THE ROLE OF COMPLIANCE AND ETHICS IN RISK MANAGEMENT

The following excerpt is from the SEC website: "Speech by SEC Staff: by Carlo V. di Florio Director, Office of Compliance Inspections and Examinations1 NSCP National Meeting October 17, 2011 Thank you for inviting me to speak at this event. The work you all do is incredibly important, and we appreciate and respect your critical contributions to investor protection and market integrity. Today I would like to address two related topics that are growing in importance: the heightened role of ethics in an effective regulatory compliance program, and the role of both ethics and compliance in enterprise risk management. The views that I express here today are of course my own and do not necessarily reflect the views of the Commission or of my colleagues on the staff of the Commission. In the course of discussing these two topics, I would like to explore with you the following propositions: Ethics is fundamental to the securities laws, and I believe ethical culture objectives should be central to an effective regulatory compliance program. Leading standards have recognized the centrality of ethics and have explicitly integrated ethics into the elements of effective compliance and enterprise risk management. Organizations are making meaningful changes to embraced this trend and implement leading practices to make their regulatory compliance and risk management programs more effective. Ethics and the Federal Securities Laws The debate about how law and ethics relate to each other traces all the way back to Plato and Aristotle. I am not the Director of the Office of Legal Philosophy, so I won’t try to contribute to the received wisdom of the ages on this enormous topic,2 except to say that for my purposes today, the question really boils down to staying true both the spirit and the letter of the law. Framed this way, ethics is a topic of enormous significance to anyone whose job it is to seek to promote compliance with the federal securities laws. At their core, the federal securities laws were intended by Congress to be an exercise in applied ethics. As the Supreme Court stated almost five decades ago, [a] fundamental purpose, common to [the federal securities]… statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry…. “It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail” in every facet of the securities industry.3 Of course, what has happened through the financial crisis I believe is yet another reminder of the fundamental need for stronger ethics, risk management and regulatory compliance practices to prevail. Congress has responded once again, as it did after the Great Depression, with landmark legislation to raise the standards of business ethics in the banking and securities industries. The manner in which the federal securities laws are illuminated by ethical principles was well illustrated by the Study on Investment Advisers and Broker-Dealers that the Commission staff submitted to Congress earlier this year pursuant to Section 913 of the Dodd-Frank Act (“913 Study”).4 As described in the 913 study, in some circumstances the relationship is explicit, such as the requirement that each investment adviser that is registered with the Commission or required to be registered with the Commission must also adopt a written code of ethics. These ethical codes must at a minimum address, among other things, a minimum standard of conduct for all supervised persons reflective of the adviser’s and its supervised persons’ fiduciary obligations.5 In other circumstances, an entire body of rules is based implicitly on ethical precepts. This is the case with the rules adopted and enforced by FINRA and other self-regulatory organizations, which “are grounded in concepts of ethics, professionalism, fair dealing, and just and equitable principles of trade,” giving the SROs authority to reach conduct that may not rise to the level of fraud.6 This has empowered FINRA and other SROs to, for example, not require proof of scienter to establish a suitability obligation, ,7 to develop rules and guidance on fair prices, commissions and mark-ups that takes into account that what may be “fair” (or reasonable) in one transaction could be “unfair” (or unreasonable) in another,8 and to require broker-dealers to engage in fair and balanced communications with the public, disclose conflicts of interest, and to undertake a number of other duties.9 In addition to approving rules grounded on these ethical precepts, the Commission has also sustained various FINRA disciplinary actions utilizing FINRA’s authority to enforce “just and equitable principles of trade,” even where the underlying activity did not involve securities, such as actions involving insurance , tax shelters, signature forgery, credit card fraud, fraudulent expense account reimbursement, etc.10 Other ethical precepts are derived from the antifraud provisions of the federal securities laws. The “shingle” theory, for example, holds that by virtue of engaging in the brokerage business a broker-dealer implicitly represents to those with whom it transacts business that it will deal fairly with them. When a broker-dealer takes actions that are not fair to its customer, these must be disclosed to avoid making the implied representation of fairness not misleading. A number of duties and conduct regulations have been articulated by the Commission or by courts based on the shingle theory.11 Another source by which ethical concepts are transposed onto the federal securities laws is the concept of fiduciary duty. The Supreme Court has construed Section 206(1) and (2) of