ADVISER SETTLES MISAPPROPRIATION CHARGE
10.29.2002 The SEC settled charges with Craig P. Scanlon, who was an officer and director of Scanlon & Associates, Inc., an unregistered investment adviser, in connection with the charge that Mr. Scanlon misappropriated client assets. The SEC alleged the Commission alleged that Scanlon fraudulently, knowingly, willfully or recklessly misappropriated clients' investment funds to pay his personal expenses by inducing them to sell their securities holdings at certain broker-dealers and to transfer their sales proceeds to him for reinvestment and management through Scanlon & Associates, Inc.
Please click http://www.sec.gov/litigation/admin/ia-2072.htm for the release announcing the administrative action.
Back To The Top
MUTUAL FUND ADVISER ENGAGES IN PROHIBITED CROSS TRADES
10.25.2002 Back Bay Advisors, L.P., a registered investment adviser located in Boston, Massachusetts, was found to have engaged in violations with respect to prohibited affiliated transactions, including false statements or omissions to clients, alteration of records, and record keeping requirements.
Specifically, Back Bay between 1994 and 1999 effected certain trades between its clients -- known as "cross trades" -- in violation of Sections 17(a)(1) and (2) of the Investment Company Act, which generally prohibit any affiliated person of a registered investment company, or any affiliated person of such affiliated person, acting as principal, from engaging in transactions with the registered investment company. Back Bay's violative affiliated transactions consisted of: (i) cross trades between an investment company client and an account of Back Bay's indirect parent; and (ii) cross trades between Back Bay's investment company clients. Back Bay also made multiple false statements and omissions to clients about those affiliated transactions largely because its internal records did not properly reflect their existence.
Back Bay was ordered to pay a civil money penalty in the amount of $150,000.
Please click http://www.sec.gov/litigation/admin/ia-2070.htm for the release announcing the administrative action.
Back To The Top
SEC PROPOSES RULES IMPLEMENTING AUDIT COMMITTEE EXPERT AND OTHER PROVISIONS OF SARBANES-OXLEY ACT
10.22.2002 The SEC proposed rules implementing certain provisions of the Sarbanes-Oxley Act of 2002 that would require investment companies (and operating companies) to include the following new disclosures in their filings under the Securities Exchange Act of 1934:
- Companies would be required to disclose the number and names of persons that the board of directors has determined to be the "financial experts" serving on the company's audit committee and whether they are independent of management, and if not, an explanation of why they are not.
- Companies (other than investment companies) would be required to include an annual internal control report of management stating the following: management's responsibilities for establishing and maintaining adequate internal controls and procedures for financial reporting for the company; management's conclusions about the effectiveness of the company's internal controls and procedures for financial reporting as of the end of the company's most recent fiscal year; and that the company's registered public accounting firm has attested to, and reported on, management's evaluation of the company's internal controls and procedures for financial reporting; and
- Companies would be required to disclose whether they have adopted a code of ethics that covers their principal executive officers and senior financial officers, or if they have not, an explanation of why they have not, as well as amendments to, and waivers from, the code of ethics relating to any of those officers.
These proposed rules would implement the requirements in Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002.
Please click http://www.sec.gov/rules/proposed/33-8138.htm for the release announcing the proposed rules.
Back To The Top
ADVISER CHARGED WITH MISAPPROPRIATING CLIENT ASSETS
10.22.2002 The SEC initiated public administrative proceedings pursuant to Sections 203(e) and 203(f) of the Investment Advisers Act of 1940 against Hoover Capital Management, Inc. ("HCM"), a registered investment adviser located in Kansas City, Missouri, and Steven R. Hoover, the sole owner of HCM, based on Hoover's criminal conviction in a Massachusetts court. In that proceeding, Hoover pled guilty to a one-count felony charge of fraudulently misappropriating nearly $200,000 from three HCM clients between 1997 and 1998 in violation of Section 206(2) of the Advisers Act (15 U.S.C. �� 80b-6(2) and 80b-17).
The SEC has alleged that between 1995 and 2001, Hoover misappropriated nearly $3 million from clients, including the Chestnut Fund LP, a hedge fund founded and managed by Hoover. The Commission also alleges that Hoover solicited and obtained investments in the hedge fund by making fraudulent misrepresentations to prospective investors, and that Hoover attempted to conceal his misappropriations by distributing fictitious account statements to investors.
