the latest participant who will be held accountable for seeking to undermine the integrity of the financial services industry.  Even as the financial and economic crisis seems to be easing, we reaffirm our commitment to ensuring that those contributing to the failures of financial institutions and corresponding losses to the Deposit Insurance Fund will be punished to the fullest extent of the law.”
“Mr. de Armas and his colleagues committed an egregious crime,” said FHFA Inspector General Linick.  “FHFA-OIG is proud to be part of the team that continues to protect American taxpayers.”

In April 2011, a jury in the Eastern District of Virginia found Lee Bentley Farkas, the chairman of TBW, guilty of 14 counts of conspiracy, bank, securities and wire fraud.  On June 30, 2011, Judge Brinkema sentenced Farkas to 30 years in prison.  In addition, six individuals have pleaded guilty for their roles in the fraud scheme, including: Paul Allen, former chief executive officer of TBW, who was sentenced to 40 months in prison; Raymond Bowman, former president of TBW, who was sentenced to 30 months in prison; Desiree Brown, former treasurer of TBW, who was sentenced to six years in prison; Catherine Kissick, former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division (MWLD), who was sentenced to eight years in prison; Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD, who was sentenced to three months in prison; and Sean Ragland, a former senior financial analyst at TBW, who was sentenced to three months in prison.

The case is being prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Robert Zink of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Charles Connolly and Paul Nathanson of the Eastern District of Virginia.  This case was investigated by SIGTARP, FBI’s Washington Field Office, FDIC-OIG, HUD-OIG, FHFA-OIG and IRS-CI.  The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury also provided support in the investigation.  The Department would also like to acknowledge the substantial assistance of the U.S. Securities and Exchange Commission in the investigation of the fraud scheme.

COURT ORDERS TWO OFFICERS OF UNITED AMERICAN VENTURES TO PAY $1 MILLION PENALTIES AND $8.5 MILLION IN DISGORGEMENT IN SEC CASE


The following excerpt is from the U.S. Securities and Exchange Commission website:
March 13, 2012
The U.S. Securities and Exchange Commission announced today that a federal judge has ordered two current and former officers of United American Ventures, LLC to pay a total of $2 million in civil penalties and to disgorge over $8.5 million in ill-gotten profits in a securities fraud case.

The SEC litigated the case beginning in June 14, 2010 when the agency charged Eric J. Hollowell of Newport Beach, California, Philip Lee David Jack Thomas of Irvine, California, Matthew A. Dies of Corona, California, Anthony J. Oliva of Placitas, New Mexico, and United American Ventures, LLC, and Integra Investment Group, LLC with securities fraud. The complaint alleged that United American Ventures, LLC, which is also known as UAV, raised $10 million from at least 100 investors through the unregistered and fraudulent sale of convertible bonds. According to the complaint, Hollowell and Thomas founded UAV, with Hollowell acting as the company’s president from 2006 until 2009, when Thomas took over as president of the company.

The Honorable Judith C. Herrara in federal court in New Mexico granted judgment in favor of the SEC on March 2, 2012, finding Hollowell, Thomas, and United American Ventures, LLC jointly liable for disgorgement of $8,652,942 and prejudgment interest of $426,430. The court also assessed civil penalties of $1,000,000 each against Hollowell and Thomas. The court had previously enjoined Hollowell and Thomas from violating Section 10(b) of the Securities Exchange Act of 1934 as well as other provisions of federal securities laws.

The court also granted judgment in favor of the SEC finding Oliva and Integra Investment Group, LLC jointly liable for $284,039 in disgorgement, and Dies liable for $54,381 in disgorgement. It assessed a $130,000 civil penalty against Oliva and a $54,381 penalty against Dies.

Wednesday, March 21, 2012

SEC BRINGS CHARGES IN CONNECTION WITH SECONDARY MARKET TRADING OF PRIVATE COMPANY SHARES


The following excerpt is from the SEC website:
March 14, 2012
The Securities and Exchange Commission today charged a New York City area fund manager with misleading investors and pocketing undisclosed commissions in connection with several pooled investment vehicles he operated.

The SEC alleges that Mazzola, who lives in Upper Saddle River, N.J., and his firms Felix Investments, LLC, and Facie Libre Management Associates, LLC, created two funds to buy securities of Facebook and other high profile technology companies. However, Mazzola and his firms engaged in improper self-dealing – earning secret commissions above the 5 percent disclosed in offering materials on the funds’ acquisition of Facebook stock and on re-sales of fund interests to new investors. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares.

