SEC ALLEGES GOVERNMENT WEB SITE MANAGER WAS TOO PERKY

Many times businesses will pay key employees who leave the business consulting fees for help in solving difficult problems. In the following case the SEC alleges that these fees were paid as perks and were not properly disclosed to investors. Please read the following excerpt from the SEC web site for more details:

"Washington, D.C., Jan. 12, 2011 — The Securities and Exchange Commission today charged a Kansas-based company that manages government websites and four current or former company executives with failing to disclose to investors more than $1.18 million in perks paid to the former CEO over a six-year period.

The SEC alleges that NIC Inc.'s public filings failed to disclose that the company footed the bill for wide-ranging perks enjoyed by former CEO Jeffrey Fraser, his girlfriend, and his family — including vacations, computers, and day-to-day personal living expenses. NIC failed to disclose that it paid thousands of dollars per month for Fraser to live in a Wyoming ski lodge and commute by private aircraft to his office at NIC's Kansas headquarters. Meanwhile, NIC and its executives falsely represented to investors that Fraser worked virtually for free from 2002 to 2005, and then continued to materially understate the perks that Fraser received in 2006 and 2007. NIC's related party disclosures for 2002 through 2005 also were misleading.

NIC, Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to pay a combined $2.8 million to settle the SEC's charges against them without admitting or denying the allegations. The SEC's litigation continues against NIC's current CFO Stephen Kovzan.

Additional Materials
SEC Complaint vs. NIC, Fraser, Herington, and Bur
SEC Complaint vs. Kovzan
Litigation Release No. 21809

Public disclosure of executive perks helps investors evaluate whether corporate assets are being used wisely or squandered," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "NIC and its executives did not comply with their disclosure obligations and the company's internal controls by paying Fraser's personal expenses while telling shareholders that Fraser was working for little or no compensation."

Among the alleged undisclosed perks for Fraser outlined in the SEC's complaints filed in federal court in the District of Kansas:

More than $4,000 per month to live in a ski lodge in Wyoming.
Costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC's Kansas headquarters.
Monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled.
Vacations for Fraser, his girlfriend and his family.
Fraser's flight training, hunting, skiing, spa and health club expenses.
Computers and electronics for Fraser and his family.
A leased Lexus SUV.
Other day-to-day living expenses for Fraser such as groceries, liquor, tobacco, nutritional supplements, and clothing.
The SEC's complaints allege that Fraser, who did not have a personal credit card, routinely charged living expenses on NIC credit cards and submitted expense vouchers falsely claiming personal items were business-related in order to have NIC pay for these personal expenses. Fraser also sought reimbursement for certain expenses he had not incurred.

The SEC alleges that Kovzan, who was then the company's Chief Accounting Officer, authorized NIC's payment of Fraser's personal expenses, circumventing NIC's internal controls and policies that required the CEO to document the business purpose for his expenses. Kovzan knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records. Kovzan prepared, reviewed or signed NIC's proxy statements, annual reports and registration statements that materially underreported Fraser's compensation, and Kovzan made false representations to NIC's independent auditors.

The SEC alleges that Bur permitted NIC to pay the expenses that Fraser submitted on his expense vouchers even though he was informed that Fraser was not submitting the required documentation. A finance department employee raised concerns to Bur that some of Fraser's expenses were not business-related. Bur was aware of the SEC's rules requiring the disclosure of executive perks, yet he reviewed, signed or certified NIC's public filings that failed to disclose Fraser's perks.

The SEC alleges that Herington, who was then NIC's Chief Operating Officer, was informed of problems with Fraser's expense reporting and failed to adequately address them. Herington received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed or signed NIC's public filings that failed to disclose Fraser's perks.

According to the SEC's complaints, NIC failed to correct Fraser's expense reporting problems even after the finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC's investigation of this matter in mid-2007. The majority of Fraser's perks were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.

NIC agreed to settle the SEC's charges by paying a $500,000 penalty and hiring an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions. NIC consented to a final judgment enjoining it from violating Sections 17(a)(2) and (3) of the Securities Act of 1933; Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9.

Fraser agreed to pay $1,184,246 in disgorgement, $358,844 in prejudgment interest, and a $500,000 penalty, and consented to an order barring him from serving as an officer or director of a public company. Fraser consented to a final judgment enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9, and from aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1.

Herington agreed to pay a $200,000 penalty and consented to a final judgment enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act and Section 13(b)(5) of the Exchange Act, and aiding and abetting NIC's violations of Sections 13(a) and 14(a) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9.

Bur agreed to pay a $75,000 penalty and consented to a final judgment enjoining him from violating Exchange Act Rules 13a-14 and 13b2-1, and aiding and abetting NIC's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to an SEC order prohibiting him from appearing or practicing before the SEC as an accountant with a right to reapply after one year.

Kovzan is charged with violating Section 17(a) of the Securities Act, Section 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. The SEC's complaint seeks a permanent injunction, disgorgement, penalties, prejudgment interest, and an officer-and-director bar against Kovzan, against whom the SEC's charges are still pending."

The above case is one in which the SEC really got tough on alleged inaccurate disclosures. Trying to pay people off the books is common in business although usually the IRS and not the SEC end up investigating these matters.

MOONLIGHT MADNESS AT TECH COMPANIES

Many employees moonlight in order to make more money for themselves and their families. However, the SEC takes a dim view of people who moonlight as informational gatherers for certain securities trading operations while working for the companies they are gathering information on. The following SEC web site excerpt explains charges brought against such consultants:

“Washington, D.C., Feb. 3, 2011 — The Securities and Exchange Commission today charged six expert network consultants and employees with insider trading for illegally tipping hedge funds and other investors to generate nearly $6 million in illicit gains. The charges stem from the SEC's ongoing investigation into the activities of expert networks that purport to provide professional investment research to their clients.
While it's legal to obtain expert advice and analysis through expert networking arrangements, it's illegal to trade on material nonpublic information obtained in violation of a duty to keep that information confidential.

The SEC alleges that four technology company employees, while moonlighting as consultants or "experts" to Primary Global Research LLC (PGR) without the knowledge of their employers, abused their access to inside information about such technology companies as AMD, Apple, Dell, Flextronics, and Marvell. The consultants received hundreds of thousands of dollars in purported consulting fees from PGR for sharing the inside information with PGR employees and clients. The SEC charges two PGR employees for facilitating the transfer of inside information from PGR consultants to PGR clients.

"Company executives and other insiders moonlighting as consultants to hedge funds cannot blatantly peddle their company's confidential information for personal gain," said Robert Khuzami, Director of the SEC's Division of Enforcement. "These PGR consultants and employees schemed to facilitate widespread and repeated insider trading by several hedge funds and other investment professionals."
The SEC's complaint filed in federal court in Manhattan alleges that PGR consultants Mark Anthony Longoria, Daniel L. DeVore, Winifred Jiau and Walter Shimoon obtained material, non-public confidential information about quarterly earnings and performance data and shared that information with hedge funds and other clients of PGR who traded on the inside information. PGR employees Bob Nguyen and James Fleishman acted as conduits by receiving inside information from PGR consultants and passing that information directly to PGR clients.
The SEC alleges that:
Longoria, a manager in AMD's desktop global operations group, had access to sales figures for AMD's various operational units. He also obtained from a colleague AMD's financial results, including "top line" quarterly revenue and profit margin information prior to their public announcement. Longoria shared this inside information with multiple PGR clients who, in turn, traded in AMD securities. From January 2008 to March 2010, Longoria received more than $130,000 for talking to PGR and its clients.
DeVore, a Global Supply Manager at Dell, was privy to confidential information about Dell's internal sales forecasts as well as information about the pricing and volume of Dell's purchases from its suppliers. DeVore regularly provided PGR and PGR clients with this inside information so it could be used to trade securities. From 2008 to 2010, DeVore received approximately $145,000 for talking to PGR and its clients.
Shimoon, a Vice President of Business Development for Components in the Americas at Flextronics, was privy to confidential information concerning Flextronics and its customers including Apple, Omnivision, and Research in Motion. Shimoon provided this inside information to PGR and PGR clients so it could be used to trade securities. From September 2008 to June 2010, Shimoon received approximately $13,600 for talking to PGR and its clients.
Jiau was a "private" PGR expert, meaning that PGR made her available only to a small number of PGR clients. Jiau, who had contacts at Marvell and other technology companies, regularly provided certain PGR clients with inside information regarding Marvell and other technology companies. Jiau provided company-specific financial results that companies had not yet announced publicly. From September 2006 to December 2008, Jiau received more than $200,000 for her consultations with select PGR clients.
Nguyen and Fleishman received, directly or indirectly, specific inside information from PGR consultants and passed this inside information on, directly or indirectly, to PGR clients.

