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February 9, 2004 - Reshipper Scam Transforms
To alert citizens regarding the inappropriate use of IP-Relay to facilitate criminal activity.
January 26, 2004 - X_BOX Giveaway Scam
To alert citizens regarding spam emails pertaining to the notification of winning a Microsoft X-Box.
November 20, 2003 - Operation Cyber Sweep (.pdf 18K)
The Internet Fraud Complaint Center (IFCC), a partnership between NW3C
and the FBI, in coordination with state and local law enforcement
agencies, the U.S. Postal Inspection Service, the U.S. Secret Service,
the Federal Trade Commission, and the U.S. Dept. of Justice offer
details on a national take down effort highlighting recent Internet
crime investigations stemming from IFCC referrals.
November 4, 2003 - Employment Scams (.pdf 6K)
To alert citizens regarding scams that target those who use the Internet to find employment.
November 4, 2003 - Romanian Warning (.pdf 7K)
The number of reported Internet auction frauds is increasing and hundreds of new complaints are received daily. Many of these frauds originate in Eastern Europe in former communist countries. Consumers are strongly cautioned against entering into Internet transactions with subjects exhibiting this behavior.
November 4, 2003 - Nigerian Warning (.pdf 6K)
The Internet Fraud Complaint Center (IFCC) is aware of a large-scale fraud scheme involving the use of counterfeit cashier's checks. The scheme targets individuals that use Internet classified ads to sell merchandise.
June 30, 2003 - "Spoofed" E-mails & Web Sites (.pdf 16K)
A Gateway to Identity Theft and Credit Card Fraud.
May 16, 2003 - Operation E-Con (.pdf 307K)
The Internet Fraud Complaint Center (IFCC), a partnership between NW3C and the FBI, in coordination with state and local law enforcement agencies, the U.S. Postal Inspection Service, the U.S. Secret Service, the Federal Trade Commission, and the U.S. Dept. of Justice offer details on a national take down effort highlighting recent Internet crime investigations stemming from IFCC referrals.
April 2003 - Internet Fraud Complaint Center (IFCC) Referred More Than 48,000 Fraud Complaints to Law Enforcement in 2002
The Internet Fraud Complaint Center (IFCC) released its annual Internet Fraud Report today showing that, on behalf of victims, IFCC referred 48,252 fraud complaints to federal, state and/or local law enforcement authorities last year. This referral rate is triple the number of referrals (16,775) in 2001. The report also states that the total dollar loss from all referred fraud cases was $54 million, up from $17 million in 2001.
February 2002 - Internet Fraud Complaint Center (IFCC) Wins Excellence .Gov Award
May 23, 2001 U.S. Department of Justice Federal Bureau of Investigation Press Release
Criminal charges brought nationwide against dozens of Internet fraud subjects.
October 2, 2000 Internet Fraud Concerning Beanie Babies and Computers
Two people pled guilty on October 2, 2000 to conspiracy to commit wire fraud in Louisiana. Gregory L. Campbell, age 50, and Lucille M. Liscomb, age 35, face up to five years in prison and a $250,000 fine or both.
September 29, 2000 Federal Grand Jury Indicts Pair On Internet Auction Fraud Scheme
Shreveport, Louisiana . . . United States Attorney Bill Flanagan announced today that a federal grand jury in Shreveport has returned a 32 count indictment charging GREGORY L. CAMPBELL, age 50, and LUCILLE M. LISCOMB, age 35, both originally from Goodyear, Arizona, with using an internet auction site at auction.yahoo.com to defraud people bidding to purchase Beanie Babies or computer merchandise.
May 8, 2000 U.S. Department of Justice Federal Bureau of Investigation Press Release
The Federal Bureau of Investigation, jointly with the Department of Justice and National White Collar Crime Center (NW3C) today announced the creation of the Internet Fraud Complaint Center (IFCC). The IFCC was established to combat the growing problem of fraud occurring over the Internet by providing a vehicle for victims around the country to report incidents of fraud online.
http://www.ifccfbi.gov/strategy/pressroom.asp
Metric Companies Inc. Reportedly Files Cybersmear Case Against Ex-Employees
On February 10, the Associated Press reported that "late last year" Metric Companies Inc. filed two corporate cybersmear lawsuits against two former employees in a The company reportedly alleges that the defendants "posted defamatory and misleading messages about Metris and its recently ousted CEO, Ronald Zebeck". In an interesting twist, the complaint reportedly includes allegations that the postings violated securities laws. According to the report, the company "contends that as a result of the postings it has lost revenue, income, investors, customers and relations with business prospects. The lawsuits ask for a stop to the Internet postings and seek unspecified compensatory and punitive damages."
New SRO Shareholder Approval Requirements for Mergers and Acquisitions
By Debbie Kurtzberg
The days of seeking shareholder approval of equity compensation plans are back, though under a different regulatory scheme. Under the NYSE’s recently revised listing standards and substantially similar revisions to the Nasdaq rules—both of which became effective on June 30, 2003—listed companies must obtain shareholder approval of most newly adopted equity compensation plans and of material amendments to most existing equity compensation plans.
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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions.
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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions. This note briefly describes those three exceptions. Note that this article does not address any other statutory or regulatory requirements regarding shareholder approval, such as certain U.S tax code provisions.
Rollovers
The rollover of options, restricted shares and other equity awards held by employees of a target company does not require approval of the shareholders of the acquiring company. In many acquisition transactions, including both cash and share transactions, employee options, restricted shares and other outstanding equity awards covering target company shares are converted at the time of the closing of the transaction into equivalent options, restricted shares or other awards covering shares of the acquiring company, as adjusted to reflect the transaction. If the principal terms of the converted awards (such as the type and duration of the awards) are substantially the same as the corresponding target company awards, shareholder approval of the new or converted awards will not be required under the new listing standards and rules. Any additional shares reserved for issuance by the acquiring company to cover converted awards will, however, count in determining whether the transaction itself must be approved by shareholders under the NYSE or Nasdaq provisions that require a listed company to obtain shareholder approval of any transaction that involves a potential issuance of 20% or more of the listed company’s outstanding common shares.
Post-Transaction Grants Under Preexisting Plans
The new listing standards and rules do not require shareholders of an acquiring company to approve grants of options, restricted shares or other equitybased awards covering shares of the acquiring company to employees of the target company or its preacquisition subsidiaries from shares remaining available for grant under a preexisting equity compensation plan of the target company. Shareholder approval will not be required in this case only if (i) the pre-existing plan was itself approved by the shareholders of the target company, (ii) post-acquisition grants are made during the original term of the preexisting plan and (iii) the number of shares of the acquiring company available for post-acquisition grants is adjusted to reflect the transaction. (A plan that is adopted in contemplation of the acquisition would not qualify as a pre-existing plan for these purposes.)
Once again, however, any additional shares reserved for issuance by the acquiring company to cover post-acquisition grants will count towards determining whether the transaction must receive shareholder approval because it involves the potential issuance of 20% or more of the acquiring company’s outstanding shares. Thus, if the inclusion of all shares available for grant under a pre-existing plan would put the acquiring company over the 20% threshold, the acquiring company may want to reserve less than all of such shares available so that the limit is not exceeded.
Employment Inducement Awards
The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements so long as the retention program is a material incentive for the target company employees to remain with the resulting entity. Broad based grants and individual grants to executives or other target company employees as well as grants to new employees are eligible for the exemption so long as the grants constitute a material inducement to remain with the company. Note that a listed company is required to issue a press release anytime it uses this exemption, as described below.
Approval of Independent Board Members Required; Notice to the NYSE; Press Release for Employment Inducement Awards
One final note: the independent compensation committee of the acquiring company (or a majority of the independent members of its Board) must approve the rollover of target company awards, post-acquisition grants and retention or other employment inducement grants for such transactions to be exempt from the new shareholder approval requirements. In addition, companies listed on the NYSE must notify the NYSE in writing when it uses one of these exemptions. Notice, which may be filed in electronic form, must be filed with the NYSE representative for the listed company as promptly as practicable following the rollover, post-acquisition grant or retention grant. If not previously filed, such notice must be included in the listed issuer’s first supplemental listing application filed with respect to the shares issued under the exemption. The notice must include sufficient details for the NYSE to verify that the grant qualifies for the exemption.
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The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements[.]
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In addition to notice to the NYSE, both the NYSE and Nasdaq rules require a listed company to issue an immediate press release when a listed company makes equity grants in reliance on the exemption for retention grants to target company employees or other employment inducement grants to newly hired employees. In the case of grants to one or more individuals who will become executives of the listed issuer following the transaction, the press release must identify the individual (or individuals) receiving the equity grant and the number of shares covered by the grant. If, on the other hand, grants are made under a retention program covering a broad class of employees of the target company, the press release can disclose the grants on an aggregate basis, in one press release, provided the grants are not individually negotiated and the release specifies the maximum number of employees covered by the program and the maximum number of shares that will be granted, assuming all eligible target company employees accept the retention grant.
About the Author
Debbie Kurtzberg is Counsel at Cleary, Gottlieb, Steen and Hamilton in New York City.
http://www.realcorporatelawyer.com/m&a/m&a0204.html
SEC Issues Proposed Regulation NMS (National Market System) Seeking Public Comment
U.S. Securities and Exchange Commission, Proposed Rule: Regulation NMS, Release No. 34-49325 (Feb. 26, 2004) (Click Here For PDF Version).
U.S. Securities and Exchange Commission, SEC To Publish Regulation NMS for Public Comment, News Release 2004-22 (Feb. 24, 2004).
On February 24, the Securities and Exchange Commission voted to publish for public comment Regulation NMS (National Market System). The proposed rules address four "interrelated" areas that the Commission says are "designed to modernize the regulatory structure of the U.S. equity markets" by updating existing Exchange Act rules and consolidating them into a single regulation. The proposal addresses trade-throughs, intermarket access, sub-penny pricing and market data.
Trade-Throughs
The proposal would crate a "uniform trade-through rule for all market centers" based on the "fundamental principle of price priority". According to the SEC announcement of the proposal, it is intended to address "problems posted by the inherent difference in the nature of prices displayed by automated markets, which are immediately accessible, compared to prices displayed by manual markets, which are not."
The proposal would require SROs (as well as any market center that executes orders) to develop procedures "to prevent the execution of an order for national market system stocks at a price that is inferior to the best bid or offer displayed by another market center at the time of execution." Two exceptions would be: (1) an order that trades through a better-priced bid or offer on another market center if the person entering the order makes an informed decision affirmatively to opt out of the trade-through protections with "informed consent" required on an "order-by-order" basis; and (2) automated markets would be able to trade through a better displayed bid or offer on a non-automated market up to a de minimus amount of one to five cents, depending on the stock's price. The Commission warns that nothing about the proposal is intended to change a broker-dealer's existing duty to obtain best execution for customer orders.
Intermarket Access
The proposal is intended to ensure non-discriminatory access at the best prices displayed by market centers without requiring "inflexible, 'hard' linkages such as the Intermarket Trading System". According to the Commission, the proposal "would prohibit a market center from imposing unfairly discriminatory terms that prevent or inhibit any person from accessing its quotations indirectly through a member, customer, or subscriber."
In addition, to promote a common quoting convention, the proposed Regulation NMS would establish an access fee standard intended to "harmonize quotations and facilitate the ready comparison of quotes across the national market system." Specifically, according to the Commission, access fees would be capped at $0.001 per share and the aggregation of this fee would be limited to no more than $0.002 per share in any transaction.
The proposal also provides that each SRO must establish and enforce rules requiring its members to avoid -- and prohibiting them from engaging in a pattern or practice of -- locking or crossing the markets.
Sub-Penny Pricing
The proposal would ban sub-penny pricing in most stocks. According to the Commission, "it would prohibit market participants from accepting, ranking or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in national market system stocks, other than those with a share price below $1.00."
