TWO FORMER VICE PRESIDENTS OF ARTHROCARE CORPORATION SETTLE WITH THE SEC

The following is an excerpt from the SEC website:

"On June 27, 2011, the Securities and Exchange Commission filed a settled civil action in United States District Court in Austin, Texas against John Raffle and David Applegate, two former senior vice presidents of ArthroCare Corporation. The Commission alleges that, between 2006 and the first quarter of 2008, Raffle and Applegate caused ArthroCare to improperly record revenue from shipments of spine products to various distributors, even though the distributors often did not need the products or have the ability to pay for them. Most of the improper transactions occurred at or near the end of quarters and were intended to enable ArthroCare to satisfy external revenue and earnings targets. As a result of these transactions, ArthroCare's publicly reported revenue and earnings were materially misstated. The Commission further alleges that Raffle misled ArthroCare's accountants and auditor about aspects of these transactions.
Raffle and Applegate agreed to settle the Commission's charges, without admitting or denying the complaint's allegations. Under the settlement, Raffle consents to a judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The judgment also orders him to pay $1,782,742.43 in disgorgement plus prejudgment interest of $329,230.44, but waives payment of all but $175,000 of this amount, and does not impose a civil penalty, based upon his sworn financial statements.
Applegate has consented to a judgment permanently enjoining him from violating Section 17(a) of the Securities Act and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The judgment orders him to pay $621,754.60 in disgorgement plus prejudgment interest of $106,469.70, but waives payment of all but $55,000 of this amount, and does not impose a civil penalty, based upon his sworn financial statements.
Under the settlement, Raffle and Applegate both will be barred from serving as officers or directors of public companies for five years.
The Commission also settled with Raffle's ex-wife, Kathy Raffle, to recover $200,000 of incentive compensation and profits from sales of ArthroCare stock John Raffle obtained during the course of the earnings management scheme, which Kathy Raffle received in a divorce agreement. The Commission does not allege any wrongdoing by Kathy Raffle.
The proposed judgments are subject to court approval."

INSIDE TRADER TO PAY FINE, PAY BACK MONEY ON PENNY STOCK DEAL

The following is from the SEC website:

"June 29, 2011
SEC v. Richard Verdiramo, Vincent L. Verdiramo, Edward Meyer, Jr., and Victoria Chen, Civil Action No. 10-CIV-1888 (S.D.N.Y.)
COURT ENTERS FINAL JUDGMENT AGAINST EDWARD MEYER, JR.
The U.S. Securities and Exchange Commission announced today that on June 27, 2011, the United States District Court for the Southern District of New York entered a Final Judgment that enjoins Edward Meyer, Jr. from violating the registration and antifraud provisions of the federal securities laws, orders him to disgorge $62,050 in ill-gotten gains, and requires him to pay civil penalties of $62,000. In addition, the Court barred Meyer from participating in any penny stock offering and from serving as an officer or director of any reporting company. Meyer consented to the entry of the Final Judgment without admitting or denying any of the allegations of the Commission’s Complaint.

In its Complaint, the SEC charged that Meyer violated the registration provisions of the federal securities laws when he sold shares of RECOV Energy Corporation between April and November 2005. According to the Complaint, RECOV issued these shares to Meyer after he and defendant Victoria Chen entered into a contract to buy a controlling interest in RECOV from RECOV’s principal, defendant Richard Verdiramo, and his father, defendant Vincent L. Verdiramo. The Complaint alleges that shortly after receiving the RECOV shares, Meyer began selling them on the open market. The SEC charged that Meyer violated Section 5(a) of the Securities Act of 1933 because his sales of RECOV shares were not registered with the SEC or subject to any exemptions from the registration provisions. The Final Judgment orders Meyer to disgorge his ill-gotten gains from these violations, which totaled approximately $48,000, and to pay a $48,000 penalty for these claims.

The SEC also charged Meyer with insider trading based on his sales of RECOV stock in August 2005. According to the Complaint, in October 2004, Meyer began working as a consultant for a private company that subsequently engaged in merger negotiations with RECOV. Meyer signed a confidentiality agreement in connection with his engagement as the private company’s consultant. The Complaint alleges that in July 2005, the private company’s principal told Meyer that he intended to terminate merger negotiations with RECOV. The Complaint alleges that Meyer sold RECOV shares after he learned of the principal’s intention to terminate merger negotiations and before the August 2005 public announcement that the parties had terminated merger negotiations. As a consequence of these trades, the Complaint alleges that Meyer avoided losses of $14,000. The SEC charged that the private company’s intention to terminate merger negotiations was material, non-public information, and that Meyer violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 when he sold RECOV stock while in possession of that information without disclosing his intention to trade. The Final Judgment orders Meyer to disgorge the $14,000 of ill-gotten gains from these violations and to pay a $14,000 penalty for these claims.

