Cox to Succeed Donaldson as SEC Chairman
6.1.2005 William H. Donaldson today announced that he would step down as SEC Chairman on June 30, 2005. Chairman Donaldson is the 27th Chairman of the SEC and was appointed by President Bush in 2003. Chairman Donaldson has pursued an aggressive approach to policy and enforcement. His resignation will precede by just weeks the expected departure later this summer of SEC Commissioner Harvey Goldschmid, who plans to step down in July or August.
On June 2, 2005, President Bush named conservative Rep. Christopher Cox, California, to lead the SEC. Cox would succeed William Donaldson.
Please click http://www.sec.gov/news/press/2005-82.htm to access the SEC release announcing Donaldson�s resignation.
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Citigroup Settles Charges Arising from Creation of Affiliated Transfer Agent to Serve Its Proprietary Mutual Funds
5.31.2005 The SEC settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. The two subsidiaries named as respondents in the action are Citigroup Global Markets, Inc. and Smith Barney Fund Management LLC, the investment adviser to the mutual funds. In the order, the SEC found that Citigroup misrepresented and omitted material facts when recommending to the boards of the mutual funds that the funds change from the third party transfer agent they previously used to a transfer agent that was a Citigroup affiliate. Under the settlement, the respondents are ordered to pay $208 million in disgorgement and penalties and to comply with substantial remedial measures, including an undertaking to put out for competitive bidding certain contracts for transfer agency services for the mutual funds.
According to the order, the investment adviser in this case placed its interest in making a profit ahead of the interests of the mutual funds it had a duty to serve. The adviser recommended that the mutual funds contract with an affiliate of the adviser to serve as transfer agent without fully disclosing to the mutual funds� boards that most of the actual work was to be done under a subcontract arrangement that Citigroup had negotiated with the mutual funds� existing third party transfer agent at steeply discounted rates. Rather than passing the substantial fee discount on to the mutual funds, Citigroup, through the affiliated transfer agent, took most of the benefit of the discount for themselves, reaping nearly $100 million in profit at the funds� expense over a five year period.
Please click http://www.sec.gov/litigation/admin/34-51761.pdf for a copy of the administrative action.
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SEC Charges Three Hedge Funds with Violating Regulation M
5.19.2005 The SEC issued administrative orders against three hedge fund advisers, Galleon Management, L.P., Oaktree Capital Management, LLC and DB Investment Managers, Inc. (DBIM), for violations of Rule 105 of Regulation M. Rule 105 is an anti-manipulation rule. It prohibits covering a short sale with securities obtained in a follow-on offering if the short sale occurred within five business days before the pricing of that offering. The rule is designed to prevent funds from improperly profiting by selling short with the expectation that they will cover that short position with lower priced shares obtained from the offering. Such short sales can play a major role in contributing to a decrease in a follow-on offering�s share price, and can ultimately reduce an issuer�s proceeds from the deal by millions of dollars.
The DBIM order provided the following example of a prohibited trade:
DBIM participated in a follow-on offering of RL. On February 27, 2002, RL announced
an offering of 12,650,000 shares of its common stock. After the close of trading on May 8, 2002, the shares were priced at $26.50 per share.
On the morning of May 8, 2002, DBIM submitted an indication of interest
to the lead underwriter to purchase shares of the offering. Later that day, DBIM sold short 25,500 shares at $27.05 per share. With no open stock position in RL at the time of this transaction, however, the order was improperly marked as a long sale, but should have been marked short. Thus, DBIM�s trade established a short position of 25,500 RL shares.
The following day, May 9, 2002, DBIM received its 175,000 share allocation of the RL offering. Later that day, DBIM used 25,500 of the offering shares to cover its short position established within the Rule 105 restricted period. The violation resulted in a profit of $14,025.
Click below to access the SEC administrative actions:
DBIM: http://www.sec.gov/litigation/admin/34-51707.pdf
Galleon: http://www.sec.gov/litigation/admin/34-51708.pdf
Oaktree: http://www.sec.gov/litigation/admin/34-51709.pdf
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SEC Settles Charges Against Hedge Fund Manager for Insider Trading and Unregistered Sale of Securities in Connection with PIPE Offering
5.18.2005 The SEC filed a complaint against Hilary L. Shane in the U.S. District Court for the Southern District of New York alleging that Shane committed insider trading and registration violations by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering and prior to the effective date of the resale registration statement for the PIPE shares. The SEC�s complaint alleges that on October 8, 2001, Shane agreed to purchase shares in a PIPE offering by CompuDyne for her personal account and for one of the hedge fund accounts she managed. Shane also agreed both orally and in writing to keep information about the PIPE offering confidential.