Market Data
The Commission says that proposed Regulation NMS seeks "to better reward SROs for their contributions to public price discovery, as well as implement most of the recommendations of the Commission's Advisory Committee on Market Information." The proposal sets forth a new formula intended to divide market data revenues equally between trading and quoting activity "in order to reward markets that publish the best accessible quotes." Additionally, there are a number of "improvements" based on recommendations by the Advisory Committee on Market Information including broadening participation in plan governance by creating advisory committees composed of non-SRO representatives representatives and authorizing market centers to distribute their own additional data, such as limit order books -- separately from other markets -- as well as establishing uniform standards for the terms of such distribution.
SEC II: SEC Proposes New Investment Company Act Rule 22c-2 Regarding Mandatory Redemption Fees for Mutual Fund Securities
U.S. Securities and Exchange Commission, SEC Proposes Mandatory Redemption Fees for Mutual Fund Securities, News Release 2004-23 (Feb. 25, 2004).
On February 25, the U.S. Securities and Exchange Commission voted to impose a two percent fee on the redemption proceeds of mutual fund securities redeemed within 5 days of their purchase. In any such case, the fund will retain the proceeds from the redemption fees. According to the Commission:
"The rule is designed to require short-term shareholders to reimburse the fund for the direct and indirect costs that the fund pays to redeem these investors' shares. In the past, these costs generally have been borne by the fund and its long-term shareholders. Thus the redemption fee would be a 'user fee' to reimburse the fund for the cost of accommodating frequent traders."
The proposed rule would require funds, in the case of shares held by financial intermediaries such as broker-dealers and retirement plans, to "obtain the information they need to assess the redemption fee, and to oversee the efforts of intermediaries to assess those fees and remit them to the fund."
The proposal apparently is more complex than might otherwise appear at first blush. First, it provides that funds must calculate the redemption fee on shares held the longest period of time first. Second, there is a de minimus exception providing that a fund may waive any redemption fee of $50 or less. Third, the proposal contains an emergency exception that allows a shareholder to avoid payment of a redemption fee in instances involving certain sorts of "unanticipated financial" emergencies.
The proposal does not apply to money market funds or exchange-traded funds. Nor would it apply "to mutual funds that encourage active trading and disclose to investors in the prospectus that such trading will likely impose costs on the fund."
SEC III: Commission Proposes Amendments to '40 Act Rule 12b-1 to Prohibit Directed Brokerage
U.S. Securities and Exchange Commission, Proposed Rule: Prohibition on the Use of Brokerage Commissions to Finance Distribution, Release No. IC-26356 (Feb. 24, 2004).
On February 24, the U.S. Securities and Exchange Commission proposed amendments to Rule 12b-1 under the '40 Act to prohibit funds from compensating a broker-dealer for promoting or selling fund shares by directing brokerage transactions to that broker. Additionally, the proposed amendments would prohibit step-out and similar arrangements designed to compensating selling brokers for selling fund shares.
Interestingly, the SEC seeks public comment on several specific questions on or before May 10. A few of these questions are:
Are its concerns about the practice of using brokerage commissions to pay brokers for selling fund shares justified?
Are there alternative measures it could take to address the use of brokerage commissions to finance distribution?
Would brokerage commissions be reduced by eliminating the use of commissions to pay for distribution? Would there be greater competition in commission rates?
If the SEC bans this practice, would the primary effect be to increase brokers' demands on advisers to make payments out of their assets -- i.e., revenue sharing? Is the SEC correct in its assumption that properly disclosed revenue sharing payments present more manageable conflicts for funds and broker-dealers?
If such an assumption is correct, should the Commission take additional steps to address revenue sharing concerns?
SEC IV: SEC's Corporation Finance Division Issues Advisory Letter to Companies and Says Entire Oil & Gas Industry Should Consider It
U.S. Securities and Exchange Commission Division of Corporation Finance, Sample Letter Sent to Oil and Gas Producers (Feb. 24, 2004).
On February 24 the Commission's Division of Corporation Finance announced that earlier that month it issued a guidance letter to registrants identified as being primarily engaged in the production of oil and gas. Significantly, however, the announcement further indicated that "All registrants with subsidiaries or operations engaged in the production of oil and gas should consider this letter in the preparation of their filings with the Commission."
The letter provides guidance regarding questions that have arisen concerning the required disclosures of FAS 69 with the more recent adoption of FASB Statement No. 143 (Accounting for Asset Retirement Obligations). According to the letter, the guidance is intended to clarify "how recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 impact the required disclosures under paragraphs 18 through 34 of FAS 69."
SEC V: SEC Extends Compliance Dates for Internal Control Over Financial Reporting Requirements
U.S. Securities and Exchange Commission, Extension of Compliance Dates Regarding Internal Control Over Financial Reporting Requirements, News Release 2004-21 (Feb. 24, 2004).
U.S. Securities and Exchange Commission, Final Rule: Management's Report on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Reports (Extension of Compliance Dates), Release Nos. 33-8392, 34-49313, IC-26357 (Feb. 24, 2004).
On February 24, the Commission announced -- as widely expected -- that it has extended the compliance dates for the effectiveness of amendments to its rules under Section 404 of Sarbanes-Oxley. The amendments require a company to include in annual reports a report by management on the company's internal control over financial reporting and the accompanying auditor's report.
According to the SEC's announcement:
Under the new compliance schedule, a company that is an 'accelerated filer' as defined in Exchange Act Rule 12b-2 (generally, a U.S. company that has equity market capitalization over $75 million and has filed at least one annual report with the Commission), must begin to comply with these amendments for its first fiscal year ending on or after Nov. 15, 2004 (originally June 15, 2004). A non-accelerated filer must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2005 (originally April 15, 2005). The Commission similarly has extended the compliance date for related requirements regarding evaluation of internal control over financial reporting and management certification requirements, including certification and related requirements applicable to registered investment companies. . . .
SEC VI: SEC Issues Fee Rate Advisory #8 for Fiscal Year 2004
U.S. Securities and Exchange Commission, Fee Rate Advisory #8 for Fiscal Year 2004, News Release 2004-24 (Feb. 27, 2004).
The Commission issued Fee Rate Advisory #8 for Fiscal Year 2004 on February 27. The advisory provides that Effective April 1, 2004, the Section 31 transaction fee rate for fiscal 2004 will decrease from the current rate of $39.00 per million to a revised rate of $23.40 per million. This rate, the Commission noted, will not apply to the Section 31 assessment on security futures transactions, which will remain at the current rate of $0.009 per round turn transaction.
PCAOB I: On March 9 the PCAOB Will Consider Adopting Standard for Audits of Internal Control Over Financial Reporting
Public Company Accounting Oversight Board, Board to Consider Adopting Standard for Audits of Internal Control Over Financial Reporting (Feb. 24, 2004).
The Public Company Accounting Oversight Board has announced that on March 9 it will conduct an open meeting at which it will consider adopting an auditing standard for internal control over financial reporting. The auditing standard, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements" addresses the work that is required to audit internal control over financial reporting as well as the relationship of such an audit to the audit of the financial statements.
PRACTICAL GUIDANCE I: Correspondence with SEC is NOT "Confidential" - Keeping Communications With the SEC Confidential (Rule 83, SEC's Rules on Information and Requests)
Since enactment of the Freedom of Information Act, any form of communication with the U.S. Securities and Exchange Commission has been at risk of being disclosed by the Commission publicly. With the recent announcement by Global Securities Information, Inc. that it would begin offering as part of its LIVEDGAR service access to a massive collection of SEC comment letters and related response correspondence this issue has come into sharp focus for many companies and their counsel.
Whenever a response to an SEC comment (or any other communication with the Commission for that matter) needs to include sensitive or confidential information, the company and its counsel may wish to consider protection of such information in either of two ways.
Confidential Treatment Under Rule 83 of the SEC's Rules on Information and Requests
To make a confidential treatment request with respect to information included in a communication with, or supplemental information provided to, the SEC under Rule 83 of the SEC's Rules on Information and Requests, a company or its counsel must:
Electronically file the comment response letter or supplemental information with the confidential information redacted while marking each applicable page or portion of each page with the legend: "Confidential Treatment Requested by [Company Name]" and include an identifying number and / or code such as a so-called "Bates-stamped number".
Submit in a paper filing to the SEC a copy of the complete comment response letter or supplemental information without the confidential information redacted;
Submit to the Commission in a paper filing a letter requesting confidential treatment under Rule 83 and identifying the specific information for which confidential treatment is requested including a reference to the identifying number and code of the page(s).
Send a copy of the request for confidential treatment (but NOT the underlying documents for which confidential treatment is requested) by mail to the Office of Freedom of Information and Privacy Act Operations with the legend "FOIA Confidential Treatment Request" prominently displayed at the top of the first page of the written request. This must include the name, address and telephone number of the person requesting confidential treatment.
Significantly, the Director of the SEC's Division of Corporation Finance recently indicated that the SEC Staff will not honor so-called "blanket requests" for Rule 83 Confidential Treatment covering the contents of all correspondence between the SEC and the issuer.
Paper Filings of Supplemental Information
In the case of supplemental information submitted to the SEC, a company should consider the possibility of submitting the information to the SEC in a paper filing instead of an electronic filing and request that the SEC return such materials following its review. Under Exchange Act Rule 12b-4 and Securities Act Rule 418(b), the Commission should -- at the company's request -- return to the company any supplemental information provided by the company so long as the company's request is made when the information is furnished to the Staff, the return of the information is "consistent with the protection of investors" and "consistent with FOIA" and the information is not filed electronically.
PRACTICAL GUIDANCE II: Courtesy of RealCorporateLawyer.com
RealCorporateLawyer.com works hard to provide its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Special Features" area of the home page for such current memoranda, as well as the SEC Reform Portal containing hundreds of other such memoranda. In the last 30 days, RealCorporateLawyer -- a free service -- has provided its readers with easy access to the following memoranda:
Sarbanes-Oxley, SEC and NYSE Corporate Governance rules and Proposals Summary from Bryan Cave LLP (02/27/04)
Urgent Notice for Non-EU Issuers of Securities from Elexica (Simmons & Simmons) (02/18/04)
Sarbanes-Oxley, SEC and Nasdaq Corporate Governance Rules and Proposals Summary from Bryan Cave LLP (02/27/04)
EU: Directive on Cross-Border Mergers from Elexica (Simmons & Simmons) (02/18/04)
Reports to Government Investigators of Audit Committee Findings May Be Discoverable by Plaintiffs in Shareholder Lawsuits from Wachtell, Lipton, Rosen, and Katz (02/27/04)
Consultation on Director and Auditor Liability from Elexica (Simmons & Simmons) (02/18/04)
SEC Delays Implementation Date of Internal Control Report Requirement for Many Public Companies from Morrison & Foerster (02/27/04) Market Abuse Directive: First Implementing Measures Adopted from Elexica (Simmons & Simmons) (02/18/04)
Alert for US Issuers: Last Minute Reminders for Preparing Your Annual Report on Form 10-K from White & Case LLP (02/26/04)
Another Call for Disclosure by Public Companies of Business in Terrorist-Supporting States from Covington and Burling (02/18/04)
SEC Extends the Compliance Dates for Internal Control Attestation Requirements Sarbanes-Oxley Section 404 from Arnall Golden & Gregory (02/26/04)
SEC Issues Interpretive Guidance on MD&A from Sullivan and Worcester (02/17/04)
M&A Notes from Kirkland & Ellis (Exculpatory Charter Provisions) (02/26/04)
What Public Companies Need to Know About This Year's Annual Reports and Proxy Statements from Sullivan and Worcester (02/17/04)
SEC Issues Additional Guidance Regarding MD&A from Kirkland & Ellis LLP (02/25/04)
Update for Form 20-F Filers from Paul, Weiss, Rifkind, Wharton & Garrison LLP (02/13/04)
ISS Study Finds Companies with Stronger Takeover Defenses Outperform Other Companies from Wachtell, Lipton, Rosen, and Katz (02/25/04)
The SEC's New MD&A Interpretive Release from Covington & Burling (02/13/04)
SEC and FDA Announce New Referral Program from Covington and Burling (02/24/04)
2004 Annual Update for Form 10-K and Proxy Statement Preparation from Mayer, Brown, Rowe & Maw LLP (02/09/04)
New Obligations - 2004 Proxy Season NYSE and Nasdaq Listed Companies from Vedder, Price, Kaufman & Kammholz P.C. (02/19/04)
SEC Issues Further Guidance on MD&A from Paul, Weiss, Rifkind, Wharton & Garrison (02/02/04)
In addition to all of this, the FAQs on Foreign Issuers & Compliance With Sarbanes-Oxley were updated during the month! Plus, the transcript to RR Donnelley’s February 19, Preparing the MD&A in a New Environment Teleconference is now available on RealCorporateLawyer.com.
