UNREGISTERED SECURITIES FRAUD NETS GOVERNMENT MILLIONS FROM FINES AND DISGOGEMENTS

The following is an excerpt from the SEC web site: November 15, 2011 “The Securities and Exchange Commission announced today that on November 8, 2011, the U.S. District Court for the Northern District of Texas ruled that Timothy Page, of Malibu, California, and his company Testre LP are liable for violating the registration provisions of the federal securities laws. The Court ordered Page to pay $2.49 million in disgorgement and $400,284 in prejudgment interest. The Court also ordered three relief defendants - Reagan Rowland and Rodney Rowland, of Los Angeles, California, and John Coutris, of Irving, Texas - to pay back their ill-gotten gains. The Commission's complaint alleged that Page and Testre violated the registration provisions of the federal securities laws when they engaged in an unregistered public offering of ConnectAJet.com, Inc., a reverse-merger company that claimed it would "revolutionize the aviation industry" by creating a real-time, online booking system for private jet travel. The Commission alleged that Page and his collaborators purchased tens of millions of shares directly from ConnectAJet.com, Inc. for pennies per share, under a purported registration exemption under the Securities Exchange Act of 1933, Regulation D, Rule 504. The Commission alleged that Page then touted the stock to investors through a national marketing campaign and dumped his shares into the public market when no registration statement was filed or in effect. The Court ruled that Page and Testre violated Section 5 of the Securities Act of 1933. In addition to the monetary relief granted by the Court, the Commission continues to seek the following additional relief against Page and Testre: civil penalties, penny stock bars, and injunctions from future violations of Section 5 of the Securities Act of 1933. Reagan Rowland and Rodney Rowland were ordered to pay $138,219 and John Coutris was ordered to pay $281,840 in ill-gotten gains they received from Ryan Reynolds, one of Page's collaborators. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.”

FORMER BROKER PLEADS GUILTY TO OBSTRUCTION OF JUSTICE

The following excerpt is from the SEC website: November 21, 2011 “The Securities and Exchange Commission ("Commission") announces that on November 8, 2011, Robert Carlsson (“Carlsson”), a former broker, pled guilty to obstruction of justice in connection with his false representations to the SEC during two separate examinations of Carlsson's broker-dealer in 2006 and 2007 by examination staff of the Commission’s Chicago Regional Office. The Commission previously announced that on September 8, 2010, the United States Attorney's Office for the Northern District of Illinois obtained a 21-count indictment of Brian Hollnagel, BCI Aircraft Leasing Inc., and five others involved in BCI's fraudulent scheme and obstruction of the Commission's attempts to discover and investigate that very scheme. U.S. v. Brian Hollnagel et al., Criminal Action No. 1:10-cr-0195 (N.D. Ill.) (St. Eve., J.). In that indictment, among various other violations, Hollnagel, BCI, and Carlsson, who raised money from investors for BCI's operations, were accused of obstruction of justice in connection with false representations to the SEC during the 2006 and 2007 examinations of Carlsson's broker-dealer, 21 Capital Group. In particular, Hollnagel, BCI, and Carlsson were accused of concealing Carlsson's fund raising activities for BCI from the Commission’s Chicago examination staff. According to the plea agreement, Carlsson faces an advisory Sentencing Guidelines range of 10 to 16 months’ imprisonment. Carlsson has agreed to fully and truthfully cooperate with the United States Attorney's Office for the Northern District of Illinois in connection with the September 8, 2010 indictment of Hollnagel, BCI, and others. Previously, 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, Defendants Hollnagel and BCI 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 was stayed in 2010 pending the criminal proceedings referenced above.”

