UBS ADVISORY ARM CHARGED BY SEC WITH MICONDUCT

The following excerpt is from the SEC website:

“Washington, D.C., Jan. 17, 2012 – The Securities and Exchange Commission today charged an investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed, resulting in a misstatement to investors of the net asset values (NAVs) of those funds. The misconduct was revealed during the course of an SEC examination, minimizing investor harm.

The SEC’s Enforcement Division began investigating UBS Global Asset Management (UBSGAM) following a referral from SEC examiners who conducted a routine exam of the firm, which is an SEC-registered investment adviser. The SEC’s investigation further determined that during a two-week period, UBSGAM did not follow the mutual funds’ fair valuation procedures in pricing certain illiquid fixed-income securities in the portfolios of the mutual funds.

UBSGAM agreed to pay $300,000 to settle the SEC’s charges.
“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office.

“Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”

According to the SEC’s order instituting administrative proceedings against UBSGAM, the firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of approximately $22 million. Most of the securities were part of subordinated tranches of nonagency mortgage-backed securities whose underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac. The securities purchased also included asset-backed securities and collateralized debt obligations.

The SEC’s order finds that following the purchases, all but six of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100 percent higher. The valuations used by UBSGAM were provided by pricing sources (broker-dealers or a third-party pricing service) that did not appear to take into account the prices at which the mutual funds had purchased the securities. Some of the broker-dealer quotations were based on the previous month-end pricing; other quotes were stale and not priced daily. UBSGAM did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee more than two weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources. By using the valuations provided by broker-dealers or a third-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures. These procedures required the securities to be valued at the transaction price until UBSGAM received a response to a price challenge based on the discrepancy identified in the price tolerance report, or UBSGAM made a fair value determination. The procedures provided that the transaction price could be used for up to five business days until a decision needed to be made to determine the fair value. By failing to implement these procedures, UBSGAM aided and abetted and caused the funds to violate Rule 38a-1 under the Investment Company Act.

The SEC’s order further finds that because the securities were not properly or timely priced at fair value, the NAVs of the funds were misstated between one cent and 10 cents per share for several days in June 2008. Consequently, the mutual funds sold, purchased, and redeemed their shares based on inaccurately high NAVs on those days. UBSGAM thus aided and abetted and caused the funds to violate Rule 22c-1 adopted pursuant to Section 22(c) of the Investment Company Act.

In settling the charges without admitting or denying the SEC’s findings, UBSGAM agreed to be censured and to pay a $300,000 penalty, and also consented to a cease-and- desist order from committing or causing violations of Rules 22c-1 and 38a-1 under the Investment Company Act. The SEC acknowledges the assistance and cooperation of UBSGAM during the examination and investigation.

The SEC’s investigation was conducted by Jamie Davidson, Marlene Key, Steven Levine, and Eric Phillips of the Chicago Regional Office. The SEC examination team that referred the matter to enforcement officials included Maureen Dempsey, Matthew Harris, Leora Hughes, Stanton Nelson, and Susan Weis of the Chicago Regional Office.”

SEC COMMISSIONER JOHN GALLAGHER MAKES REMARKS AT SRO OUTREACH CONFERENCE

The following excerpt is from the SEC website:

"Thank you, John, for that kind introduction. I would first like to thank Robert Cook and Carlo di Florio for inviting me, and would like to thank them both for their leadership in conceiving of and planning this important event. And thank you to all of the members of the SRO community who are attending today. You are literally on the front line of the securities markets, and your wisdom and feedback are incredibly important to the Commission as we wrestle with issues impacting the markets.And, as you would expect, I need to tell you that my remarks today are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

The title of this Conference is “Collaboration, Cooperation, and Oversight,” and it has been described to me by my friend John Polise as designed to foster dialogue with the SROs in an environment where both the SROs and the SEC can discuss candidly their relationship. I was heartened to hear about this drive for collaboration. Simply put, we are at a crossroads with respect to the status of self regulation. Forums like this should produce concrete results that further the incredibly important relationship between the SEC and SROs. Do not waste this opportunity. The dialogue should be open and honest, and it needs to flow in both directions.

And given the dynamism in the markets, the continued changes in the SRO community, and the massive legislative and regulatory changes in recent years, it is critically important that this dialogue be nurtured and continued.

