SEC ALLEGES RBC CAPITAL MARKETS LLC SOLD INADEQUATE INVESTMENTS WITHOUT FULL DISCLOSURES

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission today charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments. According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments. RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund. Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. “RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Kenneth R. Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “RBC Capital did not provide these school districts with full and accurate information regarding the risks of these complex structured products. We are pleased that today’s settlement will result in a significant recovery by the school districts.” According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors. The SEC’s order finds that the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments. RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser. RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million. The SEC’s investigation was conducted jointly by the Enforcement Division’s Municipal Securities and Public Pensions Unit led by Elaine Greenberg and Mark R. Zehner and Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Kevin Guerrero, Keshia W. Ellis and Ivonia K. Slade in Washington D.C. and Jeffrey A. Shank and Anne C. McKinley along with litigation counsel Steven C. Seeger and Robert M. Moye in the Chicago Regional Office. The broker-dealer examinations team of Marianne E. Neidhart, Scott M. Kalish, George J. Jacobus and Daniel R. Gregus of the Chicago Regional Office provided assistance with the investigation. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.”

SHOULD FIRMS BE BANNED FROM DESIGNING A TRANSACTION TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”. This speech is an excerpt from the SEC website: September 19, 2011 Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure. In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2 The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts. In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”

SEC ALLEGES PAYDAY LOAN OWNER USED INVESTOR MONEY FOR CARS, GAMBLING AND HOME IMPROVEMENTS

The following excerpt is from the SEC website: September 22, 2011 “The Securities and Exchange Commission today charged the owner of a Spokane-Wash.-based payday loan business with conducting a massive Ponzi scheme and stealing investor money to fund her home improvement projects, gambling jaunts to Las Vegas, and purchases of a Corvette and a Mercedes. The SEC alleges that Doris E. Nelson of Colbert, Wash., defrauded investors in her company - the Little Loan Shoppe - by misrepresenting the profitability and safety of their investments and giving them the false impression that their money was being used to grow her business. In truth, Nelson used the vast majority of new investor money to repay principal and purported returns to earlier investors. She misappropriated millions of dollars in investor funds for her personal use. According to the SEC's complaint filed in federal district court in Spokane, Nelson raised approximately $135 million between 1999 and 2008 from at least 650 investors in the United States, Canada, and Mexico. Nelson falsely told investors that Little Loan Shoppe was financially sound. In written promissory notes, Nelson promised investors annual returns of 40 to 60 percent that she claimed would be paid through Little Loan Shoppe's profits. She also told investors that their money was safe because she had insurance or a separate account to pay investors back. However, Little Loan Shoppe was not profitable, investor money was not safe, and Nelson misappropriated the money to run her Ponzi scheme. The SEC further alleges that in mid-2008 as the scheme was nearing collapse, Nelson made a last-ditch effort to attract more investment money by announcing a "window to invest" and falsely telling investors that Little Loan Shoppe had "defied financial gravity" in the declining economy. Investors responded by investing millions of dollars in 2008 before the scheme finally collapsed in 2009. Payments to investors ceased and Little Loan Shoppe was forced into bankruptcy. In its federal court action, the SEC alleges Nelson violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and monetary penalties.”

KARA N. BROCKMEYER NAMED CHIEFOF FCPA UNIT FORCUSED ON ANTI-BRIBERY PARTS OF FEDERAL SECURITIES LAWS

The following is an excerpt from the SEC website: "Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission’s Division of Enforcement announced today that Kara Novaco Brockmeyer has been named Chief of its national specialized Foreign Corrupt Practices Act Unit that focuses on violations of the anti-bribery provisions of the federal securities laws. Ms. Brockmeyer has been serving as an Assistant Director in the Enforcement Division and supervising a number of complex investigations involving violations of the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. companies from bribing foreign officials to obtain government contracts and other business. Ms. Brockmeyer spearheaded the SEC’s investigation of Halliburton Co., KBR Inc., Technip S.A., and ENI S.p.A. for FCPA violations resulting from a decades-long bribery scheme in Nigeria. The SEC’s actions in this matter together with the Department of Justice resulted in the recovery of $1.2 billion of ill-gotten gains and criminal penalties. In addition to her significant FCPA experience, Ms. Brockmeyer has served as the co-head of the Division’s Cross Border Working Group, a proactive risk-based initiative focusing on U.S. companies with substantial foreign operations. Ms. Brockmeyer’s efforts on the Cross Border Working Group have resulted in several recent significant enforcement actions, including the Commission’s first stop orders for post-effective registration statements due to the resignation of the companies’ independent auditor. “Kara’s creativity and perseverance is reflected in her outstanding efforts and results over the years in fulfilling the Commission’s mission of investor protection,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Enforcement of the FCPA remains a high priority for the Division, and adding Kara’s talent to the exceptional ability and dedication of the members of the Foreign Corrupt Practices Act Unit will further enhance our anti-corruption program.” Ms. Brockmeyer said, “I am looking forward to the privilege of leading the Foreign Corrupt Practices Act Unit and its dedicated and talented staff.” Ms. Brockmeyer is filling the position previously held by Cheryl Scarboro, who left the agency in June after serving as the first chief of the unit. Ms. Brockmeyer joined the SEC in 2000 following several years in private practice. She started supervising investigations in 2002 and was promoted to Assistant Director in 2005. In addition to FCPA investigations, Ms. Brockmeyer has substantial experience supervising matters involving financial fraud, insider trading, market manipulation, and violations by regulated entities. Ms. Brockmeyer received her law degree magna cum laude from the University of Michigan Law School and her undergraduate degree cum laude from Williams College."