the Investment Advisers Act as establishing a federal fiduciary standard governing the conduct of advisers.12 This imposes on investment advisers “the affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation to ‘employ reasonable care to avoid misleading’” clients and prospective clients. As the 913 Study stated, Fundamental to the federal fiduciary standard are the duties of loyalty and care. The duty of loyalty requires an adviser to serve the best interests of its clients, which includes an obligation not to subordinate the clients’ interests to its own. An adviser’s duty of care requires it to “make a reasonable investigation to determine that it is not basing its recommendations on materially inaccurate or incomplete information.”13 While broker-dealers are generally not subject to a fiduciary duty under the federal securities laws, courts have imposed such a duty under certain circumstances, such as where a broker-dealer exercises discretion or control over customer assets, or has a relationship of trust and confidence with its customer.14 The 913 Study, of course, explores the principle of a uniform fiduciary standard. Concepts such as fair dealing, good faith and suitability are dynamic and continue to arise in new contexts. For example, the Business Conduct Standards for Securities-Based Swap Dealers (SBSDs”) and Major Security-Based Swap Participants (“MSBSPs”), required by Title VII of the Dodd-Frank Act and put out for comment last summer, include proposed elements such as a requirement that communications with counterparties are made in a fair and balanced manner based on principles of fair dealing and good faith; an obligation to disclosure to a counterparty material information about the security-based swap, such as material risks, characteristics, incentives and conflicts of interest; and a determination by SBSDs that any recommendations that they make regarding security-based swaps are suitable for their counterparties. Of course the Business Conduct Standards have not been finalized, but the requirements of Title VII requiring promulgation of these rules, as well as the content of the rules as proposed, illustrate that ethical concepts continue to be a touchstone for both Congress and the Commission in developing and interpreting the federal securities laws. The Relationship Between Ethics and Enterprise Management. Ethics is not important merely because the federal securities laws are grounded on ethical principles. Good ethics is also good business. Treating customers fairly and honestly helps build a firm’s reputation and brand, while attracting the best employees and business partners. Conversely, creating the impression that ethical behavior is not important to a firm is incredibly damaging to its reputation and business prospects. This, of course, holds true equally for individuals, and there are plenty of enforcement cases that tell the story of highly talented and successful individuals who were punished because they violated their ethical and compliance responsibilities. Another way of saying this is that a corporate culture that reinforces ethical behavior is a key component of effectively managing risk across the enterprise. As the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) put it, in articulating its well-established standards of Internal Control and Enterprise Risk Management: An entity’s strategy and objectives and the way they are implemented are based on preferences, value judgments, and management styles. Management’s integrity and commitment to ethical values influence these preferences and judgments, which are translated into standards of behavior. Because an entity’s good reputation is so valuable, the standards of behavior must go beyond mere compliance with the law. Managers of well-run enterprises increasingly have accepted the view that ethics pays and ethical behavior is good business.15 In the wake of the financial crisis, enterprise risk management is a rapidly evolving discipline that places ethical values at the heart of good governance, enterprise risk management and compliance. For example, organizations such as COSO, the Ethics Resource Center (ERC), the Open Compliance and Ethics Guidelines (OCEG) and the Ethics & Compliance Officer Association (ECOA) have developed detailed guidance, from the board room to business units and key risk, control and compliance departments, on implementation of effective enterprise risk management systems. Industry and sector specific guidance has flowed from these general standards. As COS notes, integrity and ethical values are the pillars of an effective compliance culture. The effectiveness of enterprise risk management cannot rise above the integrity and ethical values of the people who create, administer, and monitor entity activities. Integrity and ethical values are essential elements of an entity’s internal environment, affecting the design, administration, and monitoring of other enterprise risk management components.16 Nowhere should this be more true than in financial services firms today, which depend for their existence on public trust and confidence to a unique degree. Expectations are rising around the world for a stronger culture of ethical behavior at financial services firms of all types and sizes. As the Basle Committee on Banking Supervision recently stated: A demonstrated corporate culture that supports and provides appropriate norms and incentives for professional and responsible behaviour is an essential foundation of good governance. In this regard, the board should take the lead in establishing the “tone at the top” and