BROKER-DEALER ENGAGES IN ILLEGAL REFERRAL ARRANGEMENT WITH AN ADVISER
2.25.2002 The SEC fined East West Institutional Services, Inc., a Florida broker-dealer, and its owner $100,000 for entering into an illegal arrangement whereby the broker-dealer received commissions on trades placed by an investment adviser in exchange for referring clients to that adviser. Both the broker-dealer and the adviser failed to disclose the arrangement to the adviser's clients.
The broker-dealer was also ordered to disgorge the $950,000 it received from the adviser for referrals and the SEC revoked its broker-dealer registration. Its owner was also barred from associating with a broker-dealer.
Please click http://www.sec.gov/litigation/admin/34-45486.htm to access a copy of the administrative action.
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ADVISER SETTLES CHARGES INVOLVING SOFT DOLLAR AND DISCLOSURE VIOLATIONS
2.25.2002 The SEC announced that a New York federal district court had entered a final judgment on consent against Eugene Deveney and he had consented to the judgment in connection with a civil injunctive action filed by the SEC in 1995 against Tandem Management Inc. and its principals Deveney, William Branston, and Peter Alsop. At the time the complaint was filed, Tandem was a registered investment adviser. The SEC alleged that Tandem, Deveney, Branston and Alsop:
- misappropriated over $1 million in Tandem's client assets, principally in the form of "soft dollar" credits and commission rebates;
- distributed false information concerning Tandem's performance returns and assets under management to clients, investors in a hedge fund advised by Tandem, and a national money management ranking publication;
- filed false Forms ADV;
- failed to make required disclosures concerning Tandem's financial condition; and
- failed to keep required books and records.
The judgment orders Deveney to pay of $139,048.54 in disgorgement plus prejudgment interest, but waives payment based upon Deveney's financial situation. It also bars him from associating with an investment adviser.
Please click http://www.sec.gov/litigation/litreleases/lr17380.htm to access a copy of the administrative action.
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ALJ SANCTIONS CALIFORNIA ADVISER FOR ISSUING MISLEADING REPORT TO HEDGE FUND INVESTORS
2.20.2002 An SEC ALJ sanctioned Charles K. Seavey for his role in a misleading performance report issued to investors in a hedge fund. Seavey, who resides in San Francisco, California, was employed by the fund's investment adviser to manage its investments. After incurring steep losses, the fund purchased shares of a Lithuanian bank in a transaction arranged by one of the investment adviser's owners. The owner never delivered the shares and kept the purchase price. At the time of the performance report, five months had elapsed without the transactions settling, despite diligent efforts by Seavey, with various excuses being provided by individuals in Lithuania. Seavey suspected fraud and urged the investment adviser to disclose it to investors, report it to authorities, and take legal action against the perpetrators. Nonetheless, the investment adviser sent investors a performance report, prepared and signed by Seavey, that included the Lithuanian bank stock, causing the fund's performance to appear vastly more favorable than reality. Thus, the investment adviser violated the antifraud provisions, and Seavey aided and abetted the violations through his role in the report.
The initial decision by the ALJ fines Seavey $10,000, and also imposes a censure, thirty-day suspension, and cease-and-desist order.
Please click http://www.sec.gov/litigation/aljdec/id200cff.htm to access a copy of the administrative action.
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NEW YORK HEDGE FUND ADVISER CHARGED WITH FRAUD
2.19.2002 The SEC filed a complaint in a New York federal district court alleging that Anthony Burges and his management company defrauded hedge fund investors. The SEC alleged that Burges represented that the hedge funds would invest and trade in foreign currency, such as Euro and Yen. He also represented that he had been highly successful investing in foreign currency in the past. In at least one instance he represented that he had achieved returns of about 50% a month.
Contrary to Burges's representations, the Burges Funds' assets were not invested in foreign currency. Rather, Burges and his advisory firm misappropriated investor funds. Moreover, Burges had not been highly successful in investing in currency in the past.
Please click http://www.sec.gov/litigation/litreleases/lr17363.htm to access a copy of the administrative action.
