they could
withdraw funds from their investment.
In reality, Kuretski, according to the SEC,
misappropriated investors’ funds through cash withdrawals, payments for
his personal expenses and by financing unrelated businesses, while
continually refusing to distribute or refund investors’ funds.
Brokerage and bank records of AHF and Worldwide demonstrate that
Kuretski dissipated the vast majority of investors’ funds. Kuretski
also sold these securities without association with any broker-dealer.
Please click http://www.sec.gov/litigation/litreleases/lr18951.htm for a copy of the administrative order.
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SEC ADOPTS RULE REQUIRING HEDGE FUND ADVISERS TO REGISTER
10.27.2004 In a 3-2 vote, the Commissioners of the SEC adopted new Rule 203(b)(3)-2 under the Investment Advisers Act of 1940, which will require hedge fund advisers to register with the SEC by February 1, 2006.
Registration under the new rule will permit the SEC to:
- collect important information about the operations of hedge fund advisers, which represent a significant and growing component of the U.S. financial system.
- conduct examinations of hedge fund advisers;
- require all hedge fund advisers to adopt basic compliance controls to prevent violation of the federal securities laws;
- improve disclosures made to prospective and current hedge fund investors; and
- prevent felons or individuals with other serious disciplinary records from managing hedge funds.
Hedge fund advisers will no longer be able to rely on an exemption from adviser registration designed for advisers providing advice only to 15 or fewer clients.
Please click http://www.sec.gov/news/press/2004-150.htm for the press release announcing the new rule.
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COURT RULES THAT RHODE ISLAND ADVISER IMPROPERLY COMMINGLED CLIENT FUNDS
10.26.2004 The SEC announced that the
federal district court for Rhode Island entered judgment on September 28, 2004 against
Slocum, Gordon, & Co.(SGC), a Newport, Rhode Island-based registered investment adviser,finding SGC improperly commingled client funds and
securities with firm funds and securities, in violation of Section
206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule
206(4)-2(a)(2) thereunder. The court also found that SGC, in failing to
disclose its practice of commingling firm and client assets, a potential
conflict of interest, engaged in a course of business which operated as
a fraud upon its clients, in violation of Section 206(2) of the Advisers
Act. As a result of these violations, the court ordered defendant SGC
to pay a civil penalty of $3,000. With respect to the remaining claims
of federal securities laws violations, however, the court entered
judgment in favor of the defendants, finding insufficient evidence to
establish that the defendants engaged in "cherry-picking scheme,"
whereby certain stocks were allegedly re-allocated from client accounts
to the firm’s own account after showing a profit.
Please click http://www.sec.gov/litigation/litreleases/lr18942.htm for the release describing the court decision.
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SEC PROPOSES REFORMS TO IPO PROCESS
10.16.2004 proposed amendments to Regulation M that
would prohibit certain market activities that undermine the integrity
and fairness of the offering process, particularly with respect to the
allocation of Initial Public Offerings (IPOs).
Regulation M governs the activities of underwriters,
issuers, selling security holders, and others in connection with
offerings of securities. Regulation M is designed to prohibit
activities that could artificially influence the market for the offered
security, including for example, supporting the IPO price by creating
the perception of scarcity of IPO stock or creating the perception of
aftermarket demand.
The proposed amendments would:
- Lengthen the “restricted period” for IPOs beyond the current 5-day
period. The restricted period is the time period during which distribution
participants must refrain from activity that could stimulate the market for
the security in distribution. Under the proposal, the restricted period for
an IPO generally would begin when the issuer reaches an understanding with an
underwriter to proceed with a distribution.
- Require syndicate covering bids, indicating that the underwriter is
buying shares to cover its short position, to be publicly disclosed to the
market, similar to what is required for stabilizing bids under the current
Rule.
- Prohibit the use of penalty bids, which also can function as an
undisclosed form of stabilization. Penalty bids occur when an underwriter
reclaims a selling concession from a syndicate member if the offering
security is immediately sold by the initial purchaser.
- Adopt a new rule under Regulation M that would expressly prohibit
certain IPO abuses that occurred in the late 1990’s and in other “hot issue”
periods, including conditioning or “tying” an allocation of shares on an
agreement by the customer to buy shares in another less desirable (cold)
offering, or to pay excessive trading commissions on unrelated securities
transactions.
- Require recordkeeping in connection with the rule’s “de minimis
exception,” which excepts inadvertent bids and purchases during the
restricted period that total less than 2% of the distributed security’s
average daily trading volume (ADTV). Frequent reliance on the exception
could indicate that a firm’s compliance policies and procedures
are inadequate to achieve compliance with Regulation M.
- Update the ADTV value and public float value thresholds (which are used
to determine a security’s restricted period and the availability of the
exception for actively-traded securities) to reflect the increase in market
value since Regulation M’s adoption in 1996.
The comment period for the proposals will end 60 days from the date of
publication of the proposed rules in the Federal Register.
Please click http://www.sec.gov/news/press/2004-145.htm to access the press release announcing the proposal.
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ADVISER CHARGED WITH DISPLAYING FRAUDELENT PERFORMANCE INFORMATION ON THE WEB
10.6.2004 The SEC filed a complaint in the United States
District Court for the Northern District of Georgia against Market-Timing Technologies,
LLC (Market-Timing) and David A. Perry (Perry). Market-Timing is a Georgia Limited
Liability Company based in Atlanta. Perry, who resides in Atlanta, is the president of
Market-Timing.