The SEC's complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Fleishman, Nguyen and Jiau with aiding and abetting others' violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. The complaint also charges Longoria and DeVore with violations of Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Longoria, Shimoon and DeVore from acting as an officer or director of any registered public company.”

SEC PROPOSES RULES FOR SECURITY-BASED SWAPS

The following excerpt fro the SEC website discusses some of the proposed rules for security based swaps. It is a complicated document which has proposals to regulate some extremely complicated securities transactions.

"Washington, D.C., Feb. 2, 2011 — The Securities and Exchange Commission today voted unanimously to propose rules defining security-based swap execution facilities (SEFs) and establishing their registration requirements, as well as their duties and core principles.

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to implement a regulatory framework for security-based swaps, which currently trade exclusively in the over-the-counter markets with little transparency or oversight.

The Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets, and therefore created security-based SEFs as a new category of market intended to provide more transparency and reduce systemic risk.

"Our objective here is to provide a framework that allows the security-based swap market to continue to develop in a more transparent, efficient, and competitive manner," said SEC Chairman Mary L. Schapiro. "This is an important and complex undertaking that adds a significant new component to the regulatory framework for over-the-counter derivatives."

The Commission's proposed rules:

Interpret the definition of "security-based SEFs" as set forth in Dodd-Frank.
Set out the registration requirements for security-based SEFs.
Implement the 14 core principles for security-based SEFs that the legislation outlined.
Establish the process for security-based SEFs to file rule changes and new products with the SEC.
Exempt security-based SEFs from the definition of "exchange" and from most regulation as a broker.
Public comments on the rule proposal should be received by the Commission by April 4, 2011.


FACT SHEET
Security-Based Swap Execution Facilities
Background
Division of Authority
The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets. In the process, it divided regulatory authority over swaps between the SEC and the Commodity Futures Trading Commission (CFTC).

Among other things, Title VII of the Act authorizes the Commission to regulate "security-based" swaps and directs it to engage in rulemaking to shape the regulatory framework for such products.

Security-Based Swaps and Derivatives
A derivative is a financial instrument or contract whose value is 'derived' from an underlying asset, such as a commodity, bond or equity security. The instruments provide a mechanism for the transfer of market risk or credit risk between two counterparties. Derivatives are incredibly flexible products that can be engineered to achieve almost any financial purpose.

For instance, a derivative can be used by two parties who have a differing view on whether a particular financial asset price will go up or down or whether an event will happen in the future. With derivatives, market participants can track or replicate the economics of holding or shorting an underlying asset, such as a security, thereby enabling participants to gain a desired market or credit exposure without actually holding the underlying asset.

A swap is a type of derivative contract that is traded in the over-the-counter market. One type of swap is a "security-based swap", over which the SEC has authority. Such swaps are broadly defined as swaps based on (1) a single security, (2) a loan, (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.

As an example, in a credit default swap transaction, the party who is seeking to hedge against a loss from a particular credit event, say the default of a bond, is referred to as the credit protection buyer. The credit protection buyer will receive a payment to compensate for its loss in the event that the default occurs. A credit protection seller is the counter-party.

The current market for security-based swaps, which trade over-the-counter, is opaque, with swap dealers acting as liquidity providers, and institutional investors and investment managers acting as liquidity takers. Compared to the exchange-traded markets, there is little pre-trade transparency (the ability to see trading interest prior to a trade being executed) or post-trade transparency (the ability to see transaction information after a trade is executed).

Security-Based Swap Execution Facilities
To ensure greater transparency in the security-based swaps market and reduce systemic risk, the Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets.

As such, Dodd-Frank requires security-based swap transactions that are required to be cleared through a clearing agency to be executed on an exchange or on a new trading system called a security-based swap execution facility. The Dodd-Frank Act, however, states that the transaction need not be executed on a security-based SEF or exchange if no security-based SEF or exchange makes the security-based swap "available to trade."

This newly created entity is defined under the Dodd-Frank Act in relevant part as "a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . ."

The Core Principles
The Dodd-Frank Act further requires security-based SEFs to be registered with the Commission and specifies that such a registered security-based SEF, among other things, must comply with 14 core principles.

The core principles would require these security-based SEFs to:

Comply with the core principles and any requirement the Commission may impose.

Establish and enforce rules governing, among other things, the terms and conditions of security-based swaps traded on their markets; any limitation on access to the facility; trading, trade processing and participation; and the operation of the facility.

Permit trading only in security-based swaps that are not readily susceptible to manipulation.

Establish rules for entering, executing and processing trades and to monitor trading to prevent manipulation, price distortion, and disruptions through surveillance, including real-time trade monitoring and trade reconstructions.

Have systems to capture information necessary to carry out its regulatory responsibilities and share the collected information with the Commission upon request.

Have rules and procedures to ensure the financial integrity of security-based swaps entered on or through the facility, including the clearance and settlement of security-based swaps.

Have rules allowing it to exercise emergency authority, in consultation with the Commission, including the authority to suspend or curtail trading or liquidate or transfer open positions in any security-based swap.

Make public post-trade information (including price, trading volume, and other trading data) in a timely manner to the extent prescribed by the Commission.

Maintain records of activity relating to the facility's business, including a complete audit, for a period of five years and to report such information to the Commission, upon request.

Not take any action that imposes any material anticompetitive burden on trading or clearing.

Have rules designed to minimize and resolve conflicts of interest.

Have sufficient financial, operational, and managerial resources to conduct its operations and fulfill its regulatory responsibilities.

Establish a risk analysis and oversight program to identify and minimize sources of operational risk and to establish emergency procedures, backup facilities, and a disaster recovery plan, and to maintain such efforts, including through periodic tests of such resources.

Have a chief compliance officer that performs certain duties relating to the oversight and compliance monitoring of the security-based SEF and that submits annual compliance and financial reports to the Commission.

The Proposal
The Commission proposed a series of rules related to security-based SEFs.

Attributes of a Security-Based SEF
The Commission proposed an interpretation of the definition of a security-based SEF. Under its proposed interpretation, a security-based SEF would be a system or platform that allows more than one participant to interact with the trading interest of more than one other participant on the system or platform.

Various types of trading platforms potentially could meet the proposed interpretation. For example, a limit order book system (i.e., a system or platform that allows a participant to submit executable bids and offers for display to all other participants) could meet the proposed interpretation.

Also, the proposed interpretation would accommodate a "request for quote" system that provides a participant with the ability to send a single request for a quote to all participants providing liquidity on that system, or to choose to send the request to fewer than all such participants.

The security-based SEF would not be able to limit the number of liquidity providing participants from whom a quote-requesting participant could request a quote on the SEF. However, the security-based SEF would be able to let the quote-requesting participant choose to send its request for a quote to less than all the liquidity-providing participants.

The security-based SEF also would have to provide a functionality that allows any participant the ability to make and display executable bids and offers accessible to all other participants on the security-based SEF, if the participant chooses to do so. Also, the security-based SEF would have to create and disseminate composite indicative quotes for all swaps that trade on the security-based SEF to all participants.

The Requirements for Registering SEFs
Under the proposed rules, security-based SEFs would be required to register with the Commission by filing a form, Form SB SEF. The SEF also would be required to update its filing when the information becomes inaccurate and file an amended form annually.

The proposed rules also would require that a security-based SEF:

File with the Commission proposed changes to its rules as well as the security-based swaps that it intends to trade.

Have rules to ensure compliance with the core principles outlined in the Dodd-Frank Act.

Have rules regarding access to, and the financial integrity of transactions on, the security-based SEF.

Put in place rules governing the procedures for trading on the security-based SEF.

Ensure the integrity of security-based SEF systems by having policies and procedures reasonably designed to ensure that its systems have adequate levels of capacity, resiliency, and security.

Make and keep certain books and records.

Have adequate resources to operate as a security-based SEF.

