SEC APPROVES PROPOSAL TO ESTABLISH THE ARCHIPELIGO EXCHANGE
10.25.2001 The SEC approved the Pacific Exchange's proposal to establish the Archipelago Exchange, which will be its new, electronic communications and trading facility. The all-electronic facility will operate in place of an existing trading floor, with Archipeligo market makers replacing the traditional floor specialists. The Archipeligo facility is the first fully electronic national securities exchange for the trading of equity securities since the Cincinnati Stock Exchange developed its trading system in 1976.
Archipeligo will feature three trading sessions each day: an early trading session, a core trading session, and a late trading session. Members and other users of Archipeligo will submit orders to an electronic file of orders, known as the Archipeligo Book, where all trades will be executed at prices equal to or better than the national best bid or offer.
Please click http://www.sec.gov/news/headlines/archipelago.htm for the press release announcing his appointment.
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SEC NAMES NEW DIRECTOR OF ENFORCEMENT
10.25.2001 Stephen Cutler's was appointed Director of the Division of Enforcement of the U.S. Securities and Exchange Commission. Mr. Cutler is currently the Deputy Director of the Division of Enforcement and a former partner at the law firm of Wilmer, Cutler & Pickering.
Please click http://www.sec.gov/news/press/2001-120.txt for the press release announcing his appointment.
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SEC OFFERS A BREAK TO COMPANIES THAT CONFESS WRONGDOING
10.23.2001 The SEC announced a new policy that allow companies to avoid sanctions by reporting their own violations to the SEC. In a case brought against the controller of the Seaboard Corp., a Kansas pork and poultry company, the SEC stated that it would not bring an enforcement action against the company because it reported the violation to the SEC and its shareholders, and it cooperated with the SEC's investigation. See http://www.sec.gov/litigation/admin/34-44970.htm for a copy of the administrative action. The SEC did, however, sanction the controller for allegedly covering up the violation.
A company that uncovers a securities law violation may take advantage of the SEC's new policy of leniency towards violaters who confess if it satisfies the following guidelines:
- It has self-policing procedures in place;
- It promptly reports the violation to the SEC;
- It cooperates with the SEC during its investigation; and
- It takes some kind of disciplinary action (including possible termination) against the wrongdoer, improves its compliance and control procedures and compensates investors hurt by the violation.
While the SEC did not specifically state that the policy will apply to investment advisers and other financial institutions, it is likely that the SEC would take the approach if such an institution notifies the SEC of a violation.
Please click http://www.sec.gov/litigation/investreport/34-44969.htm
to access a copy of the SEC's release announcing the new policy.
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OFFSHORE FUND AND HEDGE FUND VIOLATE NUMEROUS SECURITIES LAWS
10.22.2001 The SEC brought an administrative action against Vestron Financial, which had raised more than $11.6 million from about 350 investors across the nation and overseas through the sale of unregistered securities. In addition, a Florida federal district court entered an emergency order to temporarily freeze the assets of Vestron Financial and that of its founder and president, Salman Shariff.
The SEC alleged Vestron Financial had lured investors into investing with the company through false promises of high returns and under the false pretense that their money would be used to engage in stock and commodities trading. The SEC alleged that only 14% of these funds were actually used for stock and commodities trading.
Among other charges, the SEC charged Vestron Financial with operating an unregistered investment company.
Please click http://www.sec.gov/litigation/litreleases/lr17200.htm to access the administrative action.
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SEC CHARGES ADVISER THAT USED MODEL INSTEAD OF ACTUAL PORTFOLIO RESULTS
10.18.2001 The SEC brought charges against an investment adviser that used model instead actual performance records in performance advertisements. From at least December 1996 through December 1998, FXC was alleged to have distributed to numerous prospective investors materially misleading advertisements concerning FXC's historic annual performance results. These advertisements were improper because they indicated that the displayed performance was the actual performance of FXC's advisory clients, when in fact it reflected the hypothetical returns that would have been earned by certain "model" portfolios described in newsletters published by FXC. The advertisements also failed to make other required disclosures.