in setting professional standards and corporate values that promote integrity for itself, senior management and other employees.17 As the standards for ethical behavior continue to evolve, your firms’ key stakeholders – shareholders, clients and employees will increasingly expect you to meet or exceed those standards. In my first speech here at the SEC outlined ten elements I believe make an effective compliance and ethics program. These elements reflect the compliance, ethics and risk management standards and guidance noted above. They also reflect the U.S. Federal Sentencing Guidelines (FSG), which were revised in 2004 to explicitly integrate ethics into the elements of an effective compliance and ethics program that would be considered as mitigating factors in determining criminal sentences for corporations. These elements include: Governance. This includes the board of directors and senior management setting a tone at the top and providing compliance and ethics programs with the necessary resources, independence, standing, and authority to be effective. NEP staff have begun meeting with directors, CEOs, and senior management teams to better understand risk and assess the tone at the top that is shaping the culture of compliance, ethics and risk management. Culture and values. This includes leadership promoting integrity and ethical values in decision-making across the organization and requiring accountability. Incentives and rewards. This includes incorporating integrity and ethical values into performance management systems and compensation so the right behaviors are encouraged and rewarded, while inappropriate behaviors are firmly addressed. Risk management. This includes ensuring effective processes to identify, assess, mitigate and manage compliance and ethics risk across the organization. Policies and procedures. This includes establishing, maintaining and updating policies and procedures that are tailored to your business, your risks, your regulatory requirements and the conflicts of interest in your business model. Communication and training. This includes training that is tailored to your specific business, risk and regulatory requirements, and which is roles-based so that each critical partner in the compliance process understands their roles and responsibilities. Monitoring and reporting. This includes monitoring, testing and surveillance functions that assess the health of the system and report critical issues to management and the board. Escalation, investigation and discipline. This includes ensuring there are processes where employees can raise concerns confidentially and anonymously, without fear of retaliation, and that matters are effectively investigated and resolved with fair and consistent discipline. Issues management. This includes ensuring that root cause analysis is done with respect to issues that are identified so effective remediation can occur in a timely manner. An on-going improvement process. This includes ensuring the organization is proactively keeping pace with developments and leading practices as part of a commitment to a culture of ongoing improvement. In addition to the effective practices above, the NEP has also seen firms that have focused on enhancing regulatory compliance programs through effective integration of ethics principles and practices. These include renaming the function and titles to incorporate ethics explicitly; elevating the dialogue with senior management and the board; implementing core values and business principles to guide ethical decision-making; integrating ethics into key leadership communications; and introducing surveys and other mechanisms to monitor the health of the culture and identify emerging risks and issues. The Relationship of Compliance and Ethics with Enterprise Risk Management. We can expand the discussion above beyond compliance and ethics to address enterprise risk management and risk governance more broadly. These same program elements, and ethics considerations, are equally critical, but the scope of risks expands beyond regulatory risk to also include market, credit and operational risk, among others. The roles and responsibilities also expand to include risk management, finance, internal audit and other key risk and control functions. Whether we’re talking about compliance and ethics or we’re talking about ERM, it is important to clarify fundamental roles and responsibilities across the organization. . The business is the first line of defense responsible for taking, managing and supervising risk effectively and in accordance with the risk appetite and tolerances set by the board and senior management of the whole organization. Key support functions, such as compliance and ethics or risk management, are the second line of defense. They need to have adequate resources, independence, standing and authority to implement effective programs and objectively monitor and escalate risk issues. Internal Audit is the third line of defense and is responsible for providing independent verification and assurance that controls are in place and operating effectively. Senior management is responsible for reinforcing the tone at the top, driving a culture of compliance and ethics and ensuring effective implementation of enterprise risk management in key business processes, including strategic planning, capital allocation, performance management and compensation incentives. The board of directors (if one exists in the organization) is responsible for setting the tone at the top, overseeing management and ensuring risk management, regulatory, compliance and ethics obligations