In addition, the proposal would exempt a security-based SEF from the definition of exchange and from most regulations as a broker.

Previous Related Rulemaking
This proposal coincides with rules the SEC proposed in December that would set out the way in which clearing agencies provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps should be required to be cleared.

In addition, under the Dodd-Frank Act, the SEC has engaged in several additional rulemakings related to the derivatives market:

Defining Security-Based Swap Terms: Proposed jointly with the Commodity Futures Trading Commission new rules that would further define a series of terms related to the security-based swaps market, including "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant."

Security-Based Swap Reporting: Proposed new rules entailing how security-based swap transactions should be reported and publicly disseminated.

Security-Based Swap Repositories: Proposed rules regarding the registration and regulation of security-based swap data repositories.

Security-Based Swap Fraud: Proposed a new rule to help prevent fraud, manipulation, and deception in connection with the offer, purchase or sale of any security-based swap as well as in connection with ongoing payments and deliveries under a security-based swap.

Security-Based Swap Conflicts: Proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.

Reporting of Pre-Enactment Security-Based Swaps: Adopted an interim rule requiring certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Act. This rule applies only to such swaps whose terms had not expired as of July 21.

Confirmation of Transactions: Proposed a rule governing the way in which certain security-based swap transactions are acknowledged and verified by the parties who enter into them.

What's Next
The proposal seeks public comment by April 4, 2011, on a broad range of issues relating to the proposed interpretation, exemptions, rules and form relating to security-based SEFs, including the costs and benefits associated with the proposal. After careful review of comments, the Commission will consider whether to adopt the proposal or modify it."

Hopefully, Security Based Swaps will become less of a vehicle for gamblers and more of a vehicle to help manage risk. Of course it would be nice if you could go long the stock market and make money holding a stock for decades like our grandfathers.

SEC CHARGES CHARLES SCHWAB & CO. WITH MAKING MISLEADING STATEMENTS

The following case brought by the SEC is against one of the largest low cost brokerage firms in the United States. The case in general alleges that Charles Schwab & Co. and others invested investor money inappropriately. It has been alleged that the company invested in riskier investments then they led investors to believe. The following is an excerpt from the SEC web page and outlines in detail the case against Charles Schwab & Co. and others:

“Washington, D.C., Jan. 11, 2011 — The Securities and Exchange Commission today charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information. The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
The SEC also filed a complaint in federal court against CSIM's former chief investment officer for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.

CSIM and CS&Co. agreed to pay more than $118 million to settle the SEC's charges. The SEC's case continues against the executives.
Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals — including large mutual fund providers — must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors."
Antonia Chion, Associate Director of the SEC's Division of Enforcement, said, "Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."
The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category. The fund suffered a significant decline during the credit crisis of 2007 and 2008. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values.
According to an administrative order issued by the SEC against the Schwab entities and the SEC's related complaints against the entities and the two executives filed in federal court in San Francisco, they failed to inform investors adequately about the risks of investing in the YieldPlus Fund. For example, they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.
The SEC found that the YieldPlus Fund deviated from its concentration policy when it invested more than 25 percent of fund assets in private-issuer mortgage-backed securities (MBS). Mutual funds and other registered investment companies are required to state certain investment policies in their SEC filings, including a policy regarding concentration of investments. Once established, a fund may not deviate from its concentration policy without shareholder approval. Schwab's bond funds, including the YieldPlus Fund and the Total Bond Market Fund, had a policy of not concentrating more than 25 percent of assets in any one industry, including private-issuer MBS. The funds violated this policy, and the Investment Company Act, by investing approximately 50 percent of the assets of the YieldPlus Fund and more than 25 percent of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.
According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months. As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co., Merk, and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing "very, very, very slight" and "minimal" investor redemptions. In fact, Daifotis knew that YieldPlus had experienced more than $1.2 billion in redemptions during the two weeks prior to the calls, which caused YieldPlus to sell more than $2.1 billion of its securities. Similarly, Merk authored, reviewed and approved misleading statements about the fund, such as a false claim that the fund had a "short maturity structure" that "mitigated much of the price erosion" experienced by its peers.
The SEC also found that CSIM and CS&Co. did not have policies and procedures reasonably designed — given the nature of their businesses — to prevent the misuse of material, nonpublic information about the fund. For example, they did not have specific policies and procedures governing redemptions by portfolio managers who advised Schwab funds of funds, and did not have appropriate information barriers concerning nonpublic and potentially material information about the fund. As a result, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.
Without admitting or denying the findings in the SEC's order or the allegations in the SEC's complaint, CSIM and CS&Co. agreed to pay a total of $118,944,996, including $52,327,149 in disgorgement of fees by CSIM, a $52,327,149 penalty against CSIM, a $5 million penalty against CS&Co., and pre-judgment interest of $9,290,698. Some of CSIM's disgorgement may be deemed satisfied up to a maximum of $26,944,996 for payments made within the next 60 days to settle related investigations by FINRA or state securities regulators.
The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. The payments and any Fair Fund are subject to approval by the U.S. District Court for the Northern District of California.
CSIM, CS&Co. and Schwab Investments also consented to an SEC order requiring them to cease and desist from committing or causing future violations of the federal securities laws. The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy. In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.
In its order, the Commission found that:
CSIM and CS&Co. willfully violated anti-fraud provisions of the Securities Act of 1933, Sections 17(a)(2) and (3).
CSIM willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Section 206(4) and Rule 206(4)-8.
Schwab Investments willfully violated Section 13(a) of the Investment Company Act of 1940 by deviating from its concentration policy, and CSIM willfully aided and abetted and caused the violation.
CSIM and CS&Co. willfully aided and abetted and caused violations of the false filings provision of the Investment Company Act, Section 34(b).
CS&Co. violated Section 15(g) (formerly Section 15(f)) of the Securities Exchange Act of 1934, and CSIM violated Section 204A of the Advisers Act, both of which require policies and procedures that are reasonably designed, taking into consideration the nature of the entities' businesses, to prevent the misuse of material, nonpublic information.
The SEC's complaint against Daifotis and Merk alleges violations and aiding and abetting violations of the anti-fraud provisions of the Securities Act, Exchange Act, and Investment Advisers Act, including Section 10(b) and Rule 10b-5 of the Exchange Act, and other violations, including Sections 13(a) and 34(b) of the Investment Company Act.”

It is hopeful that companies on Wall Street will soon realize that misrepresentations are not acceptable in a real capitalist society. If everyone lies and no one can be trusted then, business grinds to a halt. If business grinds to a halt then all the people are affected.

The following is an excerpt from the SEC web site and discusses proposed changes in the definition of an "accredited investor". Accredited investors are allowed to participate in certain investments that are exempt from some security act rules. Read the following excerpt to find the details of the proposal:


"Washington, D.C., Jan. 25, 2011 — The Securities and Exchange Commission today voted to propose amendments to its rules to conform the definition of "accredited investor" to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The proposed amendments would exclude the value of an individual's primary residence in calculating net worth when determining accredited investor status. The amendments also would clarify the treatment of any indebtedness secured by the residence in the net worth calculation.
Under Securities Act rules, individuals and entities that qualify as "accredited investors" are eligible to participate in certain private and limited offerings that are exempt from Securities Act registration requirements. One of the bases on which individuals may qualify as accredited is having a net worth of at least $1 million, either alone or together with their spouse.
Section 413(a) of the Dodd-Frank Act requires that the net worth calculation for determining accredited investor status must exclude the value of the person's primary residence. This requirement came into effect upon enactment of the Dodd-Frank Act. However, the SEC is proposing to amend its rules to reflect the new standard and clarify the treatment of indebtedness secured by the primary residence in the calculation of net worth.
The new net worth standard must remain in effect until July 21, 2014, four years after enactment of the Dodd-Frank Act. Beginning in 2014, the Commission is required to review the definition of the term "accredited investor" in its entirety every four years and engage in further rulemaking to the extent it deems appropriate.
Under the proposal, the definitions of "accredited investor" in the SEC's rules would be amended to exclude the value of a person's primary residence for purposes of the net worth calculation. The proposed rule amendments clarify that "the value of the primary residence" — which must be excluded from the individual net worth calculation — is determined by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.
As a result, under the proposed rule, an investor's net worth would be reduced by the amount of "value" that the primary residence would have contributed to net worth if the residence were not required to be excluded.
The Commission is seeking public comments on the proposed rules through March 11, 2011."