COMINGS AND GOINGS: Who's Doing and Saying What and Where?
On February 26, Professor Joel Seligman (noted securities law scholar and author of the newly-revised The Transformation of Wall Street) gave an online "Fireside Chat" sponsored by the Securities and Exchange Commission Historical Society. An audio archive of the Fireside Chat is available online. Click here to access the archive.
On February 19, the Financial Accounting Foundation reappointed Edward W. Trott (FASB Board Member) and Paul R. Reilly (GASB Board Member) to their respective boards effective July 1, 2004. The reappointments were made by the Foundation's Board of Trustees, which has oversight responsibility for the Financial Accounting Standards Board and the Governmental Accounting Standards Board. See Financial Accounting Standards Board, Financial Accounting Foundation Reappoints Edward W. Trott, FASB Board Member, and Paul R. Reilly, GASB Board Member, News Release (Feb. 19, 2004).
On February 12, the American Stock Exchange named Fred Yager, formerly President and Founder of the World News & Information Network, as its Senior Vice President of Corporate Communications. Mr. Yager previously had held positions with Merrill Lynch, Fox Television, CBS News and Associated Press. See American Stock Exchange, American Stock Exchange Names Fred Yager Senior Vice President, Corporate Communications, News Release (Feb. 12, 2004).
On February 11, the Financial Accounting Foundation announced that Robert H. Attmore, a former Deputy State Comptroller in the New York State Comptroller's Office, has been elected Chairman of the Governmental Accounting Standards Board effective July 1, 2004. Mr. Attmore will succeed Tom L. Allen who has served as GASB Chairman commencing in 1995. See Financial Accounting Standards Board, Robert H. Attmore Elected Chairman of the Governmental Accounting Standards Board, News Release (Feb. 11, 2004).
On February 9 the New York Law Journal reported that Duke University School of Law professor Francis McGovern has been named fund administrator for the $1.4 billion settlement between the SEC and the country's largest brokerage firms regarding allegedly biased research. See Tom Perrotta, Law Professor Tapped as Administrator of SEC Settlement, N.Y. Lawyer (Feb. 9, 2004) (reprinted from New York Law Journal).
On February 6, the American Institute of Certified Public Accountants announced that the AICPA Board has voted to extend Barry Melancon's term as President and CEO of the AICPA for an additional five years. Prior to joining the AICPA, Melancon served as Executive Director of the Society of Louisiana CPAs and began his accounting career at the firm of Bergeron & Company in Louisiana. See American Institute of Certified Public Accountants, AICPA Board Approves Third Term for President and CEO Barry C. Melancon, News Release (Feb. 6, 2004).
What Are the Commissioners Saying? SEC Chairman William H. Donaldson delivered an Opening Statement at the February 25 open meeting on the topic of "Mandatory Redemption Fees". He also delivered a statement on the "Regulation NMS Proposal". SEC Commissioner Cynthia A. Glassman spoke at the 26th Annual Conference on Securities Regulation and Business Law Problems on February 20 regarding "Board Independence and the Evolving Role of Directors". Commissioner Glassman also delivered remarks at the Eighth Annual Conference on the Practical Implications of SEC Regulation Outside the United States regarding methods for instilling ethical procedures and preventing fraud through strong compliance. SEC Chairman William H. Donaldson delivered an "Introductory Statement at February 11, 2004, Open Meeting" regarding initiatives aimed at protecting mutual fund investors. Commissioner Cynthia A. Glassman spoke on February 3 at the Legal & Compliance Conference sponsored by the Bond Market Association regarding enforcement activities by the SEC staff and implementation of new rules under the Sarbanes-Oxley Act.
What Are the Commission Staffers Saying? On February 25, Paul F. Roye (Director of the Division of Investment Management) delivered an opening statement at the Commission's open meeting regarding "Mandatory Redemption Fees". Mr. Roye, on February 23, also delivered "Remarks Before the National Investment Company Service Association's 22nd Annual Conference & Expo" regarding the role of fund service providers and lessons for fund service providers. On February 19, Stephen M. Cutler (Director of the Division of Enforcement) delivered a "Statement Regarding SEC Action Against Ex-Enron Officer Jeffrey K. Skilling". On February 11, the SEC's Chief Accountant, Donald T. Nicolaisen, delivered "Remarks at the Tax Council Institute Conference on the Corporate Tax Practice: Responding to the New Challenges of a Changing Landscape". Also on February 11, Stephen M. Cutler delivered "Remarks Before the District of Columbia Bar Association" regarding inter-SEC "cross-pollination" to handle corporate fraud. On February 4, Mary Ann Gadziala (Associate Director, Office of Compliance Inspections and Examinations, N.Y.) spoke regarding "The Vital Role of Effective Comprehensive Compliance Controls at Broker-Dealers" at the Bond Market Association's Ninth Annual Legal and Compliance Conference. On February 2, Giovanni Prezioso (General Counsel, New York, NY) delivered "Remarks Before the Bond Market Association's Ninth Annual Legal and Compliance Conference".
January 27, Paul F. Roye (Director of the Division of Investment Management) delivered "Remarks Before the Understanding Securities Products of Insurance Companies - 2004 Conference" before a Practising Law Institute audience in New York City. On January 14, Linda C. Thomsen (Deputy Director of the Division of Enforcement) delivered a "Press Statement Regarding Settlement in SEC v. Andrew S. Fastow". On January 14, Paul F. Roye also delivered a "Statement at the SEC Open Meeting" regarding proposed rules regarding governance of mutual funds. At the same meeting, Annette Nazareth (Director of the Division of Market Regulation) delivered a "Statement at the SEC Open Meeting" regarding proposed rules concerning mutual funds. On January 8, Paul F. Roye spoke before the Mutual Fund Directors Forum in Washington, D.C. regarding "Enhancing the Fund Director's Tool Box".
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In This Issue:
SEC I: Mandatory EDGAR for Foreign Private Issuers Proposed
SEC II: Emergency and Exemptive Orders Re: Stock Repurchases, Section 16 and Rule 10b5-1 Plans
SEC III: Capital Raising and Other Relief for Airline and Insurance Industries
Stock Options: Spike in Popularity of "6 and 1" Repricing Plans
M&A: Fairness Reviews in Going Private Transactions with Controlling Shareholders
What's Up Online: 1st All-Electronic Annual Meeting Held
Comings and Goings: Who's Doing What and Where
Events Calendar
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SEC I: Mandatory EDGAR for Foreign Private Issuers Proposed
On September 25th, at an open meeting, the SEC approved the issuance of proposed rules mandating EDGAR for all foreign private and government issuers. There is a 60 day comment period.
The proposal allows for a four-month "transition period" scheduled to begin as soon as final rules are published - so that EDGAR would not be mandatory until sometime in mid-2002 (but Chairman Pitt was particularly interested in comments about whether the Form 20-Fs due at the end of June 2002 should be mandatory or not). Under the proposal, virtually all forms would be filed by EDGAR.
Although Section 16 reports were discussed at the meeting, they are not addressed in the release - the SEC is trying to reconcile any programming needs before doing any rulemaking.
The Chairman was quite interested in having "24/7" EDGAR and eliminating the current 24 hour delay in making filings available on SEC's Web site - and he asked the staff to prepare a cost-benefit analysis on these topics.
The proposed rules are at http://www.sec.gov/rules/proposed/33-8016.htm.
On an unrelated note, the SEC has delayed an adjustment of its filing fees for a few weeks - so filing fee rates remain at the levels they have been (i.e. $250 per $1 million registered). Typically, any adjustments take effect on October 1st, the first day of the SEC's fiscal year.
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SEC II: Emergency and Exemptive Orders Re: Stock Repurchases, Section 16 and Rule 10b5-1 Plans
In the wake of last month's tragic incidents, the SEC took unprecedented actions to facilitate the reopening of fair and orderly markets after the exchanges had been closed for nearly a week. This included the issuance of an emergency order (with an extension) that was effective for the 10 business days after the markets were reopened and a subsequent exemptive order that will last until October 12th.
The orders granted relief in a number of areas, including Rule 10b-18, Section 16 and Rule 10b5-1 - but some areas of relief in the emergency order (that ended Sept. 28th) were not continued in the exemptive order as noted below.
Among other matters, the orders:
Pooling-of-Interests Relief - The order's relief clarified that stock repurchases during these 10 day period would not impact the availability of pooling-of-interest accounting for past acquisitions (so far, it is reported that over 200 companies have conducted repurchases under the orders).
Suspended Time Restrictions - Repurchases were allowed throughout the day, including at the market open and within the last 1/2 hour of the trading day. This relief continues under the exemptive order but only for larger issuers and with certain limitations.
Increased Volume Limits - Up to 100% of average daily volume, an increase from 25%. Block transaction did not count against volume limits.
Relief from "Blackout" Periods - Repurchases occurring during companies' end of quarter or "blackout" periods were not by themselves considered as any indication of a violation of the securities laws.
No Section 16 Matching for Purchases - Section 16 insiders could purchase stock and those purchases were not matchable with any sales during the past six months. Note that sales were not exempted so that any purchases under the orders will be matchable. Purchases made in reliance on the emergency orders must be reported on Form 4 (with the transaction code of "J," and an explanatory footnote that the purchase was made in reliance on the orders).This relief was not extended by the exemptive order.
Termination of 10b5-1 Plans - Termination of plans established prior to September 11 will not, by itself, call into question whether the plan was "entered into in good faith and not as part of a plan or scheme to evade" if they were terminated between September 11 and September 28. This relief was not extended by the exemptive order.
A press release regarding the latest exemptive order is at http://www.sec.gov/news/headlines/newrepurchase.htm.
In addition, the Chief Accountant's office issued an interpretation that clarified that the auditor independence rules would not be implicated if accounting firms assisted clients that had offices around the World Trade Center as part of the recovery process.
The interpretation is available at http://www.sec.gov/rules/interp/33-8004.htm.
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SEC III: Capital Raising and Other Relief for Airline and Insurance Industries
The SEC has facilitated the ability of airline and insurance companies to raise capital on Form S-3. In addition to setting up phone and e-mail "hotlines" for these companies, the SEC is prepared to allow them to use Form S-3 even if they don't meet the form's eligibility requirements (e.gs. delinquent filings, inadequate float) and the SEC staff will review any filings by these companies within 5 business days of receipt.
In addition, these companies can seek relief for missing other SEC deadlines (e.g. filing for no-action relief under Rule 14a-8 regarding shareholder proposals). These special accommodations will continue through the end of the year.
The press release regarding this relief is available at http://www.sec.gov/news/headlines/airline-insurance.htm.
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Stock Options: Spike in Popularity of "6 and 1" Repricing Plans
As noted by Pat McGurn of Institutional Shareholder Services, over 100 companies have implemented "six months and one day" stock repricings so far in 2001. These option exchange plans allow companies to avoid the negative accounting effects of FASB's new Interpretation 44.
Under the accounting literature, stock options are treated as either "fixed" or "variable." If an option is treated as "variable," the company must recognize an ongoing earnings expense charge in connection with any rise in the value of the stock underlying the option. When an award is deemed "fixed," the company is required to measure a charge only at a single point in time-typically the grant date, when the "intrinsic value" is zero. Since Interpretation 44 allows companies to avoid variable accounting treatment by canceling underwater options in exchange for a promise of a new grant following a six-month "quarantine" period, this new type of "6 and 1" plan is attractive.
