TWO COMPANIES CHARGED WITH SELLING UNREGISTERED PROMISSORY NOTES

The following excerpt is from the SEC website:

February 15, 2012

SEC Charges Venulum with Registration Violations in Connection with Offerings of Wine Contracts and Promissory Notes

"The Securities and Exchange Commission today charged two non-U.S. companies — Venulum Ltd. (a British Virgin Islands company) and Venulum Inc. (a Canadian company) — and their owner and chairman Giles Cadman (a resident of the United Kingdom), with registration violations in connection with unregistered offers and sales of promissory notes and interests in fine wines. The Commission’s suit, filed in Dallas federal court, alleges that, beginning in 2002, Venulum made unsolicited calls to American investors, primarily dentists, to solicit investments in interests in trading in fine wines to be managed by Venulum. Venulum’s solicitation highlighted its purported expertise in selecting, sourcing, storing and marketing fine wines for the benefit of investors. Then, starting in 2010, Venulum solicited 94 of its wine investors to purchase high-interest promissory notes. Neither of the offerings was registered with the Commission.

Without admitting or denying the Commission’s allegations, the defendants consented to permanent injunctions against violating Sections 5(a) and 5(c) of the Securities Act of 1933. The injunction is subject to court approval.

The Commission acknowledges the assistance of the Texas State Securities Board.

JUDGE FINDS COMPANY AND CEO DEFRAUDED MUTUAL FUNDS

The following excerpt is from the SEC website:

“On Tuesday, February 14, 2012, United States District Judge Robert W. Sweet of the Southern District of New York issued an Opinion in favor of the U.S. Securities and Exchange Commission finding that United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and Lewis Chester, PCM’s Chief Executive Officer, engaged in securities fraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, Judge Sweet found that Defendants PCM and Chester orchestrated a scheme to defraud mutual funds in the United States through late trading from February 2001 through September 2003. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. ET. Judge Sweet found that the Defendants “intentionally, and egregiously violated the federal securities laws through a scheme of late trading” through broker-dealer Trautman Wasserman & Company, Inc. (TW&Co.), and found that the scheme was “broad ranging over the course of several years and in no sense isolated.”

As a result of Defendants’ conduct, the Court found that PCM and Chester violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and granted the Commission’s request to enjoin PCM and Chester from future violations of those provisions. Judge Sweet further found PCM and Chester, together with Relief Defendant Pentagon Special Purpose Fund, Ltd., PCM’s advisory client, jointly and severally liable for disgorgement of $38,416,500 of profits from the U.S. mutual fund trades executed through TW&Co. plus prejudgment interest. Finally, Judge Sweet imposed civil penalties against Defendants in the amount of $38,416,500, equal to Defendants’ pecuniary gain for late trades through TW&Co.

The Court found in Defendants’ favor regarding charges of deceptive market timing of U.S. mutual funds.

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and it is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.”

SENATOR LEVIN PROPOSES GOING AFTER "UNJUSTIFIED" TAX LOOPHOLES

The following excerpt is from the Senator Carl Levin website:

February 7, 2012
“WASHINGTON – Two Senate committee chairmen introduced legislation today to help reduce the budget deficit and pay for important priorities by closing tax loopholes.
Sens. Carl Levin, D-Mich., chairman of the Senate Armed Services Committee and the Senate Permanent Subcommittee on Investigations, and Kent Conrad, D-N.D., chairman of the Senate Budget Committee, introduced the Cut Unjustified Tax Loopholes Act, or CUT Loopholes Act. The bill, S.2075, would crack down on offshore tax abuses, close tax loopholes that encourage corporations to move jobs offshore and end a corporate tax loophole that allows corporations to claim a stock option tax deduction that is greater than the stock option expense shown on their books.

Based on estimates from the Joint Committee on Taxation and the Office of Management & Budget, the CUT Loopholes Act would yield at least $155 billion in deficit reduction over 10 years. That is more than enough to cover the $100 billion cost of a full-year extension of the payroll tax cut, and could contribute to the kind of balanced deficit reduction agreement that the nation needs.

