Adviser Charged with Fraud in Connection with Insured Investment Scheme
12.27.2007 The SEC brought an administrative action against against National Investment Advisors, Inc. (NIA) and its principal, Douglas A. Jimerson. The SEC finds that from
2002 to 2005, NIA and Jimerson offered three investment programs that purported to guarantee investors against loss of principal if they kept their assets under NIA's management for a fixed period of time.
The SEC found that each "insured" management program either lacked the appropriate insurance, or lacked insurance entirely, to protect investors against loss of principal. In the first version of the
program, Jimerson, according to the SEC, failed to acquire any insurance whatsoever to support NIA's insured management program. In the following two versions, Jimerson, according to the SEC, acquired errors and omissions insurance and falsely marketed those policies as being able to protect investors against a loss of principal. Finally, the SEC found that NIA, which was managed by Jimerson at
all relevant times, failed to disclose to its clients material information regarding its precarious financial condition and did not maintain certain books and records required under the Investment Advisers Act of 1940.
Please click http://www.sec.gov/litigation/admin/2007/34-57056.pdf for a copy of the administrative order.
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SEC Brings Enforcement Action Against Ineligible Company for Attempting to Register as an Adviser
12.27.2007 The SEC brought an administrative action against David Henry Disraeli alleging that he violated Sections 203A and 207 the Investment Advisers Act of 1940 by registering with the SEC as an investment adviser when he did not qualify for SEC registration and by making material misstatements and omissions in his registration applications. The SEC revoked Disraeli's investment adviser registration, barred Disraeli from association with any investment adviser, broker, and dealer, imposed a $85,000 civil money penalty on Disraeli, and ordered that Disraeli disgorge $84,300 plus prejudgment interest.
Please click http://www.sec.gov/litigation/opinions/2007/33-8880 to access the administrative order.
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No-Action Letter Issued Allowing the Exclusion of Shareholder Proposal from Proxy
12.18.2007 The SEC issued a no-action letter to Franklin Universal Trust (the “Trust”) to exclude from its 2008 proxy soliciting materials the following shareholder proposal (the “Proposal”) submitted by Andrew Dakos (“Proponent”) on behalf of Full Value Partners L.P. (“Full Value”):
RESOLVED: The Franklin Universal Trust is requested to conduct a self-tender
offer for all outstanding shares of the Trust at net asset value (“NAV”). If more
than 50% of the Trust’s outstanding shares are tendered, the tender offer should
be cancelled and the Trust should be liquidated.
The incoming letter successfully argued that argue that Rule 14a-8(h) permitted the Trust to exclude the Proposal from its proxy materials for the 2008 shareholders’ meeting. Under Rule 14a-8(h), a shareholder who has submitted a proposal to be included in a fund’s proxy statement must appear personally at the shareholders’ meeting or send a representative to present the proposal, or provide good cause for failing to appear. Failure to appear without good cause permits a fund to exclude any proposals submitted by the shareholder from its proxy materials for any meetings held during the next two calendar years.
The incoming letter stated that the Trust previously included a shareholder proposal (the “2007 Proposal”) submitted by Philip Goldstein on behalf of Opportunity Partners, L.P. (“Opportunity Partners”) in its 2007 annual meeting proxy statement. The incoming letter further stated that based on filings with the SEC, including Schedule 13D filings for the Fund, Messrs. Goldstein and Dakos, Opportunity Partners and Full Value were all members of the Bulldog Investors shareholder group in 2006, when Opportunity Partners submitted the 2007 Proposal for inclusion in the Trust’s 2007 proxy materials, and that they have collectively made numerous other Schedule 13D filings as Bulldog Investors, signifying their practice of voting their shares as a group. You further state that neither Opportunity Partners nor any of the other members of Bulldog Investors attended or sent a representative to the Fund’s 2007 annual meeting, and they failed to provide any explanation for their absence.
The SEC staff disagreed with Mr. Dakos argument that while Opportunity Partners and Full Value are funds within the Bulldog Investors group, they are distinct legal entities. As distinct legal entities, Opportunity Partners is not a “nominal proponent” of Full Value and, therefore, Full Value should not be precluded from submitting a shareholder proposal to the Trust.
The SEC staff noted that it had taken the position that the requirements of Rule 14a-8 cannot be circumvented through the use of “nominal proponents.” See, MGM Mirage, SEC No-Action Letter (Mar. 19, 2001) and TRW, Inc., SEC No-Action Letter (Jan. 22, 2001). Under Section 13(d)(3) of the 1934 Act, and Rule 13d-5(b) thereunder, a group is formed when two or more persons act together for the purpose of acquiring, holding, or disposing of securities; these provisions do not draw a distinction depending on whether or not the entities comprising the group are distinct legal entities. Accordingly, the SEC staff stated that it would not recommend enforcement action against the Trust if it omits the Proposal from its 2008 proxy materials in reliance upon Rule 14a-8(h) or if it excludes any proposal(s) that Full Value, Mssrs. Dakos and Goldstein, Opportunity Partners, Bulldog Investors, or any other nominal proponents of these parties, may submit for inclusion in the Trust’s 2009 proxy materials.
Please click http://www.sec.gov/divisions/investment/noaction/2007/franklin121807-14a8.pdf to access a copy of the no-action letter.