Despite widely publicized negative comment about Sprint's "6 and 1" plan as far back as November 2000, many companies have followed Sprint's lead. Pat includes a chart and list of companies that recently have adopted these plans in his article - and he predicts a backlash from institutional investors against companies that adopt such plans.
Source: Pat McGurn's observations are made in the September/October issue of the Corporate Governance Advisor published by Aspen. Aspen can be reached at http://www.aspenpublishers.com/Default.asp?cookie%5Ftest=1.
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M&A: Fairness Reviews in Going Private Transactions with Controlling Shareholders
Two recent Delaware cases illuminate how to avoid an "entire fairness" review in going private transactions conducted by a controlling stockholder. As noted by Steven Glover of Gibson Dunn, practitioners long assumed that a going private transaction in which a controlling stockholder acquires the balance of the stock from minority stockholders would be reviewed under the stringent entire fairness standard (often resulting in the use of special board committees formed on behalf of minority stockholders to show that an acquiror paid a fair price and engaged in fair dealing).
However, these recent decisions suggest that the ordinary business judgment rule will apply when the controlling stockholder makes a cash tender offer or stock exchange offer for the outstanding shares, and then conducts a short form merger to acquire any shares that were not tendered in response to the exchange offer or tender offer. This appears to work only if the controlling stockholder succeeds in acquiring 90% of the company's stock in the first step tender offer or exchange offer, so that the applicable short form merger statute is available.
These decisions are In re Siliconix Incorporated Shareholders Litigation, (Delaware Chancery Court June 19, 2001), and Glassman v. Unocal Exploration Corp., (Delaware Supreme Court July 25, 2001).
Source: The cases are available at http://caselaw.lp.findlaw.com/data2/delawarestatecases/390-2000.pdf (Unocal) and http://corporate-law.widener.edu/documents/opinions/18700-117.pdf (Siliconix). Steven Glover's article about these cases is in the September issue of the M&A Lawyer published by Glassers. Glassers can be reached at http://www.legalwks.com.
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What's Up Online: 1st All-Electronic Annual Meeting Held
In April, a small company incorporated in Delaware - Inforte - became the first company to take advantage of Delaware's year-old laws to conduct an electronic stockholders' meeting - with no physical counterpart! Now states other than Delaware, such as Massachusetts, are reported to be considering changing their laws to allow e-meetings.
Despite Delaware's modernized laws, many practitioners had predicted that no companies would attempt a pure e-meeting because of the concerns raised by many groups, including the Council of Institutional Investors and the AFL-CIO. These groups seek to preserve the ability to directly confront management as they feel that there is no comparable substitute for in-person contact. They don't take issue with supplemental Webcasts of annual meetings, and over 100 companies have done so this year.
Inforte found considerable cost and time savings in conducting an e-meeting (this was the company's first annual meeting since its IPO) - spending only $2k (for such things as the Webcast and an inspector of election), rather than the $20k budgeted. The time savings consisted of simpler planning and no traveling for management and the board. Inforte has approximately 5500 registered and beneficial holders.
Under new Section 211 of the Delaware General Corporation Law, the board can hold a meeting "by means of remote communication" and allow remote stockholders/proxy holders to be considered "present" for quorum and voting purposes, if the company has the ability to:
implement "reasonable measures" to verify that each person is a stockholder or a proxy holder.
Inforte was prepared to receive e-votes by fax (but none were faxed) and the inspector of elections would have verified the name and control number on any faxes against the transfer agent's and ADP's records.
implement "reasonable measures" to provide remote participants a "reasonable opportunity" to "participate" in the meeting.
Inforte allowed any investor (not just stockholders) to e-mail questions before - or during - the meeting (but none did).
allow to "attend" the meeting on a substantially concurrent basis, including an opportunity to read or hear the proceedings of the meeting.
Through PR Newswire, Inforte used a live audio Webcast and the meeting chair was prepared to read any e-mailed questions to the audience.
maintain a "record" of the votes or other action taken at the meeting by means of remote communication
Since Inforte collected e-votes by facsimile, this was fairly easy to do; next year, Inforte hopes to allow for online voting and recordkeeping should be even easier.
For FAQs about online stockholder meetings, see http://www.realcorporatelawyer.com/stockholdermeetings.html.
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Comings and Goings: Who's Doing What and Where
At the SEC, Harvey Pitt held his first open meeting as the new Chairman. Based on the tone and number/types of matters that were on the agenda, it appears that he is more likely to have the Commission consider more proposed rulemakings at open meetings - rather than in seriatim - and ask many more questions.
Robert K. Herdman was announced as the new Chief Accountant. Mr. Herdman was Vice-Chair of Ernst & Young, where he had been the senior partner responsible for the firm's relationships with the SEC, the Financial Accounting Standards Board, and the American Institute of Certified Public Accountants.
In the wake of last month's tragedies, tightened security is evident at the SEC. Staffers must display their badges at all times and visitors must check in and wear a badge to enter any of the buildings. The SEC's Northeast office was located in Building No. 7 of the World Trade Center and was destroyed but everyone is safe. The Northeast staff has been relocated to 233 Broadway on a permanent basis.
In Corp Fin, Christine Bianchine has left the Office of Rulemaking to concentrate her efforts on a new child. As typical at this time of year, many new junior staffers have begun their government careers in Operations, as other more seasoned staffers have transferred between Offices in an effort to vary their type of experience.
In private practice, it appears that all SEC alumni who worked in the World Trade Center are safe, including those at Brown & Wood, Thacher Profitt and Sandler O'Neil.
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Events Calendar
Although many events have been cancelled, the following upcoming events are still scheduled to be held:
RR Donnelley Financial Europe's "US GAAP Seminar," London, October 4
American Corporate Counsel Association's Annual Conference, San Diego, October 14-17
National Association of Stock Plan Professionals Annual Conference, New Orleans, October 17 - 20
RR Donnelley Financial Europe's "International Financial Reporting Issues - For Analysts, Bankers and Lawyers," Frankfurt, October 15-19
PLI's 33rd Annual Institute on Securities Regulation, New York City, November 8-11
If you would like to participate in either of these RR Donnelley Financial Europe conferences, please email martin.simmons@rrd.com for more information.
Our-Street’s ‘Nick Tracy,’ Hero Securities Cop On the Block or Fraudster Sued by the SEC? / ATTACHED REPORT Information
Our-Street.com has made a lot of noise as a self-appointed securities cop, even recently winning accolades from no less than the Dow Jones (NYSE: DJ) Newswire. The site’s purported proprietor, “Nick Tracy,” screams for more “transparency,” but like most would-be anonymous vigilantes, there is a dark side. A very, very dark side.
And not a lot of “transparency” for Our-Street and Tracy.
The site’s current target is Skyway Communications Holdings, Inc. (OTCBB: SWYC), and its recent targets have included H-Quotient (OTCBB: HQNT) and Circle Group Holdings (AMEX: CXN) when it was on the over-the-counter bulletin board. Short sellers love the site, and until recently Tracy had disclosed that he was among the short sellers trading the companies he posted.
Targeting H-Quotient turns out to have been Our-Street’s Achilles heel. H-Quotient has sued Our-Street and Nick Tracy, who claims to live and operate out of the countryside near London, Chancery Number 86916, Fairfax Circuit Court, Virginia.
Except the company didn’t sue Tracy, and it certainly didn’t sue him “just outside London,” where he has claimed residence. It sued Timothy J. Miles, of 918 Pacific Terrace, Klamath Falls, Oregon 97601, phone 541-273-0225, fax 541-273-0206, a character whose background is definitely interesting and eclectic. Miles, purportedly a.k.a. Nick Tracy sent his attorneys, Charles Hildebrandt and Michael York of the law firm of Wehner & York (http://www.lawyers.com/w&ylaw/) to answer the suit. The next hearing is scheduled May 27.
The website operator’s claim to be “outside London” appears to be true. Klamath Falls, Oregon, is definitely outside London.
Other companies that Our-Street has gone after include Silverado Gold Mines, Ltd. (OTCBB: SLGLF), Epixtar Corp. (OTCBB: EPXR), Aqua Vie Beverage Corporation (OTC: AQVB), ChampionLyte Holdings, Inc (OTCBB: CPLY), BEVsystems Interenational, Inc. (OTC: BEVI), DataMeg, Inc. (OTCBB: DTMG), Kingdom Ventures, Inc. (OTCBB: KDMV), Imaging Diagnostics, Inc. (OTCBB: IMDS), SHEP Technologies, Inc. (OTCBB: STLOF), EdgeTech Services, Inc (OTCBB: EDGH), Nutra Pharma Corp. (OTCBB: NPHC), Verdisys Inc. (OTC: VDYS), Calypte Biomedical Corporation (OTCBB: CYPT), Galaxy Energy Corp. (OTCBB: GAXI), PowerChannel, Inc. (OTCBB: PWRC), US Global Nanospace (OTCBB: USGA), and Universal Guardian Holdings (OTCBB: UGHO).
A handful have indeed become targets of the SEC, not always though for the “crimes” that Our-Street has accused them of. Many others, however, have actually prospered, and some, such as H-Quotient, reported strong earnings and revenues hard on the heels of Our-Street’s representations that its finances were a sham.
At first it was hard not to admire Our-Street’s premise, and even FinancialWire reported the site’s activities and Investrend Information even listed the site as a partner, for about a week, until certain representations became suspicious and requests for documentation as to Tracy’s existence and true whereabouts were brick-walled. The circumstances were outlined in a comment letter posted on the SEC web site at http://www.sec.gov/rules/proposed/s72303/investrend010404.htm, which claimed among other things that “Tracy’s” own comment letter supporting short selling may have been a violation if, as suspected, Tracy had not truly identified himself in an official letter to a government agency.
In response, “Nick Tracy” wrote to FinancialWire and claimed that the SEC “knows who I am.”
For Timothy J. Miles, nothing could be closer to the absolute truth.
“Securities and Exchange Commission v. C. Jones & Company, Carter Allen Jones, Timothy J. Miles, Gaylen P. Johnson, and Jonathan Curshen, Civil Action No. 03-WM-0636(PAC) (District of Colorado, filed April 11, 2003)” is proof of that. On March 1, 2004, the SEC was awarded a summary judgment against Miles in their case against him after Miles’ dismissal motion was denied.
The SEC charged Miles and his co-defendants, most of whom are believed to have dropped out of sight or left the country, with securities fraud for their participation in an alleged "pump and dump" scheme involving Freedom Golf Corporation’s common stock, where Miles was a “principal shareholder.”
The complaint alleges that in the fall of 1999, Miles provided a broker-dealer with false information to be filed with the National Association of Securities Dealers in order to initiate public trading of securities issued by Freedom Golf's predecessor company. The complaint also alleges that from late January through early March 2000, Miles paid two stock promoters, Jones and Curshen, to hype Freedom Golf via the Internet, telephone, and mail. Specifically, the complaint alleges that Jones arranged for the dissemination of between 25 and 35 million unsolicited "spam" e-mails touting Freedom Golf in February 2000. During the same period, the complaint continues, Johnson created baseless profit, revenue, and expense projections for Freedom Golf that Jones published on his company's Internet website, and that Curshen publicized on an Internet message board. In addition, the complaint alleges that Jones and Curshen failed to disclose the full amount that Miles was paying them to tout Freedom Golf, in violation of the federal securities laws.
The complaint further alleges that Freedom Golf's stock price and trading volume was pumped up to artificially inflated levels as a result of the false and misleading e-mails and baseless price projections.
According to the complaint, during the course of this manipulation, Jones, Miles, and Curshen all sold shares of Freedom Golf stock and reaped profits of more than $500,000.
And yes, indeed, the SEC does know Miles. The case is used as "class materials" in presentations on stock fraud by John Reed Stark, Chief of the Office of Internet Enforcement in the Division of Enforcement of the U.S. Securities and Exchange Commission, at http://www.johnreedstark.com/ClassMaterials/LitigationReleas....