SEC ALLEGES FRAUDULENT FEES COLLECTED BY MUTUAL FUND PORTFOLIO MANAGERS

Many people who put money into mutual funds may find that they are charged a large fee for maintaining the fund. The following case is about two portfolio managers who the SEC alleged defrauded a mutual fund that purchases securities issued by the State of Utah and other governmental organizations in Utah. Please read the following details that are a part of the SEC releases on their web site:

“Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.

The SEC found that Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.

Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.

"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."

According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.

The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.

According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.

The SEC's orders found that Young violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and that Albright violated Section 206(2) of the Advisers Act. The SEC's orders further found that Young and Albright violated Section 17(e)(1) of the Investment Company Act of 1940, which prohibits any affiliated person of a registered investment company, or any affiliated person of such affiliated person, from receiving compensation from any source other than the investment company in connection with the sale of such company's property.

Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations."

SEC INSIGHT ON MORTGAGE FRAUD: 2008 TESTIMONY BEFORE CONGRESS

Now that it is 2011 and the economy is still performing slugishly, it is important for all to review some of the key reasons for the current state of affairs namely the mortgage meltdown. The following testimony was given to congress by then SEC Chairman Christopher Cox. The following is testimony provides a general overview some of the fraud and mismanagement that took place during the housing boom and bubble:

Testimony Concerning the Role of Federal Regulators:
Lessons from the Credit Crisis for the Future of Regulation
by Chairman Christopher Cox
U.S. Securities and Exchange Commission
Before the Committee on Oversight and Government Reform
United States House of Representatives
Thursday, October 23, 2008