The Commission’s pending litigation against the other defendants in this matter is ongoing."

COURT ORDERS LOCKE CAPITAL MANAGEMENT, INC. AND OWNER TO PAY $5 MILLION PLUS

The following is an excerpt from the SEC website:

"July 1, 2011
SEC v. Locke Capital Management, Inc. and Leila C. Jenkins, Civil Action No. 09-CV-100-WES (D.R.I.)
COURT ORDERS INVESTMENT ADVISER LOCKE CAPITAL MANAGEMENT, INC. AND ITS OWNER LEILA JENKINS TO PAY OVER $5 MILLION
The Securities and Exchange Commission announced today that on June 30, 2011, a federal judge in Rhode Island granted the Commission's motion for summary judgment and entered final judgments against Locke Capital Management, Inc., an investment adviser based in Newport, Rhode Island and New York City, and Leila C. Jenkins, its founder and sole owner. The Commission's Complaint against Locke and Jenkins, filed in March 2009, alleged that they invented a billion-dollar client in order to gain credibility and attract legitimate investors. The Complaint further alleged that Jenkins tried to perpetuate her scheme by lying to the Commission staff about the existence of the invented client and furnishing the staff with bogus documents in 2008, including fake custodial statements that she created on her laptop. The Court ordered that Locke and Jenkins will be jointly and severally liable for disgorgement of $1,781,520, representing advisory fees paid to them from 2007-2009, plus prejudgment interest of $110,956. In addition, each defendant was ordered to pay a penalty of $1,781,520.

According to the Complaint, filed on March 9, 2009, Jenkins repeatedly claimed that the so-called "confidential" client accounts that she invented and claimed to manage contained more than $1 billion in assets. Even as Locke began to take on genuine clients in late 2006, the assets under management of its real clients never amounted to more than a very small portion of the billion-plus dollars that Jenkins claimed to manage. From at least 2003 to 2009, falsehoods concerning the confidential accounts were made in brochures, meetings, submissions to online databases that prospective clients used to select money managers, and in SEC filings.

The Honorable William E. Smith, United States District Judge in the United States District Court for the District of Rhode Island, issued an Opinion and Order on June 30, 2011, granting the Commission's motion for summary judgment against Jenkins and denying Jenkins's motion for summary judgment. The Court had previously granted the Commission's motion for default judgment against Locke in March 2010. The court entered final judgments against Jenkins and Locke on June 30, 2011. The final judgments permanently enjoin Jenkins and Locke from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940 (Advisers Act"). The final judgment as to Locke also permanently enjoins it from violating Sections 204 and 206(4) of the Advisers Act and Rules 204-2(a)(6), (8), (10), (15), and (16), as wells as 206(4)-1(a)(5) thereunder, and the final judgment as to Jenkins further permanently enjoins her from aiding and abetting violations of the same law sections. The final judgment as to Locke further permanently enjoins it from violating Section 204A of the Advisers Act and Rule 204A-1 thereunder. The final judgments hold Locke and Jenkins jointly and severally liable for disgorgement of $1,781,520 plus prejudgment interest of $110,956, and order each defendant was ordered to pay a penalty of $1,781,520."

TWO FORMER EXECUTIVES IN CALIFORNIA CHARGED WITH FRAUD BY SEC

The following is an excerpt from the SEC website:

June 27, 2011
The Securities and Exchange Commission today announced charges against two former Basin Water, Inc. executives with fraudulently inflating its revenues, beginning with the company’s first financial report after it went public.
The SEC alleges that former Basin Water chief executive officer Peter L. Jensen and former chief financial officer Thomas C. Tekulve, Jr. improperly recognized revenue to disguise the company’s true financial performance in its 2006 and 2007 quarterly and annual reports. The SEC also alleges that Jensen sold and donated his own Basin Water shares before the company’s true financial condition was revealed, reaping millions of dollars in trading profits and tax benefits. Basin Water built, sold, and leased water treatment systems that cleaned contaminated groundwater.
The SEC’s complaint, filed June 24, 2011, alleges that Jensen and Tekulve improperly included revenue from six sales transactions in Basin Water’s financial reports filed with the Commission. The SEC alleges that, depending upon the transaction, the sale was not final; did not have the customer’s required acceptance of the system; allowed the customer to pay nothing until the customer resold the system, even though there was no resale; did not provide enough assurance that the customer would pay for the system; or where the company had not shipped the system. The SEC alleges that as a result Basin Water overstated its 2006 revenues by 13% and its 2007 revenues by 74% and overstated its quarterly 2006 and 2007 revenues by 10% to 161%. The SEC further alleges that, before the company’s true financial condition was revealed, Jensen sold or donated approximately 1.9 million Basin Water shares for over $9.1 million in trading profits and tax deductions.
In February 2009, Basin Water restated its financial results. In July 2009, the Rancho Cucamonga, Calif.-based company declared Chapter 11 bankruptcy and is now defunct.
The SEC’s complaint charges Jensen and Tekulve with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and against Tekulve only, 13b2-2 thereunder. The complaint also alleges control person liability, pursuant to Section 20(a) of the Exchange Act, against Jensen and Tekulve for violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The complaint further charges Jensen and Tekulve with aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint also alleges that Jensen and Tekulve failed to comply with Section 304 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”). The complaint seeks against each defendant permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains plus prejudgment interest, a financial penalty, and Sarbanes-Oxley Act reimbursement.”

THOR INDUSTRIES SETTLES WITH SEC

The following is an excerpt from the SEC web site:

Litigation Release No. 21966 / May 13, 2011
Accounting and Auditing Enforcement Release No. 3280 / May 13, 2011
Securities and Exchange Commission v. Thor Industries, Inc., and Mark C. Schwartzhoff, Case No. 1:11-cv-00889-RMC. (D.D.C., filed May 12, 2011)
SEC Charges Thor Industries With Violating Commission Cease-and-Desist Order and Charges Former VP of Finance of Thor Subsidiary With Securities Fraud
The Securities and Exchange Commission filed a settled enforcement action in United States District Court for the District of Columbia charging Ohio-based producer of recreational vehicles Thor Industries, Inc. with issuer reporting, record-keeping, and internal control violations. Thor has agreed to be permanently enjoined and to pay a $1 million civil penalty for violating a 1999 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions. In the Matter of Thor Industries, Inc., Exchange Act Release No. 42021 (Oct. 18, 1999). The SEC also charged Mark C. Schwartzhoff, a former Vice President of Finance at Thor’s Dutchmen Manufacturing, Inc. subsidiary, with securities fraud and other violations. Schwartzhoff has agreed to be permanently enjoined, to be permanently barred from serving as an officer or director of a public company, and to be permanently suspended from appearing or practicing before the Commission as an accountant. Schwartzhoff also agreed to pay disgorgement of $394,830, which shall be deemed satisfied by the entry of a restitution order against Schwartzhoff in a parallel criminal case.
The SEC’s complaint alleges that from approximately December 2002 to January 2007, while serving as the senior financial officer of Dutchmen, one of Thor’s principal operating subsidiaries, Schwartzhoff engaged in a fraudulent accounting scheme to understate Dutchmen’s cost of goods sold in order to avoid recognizing inventory costs that were not reflected in Dutchmen’s financial accounting system. Instead of properly recording increased cost of goods sold, Schwartzhoff concealed the costs in various balance sheet accounts by making baseless manual journal entries to falsify the financial statements and other records he provided to Thor. To cover-up his false entries, the complaint alleges that Schwartzhoff created false supporting documentation and false account reconciliations. Schwartzhoff also submitted false documents and information to Thor’s external auditor.
As alleged in the complaint, Schwartzhoff’s fraud overstated Dutchmen’s pre-tax income by nearly $27 million from fiscal year 2003 to the second quarter of fiscal 2007, and allowed him to obtain nearly $300,000 in ill-gotten bonuses. In June 2007, Thor filed restated financial statements for fiscal years 2004 to 2006, each of the quarters of fiscal 2005 and 2006, and the first quarter of fiscal 2007, reducing its pre-tax income by approximately $26 million in the aggregate.
The SEC’s complaint further alleges that Thor failed to maintain accurate books and records and adequate internal accounting controls in violation of a 1999 Commission cease-and-desist Order. The Order directed Thor to cease and desist from committing future books and records and internal controls violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), based on similar misconduct and internal control deficiencies that occurred over four years at a different Thor subsidiary.
The complaint alleges that Thor’s failure to implement adequate internal controls after the 1999 Order provided Schwartzhoff the opportunity to commit his fraud without detection. In particular, Thor failed to adequately implement and verify certain key segregation of duties within accounting and financial functions at Dutchmen, which allowed Schwartzhoff to have unfettered access rights to Dutchmen’s accounting system, the ability to create, enter and approve manual journal entries, and the ability to create and approve account reconciliations. As a result, Schwartzhoff was able to make fraudulent journal entries in various accounts and to disguise these entries through account reconciliations and supporting documents that he falsified. In addition, as alleged in the complaint, Thor failed adequately to monitor and verify account reconciliations and account information that Schwartzhoff submitted in reporting Dutchmen’s financial results. Thor also failed to implement an effective internal audit function for Dutchmen.
As the SEC’s complaint alleges, after Schwartzhoff's fraud came to light, Thor concluded that the internal control failures at Dutchmen constituted a material weakness in Thor’s internal controls over financial reporting. Thor also determined that similar lack of segregation of duties existed in varying degrees at each of its subsidiaries. For example, senior accounting officers (Controllers and Vice Presidents of Finance) at numerous subsidiaries had the ability to create, enter, and approve journal entries and reconciliations in accounts such as accounts receivable, accounts payable, and cash. At all but one subsidiary, various individuals had inappropriate access rights to accounting and information systems, including “super user” access by senior accounting officers at some subsidiaries. In addition, the complaint alleges Thor also determined that it lacked sufficient corporate level monitoring of account reconciliations for all of its subsidiaries.
Without admitting or denying the allegations in the complaint, Thor has consented to the entry of a final judgment: (1) requiring it to comply with the 1999 cease-and-desist Order; (2) permanently enjoining it from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; (3) ordering it to pay a $1 million penalty pursuant to Exchange Act Section 21(d)(3) for violating the 1999 Order; and (4) ordering it to hire an independent consultant to review and evaluate certain of its internal controls and record-keeping policies and procedures.
Without admitting or denying the allegations in the complaint, Schwartzhoff has consented to the entry of a final judgment: (1) permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1 and 13a-13 thereunder; (2) ordering him to pay disgorgement of $299,805 plus prejudgment interest of $95,025, for a total of $394,830, with payment of this amount to be deemed satisfied by the entry of a restitution order against Schwartzhoff in a parallel criminal case that is equal to or greater than $394,830; and (3) permanently barring him from serving as an officer or director. Schwartzhoff also consented to the issuance of an order pursuant to Rule 102(e) of the Commission’s Rules of Practice, permanently suspending him from appearing or practicing before the Commission as an accountant.
These settlements are subject to the approval of the United States District Court for the District of Columbia. The settlement with Thor takes into account the company’s self-reporting and significant cooperation in the SEC’s investigation.
Separately, on May 12, 2011, the United States Attorney’s Office for the Northern District of Indiana filed a related criminal action against Schwartzhoff, and Schwartzhoff agreed to plead guilty to an Information charging him with one count of wire fraud and to pay restitution of approximately $1.9 million.”