As it turns out, the SEC’s recognition of Miles' activities were nothing new for him. From 1997 to 2001, operating from Hilton Head, SC, an EDGAR search reveals that Timothy Miles would indeed make a Nick Tracy a very knowledgeable resource for pumps, dumps and sham public companies.
Miles is listed in registration statements during that period for a wide range of public companies that were soon pumped and dumped out of business, including Ballyhoo Capital Ventures, Casinovations, Inc., Global Foods Online, Inc., ICV, Inc., Pratt Wylce & Lords Ltd., Sea Shell Galleries, and Wahoo Capital Ventures. Only one company in which he was involved, Bionet Technologies, Inc. (OTC: BNTK), survived as a public entity, and it is nothing more than a shell, with no trades at $0.0001.
Before leaving Hilton Head for Klamath Falls, however, Miles appears to have had an epiphany. As “Reverend” Timothy Miles, our self-described fighter against “corporate evil-doers” apparently discovered “the meaning of life,” and began sharing his revelations with the world at http://www.themeaningoflife.net. Recently, FinancialWire wrote to the email address on the website, addressing “Nick Tracy.” Miles/Tracy did not respond but the website was promptly taken down, perhaps to save the author from embarrassment. However, the website was downloaded and stored, and portions of it may be accessed at http://www.investrendinformation.com at http://www.investrend.com/Admin/Topics/Articles/Resources/92....
“In February 1991, a unique and mysterious crystal was discovered near what some authorities believe to be the site of the Garden of Eden. This crystal possessed remarkable powers. Anyone who held this magical crystal was healed emotionally, restored spiritually and enlightened. Everyone who held the crystal was changed in a positive and profound way,” stated Rev. Timothy Miles as part of a pitch to have individuals register at his website.
“In 1999 the crystal was discovered to also contain data. This data turned out to be a text file that revealed new insight into the meaning of life. Religious leaders and scientists gathered together and examined the crystal and the newly found text. What followed was a scientific evaluation of the crystal and the gathering of all available empirical evidence. The result; the only possible explanation for the powers of the crystal and the unusual and unexplainable characteristics of the file containing the message was that this was indeed a message from God.
“For reasons too numerous and complex to detail here, these religious leaders decided that the best thing to do with this message was to put it on the internet, accompanied by a complete story about the crystal's discovery and the events leading up to its being placed on the net to let God’s will determine if and how it would be disseminated.
Rev. Miles goes on to say that “the insight I have gained from the story and the message has changed my life in many ways, all for the better. I am a 54-year old ordained minister (30 years) and I can say without reservation, this story has strengthened my faith,” noting that “there is something remarkable about the actual file containing the message, something beyond scientific explanation that has convinced me beyond a shadow of a doubt that this is indeed a message from God. It blew me away.”
Blown away to Klamath Falls to become London’s “Hellboy” saving the world from corporate evildoers?
One would think that one public website besides Our-Street.com would have been enough for the versatile Rev. Miles, but drum roll, please, straight from Klamath Falls, Oregon, ladies and gentlemen, we bring you, wonder of wonders, OTCart.com, at http://www.otcart.com.
Here, he is a little bit more upfront about his interests, although “fine art” would not be among those most observers would have guessed. Mighty fine art, perhaps, but fine art?
Here is how the Reverend Stock Corruption Expert Pumper Dumper Corruption Fighter Art Connoisseur describes yet another enterprise: “OTCart.com was conceived and developed by Timothy J. Miles. Over 2 years in development, OTCart.com represents the logical and essential meeting of two of Mr. Miles’ great passions, the stock market and the world of fine art.
“Mr. Miles has been an avid collector of original and limited edition fine art for over 20 years. As a collector, Mr. Miles recognized the lack of a cohesive secondary market for limited edition art. He also recognized that this lack of a structured market, kept limited edition art from reaching its potential as an investment medium. After all, cars, commodities and even companies, through the public stock markets, had an organized and cohesive trading platform for their products.
“Having spent the past 14 years working as a stockbroker, consultant to and president of publicly traded companies, Mr. Miles has an intimate knowledge of the workings of the Over the Counter Stock Market and recognized the similarities between stock and limited edition art. He also realized that what the art world needed was a market similar to the Over the Counter Market as a venue to establish not only the value of a particular work of limited edition art, but the strength and depth of that market as well. In that way, the collector could make a more informed decision regarding a particular artist or work of limited edition art and a gallery owner could expand his market by participating in a global trading platform both as both a buyer and as a seller.
“OTCart.com is the perfect marriage between the stock market and the art world. Establishing a simple, effective and relevant real-time market for registered works of art, this platform creates the essential distinction between decorative and investment-grade limited edition art and facilitates the execution of that market,” concludes the quirky site.
Miles’ OTCart, Inc., in Klamath Falls, lists a phone and fax which executives at one public company say are the same where messages were left and documents were faxed from and to Nick Tracy. Our-Street publicly acknowledged receiving phone messages that were left exclusively at the phone number, 541-273-0225, and discussed documents faxed to 541-273-0206.
The site states that “effective May 1, 2003, employees and/or owners of Our-Street.com do not trade any stocks featured on this site. In fact employees and/or owners don't even short stocks period!” That policy was adopted as part of the set of principles that FinancialWire required after its initial article about Our-Street on March 17, 2003, and just prior to parent Investrend Information’s demand for more documentation as to the site’s agenda and ownership in May, 2003, when FinancialWire ceased coverage of the site’s complaints.
In late April, Our-Street, squeezed out of press release distribution by the major press wire services, frantically asked FinancialWire to publish findings that Aqua Vie Beverage (OTC: AQVB) had apparently produced its own “tout sheet,” without disclosing it was the publisher. Our-Street had filed the complaint on April 25, but it wasn’t getting the notice that “Nick Tracy” wanted.
As part of its requirements for publishing the story, FinancialWire asked Tracy to fax copies of the offense for purposes of documentation, and to assert that neither he nor others associated with Our-Street was trading in stocks of companies covered. Thus, Our-Street set its policy, but in doing so, inadvertently revealed that up until May 1, the site’s proprietors were in fact trading the stocks.
Satisfied going forward, in the wee hours of May 2, FinancialWire broke the story, and the SEC halted trading in Aqua Vie’s stock before the market opened.
The site then turned to other means to try to make money from its venture. It began accepting gratuities and selling “alerts” and “pre-alerts” about stocks it was about to publish, in essence, offering a paid front-runner service.
FinancialWire has received an email collected by Asiavest Investigative Services (www.agents911.com) that indicates Our-Street “does release information privately and before posting to their web site.”
The agent goes on to state “we believe that the person that sent this to us was one of the principals of Our-Street or closely related to the principals. The person that sent it to us is a known shorter, he is tied to organized crime people, and he was involved with a shorting criminal enterprise.”
The July 14, 2003 email message about Imaging Diagnotic Systems, Inc. (OTCBB: IMDS) sent to the individual from Tracy/Miles stated “that isn't due to hit till wedns so keep a lid on it .. thanks.”
One observer notes that many of the “scams” targeted by Our-Street had “significant price moves” prior to his “coverage.” It isn’t a leap to recognize that if there were short sellers in those companies, a scathing attack on the company wouldn’t do a short seller looking to bail out of a losing position any harm if the result, a short-term stock price deflation, occurs.
The observer notes that just because the messenger is tainted doesn’t mean that all of those targeted by short sellers are on the “up and up.” But for those that were, the executives are left after the experience wondering “who was that masked man, and what was that all about?”
That masked man, it turns out, is no relation to Dick Tracy, and he doesn’t have Sam Ketchum as a sidekick. Unmasked, is he Timothy Miles the SEC-charged fraud, the Reverend who found the meaning of life, the art connoisseur, the former stock broker and public company executive, the pumper and dumper, former Hilton Head resident now in Klamath Falls, or is he a true, abused, well-meaning, honest-to-goodness fraud-fighter just outside London? You decide.
Meanwhile, if you happen to be someone who agrees with Tracy/Miles that “Wall Street has been taken over by gangsters and terrorists in three piece suits and the cops (the SEC with its staff of 3,100) can’t handle it themselves,” you can do your part.
At http://www.voy.com/22812/, another dubious website apparently frequented by “Tracy,” mostly devoted to get-rich pyramid schemes and European lassies looking for a good time in London, you can answer this ad: “Looking for a research assistant -- Nick Tracy, 18:06:47 11/04/03 Tue [1] Nick Tracy Enterprises, Ltd is looking to hire another research assistant. We are a public company watchdog and we investigate all kinds of stock fraud and manipulation. If you like research, you will absolutely love this job. London area. Contact Nick Tracy at 207-900-2080.”
Are judicial findings of quasi-governmental status for the SROs inconsistent and unfair?
By Bill Singer
Following on the heels of last year's high-tech/Internet stock collapse, public customers have been filing complaints in growing numbers against issuers, analysts, investment bankers, broker-dealers ("BDs"), and registered persons. A byproduct of this discontent is increased scrutiny of Wall Street by Congress and the various industry regulators. Accordingly, I find myself more involved with matters before the self-regulatory organizations ("SROs"), as BDs, their management, and their employees are receiving increasing numbers of demands to produce documents and give testimony. Although it may seem comforting to view SRO regulatory practice as an isolated, esoteric discipline without impact beyond the registered entities and individuals subject to the respective jurisdiction, such a perspective is myopic. The ramifications of such investigations reach far beyond the walls of any given member firm and frequently affect pending shareholder lawsuits, consumer-initiated and intra-industry arbitrations, grand jury investigations, and subsequent criminal proceedings.
Unfortunately, to the unfamiliar practitioner, SRO investigative practice may be more than arcane --- it may be troubling and, at times, infuriating. Significant procedural policies are rarely memorialized. Disputes concerning on-site examinations or On-the-Record interviews ("OTRs") are usually resolved by a Staff member's arbitrary determination. When one raises a legitimate protest and requests a citation to whatever rule or regulation supports the Staff's position, the reply is frequently, "It's not codified, we don't have to put it in writing, Staff controls the record, and you're interfering with the investigation."
In recent years we have seen such new phenomena as electronic communications networks ("ECNs"), direct-access trading platforms, and discount, online broker-dealers. Similarly, we have seen dramatic inroads into the securities industry by organized crime and have witnessed more sophisticated financial fraud. And while it is fair to say that the SROs continue to play an important role in investigating marketplace misconduct, it is equally true that in some sense that role has diminished --- to the extent that the ultimate forum for resolving serious fraud is more frequently at the Securities and Exchange Commission ("SEC") or within the criminal justice arena.
After nearly two decades on Wall Street, during which time I have served as a regulatory attorney with the American Stock Exchange and the NASD, as in-house counsel to the industry, and more recently as a private practitioner, I have had an opportunity to observe self-regulation from both sides of the table. Now, with a new Presidential Administration, with a new SEC Chairman, and with our stock markets roiling in the face or an uncertain economy, I believe we must reappraise the system of self-regulation by asking three questions:
I. Are judicial findings of a quasi-governmental for the SROs inconsistent and unfair?
II. Is the piecemeal incorporation of criminal procedure into the SROs' civil, regulatory process inappropriate in the absence of the higher criminal standard for the burden of proof and attendant constitutional safeguards?
III. Must self-regulation be dismantled or can it be preserved through the implementation and codification of due process guarantees during investigations and pre-hearing practices?
Solomon Splits the Baby
More than a quarter of a century ago in the United States v. Solomon1, the Second Circuit ruled that SROs are private investigative organizations and do not trigger the self-incrimination rights attributable to government entities. In Solomon, a NYSE member firm notified the NYSE in mid-April 1973 of potentially significant books and records problems. The NYSE promptly investigated the firm and advised the SEC of the probable violations. On May 15, 1973 the SEC entered an Order of Investigation. On May 16, 1973 the SEC served a subpoena on the NYSE for production of all Solomon investigatory material. On May 17, 1973 Alan C. Solomon, an officer and director of the member firm, was summoned to testify before the NYSE's Department of Member Firms.