“With federal tax revenue at its lowest level in decades and economists warning that more draconian budget cuts could damage the recovery, it is clear that we can’t achieve significant deficit reduction and meet important priorities by focusing on spending cuts alone,” Levin said. “Many in Congress have refused to consider revenue measures to meet our budget challenges, but there should be bipartisan support for closing these indefensible tax loopholes.”

“The CUT Loopholes Act is a win-win as it promotes tax fairness and it will help reduce the budget deficit,” said Conrad.  “This legislation identifies a series of steps we can take now to end egregious tax loopholes and offshore tax abuses.  The revenue raised by cutting these tax loopholes will reduce the deficit and help pay for pressing domestic needs, such as an extension of the payroll tax cut.  I commend Senator Levin and his Permanent Subcommittee on Investigations for their excellent work identifying and seeking to change unjust tax policies.”

The bill would take steps to close offshore tax havens identified by the Permanent Subcommittee on Investigations. This portion of the bill is based primarily on the Stop Tax Haven Abuse Act, S. 1346, authored by Levin and cosponsored by Conrad and six others. President Obama, as a senator, supported a similar measure. Among other measures, the bill would:

Give Treasury authority to take tough new actions to combat tax haven banks and tax haven jurisdictions that help U.S. clients hide assets and dodge U.S. taxes.
Stop offshore corporations that are managed from the United States from claiming foreign status and thereby dodging taxes on their non-U.S. income.
Eliminate tax incentives for moving U.S. jobs offshore and transferring intellectual property offshore.

Establish in law the presumption that, unless a taxpayer proves otherwise, an offshore corporation that is formed by, receives assets from or benefits a U.S. taxpayer is considered under the control of that taxpayer for U.S. tax purposes.
Based on estimates from the Joint Committee on Taxation and the Office of Management and Budget, the offshore tax provisions of the bill would reduce the deficit by at least $130 billion over 10 years.

The second major focus of the bill is closing a corporate tax loophole that provides a tax subsidy to corporations that compensate executives using stock options. Under current law, corporations are allowed to take a larger income tax deduction for stock option expenses than is recorded on their financial books. Between 2005 and 2009, this loophole allowed U.S. corporations to take between $12 billion and $61 billion annually in excess tax deductions.

The bill would:
Prohibit corporations from taking a larger income tax deduction for stock-option grants than the expense shown on their books.
Preserve current tax treatment for individuals who receive stock options and for incentive stock options commonly used by start-up companies.
Apply to stock options the same $1 million overall limit on corporate tax deductions for executive pay that applies to other forms of compensation.

This portion of the bill is based primarily on the Ending Excessive Corporate Deductions for Stock Options Act, S. 1375, authored by Levin and cosponsored by Sens. Sherrod Brown, Claire McCaskill and Sheldon Whitehouse. The Joint Committee on Taxation has estimated that these provisions would reduce the deficit by $25 billion over 10 years.

“We can’t afford to use taxpayer dollars to subsidize offshore schemes and loopholes,” said Levin.  “Closing down offshore tax havens that tax dodgers use to get out of paying their fair share is not only the right thing to do, it can help us pay our bills while boosting the economy and reducing the deficit. The CUT Loopholes Act offers a way to provide additional revenue that should get bipartisan support.”

SEC TIGHTENS RULE ON INVESTMENT ADVISER PERFORMANCE FEES

The following excerpt is from the SEC website:

“Washington, D.C., Feb. 15, 2012 — The Securities and Exchange Commission today announced it is tightening its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011. The Commission-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.
The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then.”

CHAIRMAN OF THE BOARD AT CYTOCORE,INC. CHARGED WITH FRAUD BY SEC

The following excerpt is from the SEC website:

“The Commission announced that on January 31, 2012, an Illinois federal court entered a default judgment against Daniel J. Burns (“Burns”), a defendant in an action filed by the Commission in January 2011. The Commission alleged in its complaint that from 2003 to 2008, Burns, the former Chairman of the Board of Directors of CytoCore, Inc. (“CytoCore”), employed fraudulent schemes to profit from CytoCore stock transactions and received hundreds of thousands of dollars in improper compensation and benefits from CytoCore as an unregistered broker. According to the complaint, in February 2008, Burns caused CytoCore to issue a press release touting Burns’ investment in CytoCore stock, and then secretly sold shares immediately following the announcement. According to the complaint, Burns’ secret selling also constituted insider trading because Burns was in possession of material, nonpublic information about an ongoing CytoCore private stock offering.