The complaint alleges that from at least November 2002 to September 2004, the
defendants actively solicited investment advisory clients through Internet Web sites that
advertised eight different asset management programs. The programs used models that,
based on short term market trends, identified when Market-Timing and Perry should shift
clients’ investments among various mutual funds within a fund family. The complaint
alleges that although the Web sites represented that the models produced historical
average annual returns between 9% and 91.4%, the Web sites failed to disclose that these
return rates were based primarily on hypothetical investments, rather than actual results.
The complaint, also alleged that Market-Timing failed to maintain records required by
the Investment Advisers Act of 1940 (Advisers Act), such as ledgers reflecting its assets,
liabilities and other accounts and copies of all written communications to customers. The
complaint alleges further violations of the books and records provisions of the Advisers
Act because, during a recent examination by the Commission staff, Perry declined to
produce documentation substantiating the accuracy of the performance representations in
the Web sites.
Please click http://www.sec.gov/news/digest/dig100804.txt to access a copy of the administrative order.
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ADVISER SETTLES CHARGES OF PARTICIPATING IN AN ALLEGED BROKERAGE KICKBACK SCHEME
10.6.2004 The U.S. District Court
for the Southern District of New York entered a permanent injunction
against Alan Brian Bond, 43, of Upper Montclair, New York in connection with an alleged
brokerage commission kickback scheme. The SEC’s
complaint alleged that Bond received over $6.9 million in commission
kickbacks from three brokerage firms. Subsequently, the Commission
amended its complaint, alleging that Bond later orchestrated an improper
trade allocation or cherry-picking scheme. The second amended complaint
alleged that Bond realized nearly $6.6 million in profits from this
cherry-picking scheme.
The SEC’s complaint alleged that Bond, from at least September
1993 through November 1998, through his former investment advisory firm,
Bond, Procope Capital Management, received over $6.9 million in
commission kickbacks from three brokerage firms. The kickbacks, which
were siphoned off of the investment returns of Bond’s clients in the
form of mark-ups or mark-downs on principal trades, were used by Bond to
finance an opulent personal lifestyle that included the purchase of more
than 75 luxury and antique automobiles and a large home and beachfront
condominium in Florida. On Aug. 10, 2001, the Commission filed an
amended complaint seeking emergency relief, and added allegations that
beginning in March 2000, Bond, through his advisory firm, Albriond,
participated in an ongoing trade allocation or cherry-picking scheme, in
which Bond allocated the majority of profitable trades to himself,
realizing actual profits of nearly $6.6 million, and the majority of
unprofitable trades to three of his advisory clients, causing them to
lose a total of over $56.8 million.
Bond and his investment adviser, Albriond Capital Management, LLC,
without admitting or denying the SEC’s allegations, consented to
the entry of a judgment permanently enjoining them from future
violations of the antifraud provisions of the federal securities laws.
Please click http://www.sec.gov/litigation/litreleases/lr18923.htm for a copy of the administrative order.
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RS INVESTMENT MANAGEMENT SETTLES MARKET-TIMING CHARGES
10.6.2004 The SEC settled proceedings against RS Investment Management, Inc., RS Investment
Management, L.P. (collectively RS), the investment advisers to the RS
complex of mutual funds and RS’s CEO G. Randall Hecht (Hecht) and former
CFO Steven M. Cohen (Cohen). The SEC order finds that RS, Hecht
and Cohen violated the federal securities laws when they allowed favored
clients to conduct market timing trading in a mutual fund RS managed in
violation of the exchange limitations set forth in the Funds’
prospectus.
The SEC found that:
- During at least 2000 through mid-2003, RS entered into undisclosed
agreements allowing certain investors in its Emerging Growth Fund (EGF) to
engage in frequent trading which exceeded the limitations set forth in the
EGF’s prospectus. The trading was in substantial dollar amounts, from $15
million to $65 million per trade.
- The Funds’ prospectus limited investors to four exchanges in a twelve
month period. However, the special trading arrangements entered into by RS
allowed at least five investors to conduct “unlimited trading.”
- As part of these arrangements, the investors agreed to invest long-term
assets, also known as “sticky” assets, into the Funds. RS earned
approximately $1.7 million in additional fees as a result of the special
trading arrangements.
- The SEC’s order also finds that RS, Hecht and Cohen failed to
disclose these arrangements or the potential conflict of interest caused by
these arrangements with the RS Funds’ Board of Trustees.
RS consented without admitting or
denying the Commission’s findings.
Under the settlement, RS will pay a civil penalty of $13.5
million, pay disgorgement of $11.5 million, and undertake compliance
measures designed to protect against future violations. The penalty and
disgorgement amounts will be distributed to shareholders of the RS funds
affected by the market timing.
Additionally, as part of the settlement, Hecht has agreed, without
admitting or denying the Commission’s findings, to cease and desist from
committing or causing RS’s violations of Section 206(2) of the Advisers
Act and Sections 17(d) and 34(b) of the Company Act. Hecht will resign
as trustee of the RS fund trust and will not reapply for that position
for a period of five years. Hecht will curtail certain of his functions
as CEO at RS and will pay a $150,000 civil penalty.
Also under the settlement, Cohen has agreed, without admitting or
denying the Commission’s allegations, to cease and desist from
committing or causing RS’s violations of Sections 206(1) and 206(2) of
the Advisers Act and Sections 17(d) and 34(b) of the Company Act, to be
suspended from association with an investment adviser and investment
company for a nine month period, and to not hold the position of officer
or director of an investment adviser or investment company for a two-
year period.
Please click http://www.sec.gov/litigation/admin/ia-2310.htm for a copy of the administrative order.
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