According to the SEC’s complaint filed in federal court in San Francisco, Mazzola and his firms also made false statements to investors in other funds they created to invest in various pre-IPO companies. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. They also made false representations about Twitter’s revenue to attract investors to their Twitter fund.

The SEC’s lawsuit charges Mazzola, Felix Investments, and Facie Libre Management Associates with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) thereunder. It also charges Mazzola and Facie Libre Management Associates with violating Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The Commission seeks court orders prohibiting them from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.

Separately, the Commission initiated a settled administrative proceeding against Laurence Albukerk and his company EB Financial Group LLC, for failing to disclose in their offering materials certain compensation they earned in connection with two Facebook funds they managed. Without admitting or denying the SEC’s findings, Albukerk and EB Financial consented to entry of a SEC order finding that they violated Section 17(a)(2) of the Securities Act and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

The Commission also initiated a settled administrative proceeding against SharesPost, Inc., an online platform that facilitated certain secondary market transactions, and its CEO, Greg Brogger, for effecting securities transactions without registering as a broker-dealer. SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively.

OWNER, EXECUTIVES AND BCI AIRCRAFT LEASING INC., ALL CONVICTED OF FRAUD


The following excerpt is from the Securities and Exchange Commission website:
March 20, 2012
The Securities and Exchange Commission (“Commission”) announced that on March 14, 2012, a federal jury convicted Brian Hollnagel and BCI Aircraft Leasing Inc. on seven criminal counts, including fraud and obstruction charges for engaging in a fraudulent financing scheme that raised more than $50 million from investors and lenders. Brian Hollnagel, 38, of Chicago, the owner, president, and chief executive officer of BCI Aircraft Leasing Inc., and the corporation itself were each convicted of six counts of wire fraud and one count of obstruction of justice for obstructing the Commission’s 2007 lawsuit against them. As part of this verdict, Hollnagel and BCI were convicted of committing fraud and obstruction in connection with the provision of fraudulent court-ordered accountings of investor LLCs to the SEC during that litigation. U.S. v. Brian Hollnagel et al., Criminal Action No. 1:10-cr-0195 (N.D. Ill.) (St. Eve., J.).

On August 13, 2007, the Commission filed a civil injunctive complaint alleging that Defendants Hollnagel and BCI, from approximately 1998 through 2007, raised at least $82 million from approximately 120 investors as part of a fraudulent scheme in which the Defendants commingled investor funds, used investor funds to pay other investors, and failed to use investor funds as represented. The Complaint alleged that, as a result of their conduct, the Defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission’s action remains pending.

SEC CHARGES CHICAGO BROKER WITH INSIDER TRADING IN NBTY STOCK


The following excerpt is from the SEC website:
Washington, D.C., March 15, 2012 – The Securities and Exchange Commission today charged a Chicago-based management consultant with insider trading based on confidential information about his client’s impending takeover of a Long Island-based vitamin company.

The SEC alleges that Sherif Mityas and others at his global management consulting firm were retained by Washington, D.C.-based private equity firm The Carlyle Group to provide strategic advice related to the acquisition of NBTY Inc. That same month, Mityas purchased NBTY stock and subsequently tipped a relative who also bought NBTY shares. After Carlyle publicly announced its acquisition of NBTY, Mityas and his relative sold their NBTY stock for a combined profit of nearly $38,000.

Mityas, who is a partner and vice president at the firm, has agreed to pay more than $78,000 to settle the SEC’s charges. In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced the unsealing of criminal charges against Mityas.

“Mityas was entrusted with highly confidential information but, driven by greed, he violated that trust and jeopardized a successful consulting career for the chance to make a quick buck,” said Sanjay Wadhwa, Deputy Chief of the SEC’s Market Abuse Unit and Associate Director of the New York Regional Office. “Corporate transactions such as mergers and acquisitions demand confidentiality until they become public, and not just from company employees but also from the lawyers, accountants, consultants, and others who work on the deals.”

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Mityas’s firm was retained by Carlyle in May 2010. Only five days after being told during a May 17 conference call that NBTY was Carlyle’s acquisition target, Mityas moved $50,000 from a bank account he shared with a relative into a brokerage account they shared. On May 27, he transferred $49,000 from that brokerage account to a different relative’s brokerage account that he controlled as custodian, and then used those funds to purchase 1,300 shares of NBTY at a cost of more than $44,000. On July 7, based on a tip from Mityas, yet another relative bought 440 shares of NBTY stock. That same relative bought an additional 210 shares on July 14. Carlyle’s acquisition of NBTY was publicly announced the following day. Mityas sold all of his shares only three hours after the announcement was made, for an illegal profit of $25,896. The relative held the shares purchased on July 7 and 14 through the completion of the merger, and sold all of the shares on October 1 for an illicit profit of $12,035.