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Former Morgan Stanley Financial Advisors Sued by SEC for Illicit Market-Timing Scheme
12.18.2007 The SEC brought a suit against two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl A. Goldstein and Christopher O'Donnell, for allegedly engaging in a fraudulent market timing scheme. "Market timing" refers to the practice of short term buying, selling, and exchanging of mutual fund shares in order to exploit inefficiencies in mutual fund pricing.
The SEC alleges that Goldstein and O'Donnell engaged in a number of deceptive practices to defraud at least 50 mutual fund companies and their shareholders by circumventing the funds' restrictions on market-timing. The conduct alleged occurred from on or about January 2002 until August 2003 and generated approximately $1 million in net commissions or asset-based fees for the defendants. The SEC further alleges that, in response to market-timing trades by Goldstein and O'Donnell for their hedge fund customers, mutual fund companies sent MSDW at least 225 "block letters" that barred or restricted trading by Goldstein, O'Donnell, or their customers.
According to the SEC, Goldstein and O'Donnell, in an effort to circumvent mutual funds' market-timing restrictions and conceal their hedge fund customers' ongoing market-timing trading, repeatedly and systematically employed a variety of deceptive practices including, but not limited to, opening and trading in multiple brokerage accounts, trading using different financial advisor identification numbers, and trading through variable annuity contracts.
The SEC alleged that 11 different FA identification numbers were used, and that they opened approximately 122 brokerage accounts and 64 variable annuity contracts, and placed more than 4,000 market-timing trades totaling over $4.8 billion in trading volume, in less than two years for only two hedge fund customers.
Please click http://www.sec.gov/litigation/complaints/2007/comp20403 for a copy of the administrative action.
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IM Director Speaks at Mutual Fund Conference
12.6.2007 Buddy Donohue, the Director of the SEC’s Division of Investment Management, spoke at the ICI’s ICI 2007 Securities Law Developments Conference in Washington, D.C. He reviewed his Division’s priorities in 2007.
The first was mutual fund disclosure reform and enhanced use of interactive data. The second was a focus on the review of exemptive applications. With respect to mutual fund disclosure reform, he noted that the SEC issued a proposal on November 21st that would essentially revolutionize the mutual fund disclosure regime. The core of the proposal is a concise, plain English summary of key information about a mutual fund's investment objectives and strategies, costs, and risks, with more detailed information available both in paper and in a user-friendly online format. With respect to exemptive applications, he noted that his Division had set a goal to double the number of substantive orders issued under the Investment Company Act in fiscal year 2007 over fiscal year 2006. By the end of our fiscal year on September 30, the Division had issued 81 substantive notices, an 84% increase over the prior fiscal year.
With respect to 2008, Director Donohue highlighted two priorities that he expects will receive significant focus and attention from the Division. First, he stated that the Division plans to make recommendations to the full Commission regarding the reform of Rule 12b-1 under the Investment Company Act of 1940. Second, the Division will focus on reform of the adviser books and records requirements and then translate those reforms to funds' books and records.
Please click http://www.sec.gov/news/speech/2007/spch120607ajd.htm for a copy of the speech.
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CCOutreach Seminars Held for Asian-Based Advisers
12.6.2007 The SEC conducted two CCOutreach seminars for Asian-based investment advisers registered with the SEC. The programs were held in Hong Kong and in Mumbai, India. Together, they included more than 120 participants representing investment advisers registered with the SEC based in Hong Kong, Singapore, Australia, and India, as well as local industry and regulatory representatives. The program in Hong Kong was hosted by the Securities and Futures Commission, and the program in Mumbai was hosted by the Securities and Exchange Board of India.
The CCOutreach program is designed to help SEC-registered investment advisers and their chief compliance officers to establish compliance programs for the protection of investors. The program features a number of elements, including a national seminar in Washington, D.C., and regional seminars in the U.S. The programs in Mumbai and Hong Kong were the first CCOutreach events in Asia for foreign-based, SEC-registered investment advisers. In July 2007, the SEC staff held a CCOutreach program in Luxembourg for European-based SEC registered investment advisers.
The CCOutreach events were conducted by staff of the SEC's Office of Compliance Inspections and Examinations, and included a discussion of topical compliance issues, including the process for conducting a compliance risk assessment, establishing and testing compliance controls, and common deficiencies found in SEC examinations.
See http://www.sec.gov/news/press/2007/2007-264.htm for a copy of the press release about the seminars.
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SEC Holds Latin American Anti-Money Laundering Seminar
12.5.2007
The SEC held an anti-money laundering program in Santo Domingo, Dominican Republic.
The program was hosted by the Superintendencia de Vaores de la Dominican Republic, and co-sponsored by the SEC and the U.S. Agency for International Development.
The program was designed to share best practices and form partnerships among regulatory and law enforcement officials, as well as compliance officers and other industry professionals. The program was attended by 150 participants from 18 Latin American and Caribbean countries.
The program featured training on effective AML compliance programs, customer identification, monitoring for suspicious activity, examining securities market participants for AML compliance, best practices for coordination between regulators and law enforcement authorities, tracing and restraining proceeds of fraud, and appropriate penalties for AML violations. The Conference sessions were led by three SEC staff with expertise in AML related topics, a director of Merrill Lynch's Global Monetary and Financial Control Group, and public and private sector experts from the Dominican Republic, Colombia, and other participating jurisdictions.
Please click http://www.sec.gov/news/press/2007/2007-263.htm to access a copy of the press release about the seminar.
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