Chairman Waxman, Ranking Member Davis, and Members of the Committee, thank you for inviting me to discuss the lessons from the credit crisis and how what we have learned can help the Congress shape the future of federal regulation. I am pleased to appear here today with the distinguished former Chairman of the Federal Reserve and the distinguished former Secretary of the Treasury, who together have given more than 25 years of service to our country. I should say at the outset that my testimony is on my own behalf as Chairman of the SEC, and does not necessarily represent the views of the Commission or individual Commissioners.
Introduction
To begin with, it will be helpful to describe the SEC's function in the current regulatory system, to better explain our role in the events we are discussing.
The SEC requires public companies to disclose to the public their financial statements and other information that investors can use to judge for themselves whether to buy, sell, or hold a particular security. Companies do this through annual and quarterly reports, as well as real-time announcements of unusual events. Administering this periodic reporting system has been a fundamental role of the SEC since its founding 74 years ago.
The SEC regulates the securities exchanges on which stocks, bonds, and other securities are traded. The SEC makes rules that govern trading on the exchanges, and also oversees the exchanges' own rules. The primary purpose of this regulation is to maintain fair dealing for the exchanges' customers and to protect against fraud.
The SEC also regulates the securities brokers and dealers who trade on the exchanges. Our authority to do this comes from the Securities Exchange Act, written in 1934. Although the law has been amended several times in the intervening 74 years, it lays out today essentially the same role for the SEC that the agency has always had in this area.
The agency's Investment Management Division regulates investment advisers, and also investment companies such as mutual funds, under statutes written in 1940. Here, too, the SEC is concerned primarily with promoting the disclosure of important information, and protecting against fraud.
The Office of the Chief Accountant oversees the independent standard setting activities of the Financial Accounting Standards Board, to which the SEC has looked for accounting standards setting since 1973. It also serves as the principal liaison with the Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act to oversee the auditing profession.
Above all, the SEC is a law enforcement agency. Each year the SEC brings hundreds of civil enforcement actions for violation of the securities laws involving insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.
Some have tried to use the current credit crisis as an argument for replacing the SEC in a new system that relies more on supervision than on regulation and enforcement. That same recommendation was made before the credit crisis a year ago for a very different, and inconsistent, reason: that the U.S. was at risk of losing business to less-regulated markets. But what happened in the mortgage meltdown and the ensuing credit crisis demonstrates that where SEC regulation is strong and backed by statute, it is effective — and that where it relies on voluntary compliance or simply has no jurisdiction at all, it is not.
The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps. They also highlight the need for a strong SEC, which is unique in its arm's-length independence from the institutions and persons it regulates.
If the SEC did not exist, Congress would have to create it. The SEC's mission is more important now than ever.
Genesis of the Current Crisis
That brings us to the issue of how the credit crisis came about. The answers are increasingly coming into sharper relief, and this Committee has been looking at several of the contributing causes.
Because the current credit market crisis began with the deterioration of mortgage origination standards, it could have been contained to banking and real estate, were our markets not so interconnected. But the seamlessness which characterizes today's markets saw financial institutions in every regulated sector suffer significant damage &mdash from investment banks such as Bear Stearns and Lehman Brothers, to commercial banks and thrifts such as Wachovia, Washington Mutual, and IndyMac, to the government-sponsored enterprises Fannie Mae and Freddie Mac, as well as the nation's largest insurance company, AIG. Every sector of the financial services industry has been vulnerable to the effects of this toxic mortgage contagion. And as the bank failures in Europe and Asia have made clear, regulated enterprises around the world are susceptible as well.
It is abundantly clear, as the SEC's former Chief Accountant testified at this Committee's recent hearing on the failure of AIG, that "if honest lending practices had been followed, much of this crisis quite simply would not have occurred." The nearly complete collapse of lending standards by banks and other mortgage originators led to the creation of so much worthless or near-worthless mortgage paper that as of last month, banks had reported over one-half trillion dollars in losses on U.S. subprime mortgages and related exposure. This was typified by the notorious no down payment loans, and "no-doc" loans in which borrowers not only didn't have to disclose income or assets, but even employment wasn't verified.
Securitization of these bad loans was advertised as a way to diversify and thus reduce the risk. But in reality it spread the problem to the broader markets. When mortgage lending changed from originate-to-hold to originate-to-securitize, an important market discipline was lost. The lenders no longer had to worry about the future losses on the loans, because they had already cashed out. Fannie Mae and Freddie Mac, which got affordable housing credit for buying subprime securitized loans, became a magnet for the creation of enormous volumes of increasingly complex securities that repackaged these mortgages. (Fannie and Freddie together now hold more than half of the approximately $1 trillion in Alt-A mortgages outstanding.)
The credit rating agencies, which until late September 2007 were not regulated by statute, notoriously gave AAA ratings to these structured mortgage-backed securities. But that was not all: the ratings agencies sometimes helped to design these securities so they could qualify for higher ratings. These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations. Both the risk models used by financial institutions and the capital standards used by banking and securities regulators had the credit ratings hard-wired into them.
All of this made financial institutions and the broader economy seriously vulnerable to a decline in housing prices. But the economy has been through real estate boom and bust cycles before. What amplified this crisis, and made it far more virulent and globally contagious, was the parallel market in credit derivatives. If the original cause of the mortgage crisis was too-easy credit and bad lending, the fuel for what has become a global credit crisis was credit default swaps.
Credit default swaps resemble insurance contracts on bonds and other assets that are meant to pay off if those assets default. Lenders who did not sell all of the loans they originated were able to buy relatively inexpensive protection against credit risks through credit default swaps. That further encouraged unsound lending practices and encouraged greater risk-taking. At the same time, credit default swaps became a way for banks, financial firms, hedge funds, and even Fannie Mae and Freddie Mac to hedge their risk — but in the process, to expose themselves to new risk from their often unknown counterparties.
By multiplying the risk from the failure of bad mortgages by orders of magnitude, credit default swaps ensured that when the housing market collapsed the effects would be felt throughout the financial system.
For example, as this Committee heard during your hearing on AIG, when mortgage-related securities fell in value, issuers of credit default swaps around the world were forced to post collateral against their positions. This led to increasingly large losses. Credit rating downgrades for such firms would then lead to further requirements for additional collateral, accelerating the downward spiral. Investors concerned about these firms' deepening problems fled from their stocks. In the case of financial institutions, the slumping stock price led to a loss of customer confidence, often precipitating customer withdrawals and "runs on the bank" that have been averted only with central bank guarantees and liquidity.
Lessons for the Future of Financial Services Regulation
There are important lessons to be learned from this experience — for the SEC, and for the Congress. Like each of you, I have asked myself what I would have wanted to do differently, knowing what we all know now. There are several things.
First, I think every regulator wishes that he or she would have been able to predict before March of this year what we have recently seen not just in investment banks and commercial banks but the broader economy: the meltdown of the entire U.S. mortgage market, which was the fundamental cause of this crisis. I would want the agency's economists and experts to have seen in the gathering evidence what we now know was there, but what virtually no one saw clearly. Looking back, it is evident that even as the stock market reached its all-time high in October 2007, the deterioration in housing prices and the rise of credit spreads on mortgage backed securities were early signals of a trend that grew so quickly and so powerfully it would within months wipe out both Fannie Mae and Freddie Mac. But none of the investment banks, commercial banks, or their regulators in the U.S. or around the world in March 2008 used a risk scenario based on a total meltdown of the mortgage market. It clearly would have been prescient for the SEC to have done so.
Second, I would have wanted to question every one of the assumptions behind the Consolidated Supervised Entities program for investment bank holding companies. Although I was not at the SEC when the Commission unanimously approved the program in 2004, when I arrived at the SEC a year later this new program represented the best thinking of the agency's professional staff. Nonetheless, I would have wanted the Division of Trading and Markets to challenge its reliance on the Basel standards and the Federal Reserve's 10% well-capitalized test, for reasons including the fact that unlike commercial banks, investment banks didn't have access to Fed lending. That, as we have seen, can be a crucial distinction.
When the Commission wrote the rules establishing the CSE program in 2004, they chose to rely upon the internationally-accepted Basel standards for computing bank capital. They also adopted the Federal Reserve's standard of what constitutes a "well-capitalized" bank, and required the CSE firms to maintain capital in excess of this 10% ratio. Indeed, the CSE program went beyond the Fed's requirements in several respects, including adding a liquidity requirement, and requiring firms to compute their Basel capital 12 times a year, instead of the four times a year that the Fed requires.
Nonetheless, the rapid collapse of Bear Stearns during the week of March 10, 2008 challenged the fundamental assumptions behind the Basel standards and the other program metrics. At the time of its near-failure, Bear Stearns had a capital cushion well above what is required to meet supervisory standards calculated using the Basel framework and the Federal Reserve's "well-capitalized" standard for bank holding companies.
The fact that these standards did not provide adequate warning of the near-collapse of Bear Stearns, and indeed the fact that the Basel standards did not prevent the failure of many other banks and financial institutions, is now obvious. It was not so apparent before March of this year. Prior to that time, neither the CSE program nor any regulatory approach used by commercial or investment bank regulators in the U.S., or anywhere in the world, was based on the assumption that secured funding, even when backed by high-quality collateral, could become completely unavailable. Nor did regulators or firms use risk scenarios based on a total meltdown of the U.S. mortgage market. That is why, in March of this year, I formally requested that the Basel Committee address the inadequacy of the capital and liquidity standards in light of this experience. The SEC is helping to lead this revision of international standards through our work with the Basel Committee on Banking Supervision, the Senior Supervisors Group, the Financial Stability Forum, and the International Organization of Securities Commissions.
Third, both as SEC Chairman and as a Member of Congress, knowing what I know now, I would have wanted to work even more energetically with all of you to close the most dangerous regulatory gaps. I would have urged Congress to repeal the swaps loophole in the 2000 Commodity Futures Modernization Act. As you know, in this bipartisan law passed by a Republican Congress and signed by President Clinton, Congress specifically prohibited the Commission from regulating swaps in very precise language. Indeed, enacting this loophole eight years ago was a course urged upon us in Congress by no less than the SEC Chairman and the President's Working Group at the time. We now know full well the damage that this regulatory black hole has caused.
The unprecedented $85 billion government rescue of AIG, necessitated in substantial part by others' exposure to risk on its credit default swaps, is but one of several recent alarms. As significant as AIG's $440 billion in credit default swaps were, they represented only 0.8% of the $55 trillion in credit default swap exposure outstanding. That amount of unregulated financial transactions is more than the GDP of every nation on earth, combined. Last month, I formally asked the Congress to fill this regulatory gap, and I urge this Committee to join in that effort.
Fourth, I would have worked even more aggressively than I have over the last two years for legislation requiring stronger disclosure to investors in municipal securities. Now that the credit crisis has reached the state and local level, investors need to know what they own.
This multi-trillion dollar market entails many of the same risks and is subject to the same abuses as other parts of the capital markets. Individual investors own nearly two-thirds of municipal securities, directly or through funds, and yet neither the SEC nor any federal regulator has the authority to protect investors by insisting on full disclosure. The problems in Jefferson County, Alabama are only the most recent reminder of what can go wrong. The multi-billion dollar fraud in the City of San Diego, in which we charged five former City employees this past year, has injured investors and taxpayers alike. The economic slowdown will now make it even harder for many states and localities to meet their obligations. Many municipalities continue to use interest rate swaps in ways that expose them to the risk that the financial institution on the other side of the derivatives contract may fail.
That is why, repeatedly over the last two years, I have asked Congress to give the SEC the authority to bring municipal finance disclosure at least up to par with corporate disclosure. Knowing what we now know, I would have begun this campaign on my first day on the job.
Even more important than what I would have wanted to do differently in the past is what we can do together in the future to make sure that this astonishing harm to the economy is not repeated. The work that you are doing in this hearing and others like it this month is helping to build the foundation for the modernization of financial services regulation. What was formerly viewed as an opportunity for improvement sometime in the future has become absolutely essential now.
We have learned that voluntary regulation does not work. Whereas in 1999 the Chairman of the SEC could testify before the House on Gramm-Leach-Bliley that he "strongly supports the ability of U.S. broker-dealers to voluntarily subject their activities to supervision on a holding company basis," experience has taught that regulation must be mandatory, and it must be backed by statutory authority. It was a fateful mistake in the Gramm-Leach-Bliley Act that neither the SEC nor any regulator was given the statutory authority to regulate investment bank holding companies other than on a voluntary basis.
To fully understand why this is so begins with an appreciation for the enormous difference between an investment bank and an investment bank holding company. The holding company in the case of Lehman Brothers, for example, consisted of over 200 significant subsidiaries. The SEC was not the statutory regulator for 193 of them. There were over-the-counter derivatives businesses, trust companies, mortgage companies, and offshore banks, broker-dealers, and reinsurance companies. Each of these examples I have just described falls far outside of the SEC's regulatory jurisdiction. What Congress did give the SEC authority to regulate was the broker-dealers, investment companies, and investment adviser subsidiaries within these conglomerates.