The SEC’s complaint charges Mityas with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The settlement, which is subject to court approval, would require Mityas to pay disgorgement of his and his relative’s ill-gotten gains totaling $37,931, plus prejudgment interest of $2,375.39, and a penalty of $37,931. The settlement also would bar Mityas from serving as an officer or director of a public company and permanently enjoin him from future violations of these provisions of the federal securities laws.

The SEC’s investigation was conducted by Daniel R. Marcus and Amelia A. Cottrell – members of the SEC’s Market Abuse Unit in New York – and Layla Mayer of the SEC’s New York Regional Office. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

Tuesday, March 20, 2012

FORMER STARMEDIA EXECUTIVE AGREES TO SETTLEMENT IN SEC LITIGATION


The following excerpt is from the U.S. Securities and Exchange Commission website:
March 13, 2012
The U.S. Securities and Exchange Commission today announced that on March 12, 2012, the U.S. District Court for the Southern District of New York entered a settled final judgment as to Adriana J. Kampfner, the former Senior Vice President for Global Sales for StarMedia Network, Inc., a now-defunct Internet portal, in Securities and Exchange Commission v. Fernando J. Espuelas et al., Civil Action No. 06 CV 2435 (PAE) (S.D.N.Y. filed Mar. 29, 2006). The Commission’s injunctive action alleged violations of the federal securities laws by eight former StarMedia executives. The Commission’s amended complaint alleges, in relevant part, that for fiscal year 2000 and the first two quarters of fiscal year 2001, StarMedia’s books and records misstated the company’s revenue.

Without admitting or denying the allegations in the amended complaint, Kampfner consented to the entry of the Final Judgment permanently enjoining her from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act), and from aiding and abetting violations of Section 13(b)(2)(A) of the Exchange Act.

COURT ORDERS FORMER BROKER TO PAY OVER $500,000 FOR DEFRAUDING 9/11 WIDOW


The following excerpt is from the SEC website:
The Securities and Exchange Commission announced that a federal judge in Massachusetts entered a final judgment on March 14, 2012 ordering defendant James J. Konaxis, formerly a registered representative of Beverly-based broker-dealer Sentinel Securities, Inc., to disgorge more than $483,000 in commissions earned over a two-year period by defrauding a former customer who was left widowed by the September 11, 2001 terrorist attacks. Together with prejudgment interested and a civil penalty, Konaxis has been ordered to pay a total of $514,954. In granting the Commission’s motion for monetary remedies, Judge Denise L. Casper found that Konaxis was liable in the amount of all commissions earned from three of the victim’s accounts over a two-year period because he “misled the victim into thinking her investments were safe, while churning (e.g., excessively trading) her funds in a manner contrary to her interests[.]”

According to the Commission’s complaint, Konaxis violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder by excessively trading his customer’s funds while knowingly or recklessly disregarding her interests. During a two-year period, the Commission alleges that the value of his customer’s accounts (funded by payments made to the victim and her family by the September 11th Victim Compensation Fund) decreased from approximately $3.7 million to approximately $1.6 million, much of which was due to Konaxis’s investments and the resulting commissions paid to Konaxis.

At the time the Commission’s complaint was filed, Konaxis entered into a partial settlement with the Commission, in which he consented to be enjoined from future violations of the antifraud provisions of the Securities Act and Exchange Act, and to be barred from participating in any offering of penny stock. In addition, as part of the settlement, Konaxis agreed to be barred in related administrative proceedings from any future association with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent. However, the Commission also filed a motion with the Court seeking disgorgement of ill-gotten gains plus pre-judgment interest, and the imposition of a civil penalty, which Konaxis opposed.

After a hearing on March 1, 2012, Judge Denise L. Casper issued an order granting the Commission’s motion for monetary remedies, including disgorgement in the full amount of Konaxis’ commissions earned over a two-year period from the three accounts churned, totaling $483,460.23, prejudgment interest in the amount of $31,494.44, and a civil penalty of $10,000, for a total of $514,954.

Monday, March 19, 2012

SEC CHARGES INVESTMENT ADVISER WITH GIVING INVESTORS A BOGUS AUDIT REPORT


The following excerpt is from a SEC e-mail:
Washington, D.C., March 15, 2012 – The Securities and Exchange Commission today charged a San Francisco-area investment adviser with defrauding investors by giving them a bogus audit report that embellished the financial performance of the fund in which they were investing.