After all, our interests as regulators should be aligned, but to do so we also need to make sure that as our markets and the regulation of those markets continue to develop, we do not let habit, past practice and provincialism get in the way of sound, effective, and vigorous markets oversight. Importantly also, we need to insure that as much as possible the SEC speaks clearly, consistently, and with a single voice in dealing the SROs it oversees.

The SRO structure is a bedrock of the US scheme of securities regulation. It should be fostered, not eroded in an effort to make the SROs into “deputy SECs” — let’s not forget about the “S” in SRO. To be sure, the SEC must be able to vigorously carry out its duty to oversee the SROs. But, if this regulatory construct is to survive and flourish, SEC oversight must be conducted in a way that respects the unique missions and market structures of the various SROs. And if this is not possible, then we need to ask ourselves even deeper questions, such as:

• Should we have exchanges with statutory self regulatory responsibilities when, in fact, the vast majority of those responsibilities have been outsourced to another SRO?
   
• What limits, if any, should the Commission impose on the ability of SROs to contract with others?

Fortunately, the Commission had the prescience in 2004 to raise very similar questions in its SRO concept release. Although the issues discussed in that release require a substantial updating in light of the consolidations, demutualizations, and IPOs of various SROs in the last several years, the basic regulatory questions remain the same. Regardless of the answers to the questions I just posed, it may well be time for the Commission to dust off and reconsider many of the issues raised in the 2004 release.

In conclusion, I hope that today is the beginning of a new era of SEC/SRO relations. I am confident that under the stewardship of Carlo and Robert, this can be the case. I can tell you that I am very interested in these issues, and I look forward to working with the SEC staff and the SROs as the issues discussed today and other, bigger picture, issues are debated."

SEC AMENDS COMPLAINT AGAINST THREE SWISS BUSINESSES IN ARCH CHEMICALS INC., INSIDER TRADING CASE

The following excerpt is from the SEC website:

“The Securities and Exchange Commission announced today that it has filed an amended complaint in a pending action against three Swiss-based entities previously charged with insider trading. On July 15, 2011, the Commission filed a complaint charging defendants Compania International Financiera S.A. (Compania”), Coudree Capital Gestion S.A. (“Coudree”), and Chartwell Asset Management Services (“Chartwell”) with insider trading in violation of Section 10(b) of the Exchange Act, alleging that the defendants traded ahead of a July 11, 2011 public announcement that Swiss-based Lonza Group Ltd. would acquire Connecticut-based Arch Chemicals, Inc.
Today the Commission filed an amended complaint adding an additional claim for relief under the tender offer antifraud provisions of the Exchange Act, specifically Section 14(e) and Rule 14e-3 thereunder. The Commission amended its complaint because the Lonza acquisition of Arch Chemicals was in the form of a tender offer. The Commission’s amended complaint now charges the defendants with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and Rule 14e-3. The amended complaint seeks permanent injunctions, disgorgement of illegal trading profits plus prejudgment interest, and civil monetary penalties.
The Commission’s action remains pending.”

CPA PLEADS GUILTY TO LYING TO SEC STAFF

The following excerpt is from an e-mail sent out by the SEC:

“Washington, D.C., Jan. 12, 2012 – The Securities and Exchange Commission today announced that a former audit partner at accounting and consulting firm BDO USA LLP has pled guilty to criminal charges for lying to SEC enforcement staff during investigative testimony.

Ronald C. Machen Jr., the U.S. Attorney for the District of Columbia, filed the criminal charges against certified public accountant Bryan N. Polozola, who lives in Richardson, Texas.

According to the criminal information filed in U.S. District Court for the District of Columbia, the SEC issued subpoenas last year to BDO and Polozola, who was responsible for auditing several hedge funds managed by an investment adviser that the SEC is investigating. The criminal information states that the audit is a central issue in the SEC inquiry, and investigators took testimony from Polozola to obtain information about his role in the audit process and assess his credibility. Polozola was the subject of a 2005 NASD (now FINRA) proceeding alleging that he took $49,350 in funds from a former employer for his personal use. Polozola neither admitted nor denied NASD’s allegations in consenting to a bar from associating with any NASD firm.
The criminal information alleges that during questioning in September 2011, Polozola falsely testified to SEC staff that he was not aware of a $49,350 payment made on his behalf to his former employer. In fact, Polozola was aware that his attorney had repaid the $49,350 to the former employer as reimbursement of the funds he had allegedly taken for his personal use. The payment was made at Polozola’s direction and with Polozola’s funds.

