Final Judgments Entered Against Connecticut Hedge Fund Adviser
8.29.2007 Final judgments have been entered by consent against Scott R. Sacane, Durus Capital Management, LLC, and Durus Capital Management (N.A.), LLC (collectively, Durus) in a civil fraud action the SEC filed against them on October 12, 2005. The SEC's complaint, filed in federal district court in Connecticut, charged the defendants for their involvement during 2002 and 2003 in fraudulent schemes concerning the purchase and sale of the common stock of two biotechnology companies: Esperion Therapeutics, Inc. and Aksys Ltd. The SEC's complaint alleged that the defendants manipulated the price of both Esperion and Aksys stock by making regular and substantial purchases of both stocks through the hedge funds that they managed and concealing these purchases by failing to file various forms and schedules with the SEC as required by the federal securities laws and making false filings with the SEC. According to the complaint, Sacane also made misrepresentations to officers of Esperion and Aksys about the stock purchases, and made misrepresentations to Sacane's former employer about purported non-public information Sacane possessed about both companies in order to prevent the former employer from selling Aksys and Esperion stock.
The Complaint further alleged that Sacane and Durus later sold stock of both companies without disclosing their ownership position as required by the federal securities laws. The SEC's complaint alleged that the defendants' undisclosed purchases of Esperion and Aksys stock artificially inflated the price of both stocks by creating the appearance of a greater demand for the stocks than actually existed in the market. According to the complaint, from November 2002 through July 2003, Esperion's stock price more than tripled from $5.65 per share to approximately $20 per share, and Aksys' stock price quadrupled from $3.65 per share to approximately $15 per share. By July 24, 2003, the defendants' undisclosed purchases also resulted in them controlling approximately 33% of Esperion's outstanding stock and approximately 78% of Aksys' outstanding stock.
Please click http://www.sec.gov/litigation/litreleases/2007/lr20258.htm to access a copy of the administrative action.
Back To The Top
SEC Brings Action Against Illinois Adviser for Misappropriating Client Assets
8.21.2007 The SEC brought filed an emergency action against Sentinel Management Group, Inc. (Sentinel), an investment adviser located in Northbrook, Illinois, seeking to halt Sentinel's improper commingling, misappropriating and leveraging of client securities without client consent in violation of Section 206 of the Advisers Act.
The SEC's complaint alleges that, for a period of at least several months up to and including the week of August 13, 2007, Sentinel's advisory clients suffered undisclosed losses and risks of losses as a result of several unauthorized practices engaged in by Sentinel. These include:
- Pledging securities owned by clients as collateral in order to obtain a line of credit as high as $500 million for Sentinel;
- Placing at least $460 million of client securities properly belonging in segregated customer accounts in Sentinel's house proprietary account;
- Commingling client assets without the ability to verify ownership of particular securities by particular clients; and
- Providing false client account statements that did not accurately reflect client portfolio holdings or the fact that securities had been encumbered by Sentinel.
The Court entered an order requiring Sentinel to provide a full accounting of client assets and Sentinel's assets and liabilities within five days. In addition, the Court ordered Sentinel to immediately produce certain brokerage and bank documents in order to begin the process of determining client portfolio holdings and ownership of securities.
Please click www.sec.gov/litigation/admin/2007/ia-2621.pdf to access a copy of the administrative order.
Back To The Top
SEC Creates Privacy Office and Website
8.21.2007 The SEC has established a new office called the "Privacy Office." It has also created a new web page on its site about the office and privacy regulation. This page contains links to other sites about information on privacy regulation.
Please click http://www.sec.gov/about/privacy/secprivacyoffice.htm to access the SEC�s web pages devoted to privacy.
Back To The Top
Rule 12b-1 Roundtable Transcript Now Available
8.21.2007 The SEC has posted the transcript of the Rule 12b-1 Roundtable held at the SEC on June 19, 2007.
Please click
http://www.sec.gov/news/openmeetings/2007/12b1transcript-061907.pdf for a copy of the transcript.
Back To The Top
Mutual Funds Have Begun Posting Risk/Return Information Using Interactive Data
8.21.2007 The SEC reported that several mutual funds have begun providing risk/return information using interactive data. The SEC voted on June 20, 2007, to adopt final rule amendments that enable mutual funds to submit risk/return summary information from their prospectuses using interactive data. The risk/return summary at the front of every mutual fund prospectus includes information about a fund's investment objectives and strategies, risks, costs, and historical performance. All of the new, interactive mutual fund data will be made available to the public on the SEC's online database, named EDGAR, and to subscribers of EDGAR's high-speed data dissemination service.