Please click http://www.sec.gov/litigation/litreleases/lr17666.htm for the release announcing the administrative action.
Back To The Top
SEC TO HOST WEBCAST ON ANTI-MONEY LAUNDERING
10.17.2002 The SEC's Office of Compliance Inspections and Examinations will host an audio-only anti-money laundering compliance webcast at 1:00 p.m. on Monday, November 25, 2002. The webcast will last 1 and 1/2 hours.
Please click http://www.sec.gov/spotlight/moneylaunder/webcast1102.htm for information about the webcast.
Back To The Top
SEC DIRECTOR SPEAKS ABOUT HEDGE FUND STUDY AND OTHER ISSUES
10.17.2002 Paul F. Roye, Director of the SEC's Division of Investment Management, gave a speech at the 8th Annual ALI-ABA Course of Study on Investment Management Regulation in Washington, D.C., entitled "Priorities in Investment Management Regulation."
Director Roye stated that the SEC's study on hedge funds is about halfway finished. He stated that the SEC is focusing on registered funds that invest in hedge funds, i.e., fund of funds. He noted that the adviser of the investing hedge fund can not "blindly trust" the adviser of the underlying hedge fund with respect to the valuation of the securities portfolio of the underlying hedge fund.
Director Roye also stated that he expects Part 2 of the Form ADV to be adopted by the SEC by the end of the year.
Another focus is compliance procedures. The SEC has recently initiated a series of special examinations to review the overall compliance systems of a number of large broker-dealer complexes. The SEC is looking at all compliance procedures and their implementation at all broker-dealers in a complex.
The SEC is conducting specialized reviews of firms' risk management and internal controls -- evaluating the processes and procedures that firms use to measure and manage risks relating to trading, credit, liquidity, and new products. Director Richards stated that the SEC is looking for a system of controls -- written guidelines, a clear delineation of responsibility, and independent and periodic oversight that the guidelines are being followed.
Please click http://www.sec.gov/news/speech/spch592.htm for a copy of the speech.
Back To The Top
SEC TO HOLD MARKET STRUCTURE HEARINGS
10.15.2002 The SEC will hold hearings this fall to discuss key issues relating to the structure of the U.S. equity securities markets. The Commission has initially scheduled two full-day hearings, the first to be held on Tuesday, Oct. 29, 2002, at the Commission's headquarters in Washington, D.C., and the second, on Tuesday, Nov. 12, 2002, at the NYU Stern School of Business in Schimmel Auditorium, Tisch Hall, in New York City.
The hearings will address a variety of topics, including: the collection, consolidation and dissemination of market data through intermarket plans; broker-dealers' duty of best execution and corresponding marketplace rules relating to intermarket access, trade-throughs, and price protection; the role of national securities exchanges, electronic communications networks (ECNs), and alternative trading systems; and the self-regulatory system.
Please click http://www.sec.gov/news/press/2002-148.htm for information about the hearings.
Back To The Top
OCIE TO CHANGE HOW IT CONDUCTS ADVISER EXAMS
10.15.2002 The SEC's Office of Compliance Inspections and Examinations (OCIE) is revamping how it examines investment advisers. Lori Richards, OCIE's Director, recently announced the changes in a speech given to the Securities Industry Association in Tucson, Arizona.
She noted that OCIE has continued to conduct specialized reviews of firms' risk management and internal controls, evaluating the processes and procedures that firms use to measure and manage risks relating to trading, credit, liquidity, and new products. The staff is looking for a system of controls, written guidelines, a clear delineation of responsibility, and independent and periodic oversight that the guidelines are being followed.
Please click http://www.sec.gov/news/speech/spch591.htm for a copy of the speech.
Back To The Top
TREASURY DELAYS CUSTOMER IDENTIFICATION RULES
10.11.2002 The Department of Treasury announced that financial institutions will not be required to comply with the customer identification requirements in the USA PATRIOT Act until final implementing rules are adopted. The industry had been expected to be in compliance with the provisions by October 25, 2002.
Section 326 of the USA PATRIOT Act directs the Department of the Treasury and the federal functional regulators to jointly issue regulations requiring financial institutions to establish minimum procedures for the identification and verification of customers who open new accounts.
Please click http://www.treas.gov/press/releases/po3530.htm to access a copy of the announcement.