ICI 2011 CLOSED-END FUND CONFERENCE REMARKS BY EILEEN ROMINGER

The following excerpt is from the SEC website: Eileen Rominger Director, Division of Investment Management November 17, 2011 “Good afternoon, and thank you for inviting me to speak here today. Let me make the usual disclosure that my remarks represent my own views and not necessarily the views of the Commission, the individual Commissioners or my colleagues on the SEC staff. We have just listened to the panel on “How Closed-End Funds Fit in Today’s Markets.” I am reminded that the last time that an SEC Division of Investment Management Director spoke about closed-end funds at this conference was in October 2007. A panel on the same topic back then probably would have sounded somewhat different. 2007 was in many ways a peak year for closed-end funds -- their assets were about four times what they are today; they issued more than three times worth of new shares in 2007 than they did last year; and 2007 saw the biggest-ever closed-end fund IPO of $5 billion dollars.2 Year 2008 was not kind to the closed-end fund industry. During the financial crisis, the average closed-end fund discount to NAV hit record levels -- it was estimated to be more than 15%, with 443 closed-end funds trading at double-digit discounts.3 Yet perhaps the financial crisis will be remembered by the closed-end fund industry primarily as the event that, for the first time in history, froze the market for auction-rate preferred shares, or ARPs, one of the funds’ key sources of leverage. Three years after the financial crisis, it is not uncommon to read that closed-end funds still are “suffering a bad rap,” that they “lack fans,” that investors are “shying away” from their IPOs, or that their investors are still “spooked.”4 And then there are the various reminders that the ever-growing ETFs and ETNs are muscling in on some of the closed-end funds’ traditional investment territory. It is probably fair to say that in 2011, closed-end funds are still looking to regain their footing in the post-financial crisis investment environment. Some significant strides have been made -- I was glad to find out that, as of the end of September of this year, over 77% percent of ARPs that were outstanding when the markets froze in 2008, have been redeemed as funds found other comparable sources of financing or decided to de-leverage.5 Overall, these are challenging times for investors. Stresses on the global economic order have led to sharp market volatility increases, accompanied by redemptions from equity mutual funds. During periods of stress -- more than ever -- I believe that it is important that funds do all they can to maintain high standards. Only by doing so will they continue to earn and retain the confidence of investors. One area in which standards should be held high is that of informing and educating investors. For example, leverage is often a difficult issue for investors to understand and put in the right perspective. And not only for investors. For closed-end funds themselves, some leverage, such as bank debt or issuing preferred stock, may be straightforward to quantify and explain. Other leverage, such as tender option bonds or reverse repos, may be more complex and variable. In the last few years, as many closed-end funds may have shifted from using ARPs to other forms of leverage, including derivatives, they may be facing new challenges in giving their investors an understandable picture of their leverage profiles. If leverage materially affected a fund’s performance during its fiscal year, I believe the fund should discuss this factor in its annual report. About a year ago, my Division staff sent a letter to the ICI providing its most recent observations about derivatives-related disclosures by investment companies in registration statements and shareholder reports.6 The letter noted, for example, that some funds that appear to have significant derivatives exposure in their financial statements, have limited or no discussion in their annual reports of the effect of those derivatives on the funds’ performance. Even apart from the regulatory requirements, leaving investors in the dark about the role that leverage plays in the management and performance of their portfolios cannot be good for the closed-end fund business. An investor reading a fund’s annual report should not have to dig through the footnotes in the financial statements to understand the material impact that derivatives -- or leverage generally -- may have had on the fund’s performance. Unfortunately, some closed-end fund investors are still in that position today. At the other end of the spectrum, many closed-end funds do an excellent job of communicating to their investors on this topic. These funds’ annual reports speak pointedly and clearly about the role of leverage in their performance. They manage to convey to investors what is important about their funds’ often complex leverage strategies in a simplified but focused and accurate manner. I believe that these investors are well served. The complexities of how best to inform and educate investors about leverage in general, and derivatives in particular, are well known to us at the Commission. My Division is beginning to analyze the comments that have come in on the Concept Release on derivatives, which the Commission issued at the end