The SEC alleges that James Michael Murray raised more than $4.5 million from investors in his various funds including Market Neutral Trading LLC (MNT), a purported hedge fund that claimed to invest primarily in domestic equities. Murray provided MNT investors with a report purportedly prepared by independent auditor Jones, Moore & Associates (JMA). However, JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled. The phony audit report misstated the financial condition and performance of MNT to investors.

“An independent financial audit is one of the best protections available to investors,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “Murray conjured up an accounting firm and deliberately faked the audit to induce investors into believing the fund was in better shape than it actually was.”

The U.S. Attorney’s Office for the Northern District of California also has filed criminal charges against Murray in a complaint unsealed yesterday.

According to the SEC’s complaint filed in federal court in San Francisco, Murray began raising the funds from investors in 2008. The following year, MNT distributed the phony audit report to investors claiming the audit was conducted by a legitimate third-party accounting firm. However, JMA is not registered or licensed as an accounting firm in Delaware, where it purports to do business. JMA’s website was paid for by a Murray-controlled entity and listed 12 professionals with specific degrees and licenses who supposedly work for JMA. However, at least five of these professionals do not exist, including the two named principals of the firm: “Richard Jones” and “Joseph Moore.” Murray has attempted to open brokerage accounts in the name of JMA, identified himself as JMA’s chief financial officer, and called brokerage firms falsely claiming to be the principal identified on most JMA documents.

The SEC alleges that the bogus audit report provided to investors understated the costs of MNT’s investments and thus overstated the fund’s investment gains by approximately 90 percent. The JMA audit report also overstated MNT’s income by approximately 35 percent, its member capital by approximately 18 percent, and its total assets by approximately 10 percent.

The SEC’s complaint charges Murray with violating an SEC rule prohibiting fraud by investment advisers on investors in a pooled investment vehicle. The complaint seeks injunctive relief and financial penalties from Murray.

The SEC’s investigation was conducted by Karen Kreuzkamp and Robert S. Leach of the San Francisco Regional Office following an examination of MNT conducted by Yvette Panetta and Doreen Piccirillo of the New York Regional Office’s broker-dealer examination program. The SEC’s litigation will be led by Robert L. Mitchell of the San Francisco Regional Office. The SEC thanks the U.S. Attorney’s Office for the Northern District of California and the U.S. Secret Service for their assistance in this matter.

FORMER EXECUTIVE AT CKE RESTAURANTS CHARGED WITH INSIDER TRADING


The following excerpt is from the SEC website:
March 16, 2012
SEC CHARGES FORMER EXECUTIVE AT CKE RESTAURANTS WITH INSIDER TRADING
On March 15, 2012, the Securities and Exchange Commission charged a former executive at the parent company of Carl’s Jr. and Hardee’s fast food restaurants with insider trading in the company’s securities based on confidential information he learned on the job.

The SEC alleges that Noah J. Griggs, Jr., who was executive vice president of training and leadership development at CKE Restaurants Inc., made two purchases totaling 50,000 shares of CKE stock after attending an executive meeting during which he learned that the company was in discussions with private equity investors about a possible acquisition. Griggs made a potential profit of $145,430 after the stock price soared when the merger was announced publicly. Griggs has agreed to pay $268,000 to settle the SEC’s charges without admitting or denying the allegations.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Griggs attended a monthly strategic planning meeting on Friday, Nov. 20, 2009. CKE’s CEO cautioned the executives that information about the potential merger was confidential and nonpublic, and that no one should act on it. Nonetheless, on Monday morning November 23, Griggs bought 30,000 shares of CKE. He bought an additional 20,000 shares on Jan. 8, 2010. CKE and Thomas H. Lee Partners (THL) publicly announced a definitive merger on February 26 in which THL would acquire CKE. On news of the announcement, the value of Griggs’s shares increased significantly as CKE stock closed at $11.37 per share, up more than 27 percent from the previous day’s closing price of $8.91.

CKE Restaurants, Inc. is based in Carpinteria, California, and is the parent company of Carl Karcher Enterprises, which owns the fast-food restaurant brands of Carl’s Jr. and Hardee’s. Its common stock was listed on the NYSE under the ticker symbol CKR until July 13, 2010, when the NYSE suspended trading of the stock following the company’s acquisition by Columbia Lake Acquisition Holdings, Inc.

The SEC’s complaint charges Griggs with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c). Griggs agreed to pay disgorgement of $145,430, prejudgment interest of $11,035.74, and a penalty of $111,730. He also agreed to the entry of a final judgment permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 and barring him from serving as an officer or director of a public company for 10 years. The settlement is subject to court approval.