are met. While compliance and ethics officers play a key role in supporting effective ERM, risk managers in areas such as investment risk, market risk, credit risk, operational risk, funding risk and liquidity risk also play an important role. As noted above, the board, senior management, other risk and control functions, the business units and internal audit also play a critical role in ERM. As ERM matures as a discipline, it is critical that these key functions work together in an integrated coordinated manner that supports more effective ERM. Understanding and managing the inter-relationship between various risks is a central tenet of effective ERM. One needs only reflect on the financial crisis to understand how the aggregation and inter-relationship of risks across various risk categories and market participants created the perfect storm. ERM provides a more systemic risk analysis framework to proactively identify, assess and manage risk in today’s market environment. OCIE Considerations As I discussed earlier, there is an ethical component to many of the federal securities laws. When NEP staff examines, for example, an investment adviser’s adherence to its fiduciary obligations, or a broker-dealer’s effective development, maintenance and testing of its compliance program, our examiners are looking at how well firms are meeting both the letter and spirit of these obligations. In addition, our examiners certainly examine specific requirements for ethical processes, such as business conduct standards. There is another way in which the ethical environment within a firm matters to us. As you know, our examination program has greatly increased its emphasis on risk-based examinations. How we perceive a registrant’s culture of compliance and ethics informs our view of the risks posed by particular entities. In this regard we have begun meeting boards of directors, CEOs and senior management to share perspectives on the key risks facing the firm, how those risks are being managed and the effectiveness of key risk management, compliance, ethics and control functions. It provides us an opportunity to emphasize the critical importance of compliance, ethics, risk management and other key control functions, and our expectation that these functions have sufficient resources, independence, standing and authority to be effective in their roles. These dialogues also provide us an opportunity to assess the tone at the top that is shaping the culture of compliance, ethics and risk management in the firm. If we believe that a firm tolerates a nonchalant attitude toward compliance, ethics and risk management, we will factor that into our analysis of which registrants to examine, what issues to focus on, and how deep to go in executing our examinations. Finally, I would end by sharing with you that we are also embracing these leading practices. We recently created our own program around compliance and ethics. For the first time, we have a dedicated team focused on strengthening and monitoring how effectively we adhere to our own examination standards. We are in the process of finalizing our first Exam Manual, which we set forth all of our key policies and standards in one manual. We have also established a senior management committee with oversight responsibility for compliance, ethics and internal control. On the risk management front, we are also making good progress. We have recruited individuals with expertise and established a senior management oversight committee here as well. In short, we are also committing ourselves to a culture of ongoing improvement and leading practices. Conclusion Thank you for inviting me to speak here today. I hope that my remarks, both about ethics and compliance as well as our priorities for the first months of our new fiscal year, will be helpful to you and help you to perform your critical compliance functions more effectively. I invite your feedback, whether regarding the points that I made, or the points that you think I missed. I now invite your questions. -------------------------------------------------------------------------------- 1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private statements by its employees. 2 For a deeper plunge into the relationship between law and ethics, a classic exchange on this subject can be found in Positivism and the Separation of Law and Morals, H.L.A. Hart, 71 Harvard L. Rev. 529 (1958) and Positivism and Fidelity to Law: A Reply to Professor Hart, L.L. Fuller, 71 Harvard L. Rev. 630 (1958). 3 SEC v. Investment Research Bureau, Inc., 375 U.S. 180, 186-87 (1963), quoting Silver v. New York Stock Exchange, 373 U.S. 341,366 (1963). 4 Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform Act (January 2011) at 62 (available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf) (“913 Study”). 5 Advisers Act Section 204A, and Advisers Act Rule 204A-1. 6 913 Study at 51. 7 Id. 8 Id. at 66. 9 Id. at 52. 10 Id. at 52-53 and cases cited therein. 11 Id. at 51, citing Guide to Broker-Dealer Registration (April 2008), available at http://www.sec.gov/divisions/marketreg/bdguide.htm. 12 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963); 913 Study at 21. 13 Id. at 22 (quoting Concept Release on the U.S. Proxy System, Investment Advisers Act Release No. 3052 (July 14, 2010) at 119. 14 Id. at 54 and cases cited therein. 15 Enterprise Risk Management- Integrated Framework, Committee of Sponsoring Organizations of the Treadway Commission (September 2004) at 29. 16 Id. at 29-30. 17 Basel Committee on Banking Supervision, Principles for Enhancing Corporate Governance (October 2010) at 8.