Interactive data is powered by XBRL, a computer software language that labels companies' financial and other data with codes from standard lists so that investors and analysts can more easily locate and analyze desired information. The SEC commenced its XBRL Voluntary Financial Reporting Program in April 2005, allowing public companies to voluntarily submit interactive data documents as exhibits to periodic reports and other filings.
Among the first mutual fund filers to participate in the expanded voluntary program are the Allegiant Advantage Fund, American Funds' Europacific Growth Fund, Muhlenkamp Fund, and Vanguard 500 Index Fund.
Please click http://www.sec.gov/news/press/2007/2007-167.htm to access the press release about interactive data.
Back To The Top
Mutual Fund Portfolio Manager Charged with Insider Trading
8.21.2007 The SEC issued an order instituting administrative proceedings pursuant to Section 203(f) of the Advisers Act, against Joseph A. Frohna. The order finds that Frohna, a resident of Waukesha, Wisconsin, and a former portfolio manager with U.S. Bancorp Asset Management, Inc., engaged in insider trading by having the mutual fund that he managed sell all of its shares of XOMA, Ltd. on the basis of material, nonpublic information that he obtained from his brother, who was leading a joint drug study for XOMA and another pharmaceutical company. As a result of Frohna's insider trading, the mutual fund that he managed avoided a loss of $954,776.
Specifically, the SEC alleged that Joe Frohna's brother was the leader of a bio-equivalence study for a drug being developed by XOMA and Genentech, Inc. On April 3, 2002, Joe Frohna's brother learned that the Bio-Equivalence study was unsuccessful. Later that same day, Joe Frohna called his brother and learned that the Bio-Equivalency Study was unsuccessful. The next morning, on April 4, 2002, Joe Frohna caused the fund he managed, First American Investment Fund, Inc's Micro Cap Fund, to aggressively sell all of its 332,000 XOMA shares. The following day, April 5, 2002, XOMA and Genentech publicly announced that the Bio-Equivalence Study was unsuccessful. The price of XOMA's stock fell 42% that day, from $7.63 per share to a closing price of $4.42 per share. As a result of Joe Frohna's insider trading, the Micro Cap Fund avoided a loss of $954,776.
Please click
http://www.sec.gov/litigation/litreleases/2007/lr20249-declaration.pdf for a copy of the adminstrative order.
Back To The Top
Report on Improvements to Financial Reporting Made Available by the SEC
8.21.2007 The SEC posted a discussion paper on improvements to financial reporting by Robert Pozen, Chairman of the SEC's Advisory Committee on Improvements to Financial Reporting. The posting includes a request for comments. The discussion paper provides a
working outline, including a discussion of issues, views and potential
consideration points, that the Committee may evaluate.
Please click http://www.sec.gov/rules/other/2007/33-8836.pdf to access a copy of the report.
Back To The Top
Soft Dollar Case Brought Against Investment Adviser
8.15.2007 The SEC sanctioned Schultze Asset Management LLC (SAM), a New York registered investment adviser, and George J. Schultze, age 37, its principal, for making false and misleading statements concerning SAM's soft dollar practices and for failing to provide and modifying books and records requested by the SEC's staff during an onsite inspection. SAM and Schultze agreed to settle the charges, without admitting or denying the SEC's findings, by agreeing to the issuance of a censure, a cease-and-desist order ,and payment of civil penalties of $100,000 and $50,000, respectively.
In 2004, Schultze, on behalf of SAM, represented and certified three different times to an advisory client that SAM was using soft dollars generated by the account only for expenses covered by the safe harbor provided by Section 28(e) of the Securities Exchange Act - that is, only for research and brokerage services. In fact, SAM knowingly used client commissions generated by the account to pay for non-Section 28(e) expenses, including Schultze's salary.
In addition, SAM, through Schultze, used an entity called SAMCO Distributors Inc. (SAMCO), to secure soft dollar payments from broker-dealers to cover some of SAM's operating expenses. SAMCO had no business purpose other than to provide a vehicle by which SAM and Schultze could secure soft dollars to pay SAM's operating expenses and Schultze's personal expenses. Schultze, in an attempt to conceal SAMCO's role from OCIE, the SEC�s examination arm, during a 2005 inspection, failed to provide to OCIE staff a key agreement relating to SAMCO and then gave the staff a modified version of a second agreement.
