SEC ANNOUNCES FINAL JUDGMENT IN AOL TIME WARNER MISSTATEMENT OF REVENUES CASE

The following excerpt is from the SEC website: September 29, 2011 “The U.S. Securities and Exchange Commission today announced that, on September 6, 2011, the United States District Court for the Southern District of New York entered a settled final judgment against J. Michael Kelly, the former Chief Financial Officer of AOL Time Warner Inc. and that on July 19, 2010, the district court entered a settled final judgment against Joseph A. Ripp, the former Chief Financial Officer of the AOL Division of AOL Time Warner, in SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, Civil Action No. 08 CV 4612 (CM)(GWG) (S.D.N.Y. filed May 19, 2008). The final judgments resolve the Commission’s case against Kelly and Ripp. The Commission’s complaint alleges that, from at least mid-2000 to mid-2002, AOL Time Warner overstated the company’s online advertising revenue with a series of round-trip transactions. The complaint further alleges that the defendants participated in this effort and that their actions contributed to this overstatement. Online advertising revenue was a key measure by which analysts and investors evaluated the company. Without admitting or denying the allegations in the complaint, Kelly consented to entry of a final judgment permanently enjoining him from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 and ordering him to pay disgorgement of $200,000 and a civil penalty of $60,000. Without admitting or denying the allegations in the complaint, Ripp consented to the entry of a final judgment permanently enjoining him from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and ordering him to pay disgorgement of $130,000 and a civil penalty of $20,000. Steven E. Rindner and Mark Wovsaniker remain as defendants in the Commission’s action.”

SEC ISSUES RISK ALERT WARNING IN REGARDS TO TRAIDING IN SUB-ACCOUNTS

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 29, 2011 — The staff of the Securities and Exchange Commission today issued a Risk Alert warning of significant concerns regarding trading through sub-accounts, and offered suggestions to help securities industry firms address those risks. Money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage are all potential risks associated with the master/sub-account trading model, according to the alert. Customers who open master accounts with a registered broker-dealer usually subdivide it for use by individual traders or groups of traders. In some instances, the sub-accounts may be divided to such an extent that the master account customer and the firm where the account is held might not know the identity of the traders in the sub-accounts. “Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity, or in an attempt to avoid or minimize regulatory obligations and oversight,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, whose national examination staff issued the alert. The alert includes suggestions for broker-dealers to address concerns arising from trading in sub-accounts and to comply with the SEC’s Market Access Rule, which requires broker-dealers to have controls and procedures to limit risks associated with offering market access to customers, including those with master/sub-accounts. “When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” Mr. di Florio said. Possible approaches include: Obtaining and maintaining the names of all traders authorized to trade in each master account, including all sub-account traders; verifying the identities of all such traders, using fingerprints if appropriate, background checks and interviews; and periodically checking the names of all such traders through criminal and other databases. Monitoring trading patterns in both the master account and sub-accounts for indications of insider trading, market manipulation, or other suspicious activity. Physically securing information of customer or client systems and technology. Establishing requirements that validate the trader’s identity. Logging and tracking incidents of attempted hacking or other unauthorized penetration-of-system by outside parties. Determining that traders who have access to the broker-dealer’s trading system and technology have received training in areas relevant to their activity, including market trading rules. Regularly reviewing the effectiveness of all controls and procedures around sub-account due diligence and monitoring. Creating written descriptions of all controls and procedures for sub-account due diligence and monitoring, including the frequency of reviews, the identity of those responsible for conducting such reviews, and a description of the review process.”

SEC ALLEGES RBC CAPITAL MARKETS LLC SOLD INADEQUATE INVESTMENTS WITHOUT FULL DISCLOSURES

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission today charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments. According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments. RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund. Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. “RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Kenneth R. Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “RBC Capital did not provide these school districts with full and accurate information regarding the risks of these complex structured products. We are pleased that today’s settlement will result in a significant recovery by the school districts.” According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors. The SEC’s order finds that the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments. RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser. RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million. The SEC’s investigation was conducted jointly by the Enforcement Division’s Municipal Securities and Public Pensions Unit led by Elaine Greenberg and Mark R. Zehner and Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Kevin Guerrero, Keshia W. Ellis and Ivonia K. Slade in Washington D.C. and Jeffrey A. Shank and Anne C. McKinley along with litigation counsel Steven C. Seeger and Robert M. Moye in the Chicago Regional Office. The broker-dealer examinations team of Marianne E. Neidhart, Scott M. Kalish, George J. Jacobus and Daniel R. Gregus of the Chicago Regional Office provided assistance with the investigation. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.”