Back To The Top
SEC BRINGS CHARGES AGAINST HEDGE FUND ADVISER
10.8.2002 The SEC brought an administrative action against John McCamey, a principal and registered representative of Sierra Brokerage Services, Inc., and Sierra Equity Partners LP, a hedge fund based in Columbus, Ohio for making a fraudulent, unregistered offering.
Specifically, the SEC The Division alleges that in solicitations through letters to Sierra Brokerage's clients, through spam e-mails and through Sierra Brokerage's website, Mr. McCamey willfully made false and misleading statements about the safety and return investors could expect from an investment in the hedge fund. According to the SEC, Mr. McCamey raised $10,000 for the hedge fund from one investor.
As a result, the SEC alleges that McCamey willfully violated and committed violations of 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, and willfully aided and abetted and caused Sierra Brokerage's violations of Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder, and the hedge fund committed violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused Sierra Brokerage's violations of Section 15(c) of the Exchange Act and Rule 15c1-2 thereunder.
Please click http://www.sec.gov/litigation/admin/33-8137.htm to access a copy of the administrative order.
Back To The Top
EXCHANGE TO TRADE SINGLE STOCK FUTURES
10.7.2002 On November 8, 2002, OneChicago LLC will begin trading of single stock futures. OneChicago is a joint venture of the Chicago Board Options Exchange, Chicago Mercantile Exchange, Inc. and the Chicago Board of Trade. Futures contracts will be offered on 85 single stocks and 15 narrow-based indexes.
Please click http://www.onechicago.com/060000_press_news/press_news_2002/10212002.html to access a copy of the announcement.
Back To The Top
MUTUAL FUND CHARGED WITH POSTING MISLEADING PERFORMANCE RESULTS
10.2.2002 The SEC brought an administrative action against The Thurlow Funds, Inc. (the "Thurlow Funds"), Thurlow Capital Management, Inc. and Thomas F. Thurlow John McCamey, both based in the Napa, California, for posting misleading performance results on the Fund's website.
As late as December 2000, the website prominently proclaimed returns for Thurlow Growth Fund of 422% from inception through March 10, 2000. This information, while factually accurate, was rendered misleading by Thurlow's failure to disclose that Thurlow Growth Fund's total returns had declined by more than half between March 10, 2000 and September 30, 2000, the most recent quarter.
Please click http://www.sec.gov/litigation/admin/33-8136.htm to access a copy of the administrative order.
Back To The Top
ADVISER SANCTIONED FOR FAILING TO SEEK BEST EXECUTION
10.1.2002 The SEC brought an administrative action against Renberg Capital Management, Inc. and Daniel H. Renberg for causing clients to pay unnecessary execution costs and failing to seek best execution.
From at least 1997 through at least 1999, Renberg Capital failed to seek best execution in securities transactions for certain advisory clients because of an undisclosed trading practice involving cross trades between client accounts. The cross trades occurred in connection with a portfolio management technique employed by Renberg Capital called "repositioning."
Renberg Capital engaged in repositioning when it identified a stock held by clients that it believed remained a good long-term investment but that had declined in price at least 20%. Because Renberg Capital viewed the price decline as a buying opportunity, it determined that certain clients should purchase additional shares in order to restore the position in the stock to its pre-price decline weighting in these clients' portfolios. In these situations, Renberg Capital would buy the amount of additional shares of the stock required for the clients in the open market and allocate all of these shares to only one group of the clients. The clients in this first group held tax-exempt accounts that could sell stock immediately after buying without being subject to the "wash sale" provisions of the Internal Revenue Code. This allocation therefore resulted in the first group of clients holding a temporary "double position," i.e., the just purchased lower cost shares, and the previously owned higher cost shares.
Shortly after creating a double position (often within minutes, but always within the same day), Renberg Capital would sell the previously owned higher cost shares from the first group to a second group of clients in a cross trade. Clients in the second group held taxable accounts. Because of the "wash sale" provisions, they would wait at least 31 days before selling their previously owned higher cost shares. When they sold, they usually realized a tax loss that could be used to offset future taxable gains. Renberg Capital determined the price that the taxable accounts paid to the tax-exempt accounts in the cross trades, and the commissions paid by both accounts to effect the cross trades. Renberg Capital always chose a crossing price that was within the prevailing bid-ask spread at the time of the cross trade, but was higher than the initial purchase price paid by the tax-exempt accounts.
Please click http://www.sec.gov/litigation/admin/ia-2064.htm to access a copy of the administrative order.
Back To The Top