Please click http://www.sec.gov/litigation/admin/2007/ia-2633.pdf to access a copy of the administrative order.
Back To The Top
Investment Adviser Sanctioned for Not Making 13F Filing
8.15.2007 The SEC sanctioned Quattro Global Capital, LLC (Quattro), a New York registered investment adviser, for failing to file Forms 13F with the SEC between 2002 and mid-2005. Quattro agreed to settle the charges, without admitting or denying the SEC's findings, by agreeing to the issuance of a censure, a cease-and-desist order, and payment of a $100,000 civil penalty.
Section 13(f) of the Exchange Act requires institutional investment advisers who exercise investment discretion over at least $100 million of certain securities (Section 13(f) securities) to file a Form 13F quarterly with the SEC disclosing the Section 13(f) securities under management. The purpose of this disclosure requirement is to collect and disseminate to the public information about the holdings and investment activities of institutional money managers in order to assist investors, issuers and government regulators. Since 2001, Quattro's assets under management have exceeded the $100 million threshold in Section 13(f) securities, obligating Quattro to file a Form 13F each quarter beginning in 2002. However, Quattro, according to the SEC, failed to file any Forms 13F until July 2005, when the SEC's inspection staff began questioning Quattro about the absence of such filings.
Please click www.sec.gov/litigation/aljdec/2007/id635jtk.pdf to access a copy of the administrative order.
Back To The Top
SEC Updates EDGAR Manual
8.15.2007 The SEC has posted a release adopting an updated EDGAR filing manual. Revisions are being made primarily to support the expansion of the current interactive data voluntary reporting program to enable mutual funds voluntarily to submit supplemental tagged information contained in the risk/return summary section of their prospectuses on Form N-1A. The EDGAR system was upgraded to support this functionality on August 20, 2007.
The filer manual is also being revised to incorporate changes in support of several final rules previously adopted by the SEC and implemented in EDGAR. Those rules include the termination of a foreign private issuer's registration of a class of securities under Section 12(g) and duty to file reports under Section 13(a) or 15(d) of the Exchange; the electronic filing of Transfer Agent forms TA-1, TA-2 and TA-W; and revisions to the accelerated filer definition under the Exchange Act. Other revisions were made to allow an issuer to indicate whether it is subject to reporting obligations after terminating registration of a class of equity securities under the Exchange Act and to remove references to submission types N-14AE and N-14AE/A for the filing of Form N-14 from "Table 3-5: Investment Company Submission Types Accepted by EDGAR" of the Filer Manual.
Please click http://www.sec.gov/rules/final/2007/33-8834.pdf to access a copy of the release about the updates.
Back To The Top
Commisioner Campos to Leave SEC
8.9.2007 Commissioner Roel C. Campos announced that he intends to leave the SEC in a month's time and plans to return to the private sector. Currently serving his second term, Mr. Campos was first appointed by President George W. Bush and confirmed by the U.S. Senate as a Commissioner in August 2002.
Please click http://www.sec.gov/news/press/2007/2007-134.htm to access the press release announcing the resignation.
Back To The Top
SEC Proposes Major Modifications to Regulation D
8.3.2007 The SEC has proposed to revise Regulation D to provide additional flexibility to issuers and to clarify and improve the application of its rules. This proposal follows other proposed amendments to Regulation D made by the SEC in a release issued in December, 2006 (the �Private Pooled Investment Vehicle Release�).
Regulation D consists of a series of rules. Rules 501 through 503 contain definitions, conditions, and other provisions that apply generally throughout Regulation D. Rules 504 through 506 detail specific exemptions from registration under the Securities Act.
Rule 504 provides exemptions for companies that are not subject to reporting requirements under the Securities Exchange Act of 1934 (Exchange Act) for the offer and sale of up to $1,000,000 of securities in a 12-month period. Rule 505 exempts offers by companies of up to $5,000,000 of securities in a 12-month period, so long as offers are made without general solicitation or advertising. Rule 506 is a safe harbor under Section 4(2) of the Securities Act and provides an exemption from registration without any limit on the offering amount, so long as offers are made without general solicitation or advertising and sales are made only to �accredited investors� and a limited number of non-accredited investors who satisfy an investment sophistication standard.