of August.7 The Concept Release did not speak in detail about disclosure issues, but it did devote significant attention to the treatment of derivatives under the leverage, portfolio diversification and concentration requirements. These are all issues that go to providing investors a complete and accurate picture of their fund. The Concept Release also broadly invited comments on any derivatives-related issues that commenters felt were relevant to the use of derivatives by funds. We welcome and appreciate your views about derivatives-related issues from the closed-end fund community’s point of view. As the markets work through this challenging period, I hope that the closed-end fund industry as a whole makes the commitment and re-doubles efforts to provide investors with appropriate disclosure about leverage and derivatives. Take a fresh look at your funds’ shareholder reports and websites, because these are the places where your investors, as a practical matter, look for information about their funds. Efforts spent on these channels of communication will not only benefit your investors, but will be good for business, too. Speaking of what is perceived as “good for business,” a Morningstar article recently observed that “many closed-end funds live and die by their distributions.”8 In today’s environment of historically low interest rates, many closed-end funds are finding managed distribution policies to be magnets for yield-seeking investors. Couple that with the low cost of leverage, and many closed-end funds may be tempted to further increase the size of their funds’ distributions. Last year, for example, there were 566 announced distribution increases, compared to 187 distribution reductions, and the average change in distribution was an increase of 6.6%.9 Of course, managed distribution policies have been around for as long as closed-end funds themselves, with mixed results and some historical lessons. The 2007 speech to this audience by my predecessor in the Division, cautioned about several issues: the importance of timely disclosure to investors regarding the sources of fund distributions; making clear to investors the extent of a fund’s ability to sustain its current distributions; the need for monitoring of distribution rates by fund managers and directors; and the appropriateness of continuing with a distribution policy.10 It was a timely caution. The market events of 2008 -- combined with the effects of the tax rules -- led a number of closed-end funds to reduce their distribution rates or discontinue their managed distribution policies altogether. These developments made real the need for good disclosure and investor understanding of managed distributions. As we once again face a market under stress in 2011, and as investors seek refuge in yield, it is critically important to conduct business in a way that does not undermine the protection of investors. A growing segment of our population is approaching retirement and seeking yield-generating investments. It would be great if we could agree to raise the bar for informing and educating investors. And of course we all know that a few “bad apples” can tarnish an entire industry. When certain closed-end funds appear to have distribution rates that are significantly higher than their portfolios’ average annual total returns,11 it suggests an unsustainable posture that may end badly for shareholders. We should all worry when Morningstar observes that closed-end funds with high distribution rates -- particularly those that provide the least information about the sustainability of their distributions -- tend to trade at the highest premiums and are “market successes.”12 I think we would all agree that there is no “market success” when it concerns poorly informed investors on the issue of closed-end fund distributions. One cannot help but remember that closed-end funds have known their share of market “bubbles.” In fact, closed-end funds as we know them today arose out of the ashes of the infamous 1929 closed-end funds bubble. It was a time of spectacular growth for leveraged closed-end funds and premiums that reached the sky. In 1929, the premiums averaged 50%, and the hottest new closed-end fund issues sometimes traded at 200% of NAV.13 It was also a time marked by a lack of transparency that bordered on secrecy. After the great crash of 1929, one of the key ways in which closed-end funds sought to resurrect the industry was through a coordinated effort toward greater transparency to inform and educate the investing public about themselves. And the focus of that effort was not on pages and pages of “boilerplate,” but on actually getting across to an investor what sort of thing he or she would be getting when buying a closed-end fund. That real effort at transparency -- and the substantive regulation in the form of the Investment Company Act -- is what enables us to be here today to discuss the state of the closed-end fund industry in the year 2011. And yet, we are still talking about transparency and distribution policies. Reputation is far more easily lost than regained, so I encourage all to disclose clearly and completely, and to set distribution policies that will manage, and meet, investor expectations appropriately over the long-term. I’m happy to have had the chance to speak with you today. Thank you for your time.”