FXC was alleged to have submitted the newsletter performance to the publisher of an investment guide that, under the false impression that the returns reflected the performance of actual managed accounts, ranked FXC favorably against other investment advisers. FXC sent the misleading rankings to prospective investors as part of its marketing material.
Please click http://www.sec.gov/litigation/admin/ia-1991.htm
to access a copy of the SEC's release announcing the administrative action.
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OCIE DIRECTOR SPEAKS ABOUT COMPLIANCE ISSUES
10.18.2001 Lori Richards, the Director of the SEC's Office of Compliance Inspections and Examinations (OCIE), gave a speech about compliance at the National Society of Compliance Professionals National Membership meeting in Washington, D.C. Topics covered included:
- The SEC's examination program, including the purpose of deficiency letters;
- Key areas that advisers should focus on, including internal controls, policies and procedures, using technology, and internal surprise audits; and
- Contingency planning.
Please click http://www.sec.gov/news/speech/spch515.htm to access a copy of the speech.
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ICI ISSUES REPORT ON CLOSED-END FUND REGULATORY ISSUES
10.14.2001 The Investment Company Institute issued a report discussing closed-end fund regulatory issues. The report provides general information about closed-end funds, discusses issues raised by the fact that closed-end fund shares typically trade at a discount from their net asset value per share, and discusses how closed-end funds can repurchase outstanding shares and make rights offerings.
Please click http://www.ici.org/pdf/rpt_closed_end.pdf to access a copy of the report.
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NEW NASAA PRESIDENT SPEAKS ABOUT HIS AGENDA
10.12.2001 Joseph Borg, the new President of NASAA, gave a speech outlining his agenda. The speech was given at the SIA's Small Firms Conference in Fort Lauderdale, Florida, where most of the attendees were advisers regulated by states because they have less than $25 million of assets under management. Mr. Borg, who is also the Director of the Alabama Securities Commission, stated that he would emphasize the following areas:
- Urging state regulators to require advisers in their state to register through the Investment Adviser Registration Depository;
- Detecting those independent insurance agents selling securities without a license;
- Increasing enforcement efforts; and
- Achieving better coordination with other regulators, including those banking and insurance regulators.
To access a copy of Mr. Borg's speech, please click http://www.nasaa.org/nasaa/abtnasaa/display_top_story.asp?stid=209 .
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ROYE GIVES SPEECH ABOUT INVESTMENT COMPANY REGULATION
10.11.2001 In a speech at the American Bar Association Conference on Investment Management Regulation, Paul Roye, the Director of the SEC's Division of Investment Management, reviewed a number of recent SEC developments related to investment companies. Among the topics he discussed were:
- SEC actions taken with respect to investment companies to address the 9/11 crisis;
- Valuation;
- Delay of the effective date of the After-Tax Disclosure Rules;
- Folios;
- Recent SEC enforcement actions; and
- Future SEC actions.
Please click http://www.sec.gov/news/speech/spch517.htm to access a copy of Mr. Roye's speech.
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COMMISSIONER UNGER TO LEAVE THE SEC
10.9.2001 Commissioner Laura Unger announced that she was leaving the SEC this Fall. For a brief period, she served as Acting Chairman of the SEC.
Please click http://www.sec.gov/news/press/2001-109.txt for the press release announcing Commissioner Unger's departure.
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FINAL JUDGMENT ENTERED AGAINST HEDGE FUND MANAGER
10.92001 The Southern District of New York entered a final judgment against Manhattan Capital Management, Inc. ("MCM") that holds MCM liable for disgorgement of $19,874,735.44 that MCM was paid by the Manhattan Investment Fund Ltd. ("the Fund") in management and incentive fees, and $132,498.24 in prejudgment interest, for a total of $20,007,233.68. Both MCM and the Fund are the subject of Chapter 11 bankruptcy proceedings.
The Fund was a hedge fund organized under the laws of the British Virgin Islands that was open to foreign investors and tax-exempt U.S. investors. The SEC asserted that beginning in September 1996, the Fund began to sustain market losses that ultimately totaled over $393 million. At the same time the Fund was sustaining these huge losses, Berger was reporting to investors that the Fund was realizing profits of between 12% and 27% annually. To hide the Fund's losses, Berger created phony account statements that materially overstated the performance and value of the Fund. The information contained in the false account statements was provided to investors in the fund, and was shared with potential investors.