The SEC’s investigation was conducted by Los Angeles Regional Office enforcement staff Lorraine Echavarria and Carol Lally. The SEC acknowledges the assistance of NYSE Regulation, Inc. in this matter.

SEC RELEASES DATA ON CREDIT DEFAULT SWAPS


The following excerpt is from the SEC website:
Washington, D.C., March 15, 2012 –The staff of the Securities and Exchange Commission today has made available publicly an analysis of market data related to credit default swap transactions.  The analysis, which was conducted by the staff of the SEC’s Division of Risk, Strategy, and Financial Innovation, is available for review and comment as part of the comment file for rules the SEC proposed, jointly with the Commodity Futures Trading Commission, to further define the terms “swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant."  The SEC and CFTC jointly proposed those rules in December 2010 as one part of the implementation of Title VII of the Dodd-Frank Act.

The SEC staff believes that the analysis of market data has the potential to be informative for evaluating certain final rules under Title VII, including rules that further define “major security-based swap participant” and “security-based swap dealer,” and rules implementing the statutory de minimis exception to the latter definition.  Analyses of this type particularly may supplement other information considered in connection with those final rules, and the SEC staff is making this analysis available to allow the public to consider this supplemental information.  The SEC staff expects that the Commission will consider the adoption of rules defining these terms in the next several weeks.


Sunday, March 18, 2012

SEC CHARGES FIRM WITH FRAUD IN STOCK LENDING SCHEME


The following excerpt is from the SEC website:
March 16, 2012
SEC Charges Senior Executives at California-Based Firm in Stock Lending Scheme
The Securities and Exchange Commission today charged two senior executives and their California-based firm with defrauding officers and directors at publicly-traded companies in an elaborate $8 million stock lending scheme.

The SEC alleges that Argyll Investments LLC’s purported stock-collateralized loan business is merely a fraud perpetrated by James T. Miceli and Douglas A. McClain, Jr. to acquire publicly traded stock from corporate officers and directors at a discounted price from market value, separately sell the shares for full market value in order to fund the loan, and use the remaining proceeds from the sale of the collateral for their own personal benefit. Miceli, McClain, and Argyll typically lied to borrowers by explicitly telling them that their collateral would not be sold unless a default occurred. However, since Argyll had no independent source of funds other than the borrowers’ collateral, Argyll often sold the collateral prior to closing the loan and then used the proceeds to fund it.
Also charged in the SEC’s complaint filed in U.S. District Court for the Southern District of California is a broker through which Argyll attracted potential borrowers. The SEC alleges that AmeriFund Capital Finance LLC and its owner Jeffrey Spanier violated the federal securities laws by brokering numerous transactions for Argyll while not registered with the SEC.

The SEC alleges that Miceli and McClain induced at least nine corporate officers and directors since 2009 to transfer ownership of millions of shares of stock to Argyll as collateral for purported loans. Miceli and McClain promised to return the stock to the borrowers when the loans were repaid. However, rather than retaining the collateral shares as required, they sold the shares without the borrowers’ knowledge before or soon after funding the loans. In many cases, they used the proceeds from the collateral sales to fund the loans. Because Argyll typically loaned the borrowers 30 to 50 percent less than the current market value of the shares, the company retained substantial proceeds even after funding the loans. As a result of the scheme, Argyll reaped more than $8 million in unlawful gains that Miceli and McClain used in part toward their personal expenses.
In addition to the fraud charges against Miceli, McClain, and Argyll, the SEC alleges that they violated the federal securities laws by improperly selling the collateral shares — all of which were restricted securities — into the public markets in unregistered transactions. They also failed to register with the SEC as brokers or dealers.

The SEC’s complaint alleges that Miceli, McClain, and Argyll violated Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 5(a) and 5(c) of the Securities Act of 1933, and that Spanier and AmeriFund violated Section 15(a) of the Exchange Act. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
The SEC’s investigation was conducted by Jacob D. Krawitz, Anthony S. Kelly, and Anik Shah, and supervised by Julie M. Riewe. The SEC’s litigation effort will be led by Dean Conway.
The SEC thanks the U.S. Attorney’s Office for the Southern District of California and the Federal Bureau of Investigation for their assistance with this matter.

SEC COMMISSIONER LUIS A. AGUILAR ON INVESTOR PROTECTION


The following excerpt is from the SEC website:
Investor Protection is Needed for True Capital Formation
By Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
March 16, 2012
Last week, the House of Representatives passed H.R. 3606, the “Jumpstart Our Business Startups Act.” It is clear to me that H.R. 3606 in its current form weakens or eliminates many regulations designed to safeguard investors. I must voice my concerns because as an SEC Commissioner, I cannot sit idly by when I see potential legislation that could harm investors. This bill seems to impose tremendous costs and potential harm on investors with little to nocorresponding benefit.