When I ended the Consolidated Supervised Entities program earlier this year, it was in recognition of the fact that this short-lived experiment in reviewing the consolidated information for these vast global businesses that could opt in and out of the program did not work. Throughout its 74-year history, the SEC has done an outstanding job of regulating registered broker-dealers, and protecting their customers. The SEC's investor protection role has consistently been vindicated when financial institutions fail: for example, following the bankruptcies of Drexel Burnham Lambert and more recently Lehman Brothers, customers' cash and securities have been protected because they were segregated from the firms' other business. They have also been covered by insurance from the Securities Investor Protection Corporation.
But prior to the Federal Reserve's unprecedented decision to provide funding for the acquisition of Bear Stearns, neither the Fed, the SEC, nor any agency had as its mission the protection of the viability or profitability of a particular investment bank holding company. Indeed, it has been a fact of life in Wall Street's history that investment banks can and will fail. Wall Street is littered with the names of distinguished institutions — E.F. Hutton, Drexel Burnham Lambert, Kidder Peabody, Salomon Brothers, Bankers Trust, to name just a few — which placed big bets and lost, and as a result ended up either in bankruptcy or being sold to save themselves. Not only is it not a traditional mission of the SEC to regulate the safety and soundness of diversified financial conglomerates whose activities range far beyond the securities realm, but Congress has given this mission to no agency of government.
The lesson in this for legislators is threefold.
First, eliminate the current regulatory gap in which there is no statutory regulator for investment bank holding companies. This problem has been temporarily addressed by changes in the market, with the largest investment banks converting to bank holding companies, but it still needs to be addressed in the law.
Second, recognize each agency's core competencies. The mission of the SEC is investor protection, the maintenance of fair and orderly markets, and the facilitation of capital formation. In strengthening the role of the SEC, build on these traditional strengths — law enforcement, public company disclosure, accounting and auditing, and the regulation of exchanges, broker-dealers, investment advisers, and other securities entities and products. The vitally important function of securities regulation is best executed by specialists with decades of tradition and experience.
Third, ensure that securities regulation and enforcement remain fiercely independent. This point bears emphasis. Strong securities regulation and enforcement requires an arm's-length relationship, and the SEC's sturdy independence from the firms and persons it regulates is unique. For example, banks regulated by the Federal Reserve Bank of New York elect six of the nine seats on the Board of the New York Fed; both the CEOs of J.P. Morgan Chase and Lehman Brothers served on the New York Fed board at the beginning of the credit crisis. In contrast, the SEC's regulation and enforcement is completely institutionally independent. Not only the current crisis, but the significant corporate scandals such as Enron and WorldCom earlier this decade, have amply demonstrated the need for such independent, strong securities regulation and enforcement. That is why an independent SEC will remain as important in the future as ever it has been before.
Communication and coordination among regulators serving distinct but equally important purposes must also be a priority for regulatory reform. During my Chairmanship, the SEC has initiated Memoranda of Understanding with the CFTC, the Federal Reserve, and the Department of Labor, and we are working on an agreement with the Department of the Treasury. The fact that these agreements are necessary highlights the importance of better information flows among regulators, to communicate meaningful information sooner. But instead of ad hoc arrangements, an overarching statutory scheme that anticipates and addresses these needs would represent fundamental improvement. Through the sharing of market surveillance information, position reporting, and current economic data, federal regulators could get a more comprehensive picture of capital flows, liquidity, and risk throughout the system.
There is another reason that a new, overarching statutory scheme is necessary. The current regulatory system is a hodge-podge of divided responsibility and regulatory seams. Coordination among regulators is enormously difficult in this fragmented arrangement, where each of them implements different statutes that treat various financial products and services differently. Today's balkanized regulatory system undermines the objectives of getting results and ensuring accountability.
The remarkably rapid pace of change in the global capital markets has also placed new importance on international coordination. American investors simply cannot be protected any longer without help from fellow regulators in other jurisdictions, because so much of the fraud directed at investors today is international in scope. In recent years the Commission has entered into law enforcement and regulatory cooperation agreements with securities regulators in Europe (including London, Paris, and Brussels), Ottawa, Hong Kong, Tokyo, Beijing, New Delhi, Mexico City, and elsewhere that promote collaboration, information sharing, and cross-border enforcement.
We have all witnessed over the past weeks the connections between financial markets around the world. The same phenomena affecting our markets are roiling markets abroad. Regulators in other countries are also under many of the same pressures as those of us here. While our existing cooperation agreements are helping to protect investors in the current circumstances, the new administration must open negotiations on a new global framework for regulations and standards.
Perhaps the most important change to the marketplace in recent years, from the standpoint of investor protection, is the enormous growth in financial products that exist wholly outside the regulatory system. We simply cannot leave unregulated such products as credit default swaps, which can be used as synthetic substitutes for regulated securities, and which can have profound and even manipulative effects on regulated markets. The risk is too great.
Across the board, other regulatory anomalies cry out for rationalization: outdated laws that treat broker-dealers dramatically differently from investment advisers, futures differently from economically equivalent securities, and derivatives as something other than investment vehicles or insurance. Now is the time to make sense of this confusing landscape. But doing so will require enormous leadership from the Congress.
There are two main reasons that our regulatory system has grown into the current dysfunctional patchwork, and one of them is traceable to the organization of Congress itself.
The first is that our laws are relatively ancient, at least from the standpoint of today's modern markets. They were crafted mainly in the 1930s and 40s. The speed of change in the financial marketplace has only accelerated the divergence of the legal framework and reality. Regulation has embroidered a semblance of modernity onto this outdated framework, but it has not been enough to keep up.
The second is that legislative jurisdiction in both the House and the Senate is split so that banking, insurance, and securities fall within the province of the Financial Services and Banking Committees, while futures fall within the domain of the Agriculture Committees in each chamber. This jurisdictional split threatens to forever stand in the way of rationalizing the regulation of these products and markets.
I know from experience how difficult it will be to challenge the jurisdictional status quo. But the Congress has overcome jurisdictional divides in urgent circumstances before. Appointing a Select Committee, with representation from each of the existing standing committees with responsibility for financial services regulation, is a model that has worked well. As you know, I chaired such a Committee for two years after 9-11, following which the House created the permanent Homeland Security Committee with oversight jurisdiction over the new Department of Homeland Security. A Select Committee on Financial Services Regulatory Reform could cut across the existing jurisdictional boundaries and address these urgent questions from a comprehensive standpoint.
As the Congress undertakes a top-to-bottom review and reassessment of the federal framework for regulation of our financial markets, we must not fall prey to the age-old response of fighting the last war. If we continue to do what we were doing, and just do more of it, we will undoubtedly repeat history. I remember working in the White House in 1987, helping to determine how to respond to a 25% drop in the markets in one day. I see the very real similarities to current events — institutions borrowing short and lending long, housing bubbles in California and Florida, pressure to change accounting rules to give savings and loans time to right their balance sheets. The nation subsequently spent upwards of $150 billion to clean up the wreckage.
While the nation learned much in 1987, and Congress made some constructive changes in regulation, people and institutions too quickly fell back into old habits in old ways. We read now with disappointment the history of regulatory turf battles and missed opportunities, of old-fashioned greed and misguided economic incentives, of regulations that either failed or had unintended consequences.
It is time to think anew. We should begin with a clear-eyed view of the purpose of our capital markets. The financial system administered by Wall Street institutions exists to raise money for productive enterprise and millions of jobs throughout our economy, and to help put the savings of millions of Americans to work in our economy. It should not be an end in itself — a baroque cathedral of complexity dedicated to limitless compensation for itself in the short-term, paid for with long-term risk capable of threatening the entire nation's sustenance and growth. Transparency has been sorely lacking from enormous swaths of our market. It should by now be abundantly clear that risk in the system which cannot be clearly identified can neither be priced nor effectively disciplined by the market. And it can no longer be tolerated.
In redesigning the regulatory structure, we should also bear in mind the advantages of market forces over government decision-making in allocating scarce resources — including capital — throughout an economy as vast as America's, as well as what we can and cannot leave to the market alone. Government intervention, taxpayer assumption of risk, and short-term forestalling of failure must not be a permanent fixture of our financial system.
Addressing the Current Crisis
These are some of the regulatory lessons learned during this crisis, and some of the future opportunities. But just as important as reflecting on what could have been done in the past and what should be done in the future is actually dealing with the current emergency. While other federal and state agencies are legally responsible for regulating mortgage lending and the credit markets, the SEC has taken the following decisive actions to address the extraordinary challenges caused by the current credit crisis:
We have worked on a number of fronts to improve transparency, including using our new authority under the Credit Rating Agency Reform Act to expose weaknesses in the ratings process and to develop strong new rules.
We gave guidance on how financial institutions can give fuller disclosure to investors, particularly with respect to hard-to-value assets.
We have worked closely with the Financial Accounting Standards Board to deal with such issues as consolidation of off-balance sheet liabilities, the application of fair value standards to inactive markets, and the accounting treatment of bank support for money market funds.
We are in the midst of conducting a Congressionally-mandated 90-day study of the impacts of fair value accounting on financial firms in the current crisis.
We have initiated examinations of the effectiveness of broker-dealers' controls on preventing the spread of false information.
We have required disclosures of short positions to the SEC, complementing the existing requirements for reporting of long positions.
We have adopted a package of measures to strengthen investor protections against naked short selling, including rules requiring a hard T+3 close-out, eliminating the options market maker exception of Regulation SHO and expressly targeting fraud in short selling transactions.
We are working with firms in the private sector to speed the development of one or more central counterparties, clearance and settlement systems, and trading platforms for credit default swaps, as an operational step toward bringing this unregulated finance into the sunlight. This work is being closely coordinated with the CFTC and the Federal Reserve.
Beyond all of this, the SEC is first and foremost a law enforcement agency. During the market turmoil of the last several months, the professional men and women of the SEC have been working around the clock, seven days a week, to bring accountability to the marketplace and to see to it that the rules against fraud and unfair dealing are rigorously enforced.
In the fiscal year just ended, the SEC's Enforcement Division brought the second-highest number of cases in the agency's history. For the second year in a row, the Commission returned over $1 billion to injured investors. In the last few months, our Enforcement Division successfully negotiated agreements in principle to obtain $50 billion in immediate relief for investors in auction rate securities after these markets seized up. Every one of these cases, when finalized, will set a record for the largest settlements in the history of the SEC, by far.
The agency has been especially aggressive at combating fraud that has contributed to the subprime crisis and the loss of confidence in our markets. We have over 50 pending law enforcement investigations in the subprime area. Most recently, the Commission charged five California stockbrokers with securities fraud for pushing homeowners into risky and unsustainable subprime mortgages, and then fraudulently selling them securities that were paid for with the mortgage proceeds. We have brought fraud charges against the managers of two Bear Stearns hedge funds in connection with last year's collapse of those funds. And we have brought the first-ever case against a trader for spreading knowingly false information designed to drive down the price of stock.
The Division of Enforcement is currently in the midst of a nationwide investigation of potential fraud and manipulation of securities in some of the nation's largest financial institutions through means including abusive short selling and the intentional spreading of false information.
As part of this aggressive law enforcement, the Commission approved orders requiring hedge funds, broker-dealers and institutional investors to file statements under oath regarding trading and market activity in the securities of financial firms. The orders cover not only equities but also credit default swaps. To assist in analyzing this information, the SEC's Office of Information Technology is working with the Enforcement Division to create a common database of trading information, of audit trail data, and of credit default swaps clearing data. Our Office of Economic Analysis is also supporting this effort by helping to analyze the data across markets for possible manipulative patterns in both equity securities and derivatives.
In the days ahead we will continue to work to bring to justice those who have violated the law, and to help mitigate the effects of the credit crisis on investors and our markets.
Mr. Chairman, the role of the SEC has never been more important. The several thousand men and women who have devoted themselves to law enforcement and the protection of investors, markets, and capital formation represent this nation's finest. The last several months have been difficult for the country and for our markets, but this adversity has brought out the best in the people with whom I work. Every day, the staff of the SEC devote themselves with passion to protecting America's investors and ensuring that our capital markets remain strong. I am humbled to work side-by-side with them.
Thank you for the opportunity to discuss the role of the SEC in our financial system, and the lessons from the current crisis for fundamental regulatory reform