ALL AMERICAN BANK, DES PLAINES, ILLINOIS WAS CLOSED

The following is an excerpt from the FDIC website: “All American Bank, Des Plaines, Illinois, was closed today by the Illinois Department of Financial and Professional Regulation – Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with International Bank of Chicago, Chicago, Illinois, to assume all of the deposits of All American Bank. The sole branch of All American Bank will reopen during normal business hours as a branch of International Bank of Chicago. Depositors of All American Bank will automatically become depositors of International Bank of Chicago. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of All American Bank should continue to use their existing branch until they receive notice from International Bank of Chicago that it has completed systems changes to allow other International Bank of Chicago branches to process their accounts as well. This evening and over the weekend, depositors of All American Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual. As of June 30, 2011, All American Bank had approximately $37.8 million in total assets and $33.4 million in total deposits. In addition to assuming all of the deposits, International Bank of Chicago agreed to purchase essentially all of the failed bank's assets. Customers with questions about today's transaction should call the FDIC toll-free at 1-800-350-2746. The phone number will be operational this evening until 9:00 p.m., Central Daylight Time (CDT); on Saturday from 9:00 a.m. to 6:00 p.m., CDT; on Sunday from noon to 6:00 p.m., CDT; on Monday from 8:00 a.m. to 8:00 p.m., CDT; and thereafter from 9:00 a.m. to 5:00 p.m., CDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/allamerican.html. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $6.5 million. Compared to other alternatives, International Bank of Chicago's acquisition was the least costly resolution for the FDIC's DIF. All American Bank is the 85th FDIC-insured institution to fail in the nation this year, and the ninth in Illinois. The last FDIC-insured institution closed in the state was Country Bank, Aledo, on October 14, 2011.”

THE FREE RIDE: BUYING SECURITIES WITH NO MONEY DOWN

The following is an excerpt from the SEC website: “Washington, D.C., Oct. 26, 2011 – The Securities and Exchange Commission today charged a pair of purported money managers with orchestrating an illegal “free-riding” scheme of selling stocks before they paid for them and netting $600,000 in illicit profits. The SEC alleges that Florida residents Scott Kupersmith and Frederick Chelly portrayed themselves to broker-dealers as money managers for hedge funds or private investors, and they opened brokerage accounts in the names of purported investment funds they created. Kupersmith and Chelly then engaged in illegal free-riding by interchangeably buying and selling the same quantity of the same stock in different accounts – frequently on the same day – with the intention of profiting on swings up or down in the stock price. Unbeknownst to broker-dealers, Kupersmith and Chelly did not have sufficient securities or cash on hand to cover the trades, and they instead used proceeds from stock sales in one brokerage account to pay for the purchase of the same stock in another brokerage account. The SEC alleges that when trades were profitable, Kupersmith and Chelly took the profits. But when the trades threatened to result in substantial losses, Kupersmith and Chelly failed to cover their sales and left broker-dealers to settle the trades at a significant loss. In total, their brokers suffered more than $2 million in losing trades. “Kupersmith and Chelly engaged in a classic ‘heads I win, tails you lose’ scheme to trade risk-free at the expense of broker-dealers,” said George S. Canellos, Director of the SEC’s New York Regional Office. “The SEC is firmly committed to pursuing individuals who fraudulently game the system thinking that they will never be caught.” According to the SEC’s complaint filed in U.S. District Court in New Jersey, Kupersmith and Chelly traded through a special type of cash account that broker-dealers offer to customers with the understanding that the customer has sufficient securities and cash held with a third-party custodial bank to cover the trades that the customer makes in the account. Kupersmith and Chelly never disclosed to broker-dealers that they were instead using proceeds from sales of shares in one brokerage account to pay for their purchase in another brokerage account. Kupersmith and Chelly also used offshore accounts to facilitate their trading activity. According to the SEC’s complaint, the free-riding scheme occurred in 2009 and 2010, and unraveled when Kupersmith and Chelly failed to deliver shares to settle long sales in various brokerage accounts. The SEC’s complaint charges Kupersmith and Chelly with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-21 thereunder. The complaint seeks a final judgment permanently enjoining the defendants from future violations of these provisions of the federal securities laws and ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties. In parallel actions, the U.S. Attorney’s Office for the District of New Jersey and the Manhattan District Attorney’s Office today announced the unsealing of criminal charges against Kupersmith. The SEC’s investigation was conducted by Stephanie D. Shuler, Vincenzo A. DeLeo, and Peter Lamore of the SEC’s New York Regional Office. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, and Manhattan District Attorney’s Office. The SEC’s investigation is continuing.” The above free-riding activity looks like it might be fraud however, it is easy to make a mistake and get a free-ride notice from your broker or the Federal Reserve. When you are suffering significant losses on a stock that is headed into oblivion it makes it hard not to hit the sell button without doing the proper calculations to make sure the stock has been paid for. Of course opening up a margin account or using only settled funds are two easy ways to avoid being accused of violating free ride restrictions."

INVESTMENT ADVISOR BASED IN CA IS CHARGED BY SEC WITH FRAUD AND BREACH OF FIDUCIARY DUTY

The following excerpt is from the SEC website: “On October 18, 2011, the Securities and Exchange Commission (“Commission”) filed a complaint in United States District Court in Riverside, California against Copeland Wealth Management, A Financial Advisory Corporation (“CWM”), Copeland Wealth Management, A Real Estate Corporation (“Copeland Realty”), and Charles P. Copeland (“Charles Copeland”) for fraud and breach of fiduciary duty. As an investment adviser registered with the Commission, CWM manages approximately $125 million in assets under management. The assets under management are primarily mutual funds and real estate funds. Copeland Realty, an unregistered investment adviser, is the general partner for 21 limited partnerships primarily invested in real estate. Charles Copeland, a certified public accountant, is the founder, co-owner and officer of both CWM and Copeland Realty. The Commission alleges that from 2003 through May 31, 2011, Charles Copeland, CWM, and Copeland Realty raised over $62 million from over 100 investors, including many of Charles Copeland’s accounting clients, by selling interests in limited partnerships operated by CWM and Copeland Realty. According to the Commission’s complaint, throughout the offer and sale of the limited partnerships, Charles Copeland, CWM, and Copeland Realty made material misrepresentations and omissions regarding: (1) the use of investor funds, (2) conflicts of interest, (3) guaranteed returns, (4) the unauthorized trading of put options, and (5) the payment of undisclosed real estate commissions and other related compensation. Without admitting or denying the Commission’s allegations, Charles Copeland, CWM, and Copeland Realty agreed to the entry of an order permanently enjoining them from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The defendants also agreed to an order appointing a receiver over CWM and Copeland Realty and prohibiting the destruction of documents. Disgorgement plus prejudgment interest and civil penalties are to be determined at a later date.”

MAN AND HIS COMPANIES SCHEME TO PUMP-AND-DUMP HIT A BUMP

The following excerpt is from the SEC website: October 18, 2011 “The Securities and Exchange Commission announced today that on October 14, 2011, the U.S. District Court for the Northern District of Texas entered a judgment against Jason Wynn, of Plano, Texas, and two companies under his control – Wynn Holdings LLC and Wynn Industries LLC. The Commission’s amended complaint alleged that Wynn and his companies violated the antifraud and registration provisions of the federal securities laws through a scheme to pump and dump the stock of four issuers: Beverage Creations, Inc., My Vintage Baby, Inc., ConnectAJet.com, Inc. and Alchemy Creative, Inc. The Commission alleged that Jason Wynn and his companies (1) purchased tens of millions of shares directly from the issuers for pennies per share, (2) touted the stock to investors through a nationwide marketing campaign, and (3) immediately dumped their shares into the public market at grossly inflated prices when no registration statement was filed or in effect. Wynn created artificial demand for the stocks through various ad campaigns, emails and misleading promotional mailers. While the promotional mailers disclosed that the Wynn companies received the stock being touted, they did not disclose that Wynn and his companies intended to sell that stock into the artificially inflated market created by the promotions. The judgment permanently enjoins Wynn, Wynn Holdings, LLC and Wynn Industries, LLC from violating Section 5 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment also bars Wynn and his companies from participating in any penny stock offerings and provides that they will be ordered to pay disgorgement and civil penalties determined by the district court at a later date. Wynn and his companies consented to the entry of the judgment without admitting or denying the allegations in the Commission’s amended complaint. Previously, on January 3, 2011, the district court entered a judgment against stock promoter Carlton Fleming and certain entities under his control – Regus Investment Group LLC and Thomas Wade Investments, LLC. The Commission’s case against the remaining defendants – Ryan Reynolds and companies under his control – is pending. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.”