H.R. 3606 concerns me for two important reasons. First, the bill would seriously hurt investors by reducing transparency and investor protection and, in turn, make securities law enforcement more difficult. That is bad for ordinary Americans and bad for the American economy. Investors are the source of capital needed to create jobs and expand businesses. True capital formation and economic growth require investors to have both confidence in the capital markets and access to the information needed to make good investment decisions.

Second, I share the concerns expressed by many others that the bill rests on faulty premises. 1 Supporters claim that the bill would improve capital formation in the United States by reducing the regulatory burden on capital raising. However, there is significant research to support the conclusion that disclosure requirements and other capital markets regulations enhance, rather than impede, capital formation, 2 and that regulatory compliance costs are not a principal cause of the decline in IPO activity over the past decade. 3Moreover, nothing in the bill requires or even incentivizes issuers to use any capital that may be raised to expand their businesses or create jobs in the U.S.

Professor John Coates of Harvard Law School has testified that proposals of the type incorporated into H.R. 3606 could actually hurt job growth:

While [the proposals] have been characterized as promoting jobs and economic growth by reducing regulatory burdens and costs, it is better to understand them as changing … the balance that existing securities laws and regulations have struck between the transaction costs of raising capital, on the one hand, and the combined costs of fraud risk and asymmetric and unverifiable information, on the other hand. Importantly, fraud and asymmetric information not only have effects on fraud victims, but also on the cost of capital itself. Investors rationally increase the price they charge for capital if they anticipate fraud risk or do not have or cannot verify relevant information. Anti-fraud laws and disclosure and compliance obligations coupled with enforcement mechanisms reduce the cost of capital.

… Whether the proposals will in fact increase job growth depends on how intensively they will lower offer costs, how extensively new offerings will take advantage of the new means of raising capital, how much more often fraud can be expected to occur as a result of the changes, how serious the fraud will be, and how much the reduction in information verifiability will be as a result of the changes.
Thus, the proposals could not only generate front-page scandals, but reduce the very thing they are being promoted to increase: job growth.

4 Similarly, Professor Jay Ritter of the University of Florida has testified before the Senate banking committee that such proposals could in fact reduce capital formation:

In thinking about the bills, one should keep in mind that the law of unintended consequences will never be repealed. It is possible that, by making it easier to raise money privately, creating some liquidity without being public, restricting the information that stockholders have access to, restricting the ability of public market shareholders to constrain managers after investors contribute capital, and driving out independent research, the net effects of these bills might be to reduce capital formation and/or the number of small [emerging growth company] IPOs.

 5 As drafted, H.R. 3606 would have significant detrimental impacts on the U.S. securities regulatory regime, including the following:

First, the bill will reduce publicly available information by exempting “emerging growth companies” from certain disclosure and other requirements currently required under the Federal securities laws. The bill’s definition of “emerging growth company” would include every issuer with less than $1 billion in annual revenues (other than large accelerated filers and companies that have issued over $1 billion in debt over a three year period) for five years after the company’s first registered public offering. 6 It is estimated that this threshold would pick up 98% of IPOs and a large majority of U.S. public companies for that five year period.

 7An emerging growth company would only have to provide two years (rather than three years) of audited financial statements, and would not have to provide selected financial data for any period prior to the earliest audited period presented in connection with its initial public offering. It would also be exempt from the requirements for “Say-on-Pay” voting and certain compensation-related disclosure. Such reduced financial disclosure may make it harder for investors to evaluate companies in this category by obscuring the issuer’s track record and material trends.

“Emerging growth companies” would also be exempt from complying with any new or revised financial accounting standards (other than accounting standards that apply equally to private companies), and from some new standards that may be adopted by the PCAOB. Such wholesale exemptions may result in inconsistent accounting rules that could damage financial transparency, making it difficult for investors to compare emerging companies with other companies in their industry. This could harm investors and, arguably, impede access to capital for emerging companies, as capital providers may not be confident that they have access to all the information they need to make good investment decisions about such companies.
Second, the bill would greatly increase the number of record holders a company may have, before it is required to publish annual and quarterly reports. Currently, companies with more than 500 shareholders of record are required to register with the SEC pursuant to Section 12(g) of the Securities Exchange Act and provide investors with regular financial reports. H.R. 3606 would expand that threshold to 2000 record holders (provided that, in the case of any issuer other than a community bank, the threshold would also be triggered by 500 non-accredited investors). Moreover, the bill would exclude from such counts any shareholders that acquire securities through crowdfunding initiatives and those that acquire securities as eligible employee compensation. Thus, a company could have a virtually unlimited number of record stockholders, without being subject to the disclosure rules applicable to public companies. 8 This effect is magnified by the fact that the reporting threshold only counts records holders, excluding the potentially unlimited number of beneficial owners who hold their shares in “street name” with banks and brokerage companies, and thus are not considered record holders.