The SEC�s complaint alleges that the PIPE offering was likely to have a significant dilutive effect on the value of existing CompuDyne shares because the PIPE shares would increase the supply of stock in the market by more than 200% and were offered at a substantial discount to the current market price. The morning after Shane learned about her allocation in the PIPE offering but before it was publicly announced, Shane began short selling CompuDyne securities in both her personal account and the hedge fund�s account. Shane continued short selling until she had sold the same number of shares she had been allocated in the PIPE offering. Shane covered all of her short sales with the shares she obtained in the PIPE offering making substantial profits for both accounts.
The SEC�s complaint alleges that Shane�s short selling of CompuDyne shares prior to the public announcement of the PIPE offering violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleges that Shane�s short selling of CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the PIPE shares violated Sections 5(a) and 5(c) of the Securities Act of 1933.
Please click http://www.sec.gov/litigation/litreleases/lr19227.htm for a copy of the administrative action.
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Broker-Dealer Charged with Failure to Provide Customers with Mutual Fund Breakpoint Discounts
5.17.2005 SunTrust Securities, Inc., a registered broker-dealer, settled charges that between 2001 and 2002, it sold mutual fund shares without providing certain customers with the reductions in front-end loads, or sales charges, also known as breakpoint discounts, described in the prospectuses of the funds. Based on statistical analysis of data SunTrust Securities submitted as part of an industry-wide self-assessment, NASD estimated that SunTrust Securities failed to give certain customers at the time of the transactions breakpoint discounts totaling approximately $201,117. SunTrust Securities also violated Rule 10b-10 by failing to charge these customers the correct sales loads at the time of the transactions as set forth in the mutual funds� prospectuses, and by failing to disclose in confirmations the remuneration SunTrust Securities received from the sales loads charged to these customers in connection with such transactions.
Please click http://www.sec.gov/litigation/admin/34-51700.pdf for a copy of the administrative action.
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SEC Issues Report Describing Findings from Examination of Pension Consultants
5.16.2005 The SEC�s Office of Compliance Inspections and Examinations (OCIE) released the �Staff Report Concerning Examinations of Select Pension Consultants� (the �Report�). The Report follows an examination sweep into the practices of pension consultants, particularly focused on any conflicts of interest in their operations. The sweep and report were initiated as part of the SEC�s program to identify and investigate risks in the securities industry.
During its examination, SEC staff reviewed documents and information from a cross-section of 24 pension consultants who are registered with the SEC as investment advisers. The examinations reviewed: (i) the products and services provided by pension consultants; (ii) the method of payment for such services; and (iii) the disclosure provided to their clients.
The Report detailed a number of apparent conflicts of interest in the pension consultant business. It raised important issues for plan fiduciaries who often rely on the advice and recommendations of pension consultants in operating their plans.
Here are some key findings:
- More than half of the pension consultants or their affiliates provided products and services to both pension plan advisory clients and to money managers and mutual funds on an ongoing basis;
- A majority of the pension consultants have affiliated broker-dealers or relationships with unaffiliated broker-dealers which may provide a mechanism for money managers to compensate pension consultants, perhaps as a way to curry favor with the pension consultant;
- Many pension consultants have affiliates that also provide services to pension plan clients; and
- Many pension consultants do not adequately disclose material conflicts of interest arising from these practices to their clients.
Although investment advisers owe their clients a fiduciary obligation -- including to adequately disclose all material conflicts of interest -- some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients. The Report contains recommendations to enhance pension consultants� compliance programs to help ensure that the adviser is fulfilling it fiduciary obligations to its advisory clients.
Please click http://www.sec.gov/news/studies/pensionexamstudy.pdf for access to the registration statement.
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SEC Chief Economist Speaks on Conflicts of Interest in the Asset Management Business
5.12.2005 SEC Chief Economist Chester Spatt spoke at the Hedge Fund Regulation and Compliance Conference on "Conflicts of Interest in Asset Management." Mr. Spatt focused on conflicts of interest in asset management, including how the economic interests of a decision-maker who serves as an agent for an underlying investor can diverge from that of the investor. He stated that in the asset management process itself there are strong potential conflicts that arise because of the inherent nature of the fee and compensation relationship, differences in risk preferences between the investor and manager and the differential importance to the agent/portfolio manager of the multiple principals that he faces.
He noted that the existence of natural conflicts in incentives does not necessarily imply a breach of duty or responsibility by the agent or "wrongdoing," but �I do think the lens of agency theory certainly augments our understanding of investment management behavior and in some situations can help identify behavior that is problematic.�
Please click http://www.sec.gov/news/speech/spch051205css.htm to access the speech.
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SEC Comment and Response Letters are Now Available
5.12.2005 The SEC has begun the process of publicly releasing comment letters and response letters relating to disclosure filings made after August 1, 2004, and reviewed by the SEC�s Division of Corporation Finance and the Division of Investment Management. The SEC has stated that it is appropriate to expand the transparency of its comment process by making this information available, free of charge, to an unlimited audience.
