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SEC SANCTIONS PIPER JAFFREY
8.26.2003 The SEC found that Piper Capital Management, Inc.
(PCM), formerly a registered investment adviser, violated Section 17(a)
of the Securities Act of 1933, Section 10(b) of the Securities Exchange
Act of 1934, Exchange Act Rule 10b-5, and Section 34(b) of the
Investment Company Act of 1940, and aided, abetted, and was a cause of a
fund's violation of IC Act Section 13(a)(3). These violations were in
connection with disclosures that PCM made regarding the risk associated
with investing in a mutual fund that it managed.
The SEC found that certain portfolio managers made similar violations.
Piper Jaffrey represented the fund to be a
conservative portfolio, investing only in short or intermediate term
fixed income securities. Beginning in 1991, it caused the fund to
invest in collateralized mortgage obligations and other complex
securities that increased the fund's risk and volatility. However, the adviser
continued to represent the fund's conservative portfolio. The
SEC determined that Piper Jaffrey misrepresented or omitted material facts
concerning the risk of investing in the fund, and materially deviated
from the fund's stated investment objective, without shareholder
consent. The SEC concluded that a fund portfolio co-manager, participated in materially misleading disclosures related to
the fund. The SEC also determined that Piper Jaffrey and the portfolio managers, for the
period of April 4-6, 1994, all knowingly participated in a process
intended to alter the fund's net asset value. Among other things, this
caused the fund to sell, purchase, and redeem shares at prices that were
not based on the fund's current net asset value.
Please click http://www.sec.gov/litigation/opinions/33-8276.htm for a copy of the administrative order.
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NASD ISSUES NOTICE TO MEMBERS ON MUTUAL FUND BREAKPOINTS
8.26.2003 The NASD issued a Notice to Members on broker-dealer refunds to customers who did not receive appropriate breakpoint discounts in connection with the purchase of Class A shares of front-end load mutual funds. The NASD stated that it expects that members will make refunds to customers expeditiously where they are aware that customers did not receive the sales load discount to which they were entitled. If a customer comes forward and seeks a refund, the member firm must review its records to determine whether the customer is entitled to a refund and to determine the amount of the appropriate refund. A member may not place the burden of demonstrating entitlement to a refund upon the customer, but the member may require documentation from customers where the availability of the breakpoint discount can only be determined by reference to records not held by the member.
Please click http://www.nasdr.com/2610_2003.asp#03-47 for a copy of the Notice to Members.
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PRIVATE FUND ADVISER SETTLES FRAUD CHARGES
8.20.2003 The SEC settled securities fraud case
against David Isaac Lapin and Jeffrey Carl Wigginton, alleging that,
from October 1998 through September 2001, while they were associated
with Lapin & Wigginton Asset Management, LLC (LWAM),and with a registered broker-dealer, they
raised over $140 million by fraudulently offering and selling to
investors, including advisory clients of LWAM, interests in limited
partnerships that used the investors' money to fund commercial mortgage
loans. The SEC alleges that Lapin & Wigginton knowingly or recklessly
misled investors about the risks associated with the investments, in
violation of Section 17(a) of the Securities Act of 1933, and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder,
and aided and abetted LWAM's violations of Sections 206(1) and 206(2) of
the Investment Advisers Act. The SEC further alleges that Lapin and
Wigginton violated Sections 5(a) and 5(c) of the Securities Act of 1933,
by offering and selling securities when a registration statement as to
the offering was not effective and had not been filed. Finally, the SEC
alleges that Lapin and Wigginton violated Sections 206(4) and 207 of the
Investment Advisers Act, and Rule 206(4)-4(a) thereunder, by failing to
disclose fully and accurately, in reports that LWAM filed with the SEC,
a disciplinary action that the New York Stock Exchange instituted
against Lapin in 1999 for conduct unrelated to the limited partnership
investments.
Please click http://www.sec.gov/litigation/litreleases/lr18304.htm for a description of the administrative action.
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ADVISER CHARGED WITH SELF-DEALING
8.20.2003 The SEC found that World Money Managers (WMM) and Terence Michael
Coxon, who was a consultant to WMM, caused a fund called the Permanent Portfolio to invest in a broker-
dealer. WMM, Coxon, and Sergy then used the funds from the broker-
dealer to pay salaries, rent, and to fund various unrelated business
ventures. In addition, although the fund's prospectus represented that
WMM would pay certain of the fund's ordinary operating expenses,
respondents arranged for the fund to pay those expenses. The Commission
ordered Coxon and WMM to cease and desist and to pay disgorgement. The
Commission dismissed the proceeding as to Sergy because he is suffering
from a serious illness.