This provision of the bill raises concerns because it could significantly reduce the number of companies required to file financial and other information. 9Such information is critical to investors in determining how to value securities in our markets. Regular financial reporting enhances the allocation of capital to productive companies in our economy.

 10 Third, the bill would exempt “emerging growth companies” from Section 404(b) of the Sarbanes-Oxley Act, which requires the independent audit of a company’s internal financial controls. Section 404(b) currently applies only to companies with a market capitalization above $75 million; companies below that threshold have never been subject to the internal controls audit requirement and were exempted from such requirement in the Dodd-Frank Act. The internal controls audit was established following the accounting scandals at Enron, WorldCom and other companies, and is intended to make financial reporting more reliable. Indeed, a report last year by Audit Analytics noted that the larger public companies, known as accelerated filers, that are subject to Section 404(b), experienced a 5.1% decline in financial statement restatements from 2009 to 2010; while non-accelerated filers, that are not subject to Section 404(b), experienced a 13.8% increase in such restatements. 11 A study by the SEC’s Office of the Chief Accountant recommended that existing investor protections within Section 404(b) be retained for issuers with a market capitalization above $75 million. 12 With the passage of H.R. 3606, an important mechanism for enhancing the reliability of financial statements would be lost for most public companies, during the first five years of public trading.

Fourth, the bill would benefit Wall Street, at the expense of Main Street, by overriding protections that currently require a separation between research analysts and investment bankers who work in the same firm and impose a quiet period on analyst reports by the underwriters of an IPO. These rules are designed to protect investors from potential conflicts of interests. The research scandals of the dot-com era and the collapse of the dot-com bubble buried the IPO market for years. Investors won’t return to the IPO market, if they don’t believe they can trust it.
Fifth, H.R. 3606 would fundamentally change U.S. securities law, by permitting unlimited offers and sales of securities under Rule 506 of Regulation D (which exempts certain non-public offerings from registration under the Securities Act), provided only that all purchasers are “accredited investors”. The bill would specifically permit general solicitation and general advertising in connection with such offerings, obliterating the distinction between public and private offerings.

This provision may be unnecessary. A recent report by the SEC’s Division of Risk, Strategy and Financial Innovation confirms that Regulation D has been effective in meeting the capital formation needs of small businesses, with a median offering size of $1,000,000 and at least 37,000 unique offerings since 2009. 13 Regulation D offerings surpassed $900 billion in 2010. The data does not indicate that users of Regulation D have been seriously hampered by the prohibition on general solicitation and advertising.

I share the concerns expressed by many that this provision of H.R. 3606 would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult. Currently, the SEC and other regulators may be put on notice of potential frauds by advertisements and Internet sites promoting “investment opportunities.” H.R. 3606 would put an end to that tool. Moreover, since it is easier to establish a violation of the registration and prospectus requirements of the Securities Act than it is to prove fraud, such scams can often be shut down relatively quickly. H.R. 3606 would make it almost impossible to do so before the damage has been done and the money lost.
In addition others have noted that the current definition of “accredited investor” may not be adequate and that the requirement that purchasers be accredited investors would provide limited protection. 14 For example, an “accredited investor” retiree with $1 million in savings, who depends on that money for income in retirement, may easily fall prey for a “hot” offering that is continually hyped via the internet or late night commercials.

These are just a few observations regarding H.R. 3606. It also includes other provisions that require substantial further analysis and review, including among other things the so-called crowdfunding provisions.

15 The removal of investor protections in this bill are among the factors that have prompted serious concerns from the Council of Institutional Investors, AARP, the North American Securities Administrators Association, the Consumer Federation of America, and Americans for Financial Reform, among others. 16
Questions Re: H.R. 3606
As H.R. 3606 is considered, the following is a non-exhaustive list of questions that should be addressed:
1. The bill would define “emerging growth company” as any company, within 5 years of its IPO, with less than $1 billion in annual revenue, other than a large accelerated filer or a company that has issued $1 billion in debt over a three-year period.
What is the basis for the $1 billion revenue trigger?

