CHARGES BROUGHT AGAINST INVESTMENT MANAGER FOR FAILURE TO TURN OVER RECORDS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Aug. 10, 2012 – The Securities and Exchange Commission today charged a Florida-based investment manager and his firm for failing to provide SEC examiners with records of a mutual fund advisory business that invested in NASCAR-related stocks.

The SEC examiners sought records from David W. Dube and Peak Wealth Opportunities LLC while examining a mutual fund they advised called the Stock Car Stock Index Fund. Despite repeated requests, Dube and Peak Wealth failed to furnish certain records to the SEC.

"After promising multiple times to provide the requested records, Dube failed to live up to his regulatory obligations and turn over the records," said Bruce Karpati, Chief of the Enforcement Division’s Asset Management Unit. "When financial professionals fail to cooperate with SEC exams, they force the agency to expend greater resources to pursue investigations."

According to an SEC order initiating administrative proceedings, Peak Wealth was the adviser to the Stock Car Stock Index fund from 2008 to June 2010. SEC examination staff requested records from Peak Wealth and Dube in 2010 while examining Peak Wealth’s advisory business and the operations of the fund.

The SEC further alleges that Dube and Peak Wealth:
Failed to make and keep certain required financial records.
Failed to withdraw Peak Wealth’s registration with the SEC and make other required filings.
Failed to provide the fund’s board of directors with information reasonably necessary to assess Peak Wealth’s advisory fees.

Simultaneously with the SEC’s examination in 2010, the fund’s board requested information from Peak Wealth and Dube as part of the fund’s required annual evaluation of its advisory agreements. The annual evaluations are required under Section 15(c) of the Investment Company Act of 1940, which also requires advisers to provide their boards with information reasonably necessary to conduct those evaluations. Despite requesting additional time to respond to the board, Peak Wealth and Dube failed to provide any of the requested documents. The board subsequently terminated Peak Wealth’s advisory agreement and liquidated the fund by returning the money to investors.

"A fully-informed board is crucial to the advisory fee setting process, yet Dube failed to provide the board with the most basic of information," said Chad Alan Earnst, an Assistant Regional Director in the Enforcement Division’s Asset Management Unit.

Under the relevant rules, the SEC could seek to permanently bar Dube from association with an SEC registered investment adviser or broker dealer. The SEC alleges that Peak Wealth willfully violated Sections 203A and 204 of the Advisers Act of 1940 and Rules 203A-1(b)(2), 204-1(a)(1), 204-2(a)(1), (2), (4), (5), and (6) thereunder, and Section 15(c) of the Investment Company Act. The SEC charged Dube with willfully aiding and abetting and causing Peak Wealth’s violations.

The SEC’s investigation was handled by Chad Alan Earnst and Christine Lynch, members of the Asset Management Unit in the SEC’s Miami Regional Office. The related examination was conducted by John Mattimore, Faye Chin, Roda Johnson, Luisa Lipins, and Victor Pedroso. Robert Levenson is leading the SEC’s litigation.

Investor Bulletin: Exchange-Traded Funds (ETFs)

Investor Bulletin: Exchange-Traded Funds (ETFs)

FORMER DELOITTE PARTNER PLEADS GUILTY TO CRIME

FROM: U.S. JUSTICE DEPARTMENT
Former Deloitte Partner Pleads Guilty to Insider Trading
The Securities and Exchange Commission announced that on August 8, 2012, Thomas P. Flanagan, a former Deloitte and Touche LLP partner, pleaded guilty to one count of criminal securities fraud for engaging in insider trading after he obtained material, nonpublic information about several Deloitte clients. Flanagan, 64, of Chicago, used that information himself and shared it with a relative to make illegal trading profits. The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against Flanagan on July 11, 2012 in the U.S. District Court for the Northern District of Illinois. Flanagan is scheduled to be sentenced on October 25, 2012.

The criminal charges arose out of the same facts that were the subject of a civil action that the SEC filed against Flanagan and his son, Patrick T. Flanagan, on August 4, 2010. The SEC’s complaint alleged that Thomas Flanagan, a certified public accountant, worked at Deloitte for 38 years and rose to the level of Vice Chairman of Clients and Markets. The complaint alleged that Flanagan traded on nine occasions between 2005 and 2008 in the securities of multiple Deloitte clients and a company acquired by a Deloitte client while in possession of nonpublic information that he learned through his duties as a Deloitte partner. The information had not yet been disclosed to the public and concerned material, market-moving events such as earnings results, earnings guidance, and acquisitions. Thomas Flanagan’s illegal trading resulted in profits of over $430,000. On four occasions, Thomas Flanagan relayed the nonpublic information to his son Patrick Flanagan who then traded based on that information. Patrick Flanagan realized profits of more than $57,000.