Under the then existing NYSE's Constitution, a failure to testify could result in the non-cooperating party being "suspended or expelled." Solomon appeared at the interrogation, did not claim any privilege against self-incrimination, and answered the NYSE's questions. Subsequently, the member firm was placed in receivership and Solomon (as well as four other officers/directors) was indicted in July 1973. Solomon's NYSE testimony was introduced during his criminal trial and he was subsequently found guilty on one count of creating and maintaining false books and records. Solomon's sole point on appeal was the use before the grand jury and at trial of his NYSE transcript (he had previously sought to have the testimony suppressed). Essentially, Solomon argued "interrogation by NYSE must be deemed the equivalent of interrogation by the United States because the Exchange has become in effect the arm of the Government in administering portions of the Securities Exchange Act."
In denying his appeal, the Court declined to deem the NYSE an agent of the SEC and held that
Most of the provisions of the Fifth Amendment, in which the self-incrimination clause is embedded, are incapable of violation by anyone except government in the narrowest sense. No private body, however close its affiliations with the government, can hold a person 'to answer for a capital or otherwise infamous crime' without an indictment . . .2"
Non-governmental actors
As held in Solomon, SROs have historically been viewed as private, non-governmental organizations. As clearly expressed in Graman v. NASD 3, a 1998 decision of the United States District Court for the District of Columbia:
Every court that has considered the question has concluded that NASD is not a governmental actor. See First Jersey Secs., Inc. v. Bergen, 605 F.2d 690, 698, 699 n. 5 (3d Cir.1979); Shrader v. NASD, Inc., 855 F. Supp. 122, 124 (E.D.N.C.1994), aff'd, 54 F.3d 774 (4th Cir.1995); Cremin v. Merrill Lynch Pierce Fenner & Smith, Inc., 957 F.Supp. 1460, 1468 (N.D.Ill.1997); Datek Secs. Corp. v. NASD, Inc., 875 F.Supp. 230, 234 (S.D.N.Y.1995); First Heritage Corp. v. NASD, Inc., 795 F.Supp. 1250, 1251 (E.D.Mich.1992); Bahr v. NASD, Inc., 763 F.Supp. 584, 589 (S.D.Fla.1991); United States v. Bloom, 450 F.Supp. 323, 330 (E.D.Pa.1978).
[Ed: emphasis supplied]
In recent years entities and individuals are finding themselves increasingly under investigation by both an SRO and a criminal prosecutor; whereas previously, parallel investigations were more likely conducted by an SRO and the SEC. Older cases considered the issue of whether an SRO was acting as the agent of the SEC --- and then questioned whether the SEC's role as a government agency was sufficient to infect federal prosecutors under whose aegis federal criminal charges were brought. More recently we are finding SROs accused of directly acting in concert with or at the behest of state or federal prosecutors, with less emphasis on attempting to establish the SEC as a disqualifying intermediary. More dramatically, the SROs themselves are now being characterized as quasi-governmental in nature.
In Marchiano v. NASD4 , the United States District Court for the District of Columbia recently visited the issue of the NASD's role as a "private entity". In Marchiano an NASD member firm's former president sought to enjoin the SRO from pursuing a disciplinary proceeding against him. The Plaintiff alleged that the NASD acted in concert with state prosecutors (who had charged him in a pending 240 count indictment alleging stock manipulation and fraud) and that the SRO was impermissibly planning to provide its disciplinary proceeding materials to the state prosecutors. The NASD argued that it was a private entity, not a state actor. Marchiano countered that the NASD was a quasi-governmental agency acting in concert with the state prosecutors and seeking to coerce him into surrendering his privilege against self-incrimination by threatening him with permanent banishment from the securities industry for failure to testify during the SRO's investigation. In dismissing the complaint against the NASD, the Court cited to Graman as "rejecting the argument that NASD is a 'quasi governmental authority' because of its regulatory duties," and further noted, inter alia:
[T]he court is aware of no case --- and Marchiano has presented none --- in which NASD Defendants were found to be state actors either because of their regulatory responsibilities or because of any alleged collusion with criminal prosecutors.
Consequently, in 2001 a line of cases from Solomon forward has consistently deemed SROs to be private entities, even to the extent that they lack quasi-governmental standing. An interesting example of the lengths to which some courts are prepared to go to sustain a finding of non-governmental, private-entity status is demonstrated in D.L. Cromwell Investments, Inc. v. NASD5. In Cromwell the United States District Court for the Southern District of New York considered a motion for a preliminary injunction, which was brought by targets/subject of a federal grand jury investigation. Plaintiffs there alleged that the NASD was seeking to coerce them into testifying before the SRO and participating in its disciplinary proceedings after they asserted their Fifth Amendment privileges in the federal investigation. In essence, the Plaintiffs sought to depict the NASD as an agent of the federal prosecutors. The Court characterized the Plaintiffs' allegations as follows:
Plaintiffs nevertheless argue the Court should . . . infer that DOE [NASD Department of Enforcement] is acting as the cat's paw on the government from a series of circumstances:
Regulation issued Rule 8210 demands to two . . . plaintiffs for personal financial records shortly after [the plaintiffs received] Eastern District grand jury subpoenas.
[A]n unidentified FBI agent is said to have stated that "we are working with the NASD --- they know exactly what is going on."
[D]uring [NASD] investigational testimony [an employee] was questioned regarding two documents that plaintiffs "believe' were seized by the FBI and surmise were not produced by them to Regulation.
[A grand jury] subpoena gave the witness the opportunity to respond by delivering responsive documents to . . . the NASD Washington office.
Regulation has refused to adjourn the interview until the completion of the criminal investigation.
Additionally, the Court noted that NASD Regulation ("NASDR"), the NASD's regulatory arm had formed in 1998 a Criminal Assistance Prosecution Unit to assist and advise federal/state prosecutors and that the unit's sole attorney was designated as a Special Assistant United States Attorney in various districts from time to time. The Court further noted that the unit's staff is granted access to federal grand jury materials pursuant to court order. Ultimately, in dismissing Plaintiffs' motion, the Court once again held that the Fifth Amendment prohibits only governmental action and that NASD and NASDR are "private entities."6
And this line of cases has now filtered down into the very jurisprudence of the SROs themselves. On April 30, 2001, NASD Regulation, Inc. determined, in DOE v. Frank A. Persico7 that
[t]he Federal Courts have consistently held that the Fifth Amendment claim against self-incrimination cannot be properly asserted when appearing before a self-regulatory organization. As explained in the recent federal court decision in D.L. Cromwell Investments, Inc., et al., v. NASD Regulation, Inc., the Fifth Amendment privilege does not apply to the NASDR in performing its statutory mandate, since it is not a government actor. 2001 U.S. Dist. LEXIS 1912 (S. D. N. Y. February 26, 2001). In D.L. Cromwell, the court held that [t]he Fifth Amendment prohibits only governmental action. The NASD and [NASD] Regulation are private entities.... Hence, even if the individual plaintiffs are being compelled to give evidence against themselves by the threat of NASD sanctions, [NASD] Regulation's actions raise no Fifth Amendment issue unless it fairly may be said that its actions are fairly attributable to the government.
This private entity, non-governmental actor characterization has been adopted by other SROs8.
Wearing two hats: the quasi-governmental chapeau
At first blush it would appear that the issue has been resolved. The NASD, the NYSE --- SROs as a whole --- are not governmental actors but private entities. However, in 1998 in Sparta Surgical Corporation v. NASD9, the Ninth Circuit Court of Appeals considered what civil remedies were available against the NASD for wrongfully temporarily delisting and suspending trading in a stock on the opening day of a public offering. The Court found that the SRO was immune from such a lawsuit and affirmed the lower court's dismissal. The Court reasoned that
[e]xtending immunity when a self-regulatory organization is exercising quasi-governmental powers is consistent with the structure of the securities market as constructed by Congress. When Congress considered the burgeoning over-the-counter market in the 1930s, it was confronted with two alternatives: a "pronounced expansions" of the SEC, or a system of industry self-regulation with strong SEC oversight. S. Rep. No. 1455, 75th Cong., 3d. Sess. 3-4 (1938). Congress chose the latter approach and, with enactment of the Maloney Act, established a system of "cooperative regulation" . . .[citing 1 Loss & Seligman, 6 Securities Regulation 2787-90 (3d Ed. 1990).
In 1975, Congress amended the Exchange Act to vest more control in the SEC . . . [S]elf-regulatory organizations "are intended to be subject to the SEC's control and have no governmentally derived authority to act independently of SEC oversight." H.R. Rep NO. 123, 94th Cong., 1st Sess., 48-49 (1975).
[Ed: emphasis supplied]
Sparta appears to have made a bit of a right turn on the issue of an SRO's private entity status --- the Court allowed for the existence of so-called quasi-governmental powers. The Court's analysis is somewhat provocative in that it talks about quasi-governmental status and cooperative regulation between the SEC and SROs, and at the same time notes that since 1975 Congress has attempted to solidify the "control" of SROs by the SEC. So in one breath, the Court swept aside the concept of a completely non-governmental, private entity; in another breath the Court (perhaps unwittingly) strengthens the historic "agency" argument by characterizing the SEC as something akin to either a regulatory partner or a control-person of the SROs.
Not a private business!?
On the heels of Sparta, the Ninth Circuit considered Partnership Exchange Securities Company v. NASD10, a complaint for money damages against the NASD arising from alleged improprieties attendant to the initiation of disciplinary proceedings against a member firm. In Partnership Exchange the Court once again affirmed a lower court's dismissal on the basis of an SRO's absolute immunity. Following a review of its previous holding in Sparta, the Court reiterated that
[T]he NASD was not acting as a private business, so its actions are protected by absolute immunity from money damages. . . acts similar to a prosecutor's preparation "for the initiation of judicial proceedings or for trial" are entitled to absolute immunity from suits for money damages. Buckley v. Fitzsimmons, 509 U.S. 259, 273 (1993). The NASD's actions fit under that rubric . . .
[Ed: emphasis supplied]
Within the context of Fifth Amendment compelled-testimony cases, courts seem adamant that SROs are private businesses not amenable to government action --- not even as agents of prosecutors. Within the context of lawsuits for money damages against SROs, the courts seem equally as adamant that those entities are quasi-governmental. So which is it? Are SROs private entities capable of compelling witnesses to waive their Fifth Amendment rights, or are they quasi-governmental entities absolutely immune from lawsuit when acting in such capacity --- or are they both?
Simple Logic and Intense Practicality?
Now, consider the recent case of D'Alessio v. NYSE et al11, which combines several elements addressed separately in the case analyses above. A registered person sues an SRO (which he also alleges is acting in concert with both a federal prosecutor and the SEC) for money damages. In December 1999, John R. D'Alessio ("D'Alessio") sought compensatory and punitive damages against the NYSE and various officers arising from claims of injurious falsehood, fraudulent deceit and concealment, negligent misrepresentation, and breach of contract. D'Alessio alleged that the defendants concocted a phony interpretation of various '34 Act and NYSE regulations and knowingly disseminated that incorrect interpretation to the detriment of D'Alessio and other floor brokers. D'Alessio alleged that the NYSE, in an effort to keep its activities secret and curry favor with law enforcement authorities, assisted the United States Attorney's Office and the SEC in their investigation and prosecution of D'Alessio by knowingly providing them with false information about D'Alessio (and further failing to disclose to these authorities that it had approved and encouraged the practice of "flipping," the specific type of unlawful trading for which D'Alessio had been charged). D'Alessio attributed the NYSE's inaction to the substantial fees earned by the NYSE and its clearing members on the high volume of "flipped" trades and to its desire to increase its daily volume. D'Alessio contended that, as a result of the NYSE's alleged misconduct, he incurred legal difficulties and has been unable to work as a NYSE floor broker.