SHOULD FIRMS BE BANNED FROM DESIGNING A TRANSACTION TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”. This speech is an excerpt from the SEC website: September 19, 2011 Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure. In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2 The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts. In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”

SEC ALLEGES PAYDAY LOAN OWNER USED INVESTOR MONEY FOR CARS, GAMBLING AND HOME IMPROVEMENTS

The following excerpt is from the SEC website: September 22, 2011 “The Securities and Exchange Commission today charged the owner of a Spokane-Wash.-based payday loan business with conducting a massive Ponzi scheme and stealing investor money to fund her home improvement projects, gambling jaunts to Las Vegas, and purchases of a Corvette and a Mercedes. The SEC alleges that Doris E. Nelson of Colbert, Wash., defrauded investors in her company - the Little Loan Shoppe - by misrepresenting the profitability and safety of their investments and giving them the false impression that their money was being used to grow her business. In truth, Nelson used the vast majority of new investor money to repay principal and purported returns to earlier investors. She misappropriated millions of dollars in investor funds for her personal use. According to the SEC's complaint filed in federal district court in Spokane, Nelson raised approximately $135 million between 1999 and 2008 from at least 650 investors in the United States, Canada, and Mexico. Nelson falsely told investors that Little Loan Shoppe was financially sound. In written promissory notes, Nelson promised investors annual returns of 40 to 60 percent that she claimed would be paid through Little Loan Shoppe's profits. She also told investors that their money was safe because she had insurance or a separate account to pay investors back. However, Little Loan Shoppe was not profitable, investor money was not safe, and Nelson misappropriated the money to run her Ponzi scheme. The SEC further alleges that in mid-2008 as the scheme was nearing collapse, Nelson made a last-ditch effort to attract more investment money by announcing a "window to invest" and falsely telling investors that Little Loan Shoppe had "defied financial gravity" in the declining economy. Investors responded by investing millions of dollars in 2008 before the scheme finally collapsed in 2009. Payments to investors ceased and Little Loan Shoppe was forced into bankruptcy. In its federal court action, the SEC alleges Nelson violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and monetary penalties.”

KARA N. BROCKMEYER NAMED CHIEFOF FCPA UNIT FORCUSED ON ANTI-BRIBERY PARTS OF FEDERAL SECURITIES LAWS

The following is an excerpt from the SEC website: "Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission’s Division of Enforcement announced today that Kara Novaco Brockmeyer has been named Chief of its national specialized Foreign Corrupt Practices Act Unit that focuses on violations of the anti-bribery provisions of the federal securities laws. Ms. Brockmeyer has been serving as an Assistant Director in the Enforcement Division and supervising a number of complex investigations involving violations of the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. companies from bribing foreign officials to obtain government contracts and other business. Ms. Brockmeyer spearheaded the SEC’s investigation of Halliburton Co., KBR Inc., Technip S.A., and ENI S.p.A. for FCPA violations resulting from a decades-long bribery scheme in Nigeria. The SEC’s actions in this matter together with the Department of Justice resulted in the recovery of $1.2 billion of ill-gotten gains and criminal penalties. In addition to her significant FCPA experience, Ms. Brockmeyer has served as the co-head of the Division’s Cross Border Working Group, a proactive risk-based initiative focusing on U.S. companies with substantial foreign operations. Ms. Brockmeyer’s efforts on the Cross Border Working Group have resulted in several recent significant enforcement actions, including the Commission’s first stop orders for post-effective registration statements due to the resignation of the companies’ independent auditor. “Kara’s creativity and perseverance is reflected in her outstanding efforts and results over the years in fulfilling the Commission’s mission of investor protection,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Enforcement of the FCPA remains a high priority for the Division, and adding Kara’s talent to the exceptional ability and dedication of the members of the Foreign Corrupt Practices Act Unit will further enhance our anti-corruption program.” Ms. Brockmeyer said, “I am looking forward to the privilege of leading the Foreign Corrupt Practices Act Unit and its dedicated and talented staff.” Ms. Brockmeyer is filling the position previously held by Cheryl Scarboro, who left the agency in June after serving as the first chief of the unit. Ms. Brockmeyer joined the SEC in 2000 following several years in private practice. She started supervising investigations in 2002 and was promoted to Assistant Director in 2005. In addition to FCPA investigations, Ms. Brockmeyer has substantial experience supervising matters involving financial fraud, insider trading, market manipulation, and violations by regulated entities. Ms. Brockmeyer received her law degree magna cum laude from the University of Michigan Law School and her undergraduate degree cum laude from Williams College."