The SEC also instituted related administrative and cease-and-desist proceedings on August 4, 2010, finding that Flanagan violated the SEC’s auditor independence rules on 71 occasions between 2003 and 2008 by trading in the securities of nine Deloitte audit clients. The SEC’s settled administrative order found that during the time Flanagan owned or controlled these securities, Deloitte issued audit reports to the nine audit clients in which it stated that the financial statements contained in the reports had been audited by an independent auditor. However, due to Flanagan’s ownership of the audit clients’ securities, Deloitte was not independent. The companies then filed with the SEC annual reports and proxy statements which included the false audit reports. As a result, the SEC’s administrative order found that Flanagan caused and willfully aided and abetted Deloitte’s violations of the SEC’s auditor independence rules under Regulation S-X and also caused and willfully aided and abetted the companies’ violations of the reporting and proxy provisions of the Securities Exchange Act of 1934.

As alleged in the SEC’s complaint, Thomas Flanagan concealed his trades in the securities of Deloitte’s clients and circumvented Deloitte’s independence controls. According to the SEC’s complaint, he failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte’s personal income tax preparers about the identity of the companies whose securities he traded.

As a result of their conduct, the SEC’s complaint charged Thomas and Patrick Flanagan with violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3. The SEC’s administrative action found that Thomas Flanagan caused and willfully aided and abetted Deloitte’s violations of Rule 2-02(b)(1) of Regulation S-X, and caused and willfully aided and abetted the clients’ violations of Sections 13(a) and 14(a) of the Exchange Act, and Rules 13a-1, 13a-13, and 14a-3 thereunder. Without admitting or denying the SEC’s allegations in the complaint and the findings in the administrative order, Thomas Flanagan consented to the entry of an order of permanent injunction, to pay disgorgement with prejudgment interest and civil penalties totaling $1,051,042, and to a denial of the privilege of appearing or practicing before the SEC as an accountant. Without admitting or denying the SEC’s allegations in the complaint, Patrick Flanagan consented to the entry of an order of permanent injunction and to pay disgorgement with prejudgment interest and a civil penalty totaling $123,270.

SEC FREEZES AN ADDITIONAL $6 MILLION IN NEXEN INSIDER TRADING CASE

FROM: U.S. SECURITIES AND EXCHANGE COIMMISSIOIN
On August 6, 2012, the Securities and Exchange Commission obtained an emergency court order in the United States District Court for the Southern District of New York to freeze more than $6 million in assets of additional unknown traders who made approximately $2.3 million in illegal profits by trading in advance of the July 23, 2012 announcement that China-based CNOOC Ltd. had agreed to acquire Canada-based Nexen Inc. for approximately $15.1 billion.

On Friday, July 27, 2012, just days after the acquisition announcement, the SEC filed an initial complaint in federal district court in Manhattan alleging that Hong Kong-based Well Advantage Limited and other unknown traders had traded Nexen stock based on nonpublic information about CNOOC’s impending acquisition of Nexen and reaped a total of more than $13 million in illicit trading profits. That same day, the SEC obtained a court order freezing the assets of the initial defendants valued at more than $38 million.

One week later, on Friday, August 3, 2012, the SEC filed an amended complaint adding allegations that additional unknown traders in possession of material nonpublic information purchased Nexen stock in the days leading up to the public announcement of its acquisition. According to the SEC’s First Amended Complaint, the additional unknown traders opened a U.S. brokerage account through Hong Kong-based CSI Capital Management Limited only one week before the announcement and purchased 250,000 shares of Nexen stock during the following two days at a cost of approximately $4.2 million. Immediately following the announcement, the unknown traders sold these shares for nearly $6.5 million, reaping approximately $2.3 million in illegal profits. In connection with filing the First Amended Complaint, the SEC obtained another emergency court order freezing nearly $6.5 million in the assets of these additional traders, bringing the total value of assets frozen in this case to more than $44 million.

The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to the emergency relief, the Commission is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest and pay financial penalties, and permanently barring them from future violations.

SEC SETTLES FCPA CHARGES AGAINST PFIZER INC. AND WYETH LLC

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today filed a settled enforcement action in the U.S. District Court for the District of Columbia against Pfizer Inc. for violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries bribed doctors and other health care professionals employed by foreign governments in order to win business.

The SEC alleges that employees and agents of Pfizer’s subsidiaries in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia made improper payments to foreign officials to obtain regulatory and formulary approvals, sales, and increased prescriptions for the company’s pharmaceutical products. They tried to conceal the bribery by improperly recording the transactions in accounting records as legitimate expenses for promotional activities, marketing, training, travel and entertainment, clinical trials, freight, conferences, and advertising.

The SEC filed a separate settled enforcement action in the U.S. District Court for the District of Columbia against another pharmaceutical company that Pfizer acquired a few years ago – Wyeth LLC – for its own FCPA violations. Pfizer and Wyeth agreed to separate settlements in which they will pay approximately $45 million combined in disgorgement and prejudgment interest to the SEC to settle their respective charges. In a related action, Pfizer H.C.P. Corporation, an indirect wholly owned subsidiary of Pfizer, will pay a $15 million penalty to settle FCPA charges brought against it today by the U.S. Department of Justice (DOJ) under a deferred prosecution agreement.