Please click http://www.sec.gov/litigation/litreleases/lr17193.htm to access the release announcing the court action.
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ERISA LEGILATION ADVANCES
10.3.2001 The House Education and Workforce Committee approved H.R. 2269, a bill that would provide a statutory exemption from ERISA's prohibited transaction rules to allow financial institutions to provide investment advise to 401(k) and other retirement plan participants, even if the financial institution provided investment options or other services to the plan. The full House is expected to take up the legislation later this Fall.
Please click http://edworkforce.house.gov/markups/107th/fc/hr2269/103main.htm for information about H.R. 2269.
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PENNSYLVANIA ADVISER CHARGED WITH FORM ADV AND ADVERTISING VIOLATIONS
10.3.2001 The SEC charged that from approximately February 1998 through July 2000, Tiffany Advisors, Inc., a registered investment adviser located in Willow Grove, Pennsylvania, materially overstated the number of its advisory clients and assets under management. These overstatements occurred in Forms ADV filed with the Commission, in various advertisements consisting of submissions to third party reporting services, Nelson's Investment Manager Database, Mobius Group, Inc. and Mercer Investment Consulting, Inc., and in a request for a proposal to a prospective client. The SEC also alleged that Tiffany Advisors tried to cover up the violations. In addition, the firm from approximately February 1998 through July 2000, failed to maintain true, accurate and current copies of its advertisements which consisted of submissions to third party reporting services.
The firm was censured and it and its principal were ordered to pay a civil penalty in the amount of $40,000.
Please click http://www.sec.gov/litigation/admin/ia-1988.htm to access the release announcing the administrative action.
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INVESTMENT ADVISER REPRESENTATIVE FAILS TO REPORT PERSONAL SECURITIES TRADES
9.28.2001 The SEC charged David Bellet, an employee of Crown Capital Management, Ltd. and Crown-Glynn Advisors Ltd., with causing the advisers to violate Rule 204-2(a)(12) under the Investment Advisers Act. This rule requires every investment adviser to make and keep true, accurate, and current records of every transaction in a security in which an advisory representative of the investment adviser has, or by reason of the transaction acquires, any direct or indirect beneficial ownership.
From January 1997 through September 1998, personal brokerage accounts over which Bellet had investment discretion engaged in several hundred transactions in securities in which Bellet had, or as a result of the transactions acquired, direct or indirect beneficial ownership. Bellet failed to disclose these transactions to Crown Capital's compliance officer as required by Crown Capital's internal operating procedures. Instead of reporting his actual personal trades, Bellet submitted personal trading reports that contained fictitious transactions to Crown Capital's compliance officer over the course of the seven quarterly periods.
Bellet's misconduct, as described above, with respect to his reporting of personal trades to Crown Capital did not adversely affect the economic interests of Crown Capital, the partnerships or trust managed by Crown Capital, or their respective clients or accounts.
Please click http://www.sec.gov/litigation/admin/ia-1979.htm to access the release announcing the administrative action.
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SEC CHARGES INVESTMENT ADVISER WITH MAKING MISLEADING ADVERTISEMENTS
9.28.2001 The SEC charged Benefit Concepts, an investment adviser located in Arlington, Virginia, with advertising false and misleading performance results in publications, brochures, a website and through press releases. The SEC also alleged that Benefit Concepts falsely claimed that it had a long history of managing investment advisory client accounts, when it actually had no investment advisory clients until spring 1998. Finally, the SEC alleged that, based on false information provided by Cannon, the publication Nelson's World's Best Money Managers ranked Benefit Concepts second out of 897 money managers in the category of U.S. Equity money managers, based on the company's reported five-year annualized rate of return for the five years ending March 31, 2000.
Please click http://www.sec.gov/litigation/admin/34-44880.htm to access the release announcing the administrative action.