CLOTHING EXECUTIVE CHARGED WITH FRAUD AND INSIDER TRADING

Finding honest management is very difficult. When I was young I had training with the loss prevention manager at a big box retail store. He told me several stories of some of the memorable people he had caught stealing. This included various store personnel including managers. I asked him how he could tell if someone might be a thief. He replied without hesitation that "Everyone steals if they think they can get away with it." As an investor I certainly have come to regret not keeping in mind the words of the old store detective.

The following case involves alleged fraud committed against investors in a line of children’s clothing called Carter's. Following is an excerpt from the SEC web page:

Washington, D.C., Dec. 20, 2010 — The Securities and Exchange Commission today charged a former Executive Vice President of children's clothing marketer Carter's Inc. for engaging in financial fraud and insider trading. The SEC alleges that Joseph M. Elles's misconduct caused an understatement of Carter's expenses and a material overstatement of its net income in several financial reporting periods.

The SEC also announced that it has entered a non-prosecution agreement with Carter's under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles's unlawful conduct. The non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. This marks the first non-prosecution agreement entered by the SEC since the announcement of the SEC's new cooperation initiative earlier this year.

"Elles's trickery in secretly awarding excessive discounts deceived and damaged Carter's investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "While that was the wrong thing to do, Carter's did the right thing by promptly self-reporting the misconduct, taking thorough remedial action, and extensively cooperating with our investigation, for which it received the benefits of a non-prosecution agreement. In such circumstances, incentivizing appropriate corporate response to misconduct through the use of non-prosecution agreements is in the best interest of companies, shareholders and the SEC alike."

William P. Hicks, Associate Director of Enforcement in the SEC's Atlanta Regional Office, added, "Elles deceived accounting personnel at Carter's and caused financial misstatements to investors. After his misconduct inflated the company's earnings, Elles exercised options for the purchase of Carter's common stock and sold the resulting shares for his personal gain."

According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Elles conducted his scheme from 2004 to 2009 while serving as Carter's Executive Vice President of Sales. The SEC alleges that Elles fraudulently manipulated the dollar amount of discounts that Carter's granted to its largest wholesale customer — a large national department store — in order to induce that customer to purchase greater quantities of Carter's clothing for resale. Elles then concealed his misconduct by persuading the customer to defer subtracting the discounts from payments until later financial reporting periods. He created and signed false documents that misrepresented to Carter's accounting personnel the timing and amount of those discounts.

The SEC further alleges that Elles realized sizeable gains from insider trading in shares of Carter's common stock during the fraud. Between May 2005 and March 2009, Elles realized a profit before tax of approximately $4,739,862 from the exercises of options granted to him by Carter's and sales of the resulting shares. Each of these stock sales occurred prior to the company's initial disclosure relating to the fraud on Oct. 27, 2009, immediately after which the company's common stock share price dropped 23.8 percent.

After discovering Elles's actions and conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.

Under the terms of the non-prosecution agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC staff as well as in the enforcement action filed against Elles.

The SEC's complaint alleges that Elles violated Section 17(a) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and an officer and director bar against Elles."

The above shows the conumdrum that the government finds itself in when pursuing justice in cases involving securities manipulation. The people harmed by the fraud are the investors and the investors are often harmed by the government prosecuting the fraud since the value of their investment may be less than what it would have been had there been no prosecution of the criminals.

Being a corporate executive is a sweet deal since after cheating your investors you can then hold them hostage to thwart criminal prosecution. Someone who steals $100.00 worth of clothing from investors in a store may receive a much greater punishment than one who steals millions of dollars through securites fraud from investors in that same store.

ATTORNEY FOR KENNETH IRA STAR CHARGED BY SEC

This is an expansion of the case brought earlier against Kenneth Ira Star. This time the charges were brought against his attorney who is alleged to have helped Mr. Star by allowing him to use attorney trust accounts to allegedly steal money from clients. Please take a look at the following case which was excerpted from the SEC web site:

Washington, D.C., Dec. 16, 2010 — The Securities and Exchange Commission today charged Jonathan Star Bristol, attorney for former financial advisor Kenneth Ira Starr, with aiding and abetting Starr's multi-million dollar fraud by allowing Starr to use his attorney trust accounts as conduits when Starr stole money from advisory clients.

The SEC alleges that more than $25 million belonging to Starr's clients flowed through Bristol's attorney trust accounts. Without his clients' authorization, Starr would transfer their funds into the attorney trust accounts, and then Bristol would transfer the stolen funds to Starr and his two companies for personal use.
The SEC alleges that Bristol never disclosed the existence of the attorney trust accounts to the prominent international law firm where he worked at the time. Monthly account statements clearly listing the names of Starr's clients as the source of the incoming transfers were sent directly to Bristol's home address instead of the law firm. Meanwhile, Bristol touted his relationship with Starr to his colleagues and others, claiming that Starr managed $70 billion in assets. In fact, Starr managed only a fraction of that amount.
"Bristol had a legal and professional responsibility not to assist Ken Starr in conduct that he knew was unlawful," said George S. Canellos, Director of the SEC's New York Regional Office. "Bristol crossed the line from lawyer to conspirator when he failed to safeguard funds entrusted to him, helped Starr steal client money, and lied to the victims to perpetuate the scheme."
The SEC previously charged Starr, Starr Investment Advisors LLC, and Starr & Company LLC with violating securities laws pertaining to custody of clients' assets and misusing client funds to buy a multi-million dollar luxury condominium on Manhattan's Upper East Side among other things.
The SEC's amended complaint, filed today in federal court in Manhattan, adds Bristol as a defendant, alleging that beginning around November 2008 and continuing until Starr's arrest in May 2010, Bristol repeatedly allowed Starr to use his attorney trust accounts to funnel money stolen from Starr clients. Notwithstanding his personal role in the scheme, Bristol represented Starr and his companies throughout the SEC's investigation and in an investment advisory examination by SEC staff.
According to the SEC's amended complaint, Bristol was confronted by one of Starr's victims about an unauthorized $1 million transfer from the victim's account. Bristol lied to the victim that the funds were being bundled with other clients' funds for an investment with UBS Financial Services. In fact, Bristol had already used the misappropriated funds to pay a multi-million dollar legal settlement with one of Starr's former clients. Bristol subsequently sought to represent that same victim after the victim was contacted by SEC staff in its investigation. In addition to the fact that such representations violated the ethical obligations of lawyers, Bristol's clear intent was to obstruct and undermine the SEC's investigation in order to conceal the wrongdoing.
The SEC's amended complaint charges Bristol with aiding and abetting the Starr Parties' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest and financial penalties. The SEC also will seek an order barring Bristol from practicing before the Commission pursuant to Rule 102(e) of the Commission's Rules of Practice.”

