NEW JERSEY ADVISER BARRED FROM ADVISORY INDUSTRY
5.30.2002 The SEC barred Alexis A. Arlett, who resides in Skillman, New Jersey, from the advisory industry. She was the president, sole owner and operator of Arlett and Associates, Inc., an investment adviser registered with the state of New Jersey.
The SEC's complaint alleged that, between September 1995 and November 2000, Arlett, through her advisory firm, misappropriated approximately $4.1 million in client funds from accounts maintained at a broker-dealer, falsely claiming that these funds represented fees owed by clients. Arlett's clients had signed agreements allowing her to obtain the funds directly from the broker-dealer upon presentation of a request for fees. Arlett and her company took approximately $2.5 million of this total from the accounts of one family.
The complaint further alleged that, in order to perpetrate and conceal the fraud, Arlett created and distributed false account statements to clients, and made misrepresentations and omissions of material fact in correspondence, e-mails and oral statements to investors. Arlett transferred the stolen funds to several bank accounts and used these funds for lavish personal living expenses, including more than $1.3 million spent on jewelry, and hundreds of thousands of dollars on artwork.
Please click http://www.sec.gov/litigation/admin/ia-2034.htm announcing the administrative action.
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ADVISER SENTENCED TO PRISON FOR FRAUD
5.24.2002 Jose Patricio Zollino was sentenced to twelve years in federal prison for his role in a scheme that victimized more than 1,200 investors out of at least $325 million. Zollino, the former chairman of the board of InverWorld Securities, Inc., a broker-dealer registered with the SEC, and InverWorld, Inc., an investment adviser registered with the SEC, entered formal pleas to conspiring to commit fraud and conspiring to launder money.
On August 4, 1999, the SEC charged Zollino and others with losing as much as $475 million of client funds in unauthorized, highly leveraged securities investments and practically worthless securities issued by foreign shell companies. The companies used by Zollino and others to move client money offshore are in bankruptcy.
On March 22, 2001, Zollino was indicted by a San Antonio grand jury on 13 counts of conspiracy, fraud, and money laundering. Zollino's indictment was based upon the same conduct alleged in the Commission's complaint filed on August 4, 1999 that charged him with violating the antifraud provisions of the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940.
Please click http://www.sec.gov/litigation/litreleases/lr17533.htm announcing the sentence.
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SEC CHAIRMAN PITT ANNOUNCES PLANS TO STUDY REGULATION OF HEDGE FUNDS
5.24.2002 Harvey Pitt, the Chairman of the SEC, spoke at the Investment Company Institute's 2002 General Membership Meeting about an SEC study on the hedge fund industry. Chairman Pitt expressed his concern "about the implications flowing from the growth in these private investment funds." He announced the commencement of a formal fact-finding investigation to "enlighten" the SEC about:
- incidents of fraud that we have seen with certain of these vehicles, particularly hedge funds;
- conflicts associated with managing these vehicles alongside mutual funds; and
- marketing these vehicles directly and indirectly to retail investors.
He stated that the SEC's goal is to "determine whether the present state of regulation or perhaps more accurately the lack thereof is in the public interest."
Chairman Pitt also spoke about the regulation of mutual funds, including the proposed amendments to fund advertising rules, new registration form (Form N-6) for insurance company separate accounts offering variable life insurance policies, exchange-traded funds, and fund distribution practices.
Other topics included the disclosure and accounting reforms, corporate disclosure reforms, corporate governance reforms, and the proposed public accountability board.
Please click http://www.sec.gov/news/speech/spch562.htm to access a copy of the speech.
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HEDGE FUND ADVISER SENTENCED TO PRISON
5.24.2002 Michael L. Smirlock, the former President and CEO of LASER Advisers, Inc., a Short Hills, New Jersey investment adviser firm, was sentenced to four years incarceration and ordered to pay $12.6 million in restitution to investors in three hedge funds managed by Smirlock. Judge Gerard E. Lynch of the Federal District Court for the Southern District of New York imposed the sentence.
Smirlock had pled guilty to two counts of securities fraud for engaging in a complex scheme that falsely inflated the value of an investment portfolio that Smirlock managed for the three hedge funds. Simultaneous with Smirlock's criminal indictment, the SEC filed a civil enforcement action against Smirlock and LASER Advisers, Inc. The SEC charged, among other things, that Smirlock and LASER Advisers, Inc. engaged in securities fraud by inflating the values reported for certain thinly traded securities known as swaptions. The SEC also charged Smirlock with violating a prior SEC order.
Please click http://www.sec.gov/litigation/litreleases/lr17536.htm for the release announcing the sentence.
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SEC PROPOSES AMENDMENTS TO MUTUAL FUND ADVERTISING RULES
5.17.2002 The SEC proposed amendments to the mutual fund advertising rules. The proposed amendments would require fund advertisements that contain performance information to:
- direct investors to a toll-fee or collect telephone number (and perhaps Web site) to obtain the most recent month-end performance information for a fund's 1-, 5- and 10-year periods, giving investors access to the most current performance information available;
- have narrative disclosures to explain the limits of past performance data and the importance of fund fees and expenses; and
- highlight explanatory information more prominently.
The proposed amendments would also increase the mutual funds' flexibility to advertise by eliminating requirements that advertisements be limited only to information whose substance is included in the prospectus.
Please click http://www.sec.gov/rules/proposed/33-8101.htm to access a copy of the rule proposal.
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SEC AND CFTC ADOPT SECURITY FUTURES RULES
5.14.2002 The Commodity Futures Trading Commission (CFTC) and the SEC adopted a new rule that generally requires that the final settlement price for each cash-settled security futures product fairly reflect the opening price of the underlying security or securities, and that trading in any security futures product halt when a regulatory halt is instituted with respect to a security or securities underlying the security futures product by the national securities exchange or national securities association listing the security.