“Truth in testimony is the first principle of a fair and effective enforcement program,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This guilty plea is a stark reminder that those who lie in SEC investigations will face an SEC committed to working closely with the criminal authorities to ensure that they are held accountable.”
Polozola pled guilty to a one-count information charging him with making a false statement to government officials in violation of 18 U.S.C. § 1001.

The SEC thanks the U.S. Attorney’s Office for the District of Columbia for its efforts in prosecuting the case.”

SEC BRINGS CHARGES AGAINST IMPERIALI, INC., FOR FRAUD

The following excerpt is from the SEC website:

“On January 9, 2012, the Securities and Exchange Commission charged Florida-based Imperiali, Inc., one current and one former officer, and its former auditor for their involvement in a fraudulent disclosure and accounting scheme.

The SEC’s Complaint alleges that between 2005 and 2008, Daniel Imperato orchestrated a scheme to use Imperiali, a business development company that Imperato owned and controlled, to defraud investors by making it appear that Imperiali was a thriving multinational corporation with several wholly-owned businesses, when in fact it was nothing more than a shell corporation. The Complaint alleges that Imperiali raised approximately $2.5 million using offering materials that included numerous material misrepresentations and omissions, and that Imperato and Fiscina drafted, reviewed, and certified at least 16 materially false and misleading registration statements, periodic reports and current reports with the Commission on behalf of Imperiali. Among other things, the Complaint alleges that those filings overvalued Imperiali’s virtually worthless assets at amounts ranging from $3.5 million to $269 million, and failed to disclose the issuance of millions of shares of restricted stock. The Complaint also alleges that O’Donnell failed to audit Imperiali’s financial statements in accordance with Public Company Accounting Oversight Board (PCAOB) Standards, and issued audit reports on Imperiali’s financial statements that he knew or was reckless in not knowing contained materially false and misleading information.

The SEC’s complaint charges that Imperiali and Imperato violated, or aided and abetted violations of, Sections 5(a), 5(a), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; that Imperiali also violated Sections 18(d), 31(a), and 34(b) of the Investment Company Act of 1940 (Investment Company Act) and rule 31a-1 thereunder; that Imperato also violated Sections 13(b)(5) and 15(a) of the Exchange Act and rules 13b2-1, 13b2-2, and 13a-14 thereunder, and Section 34(b) of the Investment Company Act; and that O’Donnell violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC seeks permanent injunctions and civil penalties from each defendant, disgorgement with prejudgment interest from Imperiali and Imperato, and an officer and director bar against Imperato, and Fiscina.
Without admitting or denying the SEC’s allegations, Fiscina has consented to the entry of a final judgment that permanently enjoins him from future violations of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder, and Section 34(b) of the Investment Company Act, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder, and bars him from acting as an officer or director of a public company. The Fiscina final judgment does not impose a civil penalty against him based on his sworn inability to pay. The settlement is subject to the Court’s approval.”

SEC ALLEGES INSIDER TRADING IN MATRIA HEALTHCARE, INC., STOCK

The following excerpt is from the SEC website:

"On January 9, 2012, the Securities and Exchange Commission filed a civil injunctive action against Earl C. Arrowood, a 67-year old resident of Gainesville, Georgia, and Parker H. “Pete” Petit, a 72-year old who maintains residences in both Miramar Beach, Florida and Roswell, Georgia. The Commission alleges insider trading by Arrowood based on material non-public information about the potential sale of Matria Healthcare, Inc. (“Matria”), formerly a NASDAQ-listed company, provided by his friend and flying partner, Petit. At that time, Petit was the Chairman and Chief Executive Officer of Matria. The Commission alleges that Petit tipped Arrowood that Matria was seeking to be acquired in advance of Matria’s January 15, 2008 public announcement. Based on the tip, Arrowood purchased a total of over 17,500 common shares of Matria in October and December 2007 resulting in unrealized gains on the Matria trades in excess of $94,000, based on a 20 percent increase in Matria’s share price after the news was made public in January 2008.

The Commission’s complaint, filed in the United States District Court for the Northern District of Georgia, charges Arrowood and Petit with violating the antifraud provisions of the federal securities laws. The complaint alleges that that each violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, alleges and seeks against each a permanent injunction, disgorgement with prejudgment interest and civil monetary penalties pursuant Section 21A of the Exchange Act; and as to Petit, an order barring him from acting as an officer or director of any issuer whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act or which is required to file reports with the Commission pursuant to Section 15(d) of the Exchange Act."