Why is revenue the right test? Why is $1 billion the right level?

It has been estimated that this definition would include 98% of all IPOs, and a large majority of all public companies within the 5-year window. Was such a broad scope intended?
2. As provided in the bill, financial accounting standards, auditing and reporting standards, disclosure requirements, and the period for which historical financial statements is required, could all differ as between “emerging growth companies” and all other public companies – including all companies that went public before December 8, 2011.
How will these differences affect the comparability of financial reporting for these two classes of issuers?

Will reduced transparency, or lack of comparability, affect the liquidity of emerging growth companies?

Will reduced transparency or reduced liquidity affect the cost of capital for emerging growth companies? Will investors demand a “discounted price” to offset any perceived higher risk resulting from reduced disclosures and protections?

Will emerging growth companies be required to include risk factors or other disclosure in their registration statements and other filings, regarding transparency, comparability and any potential effects thereof?
3. The bill would expand the threshold for the number of shareholders an issuer may have, before it is required to file annual and other reports under Section 12(g) of the Exchange Act, from 500 to 2000 (of which no more than 500 may be non-accredited investors, for issuers other than community banks), and would exclude from such counts shareholders that acquire securities through crowdfunding initiatives and those that acquire securities as eligible employee compensation.
How was the new threshold of 2000 holders determined?

Is that the right threshold for determining whether the public interest in such securities justifies regulatory oversight?

How many companies would be exempted from registration and reporting by the bill?

When shares are held in “street name” the number of beneficial owners may greatly exceed the number of record holders. How will the new threshold of 2000 record holders be applied in such cases?17

How would the exclusion of employees and crowdfunding purchasers be applied, if such holders transfer their shares to other investors? How would this be tracked?
4. To the extent the bill results in reduced transparency and/or reduced liquidity for emerging growth companies, or for companies exempted from Exchange Act reporting by the new thresholds under Section 12(g), such results may impact investment decisions by institutional investors.
How would mutual fund managers, pension fund administrators, and other investors with fiduciary duties address such reduced transparency or lack of liquidity in making investment decisions?

Could reduced transparency or reduced liquidity impact the ability of fund managers to meet applicable diversification requirements?

Could such effects cause managers to increase concentration into fewer US reporting companies? How would such concentration affect market risk? Would the bill result in investor funds being redirected to companies overseas?
5. The bill is being promoted as a jobs measure, on the grounds that reducing regulation will improve access to capital for small and emerging businesses, allowing them to grow and add employees.
What is the evidence that regulatory oversight unduly impedes access to capital?

What is the evidence that companies that are otherwise prepared to grow (that is, they have the appropriate business model, management team, and aspirations) are prevented from growing by an inherent lack of access to potential sources of capital?

I understand that the costs of complying with regulatory requirements are a factor underpinning H.R. 3606. How do such costs compare to other costs of raising capital, such as investment banking fees? How do such costs compare to other administrative costs? If reduced transparency, lack of comparability, and other consequences of the bill result in a higher cost of capital for emerging growth companies, will the money saved on compliance be worth it?
6. Evidence shows that the public companies that are currently exempt from internal controls audit requirements have a higher incidence of financial reporting restatements, and that companies that have restated their financial results produce substantially lower returns for investors. 18
How do any perceived benefits from H.R. 3606’s exemption of emerging growth companies from the audit of internal controls compare to the likelihood of increased restatements? Would an increase in restatements hamper capital formation?

Will the lack of an internal controls audit result in greater financial and accounting fraud?

7. The bill requires the Commission to revise its rules to provide that the prohibition against general solicitation or general advertising contained in Regulation D shall not apply to offers and sales of securities pursuant to Rule 506, provided that all purchasers are accredited investors.
Given the success of Regulation D as a capital raising mechanism, including its successful use by small and emerging companies,19 is there any evidence that general solicitation and general advertising are necessary for capital formation?

Given the current definition of “accredited investor”, is that the right test for determining who issuers may target, in offers made by general solicitation or advertising?

Conclusion
H.R. 3606 would have a significant impact on the capital markets and raises many questions that have yet to be satisfactorily resolved. I have yet to see credible evidence that justifies the extensive costs and potential harm to investors this bill may impose.
I urge Congress to undertake the review necessary to resolve these questions, and to ensure that investors, as the providers of the capital that companies need to grow and create jobs, have the protections they need and deserve.
a href="http://gan.doubleclick.net/gan_click?lid=41000613802101859&pubid=21000000000397724">Furniture Event - Save up to 50% at officemax.com