Comment letters and response letters relating to reviewed disclosure filings will begin to be released individually on a filing-by-filing basis through the EDGAR system at www.sec.gov. The process will commence with some of the oldest eligible filings, but as it continues, letters will be released no earlier than 45 days after the review of the disclosure filing is complete.
Please click http://www.sec.gov/news/press/2005-72.htm to access the press release.
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SEC Appoints Linda Chatman Thomsen as New Enforcement Director
5.12.2005 The SEC announced the appointment of Linda Chatman Thomsen as the new Director of the Enforcement Division. Ms. Thomsen replaces Stephen M. Cutler, who in April announced that he was leaving the Commission staff.
Thomsen, 50, joined the SEC�s staff in 1995 as Assistant Chief Litigation Counsel. In 1997, Thomsen was named Assistant Director of the Division of Enforcement, and in 2000, she became Associate Director of the division. She became Deputy Director in January 2002. During her tenure at the SEC, she has overseen the investigation and litigation of numerous cases. Among her current duties is oversight of the SEC�s ongoing Enron investigation.
Please click http://www.sec.gov/news/press/2005-73.htm to access the release announcing her appointment.
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Court Denies Claim for 12b-1 Fees
5.9.2005 A Massachusetts federal court ruled that plaintiff shareholders had no claim for 12b-1 fees charged on mutual funds that were no longer selling their shares. Rule 12b-1 under the Investment Company Act of 1940 allows mutual funds to use their assets to finance activities primarily intended to result in the sale of their shares, including compensating underwriters, dealers, and sales personnel. The rule requires an annual vote of the fund's directors, who must conclude, in the exercise of their reasonable business judgment and in light of their fiduciary duties under state law and under the 1940 Act, that there is a reasonable likelihood that the plan will benefit the fund and its shareholders. Many funds continue to charge 12b-1 fees after the funds are closed to new investors. The court ruled that the directors may properly take account of expenses incurred before the fund was closed to new investors when deciding whether to continue a 12b-1 plan.
Please click http://www.nysd.uscourts.gov/courtweb/pdf/D02NYSC/05-03158.PDF to access a copy of the opinion.
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OCIE Associate Director Provides Job Description for Hedge Fund Adviser CCOs
5.5.2005 Gene Gohlke, Associate Director Office of Compliance Inspection and Examinations (OCIE) gave a speech in New York at the Managed Funds Association Educational Seminar Series entitled �A Job Description For CCOs of Advisers to Private Investment Funds.� He discussed the qualities and duties the SEC's release adopting the compliance rules establishes for CCOs of advisers. Adviser CCOs must have the necessary skills to:
- Identify and assess risk and assessment;
- Create policies and procedures to address the risks identified; and
- Implement the policies and procedures while recognizing principles of good management and controls.
Mr. Gohlke then listed and described 24 functions of the CCO.
Please click http://www.sec.gov/news/speech/spch050505gg.htm for a copy of the speech.
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SEC Charges Hedge Fund Manager with Securities Fraud
5.2.2005 The SEC charged Vincent Montagna, president of Quantus Holding Company, Inc. (Quantus), an unregistered investment adviser, with securities fraud., and naming his wife, Christine Palmer, as a relief defendant. The complaint alleges that from August, 2001 until August, 2002, Montagna defrauded investors and prospective investors in two hedge funds he managed through Quantus - Tiburon Asset Management LLC and Tiburon Partners, Ltd. (Funds). Montagna allegedly defrauded the investors and prospective investors by:
- repeatedly causing extremely positive - and false - performance claims to be disseminated to them;
- failing to disclose to investors the declining value and increased risk of fund holdings;
- failing to disclose conflicts of interest he had with respect to certain investments; converting fund income and assets for his own (or his wife�s) benefit; and
- causing the funds to make payments to him and his associates in excess of the amounts to which they were entitled.
Through this conduct, Montagna violated the antifraud provisions of the Securities, Exchange, and Investment Advisers Acts, more specifically 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.
Please click http://www.sec.gov/litigation/litreleases/lr19211.htm for a copy of the administrative action.
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Independent Directors Council Report on Fund Board Structures
5.1.2005 The Independent Directors Council, which serves the mutual fund independent director community, issued a task force report concluding that the unitary or cluster board structure, in which the same directors oversee all or many of the mutual funds and closed-end funds in a fund complex, is prevalent in the industry and is consistent with good governance. Some industry critics had argued that directors cannot effectively oversee a large number of funds, a position rejected by the IDC task force, whose members oversee from six to 300 funds in their respective complexes. Instead, the report concludes that significant efficiencies are realized when a single or limited number of boards oversees all of the funds within a fund family, and that a board that oversees a significant portion of an advisory firm's assets under management has a greater ability to negotiate with and influence management.
Please click http://www.idc1.org/getPublicPDF.do?file=18833 for a copy of the report
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