KNOWN PURCHASERS WHO MADE CERTAIN TRADES HAVE HAD THEIR ASSETS FROZEN

UThe following excerpt is from the SEC website: “On September 16, 2011, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Global Industries, Ltd. (the “Unknown Purchasers”). The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the September 12, 2011 public announcement that Technip SA (“Technip”), a French company, and Global Industries, Ltd. (“Global”) had entered into an agreement pursuant to which Technip would offer to acquire all of the outstanding common stock of Global for $8.00 per share, a 55% premium over the closing price of Global common stock on the trading day preceding the public announcement. The Commission’s complaint alleges that the Unknown Purchasers engaged in insider trading, thereby violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil money penalties. The Commission’s complaint alleges that on September 8 and 9, 2011, the Unknown Purchasers bought a total of 685,840 shares of Global common stock through an omnibus account in the name of Raiffeisen Bank International AG Vienna, Austria, at Brown Brothers Harriman & Co., at share prices ranging from $5.14 to $5.39. These purchases accounted for 8.6% and 11.9%, respectively, of the total volume of Global trading on each of those days. The closing price for Global common stock on September 9 was $5.15 per share. On the next trading day, September 12, before the U.S. markets opened, the public announcement of the Global buy-out was made. Following the public announcement, Global shares opened at $7.77. The Unknown Purchasers sold all 685,840 shares of Global on September 12 at prices ranging from $7.77 to $7.80 per share, realizing a profit of approximately $1,726,809. The U.S. District Court for the Southern District of New York issued a Temporary Restraining Order freezing the assets relating to the trading; requiring the Unknown Purchasers to identify themselves, imposing an expedited discovery schedule, and prohibiting the defendants from destroying documents. The Commission acknowledges the Office of Fraud Detection and Market Intelligence of the Financial Industry Regulatory Authority (“FINRA”) for its assistance in this investigation.”

SEC ALLEGES A QUANTITATIVE FUND MANAGER CONCEALED A COMPUTER ERROR THAT COST INVESTORS $217 MILLION

The following excerpt is from the SEC website: Washington, D.C., Sept. 22, 2011 — The Securities and Exchange Commission today charged the co-founder of institutional money manager AXA Rosenberg with securities fraud for concealing a significant error in the computer code of the quantitative investment model that he developed and provided to the firm's entities for use in managing client assets. According to the SEC's order instituting administrative proceedings against Barr M. Rosenberg, he learned of the error in June 2009 but directed others to keep quiet about it and not fix it immediately. Rosenberg denied the existence of any significant errors in the model during an October 2009 board meeting discussion about its performance. AXA Rosenberg disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination. The error was not disclosed to clients until April 2010, causing them $217 million in losses. Rosenberg has agreed to settle the SEC's charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar. The SEC previously charged AXA Rosenberg and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty. "Rosenberg chose concealment over candor, and in doing so selfishly served his interests over those of his clients," said Robert Khuzami, Director of the SEC's Division of Enforcement. Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement, added, "Investors in quant funds trust their advisers to develop, maintain and operate the quant models that drive a fund's performance. Rosenberg betrayed investors when he failed to disclose the material coding error." According to the SEC's order, Rosenberg created the model, oversaw research projects to improve and enhance it, and exercised significant authority throughout the AXA Rosenberg organization. The material error in the model's computer code disabled one of its key components for managing risk and affected the model's ability to perform as expected. Clients raised concerns about this underperformance, and Rosenberg knew about and discussed these concerns with others at AXA Rosenberg. But instead of disclosing and correcting the error immediately, Rosenberg directed others to conceal the error and declined to fix the error. The SEC's order found that due to Rosenberg's misconduct, AXA Rosenberg and its affiliated investment advisers misrepresented to clients that the model's underperformance was attributable to factors other than the error, and inaccurately stated that the model was controlling risk correctly. Rosenberg's instructions to delay fixing the error caused additional client losses. In its order, the SEC found that Rosenberg willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Sections 206(1) and 206(2). Without admitting or denying the SEC's findings, Rosenberg consented to the entry of an SEC order that requires him to cease and desist from committing or causing any violations and any future violations of these provisions; orders him to pay the $2.5 million penalty; and bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from serving as an officer, director or employee of a mutual fund.”