The SEC’s complaint against Pfizer alleges that Pfizer’s misconduct dates back as far as 2001. According to the SEC’s complaint, employees of Pfizer’s subsidiaries authorized and made cash payments and provided other incentives to bribe government doctors to utilize Pfizer products. In China, for example, the SEC’s complaint alleges that Pfizer employees invited "high-prescribing doctors" in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions. In addition, according to the SEC’s complaint, Pfizer employees in Croatia created a "bonus program" for Croatian doctors who were employed in senior positions in Croatian government health care institutions. According to the SEC’s complaint, once a doctor agreed to use Pfizer products, a percentage of the value purchased by a doctor’s institution would be funneled back to the doctor in the form of cash, international travel, or free products.

According to the SEC’s complaint, Pfizer made an initial voluntary disclosure of misconduct by its subsidiaries to the SEC and Department of Justice in October 2004, and fully cooperated with SEC investigators. The complaint alleges that Pfizer took such extensive remedial actions as undertaking a comprehensive worldwide review of its compliance program.

The SEC further alleges that Wyeth subsidiaries engaged in FCPA violations, primarily before, but also after, the company’s acquisition by Pfizer in late 2009. For example, according to the SEC’s complaint, starting at least in 2005, subsidiaries marketing Wyeth nutritional products in China, Indonesia, and Pakistan bribed government doctors to recommend their products to patients by making cash payments or in some cases providing BlackBerrys and cell phones or travel incentives. The complaint alleges that Wyeth’s employees often used fictitious invoices to conceal the true nature of the payments.

According to the SEC’s complaint, following Pfizer’s acquisition of Wyeth, Pfizer undertook a risk-based FCPA due diligence review of Wyeth’s global operations and voluntarily reported the findings to the SEC staff. The complaint alleges that Pfizer diligently and promptly integrated Wyeth’s legacy operations into its compliance program and cooperated fully with SEC investigators.

In settling the SEC’s charges, Wyeth neither admitted nor denied the allegations. Pfizer consented to the entry of a final judgment ordering it to pay disgorgement of $16,032,676 in net profits and prejudgment interest of $10,307,268 for a total of $26,339,944. Pfizer also is required to report to the SEC on the status of its remediation and implementation of compliance measures over a two-year period, and is permanently enjoined from further violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Wyeth consented to the entry of a final judgment ordering it to pay disgorgement of $17,217,831 in net profits and prejudgment interest of $1,658,793, for a total of $18,876,624. As a Pfizer subsidiary, the status of Wyeth’s remediation and implementation of compliance measures will be subsumed in Pfizer’s two-year self-reporting period. Wyeth also is permanently enjoined from further violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The settlements are subject to court approval.

SEC CHARGES REAL ESTATE INVESTMENT COMPANY AND ITS PRINCIPALS WITH OFFERING FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
On July 6, 2012 the Securities and Exchange Commission filed a Complaint in federal district court against The Companies (TC), LLC ("The Companies") and its principals, Kristoffer A. Krohn ("Kris Krohn"), Stephen R. Earl ("Earl"), and former officer, Michael K. Krohn ("Mike Krohn") (collectively "Defendants").

The Companies, directly and through related companies and subsidiaries, purchases distressed real estate for investment. The Complaint alleges that to raise money to purchase real estate, The Companies or its subsidiary, Alpha Real Estate Holdings, L.P. ("Alpha LP"), initiated four unregistered offerings of securities from January 2009 to June 2011. Kris Krohn, Earl, and Mike Krohn participated in the offerings by providing content for and approval of the private placement memoranda ("PPMs") used to solicit investors and by directly offering the securities to investors. The four offerings raised a total of approximately $11.9 million from approximately 169 investors. The PPMs contained material misrepresentations and omissions related to, among other things, the value of properties to be purchased or that were owned by the Companies or Alpha LP.

In addition to containing false representations, each of the four offerings relied on the exemption to registration under Regulation D, Rule 506. The offerings did not qualify for the Rule 506 exemption because Defendants solicited investors through general solicitation at meetings that were open to the public.

The Defendants consented to entry of judgments against them without admitting or denying the allegations in the SEC’s complaint. Each of the Defendants consented to a judgment permanently enjoining them from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933. In addition, The Companies agreed to undertake to inform all investors in writing of the final judgment, provide audited financial statements, and offer return of consideration for investors who choose to return their securities to The Companies after receiving the written disclosures. Kris Krohn, Mike Krohn, and Earl have also agreed to pay civil monetary penalties of $75,000 each.

The SEC’s investigation was conducted by Cheryl Mori and Justin Sutherland; the litigation will be led by Dan Wadley and Tom Melton.