EXECUTIVE AT LARGE DISCOUNT BROKER SETTLES WITH SEC

The following excerpt is from the SEC website: November 21, 2011 “The Securities and Exchange Commission today announced that Randall Merk consented to the entry of a permanent injunction, payment of a civil penalty, and a suspension in order to settle a Commission action related to the Schwab YieldPlus Fund. Merk was an Executive Vice President at Charles Schwab & Co., Inc., President of Charles Schwab Investment Management, and a Trustee of the Schwab YieldPlus Fund and other Schwab funds. In January 2011, the Commission filed a complaint alleging that Merk and another official committed securities law violations in connection with the offer, sale, and management of the YieldPlus Fund. YieldPlus is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts, making it the largest ultra-short bond fund at the time. The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets fall from $13.5 billion to $1.8 billion during an eight-month period. According to the complaint, Merk misled or failed to inform investors adequately about the risks of investing in YieldPlus. The complaint also alleged that Merk approved other Schwab funds’ redemptions of their investments in YieldPlus at a time when he knew or was reckless in not knowing that a portfolio manager for those funds had received material, nonpublic information about YieldPlus without the authorization of the YieldPlus Fund’s board of trustees. On November 21, 2011, the SEC filed a consent signed by Merk and a proposed final judgment against him. Without admitting or denying the Commission’s allegations, Merk consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of, or otherwise violating, Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The proposed final judgment also would enjoin Merk from future violations of Section 34(b) of the Investment Company Act of 1940, which prohibits the making of untrue statements of material fact, or material omissions, in documents filed with the Commission. Merk also agreed to pay a $150,000 civil penalty, which the Commission is seeking to have included in an existing Fair Fund for distribution to injured YieldPlus investors. The proposed judgment is subject to the Court’s approval. If the Court enters the injunction, Merk also has agreed to settlement of a yet-to-be instituted administrative proceeding in which the Commission would suspend Merk for 12 months from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any penny stock offering. The Commission previously entered into a $118 million settlement with three Schwab entities regarding the YieldPlus Fund and another bond fund. See Press Release 2011-7 and Litigation Release No. 21806 (Jan. 11, 2011). Litigation continues against Kimon Daifotis, the former lead portfolio manager for the YieldPlus Fund and former Chief Investment Officer for Fixed Income for Charles Schwab Investment Management. See Litigation Release No. 21805 (Jan. 11, 2011).”

THE WASHINTON PONZI FAMILY

The following excerpt is from the SEC website: “On November 18, 2011, the Securities and Exchange Commission charged a Bethesda, Md. man and several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area. The SEC alleges that Garfield M. Taylor lured primarily middle-class residents in his community with little to no investing experience to invest in promissory notes issued by his two companies that engaged in purportedly low-risk options trading. Taylor urged investors to refinance their homes and use any available means to invest, including their personal savings and retirement funds. The SEC alleges that he promised returns as high as 20 percent per year and falsely assured investors that their investments would be protected by a “reserve account” or that he would employ a “covered call” trading strategy that would not touch the principal amount of their investment. According to the SEC’s complaint filed in federal court in Washington D.C., Taylor and his companies instead engaged in very high-risk, speculative options trading and suffered massive losses. Taylor relied upon money from new investors to pay returns to earlier investors in typical Ponzi scheme fashion. The SEC’s complaint also alleges that he siphoned off $5 million in investor funds to pay family and friends and for other personal uses, including $73,000 to the private school his children attended. The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors from 2005 to 2010. The scheme ultimately collapsed in the fall of 2010 when the companies’ accounts were depleted by the trading losses and interest payments to investors. The SEC’s complaint charged Taylor’s companies Garfield Taylor Inc. and Gibraltar Asset Management Group LLC – which were not registered with the SEC – as well as five collaborators in Taylor’s scheme: Maurice G. Taylor of Bowie, Md., who is the brother of Garfield Taylor. He is the Chief Investment Officer at Gibraltar and worked as a trader for Garfield Taylor Inc. Randolph M. Taylor of Washington D.C., who is the nephew of Garfield Taylor. He was formerly the Vice President for Organizational Development at Gibraltar. Benjamin C. Dalley of Washington D.C., who is the childhood friend and business partner of Randolph Taylor. He was formerly Vice President of Operations at Gibraltar. Jeffrey A. King of Upper Marlboro, Md., whose sister is married to Maurice Taylor. He was a former independent contractor for Garfield Taylor Inc. and former President and Chief Operating Officer of Gibraltar. William B. Mitchell of Middle River, Md., who was formerly Vice President for Finance at Garfield Taylor Inc. and former Executive Vice President of Strategic Planning at Gibraltar. According to the SEC’s complaint, Garfield Taylor and the others jointly prepared and finalized a Gibraltar PowerPoint presentation for prospective investors that was riddled with false and misleading statements. They misrepresented the nature of the company’s options trading strategy, the anticipated rate of return, the protections offered by its outside accountant, and the overall level of risk involved in an investment with Gibraltar. They pitched the PowerPoint presentation to potential institutional investors and charitable organizations, including a Washington D.C.-based children’s charity and a Baptist church in Maryland. Garfield Taylor went so far as to provide the Baptist church with a fake “letter of recommendation” from Charles Schwab as he pitched the investment opportunity. The SEC alleges that in order to maintain a steady flow of new investor money, Garfield Taylor induced current investors and others including King and Mitchell to solicit and refer new investors to him in exchange for commission payments based on the amounts invested. Garfield Taylor, who was not a licensed securities broker, persuaded several individuals to give him online access to their personal brokerage accounts so he could place trades and share in any profits generated. The SEC’s complaint charges Garfield Taylor, Inc., Gibraltar Asset Management Group LLC, Garfield Taylor, Dalley, King, and Randolph Taylor with violations of Sections 17(a) of the Securities Act of 1933 (“Securities Act”). The SEC’s complaint also charges those defendants and Maurice Taylor with violating or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It also alleges that Garfield Taylor violated Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC’s complaint also charges Garfield Taylor, Inc., Gibraltar Asset Management Group, LLC, and Garfield Taylor with violations of Sections 5(a) and 5(c) of the Securities Act. The SEC’s complaint also alleges that Garfield Taylor, King, and Mitchell violated Section 15(a) of the Exchange Act. The SEC seeks a judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay penalties and disgorgement with prejudgment interest. The SEC also named three companies belonging to Randolph Taylor, Dalley, King, and Mitchell as relief defendants for the purposes of seeking disgorgement with prejudgment interest of investor funds.”