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GEORGIA ADVISER CHARGED WITH FRAUD
2.19.2002 The SEC filed a complaint in a Georgia federal district court alleging that John Clain and his advisory firm Saint James Asset Management, Inc. misappropriated approximately $920,000 from sixteen clients. Saint James is located in Alpharetta, Georgia. The complaint alleges that Clain told clients that their funds would be invested in securities. Instead, the SEC claims that the investors' money was used to fund operations of a company partially owned by Clain. In addition, Clain also allegedly used client money to purchase personal items.
Please click http://www.sec.gov/litigation/litreleases/lr17345.htm to access a copy of the administrative action.
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NASD PROPOSES ANTI-MONEY LAUNDERING RULES
2.15.2002 The NASD filed a proposed rule with the SEC that would require financial institutions, including broker-dealers, to implement anti-money laundering compliance programs. The USA Patriot Act, which was enacted shortly after the events of September 11, 2001, requires the NASD and other regulators to adopt anti-money laundering regulations.
The rule will require each broker-dealer that is a member of the NASD to:
- establish and implement policies and procedures that detect and cause compliance with the reporting requirements of certain provisions of the Bank Secrecy Act;
- establish and implement policies, procedures and internal controls to achieve compliance of other provisions of the Bank Secrecy Act;
- provide for independent testing for compliance to be conducted by broker-dealer personnel or an outside party;
- designate a compliance officer responsible for implementing and monitoring the day-to-day operations of the money laundering compliance program; and
- provide money laundering compliance training for appropriate personnel.
The rules are designed to cause broker-dealers to have money laundering compliance programs that resemble those that have been in operation at banks for a number of years.
Please click http://www.nasdr.com/2685.asp to access a copy of the NASD's proposed anti-money laundering rule.
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SEC SEEKS TO IMPROVE FINANCIAL DISCLOSURE
2.13.2002 The SEC proposed rules that will require corporations to disclose significantly more information. Under the proposed rules, corporations will be required to:
- make financial reports more promptly;
- post certain reports on their web site;
- inform investors about securities trades made by executives, waivers of corporate ethics rules, and changes in accounting policies; and
- report changes in credit ratings, major write-offs, and lost customers or contracts.
The SEC also is proposing to change the timing of disclosure. It would require corporations to report certain significant events to the SEC in two days, instead of the current requirement of 15 days. Annual reports would have to be filed within 60 days of fiscal year-end and quarterly reports would have to be filed within 30 days of the end of the quarter. Many of the proposed regulations are in response to Enron's failure to make timely and accurate disclosure of its financial condition.
Please click http://www.sec.gov/news/headlines/corpdiscrules.htm to access a copy of the release announcing the proposed rules.
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AIMR COMMENTS ON PROPOSED ANALYST RULES
2.7.2002 The Association for Investment Management and Research (AIMR) issued a release commenting on the SEC's proposed analyst rules. AIMR supports the SEC's rules. In addition, the release stated that AIMR had set up a task force that will develop "Research Objectivity Standards." The standards will be voluntarily professional standards for individual investment professionals and firms that employ research analysts. The purpose of the standards is to ensure the independence of research analysts from the companies they follow and other influences.
Please click http://www.aimr.org/pressroom/02releases/02analyst_rules.html to access a copy of the AIMR release.
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NEW RULES ON ANALYST CONFLICTS OF INTEREST PROPOSED
2.7.2002 The NASD proposed rules designed to address research analysts' conflicts of interest. The New York Stock Exchange proposed similar rules. Both sets of rules must be approved by the SEC.
The new rules would cover a variety of areas, including investment banking departments' relationships with their research departments, analyst compensation, personal trading, supervisory procedures and reporting requirements. The rules would require investment banks to strengthen their Chinese Walls between their investment banking and research operations. The rules would introduce quiet period requirements, which would prohibit an investment bank's research department from issuing a research report on an issuer for which the investment bank acted as manager or co-manager of that issuer's securities offering. There would also be black-out periods that would prohibit an analyst from trading in securities of companies they follow for 30 days prior to the issuance of a research report and five days after. The research reports would also have to disclose certain financial interests the investment bank or its research analysts have in companies that are the subject of the report.
Please click http://www.nasdr.com/filings/rf02_21.asp to access a copy of the proposed analyst rules.
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