The SEC found that the firm and Coxon violated the antifraud and disclosure provisions of the Securities
Act, Exchange Act, and the Investment Company Act. The Commission also
found that Coxon aided and abetted WMM's violations of Section 206(2) of
the Advisers Act. The SEC further found that WMM and Coxon aided
and abetted and were causes of an investment company's violations of the
investment policy, self-dealing, and fund governance provisions of the
Investment Company Act. WMM was the investment adviser to the Permanent
Portfolio, an investment company. Coxon is one of WMM's general
partners.
Please click http://www.sec.gov/litigation/opinions/33-8271.htm to access a copy of the administrative order.
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ACCOUNTANT CHARGED WITH RECKLESSLY AUDITING AN INVESTMENT COMPANY
8.20.2003 The SEC imposed sanctions on Carroll A. Wallace as
a result of a finding that Wallace recklessly conducted two annual
audits of the Rockies Fund (Fund), a business development company and investment company, for 1994 and
1995. Wallace recklessly failed to plan and supervise the conduct of
the audits with the result that the 1994 audit accepted a
misclassification of stock in the Fund's portfolio as unrestricted when
in fact the stock was restricted. The failure to discover the
misclassification occurred even though Wallace knew that the SEC
staff had discovered deficiencies in the Fund's practices with respect
to correct classification of stock. In addition to the
misclassification, the auditors failed to examine adequately the
valuation the Fund's board of directors had attributed to the restricted
shares in question.
The valuation the auditors accepted was a material
overstatement of the value of the Fund's assets and was contrary to the
Fund's own valuation policies and authoritative accounting guidance.
Wallace's reckless failure to plan and supervise the 1995 audit led the
auditors to accept a valuation of the Fund's stock that was again
reached contrary to the Fund's own policies and authoritative accounting
guidance.
Please click http://www.sec.gov/litigation/opinions/34-48372.htm for a copy of the administrative order.
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DEUTSCHE ASSET MANAGEMENT SETTLES FRAUD CHARGES FOR FAILING TO DISCLOSE CONFLICT OF INTEREST BEFORE VOTING CLIENT PROXIES
8.18.2003 The SEC found that Deutsche Asset Management, Inc. (DeAM) failed to disclose a material
conflict of interest before voting its clients' proxies for the
corporate merger between Hewlett-Packard Company (HP) and Compaq
Computer Corporation (Compaq) in 2002.
The SEC found that on March 19,
2002, DeAM, an investment adviser registered with the Commission, voted
proxies on behalf of advisory clients on approximately 17 million shares
of HP stock in favor of the HP-Compaq merger. Before doing so, DeAM
failed to disclose to its advisory clients that in January 2002 Deutsche
Bank's investment banking division had been retained to advise HP on the
proposed merger. Pursuant to a confidentiality agreement with HP,
Deutsche Bank did not disclose publicly that HP had retained it. The
Order further finds that DeAM failed to disclose to its clients before
voting the proxies that senior Deutsche Bank investment bankers had
intervened in DeAM's proxy-voting process by requesting that HP have an
opportunity to present its strategy to a DeAM committee responsible for
voting the proxies. This occurred after DeAM had voted to cast all DeAM-
controlled HP proxies against the merger. Following the intervention
and presentations to it by the leading dissident shareholder opposed to
the merger, and HP management, the committee reversed its prior
decision, this time voting for the merger.
Based upon the foregoing, the SEC found that DeAM willfully violated
Section 206(2) of the Investment Advisers Act by voting client proxies
on the HP-Compaq merger without first disclosing its investment banking
affiliate's work for HP on the proposed merger and its intervention in
DeAM's proxy voting process.
Please click http://www.sec.gov/litigation/admin/ia-2160.htm for a copy of the administrative action.
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ADVSIER SANCTIONED FOR UNAUTHORIZED TRADING
8.15.2003 The SEC found that Brian R. Cassidy, a resident of Yardley,
Pennsylvania, from January 1999 through April 2000, engaged in unauthorized equity trading in an account of one of Penn
Street's advisory clients, resulting in a loss of approximately $1.2
million. Cassidy concealed his unauthorized trading by lying to the
client and by creating and sending to the client false account
statements. Cassidy was a portfolio manager with Penn Street Advisors, Inc. (Penn
Street), which was then an investment adviser registered with the
Commission. Cassidy was also a principal of a registered broker-dealer
and an officer of a registered investment company during this same
period. As a result of his conduct, Cassidy
violated the antifraud provisions of the federal securities laws, and
willfully aided and abetted and caused violations of the books and
records provisions of the Investment Advisers Act of 1940.