In considering a motion to dismiss, the United States District Court for the Southern District of New York framed the pending question as asking whether NYSE employees "who, pursuant to statutory delegation, perform regulatory functions that would otherwise be performed by the Securities and Exchange Commission are entitled to the same immunities from suit to which comparable Commission employees would be entitled." In deciding that issue, the Court explained that
nder the federal securities laws, the Exchange "performs a variety of regulatory functions that would, in other circumstances, be performed by a government agency," namely, the Commission. Barbara, 99 F.3d at 59. Mutatis mutandis, the Exchange and its employees, in performing these functions, should be accorded the same absolute immunity that would be afforded the Commission and its employees in parallel circumstances. See Austin Mun. Securities, Inc. v. National Ass'n of Sec. Dealers. 757 F. 2d 676, 688 (5th Cir. 1985) (extending absolute immunity to another national securities exchange and its employees). This is a matter not simply of logic but of intense practicality, since, in the absence of such immunity, the Exchange's exercise of its quasi-governmental functions would be unduly hampered by disruptive and recriminatory lawsuits. See Barbara, 99 F.3d at 59; Austin 757 F.2d at 688.
On appeal, the United States Court of Appeals for the Second Circuit affirmed the lower court's ruling and held:
After reviewing the complaint, we agree with the district court's determination that the NYSE's alleged misconduct falls within the scope of quasi-governmental powers delegated to the NYSE pursuant to the Exchange Act and, therefore, conclude that absolute immunity precludes D'Alessio from recovering money damages in connection with his claims.
In reaching its decision, the Circuit Court specifically cited approvingly the District Court's above-referenced mutatis mutandis explanation, and further explained that the
NYSE, as an SRO, stands in the shoes of the SEC in interpreting the securities laws . . . and in monitoring compliance with those laws. It follows that the NYSE should be entitled to the same immunity enjoyed by the SEC when it is performing functions delegated to it under the SEC's broad oversight authority.
Question: If the D'Alessio quasi-governmental/absolute immunity inference is compelled as a matter of logic and practicality, then does not the following syllogism have equally sound footing? To wit:
Under the federal securities laws, SROs perform a variety of regulatory functions that would, in other circumstances, be performed by the SEC. Mutatis mutandis, the SROs and their employees, in performing these functions, should be accorded the same absolute immunity that would be afforded the SEC and its employees in parallel circumstances. This is a matter not simply of logic but of intense practicality, since, in the absence of such immunity, the SRO's exercise of its quasi-governmental functions would be unduly hampered by disruptive and recriminatory lawsuits.
Accordingly, witnesses compelled to give testimony before SROs are appearing under circumstances similar to that presented before the SEC (or other governmental agency) and should be entitled to the same constitutional protections afforded such parallel parties. Similarly, this too is a matter not simply of logic but of intense practicality, since in the absence of such constitutional protections, the witness' testimony before a quasi-governmental entity would be unduly coerced and lacking appropriate due process protections.
So much for a foolish consistency being the hobgoblin of small minds. D'Alessio declares that an SRO is a quasi-governmental entity when engaged in its regulatory role --- it stands in the SEC's shoes! And this federal court's interpretation is used against a registered person seeking to sue an SRO and its officers. The reward of such quasi-governmental status is absolute immunity bestowed upon the SROs --- a veritable legal shield if ever there was one. However, when an SRO is pursuing a registered person and that target seeks to assert a Constitutional right against self-incrimination, the SRO amazingly transforms itself into a non-governmental, private party. Now the SRO is armed with a prodigious sword. And they say there's no magic left in the world.
More to follow in the next installment!
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ENDNOTES
United States of America v. Alan C. Solomon, 509 F.2d 863, Fed. Sec. L. Rep. ¶94, 948 (2nd Cir. Jan. 14, 1975, Friendly, J.)
An interesting bit of dicta in Solomon was the Court’s discussion as to whether Solomon was coerced into not asserting his Fifth Amendment privilege before the NYSE by a threat of mandatory “permanent loss of employment in the only business which he knew." See, Garrity v. New Jersey,385 U.S. 493, 87 S.Ct. 616, 17 L.Ed.2d 562 (1967). Solomon noted that in Garrity, the applicable state statute used the words “shall be subject to a proceeding to have you removed from the department” (Ed: a requirement that police officers under oath answer questions pertaining to their office), whereas the NYSE’s Constitution stated that one “may be suspended or expelled” for failure to testify. Additionally, Solomon notes that “there would be a complete breakdown in the regulation of many areas of business if employers did not carry most of the load of keeping their employees in line and have the sanction of discharge for refusal to answer what is essential to that end.”
Martin Graman, v. National Association Of Securities Dealers, Inc., et al., 1998 WL 294022, (No. Civ. A. 97-1556-JR., April 27, 1998, D.D.C.)
Anthony J. Marchiano v. National Association of Securities Dealers, Inc., 134 F. Supp.2d 90 (D.D.C., Feb. 16, 2001)
D.L. Cromwell Investments, Inc., et al. v. NASD Regulation, Inc., 132 F. Supp.2d 248 (S.D.N.Y., Feb. 26, 2001)
Notwithstanding its ruling, the Court urged the NASDR to “give careful attention to its arrangements concerning assistance to criminal investigations and to the relationships, both physical and administrative, between CPAG [NASD’s Criminal Assistance Prosecution Unit (sic)] and DOE [NASD’s Division of Enforcement]. The present arrangements left doubt sufficient to require a trial as to the independence of DOE’s 8210 requests . . .”
Department of Enforcement v. Frank A. Persico, http://www.nasdr.com/pdf-text/oho_dec01_16.txt (Disciplinary Proceeding No. C10000139, April 30, 2001)
See,Exchange Hearing Panel Decision 01-20 (John Henry Libaire, Jr), http://www.nyse.com, (February 8, 2001) (“[L]ibaire informed Enforcement, by his attorney, that he would assert a claim of privilege under the Fifth Amendment to the U.S. Constitution and would not be providing the explanation requested by Enforcement. Enforcement advised Libaire’s attorney in this conversation, in substance, that the Fifth Amendment only applies to governmental proceedings and thus is inapplicable to Exchange proceedings.”); Exchange Hearing Panel Decision 00-176 Michelle McDonough a/k/a Michelle Sarian,http://www.nyse.com, (October 10, 2000) ([E]xchange advised McDonough’s attorney that the Exchange is not a government agency and does not recognize the invocation of the Fifth Amendment . . .”)
Sparta Surgical Corporation v. National Association of Securities Dealers 159 F. 3d 1209, Fed. Sec. L. Rep. ¶ 90, 318 (9th Cir. November 6, 1998) (No. 97-15394)
Partnership Exchange Securities Company v. National Association of Securities Dealers, Inc. et al. 97-16497, CV-96-02792-DLJ (February 25, 1999)
John R. D’Alessio, D’Alessio Securities, Inc. v. New York Stock Exchange, Inc., Richard A. Grasso,Edward A. Kwalwasser, and Robert J. McSweeney, 125 F.Supp.2d 656, Fed. Sec. L. Rep. ¶ 91, 227 (S.D.N.Y. Sept. 29, 2000) affirmed2001 WL 815541, --- F.3d ---, (2nd Cir., July 19, 2001). (Note: current SEC Chairman Harvey L. Pitt appeared as counsel on behalf of Appellees.)
A version of this article appeared in the eSecuritiesnewsletter in August 2001 (volume 3, No. 12): Reappraising Self Regulation: Examing Judicial Findings of Quasi-Governmental Status for SROs. Reprints of that article may be ordered from Law Journal Newsletters, 105 Madison Avenue, New York, NY 10016.
http://www.rrbdlaw.com/2001/Q3/010816sro1.htm
FBI analyst faces trial for surfing law enforcement systems
03/17/04
By Wilson P. Dizard III,
Staff Writer
A former FBI investigative analyst is set to go on trial early next month in Dallas on felony charges related to his alleged misuse of law enforcement databases.
Jeffrey D. Fudge of Lancaster, Texas, faces eight counts of exceeding authorized access to a government computer and two counts of making false statements. If he is convicted on all the charges, Fudge could be imprisoned for up to 50 years or fined up to $2.5 million.
Fudge, who has denied all the charges, could not be reached for comment. Attorney Kevin Lamar Kelley of the firm of Kelley and Witherspoon of Dallas represented Fudge after his Nov. 5, 2003 arrest and firing. “Once the truth has come out, Jeffrey’s name will be cleared,” Kelley said. Federal public defender Richard D. Goldman now represents Fudge.
According to the indictment in the case of USA v. Fudge, the former investigative analyst’s work in support of FBI agents involved using the bureau’s Automated Case Support system, the National Crime Information Center, the Texas Crime Information Center, the Texas Law Enforcement Telecommunications System and the FBI Net.
The government charged that Fudge, beginning at least as early as October 1997 and continuing through April 2003, accessed FBI files and computer programs and revealed information to his friends and family members. He also checked whether the bureau was investigating specific people, including prominent Dallas residents. “Likewise, the defendant accessed FBI files to satisfy his own curiosity about FBI investigations,” according to the indictment. Fudge had worked for the FBI since 1988.
The indictment cites Fudge’s allegedly unauthorized access of files concerning eight people known to the grand jury and referred to as persons A through G. The grand jury charged Fudge with disclosing the information he found, in some instances, to other unnamed persons.
The false-statement charges allege that Fudge failed to cooperate with Justice Department agents investigating the case and failed to fully disclose the names of people to whom he passed on FBI files and computer programs.
Steven P. Beauchamp, special agent in charge of the Justice Department’s Inspector General’s Office, said in a statement, “This indictment serves as a reminder that the department will not tolerate the misuse and unauthorized disclosure of sensitive law enforcement information. In today’s world, and with advancing technology, there is too much at stake.”
Fudge’s trial is set to begin April 5 in the U.S. District Court for the Northern District of Texas in Dallas.
http://www.gcn.com/cgi-bin/udt/im.display.printable?client.id=gcndaily2&story.id=25279
April 1, 2004 - Governor Donald L. Kohn Monetary Policy and Imbalances At the Banking and Finance Lecture Series, Widener University, Chester, Pennsylvania www.federalreserve.gov/boarddocs/speeches/2004/200404012/default.htm
April 1, 2004 - Comptroller Hawke Tells House Panel National Banks Are in Sound Condition - Comptroller of the Currency John D. Hawke, Jr. told a House panel today that the national banking system is in excellent health and that national banks are continuing to play their traditional role of providing investment capital to America's businesses and communities.
Press Release: www.occ.treas.gov/scripts/newsrelease.aspx?Doc=NFBQ8WDP.xml
Attachment: www.occ.treas.gov/ftp/release/2004-26a.pdf
Attachment: www.occ.treas.gov/ftp/release/2004-26b.pdf
April 1, 2004 - Statistical Release G.5 Foreign Exchange Rates (Monthly) THE Table Below Shows The Average Rates Of Exchange In March 2004 Together With Comparable Figures For Other Months. Averages Are Based On Daily Noon Buying Rates For Cable Transfers In New York City Certified For Customs Purposes By The Federal Reserve Bank Of New York. www.federalreserve.gov/Releases/G5/Current/default.htm
April 1, 2004 - Governor Ben S. Bernanke Financial education and Jump$tart survey At the Jump$tart Coalition for Personal Financial Literacy and Federal Reserve Board joint news conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/20040401/default.htm
March 31, 2004 - Statistical Release E.15 Agricultural Finance Databook - These data are derived from quarterly sample surveys conducted by the Federal Reserve System during the first full week of the second month of each quarter. www.federalreserve.gov/releases/e15/default.htm
March 31, 2004 - Governor Edward M. Gramlich - Budget and Trade Deficits: Linked, Both Worrisome in the Long Run, but not Twins At the Los Angeles Chapter of the National Association for Business Economics Luncheon, Los Angeles, California
www.federalreserve.gov/boarddocs/speeches/2004/20040225/default.htm
March 31, 2004 - NCUA - Statement of NCUA Chairman Dennis Dollar Announcing His Resignation Effective April 30, 2004 www.ncua.gov/news/press_releases/2004/NR04-0331.htm
March 31, 2004 - Retail Payment Systems Guidance Released by Federal Financial Institution Regulators - The Federal Financial Institutions Examination Council today issued revised guidance for examiners, financial institutions, and technology service providers on the risks associated with retail payment systems.