SEC CIVIL ACTION AGAINST INSIDE TRADERS GUPTA AND RAJARATNAM

The following excerpt is from the SEC website: “On October 26, 2011, the Securities and Exchange Commission charged former McKinsey & Co. global head Rajat K. Gupta with insider trading for illegally tipping convicted hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam after first charging him with insider trading in October 2009. According to the SEC’s complaint filed in federal court in Manhattan, Gupta illegally tipped Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and P&G as well as an impending $5 billion investment in Goldman by Berkshire Hathaway at the height of the financial crisis. Rajaratnam, the founder of Galleon Management who was recently convicted of multiple counts of insider trading in other securities stemming from unrelated insider trading schemes, allegedly caused various Galleon funds to trade based on Gupta’s inside information, generating illicit profits or loss avoidance of more than $23 million. The SEC’s complaint alleges that Gupta provided his friend and business associate Rajaratnam with confidential information learned during board calls and in other communications and meetings relating to his official duties as a director of Goldman and P&G. Rajaratnam used the inside information to trade on behalf of certain Galleon funds, or shared the information with others at his firm who caused other Galleon funds to trade on it ahead of public announcements by the firms. During this period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with him. According to the SEC’s complaint, Gupta while serving as a Goldman board member tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Based on this inside information, Rajaratnam arranged for Galleon funds to purchase more than 215,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $800,000. The SEC also alleges that Gupta tipped Rajaratnam to inside information about Goldman’s positive financial results for the second quarter of 2008. There was a flurry of calls between Gupta and Rajaratnam on the evening of June 10, 2008, after Gupta learned from Goldman CEO Lloyd Blankfein of the firm’s quarterly earnings results, which were significantly better than analyst consensus estimates. The following morning, minutes after the markets opened, Rajaratnam caused Galleon funds to start purchasing Goldman securities including 7,350 out-of-the-money Goldman call options and 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17 – the date when Goldman announced its quarterly earnings – generating illicit profits of more than $18.5 million for the Galleon funds. The SEC’s complaint further alleges that Gupta tipped Rajaratnam with confidential information that Gupta learned during an Oct. 23, 2008, board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. Mere seconds after the board call ended, Gupta tipped Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 150,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman to earn $2.50 per share, he heard the prior day from a Goldman board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on inside information provided by Gupta, the Galleon funds avoided losses of more than $3.6 million. The SEC’s complaint additionally alleges that Gupta illegally disclosed to Rajaratnam inside information about P&G’s financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterwards informed another participant in the insider trading scheme that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000. 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 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 on a joint and several basis their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser. The SEC previously instituted an administrative proceeding against Gupta for the conduct alleged in today’s enforcement action, but later dismissed those proceedings while reserving the right to file an action against Gupta in federal court. The SEC previously charged Rajaratnam and others in the widespread insider trading investigation centering on Galleon, the multi-billion dollar New York hedge fund complex founded and controlled by Rajaratnam. The SEC has now charged 29 defendants in its Galleon-related enforcement actions, which have alleged widespread and repeated insider trading at numerous hedge funds, including Galleon, and by other professional traders and corporate insiders in the securities of more than 15 companies. The insider trading generated illicit profits totaling more than $90 million.”.