Please click http://www.sec.gov/litigation/admin/33-8266.htm to access a copy of the administrative action.
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MFA ISSUES REPORT TITLED "SOUND PRACTICES FOR HEDGE FUND MANAGERS
8.15.2003 The Managed Funds Association, a trade association for the alternative investment industry, recently released 2003 Sound Practices for Hedge Fund Managers, a set of recommendations for risk management and internal controls.
Please click http://www.mfainfo.org/images/pdf/2003SoundPractices_forHedgeFundManagers.pdf to access a copy of the report.
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SEC AND TREASURY ISSUE FAQ ON MUTUAL FUND ANTI-MONEY LAUNDERING LAWS
8.14.2003 The SEC and Department of Treasury issued a FAQ regarding the mutual fund customer identification program rule.
Please click http://www.sec.gov/divisions/investment/guidance/qamutualfund.htm for a copy of the FAQ.
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SEC ISSUES FAQ ON AUDITOR INDEPENDENCE
8.13.2003 The SEC's Office of the Chief Accountant
today provided its responses to 35 frequently asked questions regarding
the application of the Commission's rules on auditor independence. On
Jan. 28, 2003, the SEC released new regulations strengthening the
SEC's existing requirements regarding auditor independence. The FAQ
includes the staff's responses to questions in the general areas of:
- partner rotation and transition questions
- other audit partner and partner rotation matters
- nonaudit services
- audit committee pre-approval
- audit committee communications
- fee disclosures
- "cooling off" period
- broker-dealers and investment advisers
Please click http://www.sec.gov/info/accountants/ocafaqaudind080703.htm for a copy of the FAQ.
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HEDGE FUND MANAGER BARRED FROM ASSOCIATING WITH INVESTMENT ADVISER
8.6.2003 The SEC alleged, among other
things, that Ryan J. Fontaine, who is 22 years old and a resident of Bloomfield
Hills, Michigan, was the president and sole shareholder of Simpleton
Holdings Corporation a/k/a Signature Investments Hedge Fund (Signature),
an unregistered investment company which also acted as an unregistered
investment adviser. The SEC further alleged that, beginning as
early as July 2002 and continuing through Oct. 22, 2002, Fontaine and
Signature deceived investors into investing in Signature by fraudulently
claiming, among other things, that: (a) Signature managed approximately
$250 million; (b) Salomon Smith Barney was Signature's sub-adviser; (c)
KPMG, LLP performed auditing services for Signature; and (d) Signature
had earned above-average returns throughout its 13-year investment
history. According to the complaint, all of these representations were
false. The complaint alleged that Fontaine and Signature raised at
least $29,300 from at least two investors by means of their fraudulent
statements.
Please click http://www.sec.gov/litigation/admin/ia-2155.htm to access a copy of the administrative action.
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SEC PROPOSES RULES THAT WOULD STRENGTHEN DISCLOSURE RELATING TO NOMINATION OF DIRECTORS
8.6.2003 The SEC proposeD rule changes
that would strengthen disclosure requirements relating to nomination of
directors and shareholder communications with directors.
The proposals call for important information
regarding a company's process of nominating directors, including:
- whether a company has a separate nominating committee and, if not, the
reasons why it does not and who determines nominees for director;
- whether members of the nominating committee satisfy independence
requirements;
- a company's process for identifying and evaluating candidates to be
nominated as directors;
- whether a company pays any third party a fee to assist in the process or
identifying and evaluating candidates;
- minimum qualifications and standards that a company seeks for director
nominees;
- whether a company considers candidates for director nominees put forward
by shareholders and, if so, its process for considering such candidates; and
- whether a company has rejected candidates put forward by large long-term
institutional shareholders or groups of shareholders.
The proposals also call for important new information
regarding shareholder communications with directors, including:
- whether a company has a process for communications by shareholders to
- directors and, if not, the reasons why it does not;
the procedures for communications by shareholders with directors;
- whether such communications are screened and, if so, by what process; and
- whether material actions have been taken as a result of shareholder
communications in the last fiscal year.
These proposals would also apply to proxy statements of registered
investment companies in the same manner that they apply to other
companies.
Please click http://www.sec.gov/rules/proposed/34-48301.htm to access a copy of the proposed rule.
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