The SEC proposes to make changes in the following four principal areas involving Regulation D:
- Creating Rule 507, a new exemption from the registration provisions of the Securities Act for offers and sales to �large accredited investors�;
- Revising the definition of the term �accredited investor� to clarify it and reflect developments since its adoption;
- Shortening the length of time required by the integration safe harbor for Regulation D offerings; and
- Providing uniform disqualification provisions throughout Regulation D.
Under proposed new Rule 507, the large accredited investors exemption, limited advertising of these offerings would be permitted. Large accredited investors would consist of the same categories of entities and individuals that qualify for accredited investor status under existing Rule 506, but with significantly higher dollar-amount thresholds for investors subject to such thresholds. Legal entities that are considered accredited investors if their assets exceed $5 million would be required to have $10 million in investments to qualify as large accredited investors. Individuals generally would be required to own $2.5 million in investments or have annual income of $400,000 (or $600,000 with one�s spouse) to qualify as large accredited investors, as compared to the current accredited investor standard of $1 million in net worth or annual income of $200,000 (or $300,000 with one�s spouse). Legal entities that are not subject to dollar-amount thresholds to qualify as accredited investors, generally government-regulated entities, would not be subject to dollar-amount thresholds to qualify as large accredited investors.
The proposed Rule 507 exemption would share the following characteristics with the Rule 506 exemption:
- It would allow an issuer to sell an unlimited amount of its securities to an unlimited number of investors who meet specified criteria�accredited investors in the case of Rule 506 transactions and large accredited investors in the case of Rule 507 transactions;
- Its availability would focus on purchasers, and not depend on the characteristics of offerees;
- It would place no restrictions on the payment of commissions or similar transaction-related compensation;
- It would be non-exclusive, meaning that the issuer could choose to claim any other available exemption without the benefit of the rule;
- Securities acquired in a transaction under the rule would be subject to the limitations on resale under Rule 502(d) and therefore would be treated as �restricted securities� as defined in Securities Act Rule 144(a)(3)(ii);
- The issuer would be required to exercise reasonable care to assure that the purchasers of the securities are not underwriters; and
- The issuer would have an obligation to file a notice of sales in the offering with the SEC on Form D.
Rule 507 would differ from Rule 506 in five ways:
- Large Accredited Investor Standard. Rule 507 would be premised on the concept of large accredited investors. Rule 506 would continue to be premised on the concept of accredited investors.
- Limited Advertising Permitted. Instead of a total ban on general solicitation and general advertising, as is the case in Rule 506 transactions, issuers in Rule 507 transaction requirements of the rule. All other general solicitation and advertising would be prohibited.
- No Sales to Persons Who Do Not Qualify as Large Accredited Investors. Issuers in Rule 507 transactions would not be allowed to sell securities to any investor who does not qualify as a large accredited investor. In Rule 506 transactions, issuers may sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors.
- Authority for Exemption. Rule 507 would be adopted as an exemption primarily under the SEC�s general exemptive authority under Section 28 of the Securities Act, while Rule 506 was adopted as a safe harbor under Section 4(2) of the Securities Act.
- Covered Security Status. Securities sold in accordance with either of these rules would be considered �covered securities,� but under different provisions of Section 18 of the Securities Act. Securities sold under Rule 507 would be covered securities because the purchasing large accredited investors would be defined as �qualified purchasers� under Section 18(b)(3) of the Securities Act. Securities sold under Rule 506 would continue to be covered securities under Section 18(b)(4)(D) of the Securities Act because Rule 506 was under Section 4(2) of the Securities Act.
Rule 507 would permit an issuer in an exempt transaction to publish a limited announcement of an offering. The announcement would be required to state prominently that sales will be made to large accredited investors only, that no money or other consideration is being solicited or will be accepted through the announcement, and that the securities have not been registered with or approved by the SEC and are being offered and sold pursuant to an exemption. At the issuer�s option, the announcement also could contain the following additional information:
- The name and address of the issuer;
- A brief description of the business of the issuer in 25 or fewer words;
- The name, type, number, price, and aggregate amount of securities being offered and a brief description of the securities;
- A description of what large accredited investor means;
- Any suitability standards and minimum investment requirements for prospective purchasers in the offering; and
- The name, postal or email address, and telephone number of a person to contact for additional information.