It is hard to perpetrate a fraud alone. The only problem is that complicated plans will often fall apart and all the participants will have their part in the conspiracy brought to light.

SEC INFORMS INVESTORS REGARDING TRADING SUSPENSIONS

The following information is from the SEC web site. It helps to define the parameters the SEC uses when suspending the trading in a particular security. The excerpt from the SEC page also tries to answer questions regarding the suspension of a security. If you have questions regarding SEC supensions please read the following:

"The federal securities laws allow the SEC to suspend trading in any stock for up to ten trading days. This document answers some of the typical questions we receive from investors about trading suspensions.


When can the SEC suspend a stock from trading?
When it serves the public interest and will protect investors, the SEC may suspend trading. For instance, the SEC may act when public information about a company is not current, accurate, or adequate. The SEC has acted when serious questions arose about a company's assets, operations, or other financial information.


Why couldn't the SEC forewarn me that it was about to suspend trading before I bought the security in the first place?
The SEC cannot announce that it's working on a suspension. We conduct this work confidentially to maintain our effectiveness and to guard against the destruction of evidence if our work becomes widely known. Confidentiality also protects a company and its shareholders if the SEC ultimately decides not to issue a trading suspension. Mindful of the seriousness of suspensions, the SEC moves as quickly as possible when it considers a trading suspension.


What happens when the ten-day suspension period ends? Will the SEC issue a statement about the status of the company after the suspension has ended?
No. The SEC will not comment publicly on the status of a company when the ten-day suspension ends because the company may still have serious legal problems. For instance, the SEC may continue to investigate a company to determine whether it has defrauded investors. The public will not know if the SEC is continuing its investigation until the SEC publicly announces an enforcement action against the company.


Will trading automatically resume after ten days?
It depends on the market where the stock trades. Different rules apply in different markets.

For stocks that trade in the OTC or the over-the-counter market, trading does not automatically resume when a suspension ends. (The OTC market includes the Bulletin Board and the Pink Sheets.) Before trading can resume for OTC stocks, SEC regulations require a broker-dealer to review information about a company before publishing a quote. If a broker-dealer does not have confidence that a company's financial statements are current and accurate, especially in light of the questions raised by the SEC, then a broker-dealer may not publish a quote for the company's stock.

In contrast to OTC stocks, stocks that trade on an exchange or Nasdaq resume trading as soon as an SEC suspension ends.


If the suspended stock resumes trading, why is it trading at a much lower price?
The trading suspension may raise serious questions and cast doubts about the company in the minds of investors. While some investors may be willing to buy the company's stock, they will do so only at significantly lower prices.


Why would the SEC take such action when it knows it will hurt current shareholders?
Because a suspension often causes a dramatic decline in the price of the security, the SEC suspends trading only when it believes the public may be making investment decisions based on false or misleading information. Suspensions give notice to current and potential investors that we have serious concerns about a company. A suspension may prevent potential investors from being victimized by a fraud.


How can I find out if the stock will trade again after a suspension?
You can contact the broker-dealer who sold you the stock or a broker-dealer who quoted the stock before the suspension. Ask the broker-dealer if it intends to resume publishing a quote in the company's stock.


If there is no market to sell my security, what can I do with my shares?
If there is no market to trade the shares, they may be worthless. You may want to contact your financial or tax adviser to determine how to treat such a loss on your tax return.


What can I do if the company acted wrongfully and I have lost money?
To get your money back, you will need to consider taking legal action on your own. The SEC cannot act as your lawyer. You must continue to pursue all of your legal remedies. For more information about how to protect your legal rights, including finding a lawyer who specializes in securities laws, read our flyer, How the SEC Handles Your Complaint or Inquiry.

To learn how to file an arbitration action against a broker-dealer, you can contact the Director of Arbitration at FINRA or the New York Stock Exchange. FINRA and the NYSE also offer mediation as an option before going to arbitration.


Where can I get information about trading suspensions?
You can find a list of companies whose stocks have been suspended by the SEC since October 1995 on our Web site.


How can I learn more?
We offer educational materials so that you can understand how the securities industry works and how you can avoid costly mistakes and fraud. Our educational materials also provide tips on how you can invest wisely. You can order our free publications by calling (800) SEC-0330, or read them on our Web site. For specific information about the risks of investing in low-priced stocks, see our publication, Microcap Stock: A Guide for Investors."

SEC SAYS COMPANY DIRECTLY BOUGHT DISCOUNTED SECUITES AND DUMPED THEM ON THE PUBLIC

A few people in the media have been claiming that the securities market is rigged in favor of a few investors who have an inside track with exchanges and companies for the purpose of manipulating markets and swindling the public. If the following alleged crimes took place then this case is one that certainly proves that investing in securities based upon price moves and company information can be very dangerous for small investors. The following details are from the SEC web site:

Washington, D.C., Jan. 6, 2011 — The Securities and Exchange Commission today charged Gendarme Capital Corporation and its two executives with engaging in an illegal stock distribution scheme.

The SEC alleges that Gendarme repeatedly acquired deeply discounted shares from penny stock issuers under the pretense of a long-term investment and then dumped the shares into the market, essentially effecting public stock distributions without complying with the disclosure requirements of the federal securities laws. Through its two principals — CEO Ezat Rahimi of Elk Grove, Calif., and vice president Ian Lamphere of Lawrenceville, Vt. — Gendarme sold more than 15 billion shares of at least a dozen companies, netting illicit profits of more than $1.6 million.

"The federal securities laws are designed to ensure that buyers of stock in the open market have access to information about the companies in which they are investing," said Marc Fagel, Director of the SEC's San Francisco Regional Office. "Gendarme and its executives created a novel, but illegal, business plan to make an end-run around these investor protection laws, supposedly buying billions of shares of penny stock for investment purposes but instead turning around and dumping those shares into the market."
According to the SEC's complaint, filed today in federal district court in Sacramento, Gendarme began entering into agreements with penny stock issuers in early 2008. The agreements gave Gendarme the right to purchase stock at 30 to 50 percent discounts to the market price. The SEC alleges that, in an effort to avoid the registration and disclosure obligations of the federal securities laws, Gendarme falsely represented to issuers that it was purchasing shares for "investment purposes only." Contrary to those representations, Gendarme quickly dumped most of these shares on the public markets, profiting by more than $1.6 million from its unregistered stock distributions.

The SEC also alleges that Gendarme's outside attorney — Cassandra Armento of Greenwich, N.Y. — violated the securities laws by issuing more than 50 false legal opinion letters in support of Gendarme's activities. Armento repeatedly informed stock transfer agents that Gendarme was not an "underwriter" and thus had no intent to sell the stock. Thus, shares could be obtained by Gendarme without trading restrictions. However, the SEC alleges Armento made no inquiry into whether Gendarme intended to resell the stock, and was aware of information showing that it was likely that Gendarme was dumping the stock into the market.

The SEC's complaint charges Gendarme, Rahimi, Lamphere and Armento with violating the registration provisions of the federal securities laws. Against Gendarme, Rahimi, and Lamphere, the SEC seeks injunctive relief, disgorgement of ill-gotten gains, monetary penalties, and an order barring them from participating in an offering of penny stock. The SEC seeks injunctive relief and monetary penalties against Armento.”

The above case concerns low priced stocks however; the same types of shenanigans outlined by the SEC in the above case can happen in the case of any investment. Buying discounted to market priced shares of stock and then directly dumping them in the public market is certainly a reason some people are very rich and others are not.