SEC OFFERS MORE GUIDANCE ON SECURITY-BASED SWAPS

The following excerpt came from the SEC website:

“Washington, D.C., July 1, 2011 — The Securities and Exchange Commission today provided additional guidance to clarify which U.S. securities laws will apply to security-based swaps starting July 16 -- the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

That Act created a new regulatory framework for over-the-counter derivatives, authorizing the SEC to regulate security-based swaps and the Commodity Futures Trading Commission to regulate other swaps. Under the Dodd-Frank Act, starting July 16, 2011, security-based swaps are defined as “securities” subject to existing federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934.

As one part of today’s action, the Commission approved an order granting temporary relief and interpretive guidance to make clear that a substantial number of the requirements of the Exchange Act applicable to securities will not apply to security-based swaps when the revised definition of “security” goes into effect on July 16. Nevertheless, federal securities laws prohibiting fraud and manipulation will continue to apply to security-based swaps after that date. To enhance legal certainty for market participants, the Commission also provided temporary relief from provisions of U.S. securities laws that allow the voiding of contracts made in violation of those laws.

“As we move forward with the implementation of the Dodd-Frank Act, this temporary relief will help maintain the existing legal framework for security-based swaps under the Exchange Act until the Commission adopts new rules for these transactions,” said Robert Cook, Director of the SEC’s Division of Trading and Markets.

In addition, the Commission approved an interim final rule providing exemptions from the Securities Act, Trust Indenture Act and other provisions of the federal securities laws to allow certain security-based swaps to continue to trade and be cleared as they have pre-Dodd-Frank. That interim relief will extend until the Commission adopts rules further defining “security-based swap” and “eligible contract participant.”
The Commission previously issued guidance in this area on June 15 and plans additional steps in coming days related to the July 16 effective date. Although these actions have been approved, the Commission is seeking input from the public on today’s actions.”