Pooled investment vehicles that rely on the exclusion from the definition of �investment company� provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act would not be able to take advantage of the limited advertising proposed to be permitted under Rule 507. This results because those vehicles are required to sell their securities in transactions not involving a public offering. Such vehicles typically rely on Section 4(2) to meet this requirement, frequently through Rule 506, which expressly forbids general solicitation and general advertising. Accordingly, they would be precluded from selling their securities in reliance on Rule 507 advertising.
The SEC also proposed revisions to the definition of the term �accredited investor� in Rule 501(a) of Regulation D, which sets forth the standards to qualify as an accredited investor.
The proposed revisions would:
- add an alternative �investments-owned� standard to Rule 501(a);
- define the term �joint investments�;
- establish a mechanism to adjust the dollar-amount thresholds in the definitions in the future to reflect inflation; and
- add several categories of permitted entities to the list of accredited and large accredited investors.
As noted, SEC in its December, 2006 Private Pooled Investment Vehicle Release, proposed to revise Regulation D to establish a new category of accredited investor, �accredited natural person,� that individuals would need to satisfy in order to invest in certain private pooled investment vehicles relying on Rule 506. In the Private Pooled Investment Vehicle Release, the SEC expressed our concerns about the increased number of individual investors who may today be eligible as accredited investors to make investments in pooled investment vehicles relying on Section 3(c)(1) of the Investment Company Act of 1940.
The SEC received numerous comments disagreeing with the proposed definition of accredited natural person set forth in its Private Pooled Investment Vehicle Release. Most of those submitting comments argued that the proposal limits investor access to private pooled investment vehicles and questioned the dollar amount of the investments standard.
In its latest release, the SEC proposed additional revisions to Regulation D, including amendments to Rule 502 of Regulation D. Rule 502 sets forth conditions that are applicable to offers and sales made under Regulation D. The SEC proposes to make changes to those conditions, including shortening the amount of time issuers are required to wait to make offers and sales in order to rely on the integration safe harbor provided in Rule 502(a) and adding disqualification provisions for certain issuers seeking to rely on the exemptions in Regulation D. The SEC also has proposed new guidance regarding the integration of concurrent public and private offerings.
Comments on the proposals are due to the SEC by October 9, 2007.
Please click http://www.sec.gov/news/press/2007/2007-134.htm to access the rule amendments proposal.
Back To The Top
Date for Merrill Rule Repeal is Set for October 1, 2007
8.2.2007 A federal court ruled that October 1, 2007 is the date that the �Merrill Rule� will be repealed. The U.S. Court of Appeals for the DC Circuit on March 30, 2007 vacated the SEC rule exempting broker-dealers from the registration and fiduciary requirements of the Investment Advisers Act of 1940, the so called �Merrill Rule.� On April 12, 2005, the SEC adopted a final rule to broaden the exemption of broker-dealers from the registration requirements of the Advisers Act. Under the Merrill Rule, broker-dealers could provide investment advice for a fee, subject to certain disclosures, without being subject to the fiduciary requirements of the Advisers Act.
The D.C. Circuit stated the SEC exceeded its rule making authority. The Advisers Act specifically exempts a broker-dealer from registration as an investment advisor provided the advice is �solely incidental� to the brokerage transaction, and the broker-dealer does not receive �special compensation� for the advice.
The brokerage industry, led by its trade group the Securities Industry and Financial Markets Association (SIFMA), had sought a longer extension to transition the estimated 1 million fee-based customer accounts at broker-dealers. Because of the court ruling, these accounts now will have to either be converted to commission-based accounts or advisory accounts by October 1, 2007. Brokerage firms will have to adjust their systems immediately and communicate the new arrangements to customers promptly. For example, brokerage firms will no longer be able to engage in principal trades with customers who have fee-based advisory accounts. In addition, registered representatives assigned to such accounts will have to become registered as investment adviser representatives.
SIFMA has posted a draft of an interim rule that the SEC is considering adopting that would grant dual registrants certain relief on principal trading by the October 1, 2007 deadline. Under the proposal, dual registrants would be allowed to obtain a single written consent from clients to conduct principal trades in non-discretionary accounts.
Please click http://www.sec.gov/news/openmeetings/2007/12b1transcript-061907.pdf to access a copy of the administrative order.
Back To The Top