The Commodities Exchange Act and the Securities Exchange Act stipulate that the listing standards of an exchange or association trading security futures products shall, among other things, require that trading in the security futures product not be readily susceptible to manipulation of the price of such security futures products, nor to causing or being used in the manipulation of the price of any underlying security or option thereon. In addition, listing standards must require that the market on which the security futures product trades has in place procedures to coordinate trading halts between such market and any market on which any security underlying the security futures product is traded and other markets on which any related security is traded.
The CFTC adopted amendments to Rule 41.1 and Rule 41.25 under the Commodities Exchange Act, and the SEC adopted new Rule 6h-1 under the Securities Exchange Act to generally provide that (i) the final settlement price for each cash-settled security futures product fairly reflect the opening price of the underlying security or securities, and (ii) the listing standards of national securities exchanges and national securities associations trading security futures products establish a halt in trading in any security futures product when the national securities exchange or national securities association listing the security institutes a regulatory halt with respect to a security or securities underlying the security futures product.
Please click http://www.sec.gov/rules/final/34-45956.htm for a copy of the release adopting the rules.
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NASDR AND NYSE RESEARCH ANALYST CONFLICTS OF INTEREST RULES APPROVED
5.10.2002 The SEC approved National Association of Securities Dealers Regulation (NASDR) and New York Stock Exchange (NYSE) rules designed to address conflicts of interest that are raised when research analysts recommend securities in public communications. These conflicts can arise when analysts work for firms that have investment banking or other business relationships with issuers of the recommended securities, or when the analyst or firm owns securities of the recommended issuer. The approved rules implement structural reforms designed to increase analysts' independence and further manage conflicts of interest, and require increased disclosure of conflicts in research reports and public appearances.
The rules:
- Limit the relationship and communications between the firm's investment banking and research department;
- Place restrictions on analyst and firm compensation arrangements, and require disclosure of such compensation;
- Prohibit arrangements where analysts promise favorable recommendations;
- Restrict analyst's personal trading; and
- Require disclosure about the firm's and their analysts' ownership of securities.
Please click http://www.sec.gov/rules/sro/34-45908.htm to access the administrative action.
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AMENDMENTS TO DEPARTMENT OF LABOR PROHIBITED TRANSACTION EXEMPTION 86-128 PROPOSED
5.6.2002 The Department of Labor proposed an amendment to Prohibited Transaction Exemption (PTE) 86-128. PTE 86-128 is a class exemption that permits certain persons who serve as fiduciaries for employee benefit plans to effect or execute securities transactions on behalf of those plans, provided that specified conditions are met. The exemption also allows sponsors of pooled separate accounts and other pooled investment funds to use their affiliates to effect or execute securities transactions for such accounts when certain conditions are met. Currently, PTE 86-128 generally is not available to any person (or any affiliate thereof) who is a trustee (other than a nondiscretionary trustee), plan administrator or an employer, any of whose employees are covered by the plan. The proposed amendment, if adopted, would allow a fiduciary that is a plan trustee to engage in a transaction covered by PTE 86-128. The proposed amendment would affect participants and beneficiaries of employee benefit plans, fiduciaries with respect to such plans, and other persons engaging in the described transactions.
Please click http://www.dol.gov/pwba/regs/fedreg/notices/2002011662.htm to access a copy of the release proposing the amendment.
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OCIE DIRECTOR SPEAKS ON ANTI-MONEY LAUNDERING
5.2.2002 Lori Richards, the Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), spoke at the Securities Industry Association Conference on
Anti-Money Laundering Compliance for Broker-Dealers, where she discussed the SEC's recent "sweep" inspection of anti-money laundering compliance programs in the securities industry. She reviewed the results of the sweep in the following areas:
- Suspicious activity detection and reporting;
- Due diligence with respect to account opening;
- Supervision;
- Training;
- Bank Secrecy Act compliance; and
- Clearing firms' role.
Please click http://www.sec.gov/news/speech/spch555.htm to access a copy of her speech.
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INVESTMENT ADVISER CHARGED WITH FRAUD
5.1.2002 A Massachusetts federal district court indicted Alfred Lemcke for criminal fraud under the Investment Advisers Act of 1940. The adviser was also charged with nine counts of wire fraud.
The indictment alleges that Lemcke represented that he was in the business of providing investment advice, financial management and related financial services to individuals. The indictment further alleges that Lemcke induced his victims to give him money by falsely representing that he would invest the money in securities appropriate to their financial needs and objectives through the Individual Investment Portfolio Design Company, which was described as a Chicago-based financial services company. According to the indictment, Lemcke instead spent nearly all of the money he raised for his own purposes while periodically providing his victims with false account statements designed to lull them into believing that their investments were doing well.
Please click http://www.sec.gov/litigation/litreleases/lr17515.htm to access a copy of the administrative action.
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SEC PROPOSES RULE ALLOWING TRANSACTIONS BETWEEN MUTUAL FUNDS AND PORTFOLIO AND SUBADVISORY AFFILIATES
4.30.2002 The SEC proposed amendments to rules under the Investment Company Act of 1940 to expand the current exemptions for mutual funds to engage in transactions with "portfolio affiliates" - i.e., companies that are affiliated with the fund solely as a result of the fund (or an affiliated fund) controlling them or owning more than 5% of their voting securities. The SEC also proposed one new rule and several rule amendments to permit funds to engage in transactions with subadvisers of affiliated funds. The proposals respond to the growth of investment companies and changes in the organization of funds; they are designed to permit transactions between funds and certain affiliated persons under circumstances where it is unlikely that the affiliate would be in a position to take advantage of the fund.
Please click http://www.sec.gov/rules/proposed/ic-25557.htm to access a copy of the rule proposal.
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