The complaint further alleged that, from 2003 to 2008, Burns improperly received transaction-based compensation as an unregistered broker soliciting investors in CytoCore stock. The complaint also alleged that Burns submitted false claims for commissions purportedly earned by a friend for soliciting CytoCore investors, and his friend, in turn, remitted those commission payments to Burns. The Complaint also alleged that Burns submitted to CytoCore false claims for expense reimbursements relating to his investor solicitations. The complaint further alleged that Burns violated insider reporting requirements.

The Court’s final judgment enjoins Burns from future violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 14(a), 15(a), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 14a-9, and 16a-3 thereunder, orders him to pay disgorgement in the amount of $804,100.00, plus prejudgment interest of $324,325.00, for a total amount of $1,128,425.00, and permanently bars him from acting as an officer or director of a public company.”

SENATOR LEVIN PROPOSES ENDING TAX LOOPHOLES FOR SPECULATORS

The following excerpt is from the Senator Carl Levin website:

January 23, 2012
WASHINGTON – Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, on Monday introduced legislation to end a tax loophole that subsidizes short-term speculation in derivatives.
The Closing the Derivatives Blended Rate Loophole Act [PDF] would end a tax loophole that allows traders in complex derivatives to buy and sell these instruments in days or even seconds, yet claim a large portion of the resulting income as a long-term capital gain. It is one of a series of bills from Levin to implement a seven-point deficit reduction plan he rolled out in September.

The bill would end a tax subsidy that allows people who make short-term investments in certain derivatives to treat much of their earnings as long-term capital gains. Generally speaking, taxpayers are allowed to claim the lower capital gains tax rate on earnings only if those earnings come from the sale of assets that they have held for more than a year. That’s the way the tax code encourages the long-term investment that helps our economy grow.

But under Section 1256 of the Internal Revenue Code, traders in covered derivatives can claim 60 percent of their income as long-term capital gains, no matter how briefly they hold the asset.

In December, the American Bar Association Tax Section called for ending the loophole, telling lawmakers in a letter: “Whatever the merits of extending preferential rates to derivative financial instruments generally, we do not believe that there is a policy basis for providing those preferential rates to taxpayers who have not made such long-term investments.”

Levin has repeatedly called for ending tax breaks and loopholes that benefit Wall Street and high-income tax payers, and has pointed out that a range of budget experts across the ideological spectrum say that addressing revenue, along with spending cuts, is essential to achieving real deficit reduction while avoiding damaging cuts in important federal programs such as education, alternative energy and defense. In September, he outlined a plan that would reduce the deficit by hundreds of billions of dollars. In addition to ending the blended-rate loophole, that plan would:

:
End the carried interest loophole that subsidizes the pay of hedge-fund managers.
End abusive offshore tax shelters.
End a tax loophole that subsidizes lucrative stock options given by corporations to their executives.
Replace the wasteful and inefficient paper tax lien system with a publicly available electronic database that is more efficient and increases scrutiny on those who have failed to pay what they owe.
Restore capital gains tax rates to those in place under President Reagan.
Restore Clinton-era income tax rates on incomes of $250,000 or more.
Levin’s Stop Offshore Tax Haven Abuse Act, introduced last year, would address the offshore tax loophole issue. He and Sen. Sherrod Brown, D-Ohio, last year introduced the Ending Excessive Corporate Deductions for Stock Options Act to end tax subsidies for stock-option pay. And with Sen. Mark Begich, D-Alaska, he introduced the legislation to modernize the tax lien system and improve enforcement.

“This is an agenda for ending wasteful policies that add to our deficit, raise the tax burden on hardworking Americans and make it harder for them to provide for their families,” Levin said. “By closing loopholes and ending tax breaks that overwhelmingly benefit wealthy taxpayers and corporations, we can reduce our budget deficit without crippling our ability to care for our seniors, educate our children and defend our nation.”