SEC ALLEGES CANADIAN RESIDENT USED BUSINESS AS PONZI SCHEME

The following excerpt is from the SEC website: November 17, 2011 “The Securities and Exchange Commission announced that, on November 16, 2011, it charged a New Hampshire business directed by a Canadian resident with obtaining over $1.3 million from investors in a fraudulent Ponzi scheme. The SEC also announced that Judge Joseph N. Laplante of the U.S. District Court in New Hampshire has issued a temporary restraining order that, among other things, freezes the assets of the company and its principal and prohibits them from continuing to solicit or accept investor funds. In its complaint, the SEC alleges that Henry Roche, a Canadian resident, through New Futures Trading International Corporation has been engaged in an ongoing unregistered offering of securities in the United States through operations in New Hampshire and Ontario, Canada. According to the Complaint, since December 2010 Roche has raised over $1.3 million from at least 14 investors in nine states through the offer and sale of high yield promissory notes purportedly yielding either 5-10% per month, or a 200% return within 14 months. The Complaint alleges that Roche represented to some investors that funds supplied would be invested in bonds, Treasury notes and/or 10-year Treasury note futures contracts, and to others that the funds would be invested directly in New Futures, an on-line futures day-trading training business Roche was operating from Canada. According to the complaint, instead of using the funds for either purpose, Roche used approximately $937,000 provided by New Futures investors to make Ponzi “interest” payments to investors in prior Roche-controlled entities. The Complaint also alleges that Roche misappropriated at least another $359,000 to support his lifestyle, to operate a horse breeding venture, Majestic Horses, and to buy horses. The Complaint alleges that Roche’s present activity through New Futures appears to be the continuation of an ongoing investment scheme Roche has been operating over the past three years under a series of entity names, including Masters Palace, Inc., and Third Realm Institute (a/k/a Third Realm, Inc.). The Commission’s complaint charges Roche and New Futures Trading International Corporation with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission acknowledges the assistance of the Ontario Securities Commission and the New Hampshire Bureau of Securities in this matter.”