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ADVISER ALLEGED TO HAVE ENGAGED IN ILLICIT DIRECTED BROKERAGE ARRANGEMENT
9.28.2001 The SEC charged Chris Woessner, a former salesman for Duff & Phelps Investment Management Co., an investment adviser, with participating in an illegal directed brokerage arrangement. The SEC alleged that Duff & Phelps directed approximately $613,000 of advisory client commission business for the benefit of East West Institutional Services, Inc., then a registered broker-dealer, in exchange for the referral of a client, a pension fund for the International Brotherhood of Teamsters Union Local 710. East West was able to influence the Local 710 because it had an arrangement with two trustees of the Local 710, who received illegal kickbacks of commissions from East West. During the same time period, the Local 710 hired an unrelated pension consultant to provide advice concerning the selection of new investment advisers. The pension consultant recommended Duff as an adviser to the Local 710. Duff & Phelps later directed approximately $102,000 of advisory client commission business for the benefit of the pension consultant in exchange for the pension consultant's continued recommendation that the Local 710 retain Duff & Phelps as an investment adviser.
The Division of Enforcement alleges that Duff & Phelps did not disclose to its clients its direction of brokerage in exchange for a client referral, and it falsely stated in its Commission filings that it did not direct commissions in exchange for client referrals, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
Please click http://www.sec.gov/litigation/admin/ia-1985.htm to access the release announcing the administrative action.
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PRINCIPAL SETTLES MUTUAL FUND NAV AIDING AND ABETTING CASE
9.28.2001 In this case, Kyle Kirkland, a registered representative of a California broker, and a portfolio manager of a mutual fund and hedge fund engaged in acts that resulted in the overstatement of the net asset value ("NAV") of the mutual fund and an offshore fund from 1996 to 1998. The portfolio manager caused the funds to purchase securities underwritten by the broker-dealer and Kirkland. After the securities began performing poorly and the issuers suffered severe financial problems, Kirkland provided information as to the value of certain securities without disclosing that the valuations did not reflect the current market value of the securities. Kirkland participated with the portfolio manager in providing valuations for the troubled securities that did not reflect current market value, which caused the one of the funds to materially overstate its NAV.
Please click http://www.sec.gov/litigation/admin/33-8019.htm to access the release announcing the administrative action.
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MINNESOTA MUTUAL FUND VIOLATES NUMEROUS SECURITIES LAWS
9.28.2001 Lawrence P. Grady is the director and the only employee of Minn Shares, Inc., a registered investment company. Prior to registering as an investment company, Minn Shares was a frozen yogurt business named The Yogurt Place, Inc. Minn Shares is a closed-end, non-diversified management investment company with 5,713,455 outstanding shares of common stock and approximately 370 shareholders.
The SEC alleged that Minn Shares violated a number of provisions of the Investment Company Act, including:
- Operating without a written code of ethics;
- Grady failing to report personal securities trades;
- Failing to file 1998 proxy statement with the SEC, which contained untrue statements;
- Operating without a fidelity bond;
- Failing to send annual reports to shareholders; and
- Fund engaging in transactions with affiliates.
Please click http://www.sec.gov/litigation/admin/34-44882.htm to access the release announcing the administrative action.
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LEGG MASON CHARGED WITH FAILING TO UNCOVER MUTUAL FUND PRICING SCHEME
9.28.2001 In this case, a portfolio manager defrauded a mutual fund and an offshore fund from 1996 to 1998. The portfolio manager concealed from the funds and their investment advisers that issuers of securities held by the funds were suffering severe financial problems and inflated the value of the troubled securities, which caused one of the funds materially to overstate its net asset value. The funds' manager, Legg Mason Fund Adviser, and the sub-adviser, Western Asset Management, failed to reasonably supervise the portfolio manager. Legg Mason Fund Adviser failed to have adequate policies and procedures to respond adequately to indications that the portfolio manager was overstating the value of one of the fund's securities. Western Asset Management failed to have adequate policies and procedures designed to prevent securities violations by the portfolio manager.
Please click http://www.sec.gov/litigation/admin/ia-1980.htm to access the release announcing the administrative action.
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