FFIEC: www.ffiec.gov/press/pr033104.htm
OTS: http://www.ots.treas.gov/docs/77407.html
OCC: www.occ.treas.gov/ftp/bulletin/2004-14.txt
NCUA: www.ncua.gov/news/press_releases/2004/FFIEC040331.pdf
March 31, 2004 -FDIC Makes Public February Enforcement Actions; No Administrative Hearings Scheduled - The Federal Deposit Insurance Corporation today released a list of orders of administrative enforcement actions taken against banks and individuals in February. No administrative hearings are scheduled for April. www.fdic.gov/news/news/press/2004/pr3604.html
March 30, 2004 - This issuance notifies national banks that the OCC has been advised by the Finanzmarktaufsicht--Financial Market Authority of Austria that the Investment Bank of Austria has not been granted a banking license by Austrian authorities, and the entity is not authorized to conduct banking business in Austria. The contact information on the subject entity's Web site contains a street address in St. Paul, Minnesota, and lists nonworking telephone and facsimile numbers. www.occ.treas.gov/ftp/alert/2004-10.txt
March 30, 2004 - St. Louis Fed's Poole Lauds U.S.' "Superb Entrepreneurial Environment." www.stlouisfed.org/news/releases/2004/03_30_04.htm
March 30, 2004 - 2003 FFIEC Annual Report - www.ffiec.gov/PDF/annrpt03.pdf
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Georgia Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Stephanie E. Stewart. www.fdic.gov/news/news/press/2004/pr3504.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Texas Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Teresa Rodriguez. www.fdic.gov/news/news/press/2004/pr3404.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Texas Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Sandra Ruiz. www.fdic.gov/news/news/press/2004/pr3304.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order and Civil Money Penalty Against Former South Carolina Banker - The Federal Deposit Insurance Corporation issued a removal and prohibition order and imposed a $10,000 civil money penalty against Larry D. Bailey. www.fdic.gov/news/news/press/2004/pr3204.html
March 30, 2004 - FDIC Issues Removal And Prohibition Order Against Former South Dakota Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Bryan M. Plack. Plack was a branch manager of Security Bank, Madison, SD. www.fdic.gov/news/news/press/2004/pr3104.html
March 30, 2004 - Statistical Release G.20 Finance Companies www.federalreserve.gov/releases/g20/current/default.htm
March 30, 2004 - NCUA - Chairman Dollar Says NCUA Board Will Consider Proposal To Allow Low-Income Student-Run Credit Unions To Apply For TAG Grants And CDLRF Loans.
www.ncua.gov/news/press_releases/2004/NR04-0329-2.htm
March 30, 2004 - Governor Ben S. Bernanke Trade and Jobs At the Distinguished Speaker Series, Fuqua School of Business, Duke University, Durham, North Carolina. http://www.federalreserve.gov/boarddocs/speeches/2004/20040330/default.htm
March 29, 2004 - NCUA - PALS Workshop Teaches Credit Unions to Safely Make More Business Loans - More than 230 credit union leaders learned innovative ways to safely make member business loans at the National Credit Union Administration's latest Partnering and Leadership Successes workshop, March 25 in San Francisco. www.ncua.gov/news/press_releases/2004/NR04-0329.htm
March 27, 2004 - Governor Ben S. Bernanke - Monetary Policy Modeling: Where Are We and Where Should We Be Going? At the Federal Reserve Board Models and Monetary Policy Conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/20040327/default.htm
March 26, 2004 - Governor Donald L. Kohn - Research at the Federal Reserve Board: The Contributions of Henderson, Porter, and Tinsley At the Federal Reserve Board Models and Monetary Policy Conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/200403262/default.htm
Court Enters Default Judgment Against Man Who, the SEC Says, Conducted an Internet Investment Scam from Canada
The U.S. Securities and Exchange Commission has announced that on February 18, the United States District Court for the Western District of Oklahoma entered a default judgment against Garry W. Stroud ordering him to pay disgorgement and prejudgment interest in the amount of $1,044,879, a $956, 379 civil penalty and enjoining him from further securities law violations. The SEC alleged in its complaint in the action that Stroud "fleeced over 2,200 investors worldwide of approximately $1 million" by using multiple Web sites and spam e-mail to solicit investors in "pure shams" like Morgenthau Gold Bond Certificates, foreign gold-mining projects and prime bank trading programs. He purportedly targeted investors who recently had been defrauded in another investment scam known as E-Biz Ventures which was the subject of a separate SEC enforcement action in January 2001.
http://www.sec.gov/litigation/litreleases/lr17988.htm
Gotcha! Internet scam detector developed
February 3 2003
Internet scams will be easier to detect thanks to a new automatic web classification system being developed by the Australian Securities and Investments Commission (ASIC).
ASIC today launched a $1 million joint research project with the Capital Markets Cooperative Research Centre (CMCRC), the University of Sydney and Macquarie University to develop the system.
ASIC said it was the largest language technology research project ever initiated in Australia.
"The internet represents enormous opportunities for scams and rip-off artists," ASIC director of electronic enforcement Keith Inman said.
"The system we are developing through this joint project will be an eye that never sleeps, constantly seeking out sites that we can take action against.
ScamSeek will be able to determine potential risk by scanning entities against public and private databases.
It will also be able to assess the risk associated with information on a website, identify people and companies mentioned and mark sites that are above the acceptable risk threshold for further analysis.
http://www.theage.com.au/articles/2003/02/03/1044122307805.html
ASIC Reportedly Has Launched Research Project To Automate Detection of Online Securities Scams
On February 3, the Australian Securities and Investments Commission launched what is said to be the "largest language technology research project ever initiated in Australia" to develop an automated system to detect online securities scams. The initiative, called ScamSeek, reportedly will constantly search for Web sites that involve securities scams and will match information gleaned from such sites against public and private databases and alert authorities to sites that require further analysis.
Germany: Dealing in Securities Only a Business if done on a Business Basis - Supreme Tax Court
Article by Andrew Miles
The Supreme Tax Court has rejected a claim for tax recognition of losses incurred in dealing in securities on the grounds that the operations were not part of a recognisable business.
The case was brought by a private individual with regular dealings on the money markets. He had installed a limited amount of equipment for this (television, computer with access to online market information etc.) and was now claiming that his losses had been incurred by way of trade, rather than through his private asset management. The tax office took the opposing view, with which the Court agreed.
Clearly, the Court arrived at its findings, at least in part, as a result of the taxpayer's inconclusive statements, ambiguities and unsupported assertions. However, it took the opportunity to set forth a few rules of thumb to distinguish dealing by way of trade from transactions in the course of private asset management:
If the taxpayer claims to be a trader in securities, his main activity will be in transacting in his own name but for the account of others. For this, he will need a permit under the Banking Act from the Financial Services Supervision Authority. Since such permits are only issued after exhaustive enquiries designed not least to establish that a proper control environment based on a division of duties exists, it will usually be clear that a permit holder operates by way of trade.
If the taxpayer deals only on his own account, he will not need a permit. He will be a trader ("finance business") if his manner of operating is typical for the trade, but will be seen to be acting privately where this is not the case.
Typical for the trade implies
1. dealing with market players direct as opposed to through one or more (in this case six) custodial banks
2. the activity must be his main business activity as opposed to being from facilities installed in his lawyer's chambers or accountant's offices
3. there must be at least a modicum of commercial organisation supporting the business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Reverse Mergers On the Rise?
By Avital Louria Hahn
So-called "reverse mergers," one of the more controversial ways for a private company to go public, are on the rise in the U.S., especially by Chinese and other international companies that often find even a depressed price for their shares in the U.S. to be far higher than anything they could fetch in their home markets.
"In the past six months or so we have seen an increase in companies looking to do a reverse merger," said Tim Halter, president of Halter Financial, a consulting firm that specializes in helping private companies go public. "We are seeing a lot of international deals, with many coming from Asia."
The evidence so far is anecdotal, as neither the American Stock Exchange nor Nasdaq keep track of reverse mergers. But Halter and others believe the controversial capital-raising practice is on the increase-and that is both good news and bad. Often termed the "back door" way to go public, it can be defined in various ways. Basically, however, it is a process in which a private company locates the shell of a public company, and enters into an agreement for the shell, which retains its ticker symbol, to purchase the private company with newly issued shares. The resulting company often changes its name-even its symbol-and sometimes uses its new stock to make acquisitions.
To be sure, quite legitimate firms have gone public this way. In 1970, Ted Turner used it to go public with Rice Broadcasting, which later became Turner Broadcasting Systems. In 1996, brokerage Muriel Siebert & Co. entered into such a back-door arrangement with J. Michaels Inc., a publicly traded Brooklyn-based retail furniture concern.
But the practice also has its share of critics, who maintain that the process is so porous it allows companies that never would have passed muster with an underwriter, let alone with investors on a roadshow, to wind up public.
Companies that do take this back-door route are often disappointed, according to Hartley Bernstein, president of Stockpatrol.com, a Web site that reports on penny stocks and small companies not covered by research analysts. With no analysts covering them and no banking relationships, they often find the public markets for additional financing closed, and the only capital they can raise is via private deals with onerous terms.
"[Buying a shell] sounds like a wonderful idea, except you don't get very much for it," Bernstein said. "It usually has no assets, and the stock is often controlled by investors who want to pump up the stock." Another negative, Bernstein added, is that the business that buys the shell can be tainted by the problems the former company had-or worse, inherit its liabilities.
What is more, reverse-merger companies frequently find the expense of being public too great. Expectations dashed, they then come to investment banks to undo the deal, said Rick Chance, managing director and head of restructuring at Calif.-based Trenwith Securities, which specializes in restructuring advice for middle-market companies. Chance said he has come across that very situation. On the other hand, Chance said, one of his clients is a Chinese company that became public via a reverse merger with a shell and is solid enough to make acquisitions.
A recent success
Despite the negatives, some companies this year are finding apparent success through the process. Consider China Automotive, which earlier this year decided to go public in the U.S., but found the initial public offering market closed tight.
China Automotive then found a law firm adviser that specialized in the process, and got hold of a public shell called Visions in Glass Inc. In May, it changed its name to China Automotive Systems Inc. and began trading on the OTC bulletin board under a new symbol. It closed last Thursday at $3.82 a share, with a market cap of about $80 million-small by U.S. standards, but larger than most other international entrants.
China Automative is only one of several Asian companies recently involved in reverse mergers, according to consultant Halter. He added that they want the U.S. listing to enable them to make acquisitions. They're hoping to benefit from a share price in the U.S. that, while depressed, often reflects double or triple the valuation they would get in their home market.
Often, foreign companies seeking the back-door route may well be larger and in better financial shape than their U.S. counterparts. Indeed, small U.S. companies that do reverse mergers often have compromised financing capability and end up paying dearly for additional financing from private investors, bankers said.
Valde Connections Inc., for example, which is in the business of "identifying profitable clinical day spa and salons for potential acquisitions," recently went public via a reverse merger with Jdlphotos.com. Afterwards, with its stock trading at about $0.20 and additional public capital unavailable, it sold 4.6 million of its shares in May to an offshore investor for $500,000-barely $0.11 per share.
A stricter filter
to determine which firms should be allowed to go public is exactly what is needed, said Halter. "You have to have realistic expectations and strong fundamentals, a projected market cap of $30 million or more, and you have to look at your traded peer group and see how is it valued," Halter said. "You have to compare your company's performance to peers and arrive at projected market value."
Companies that do qualify can reverse merge in one of two ways, Halter said. One is to merge with a shell that is currently reporting and listed in the pink sheets or the OTC bulletin board, a listing that costs about $300,000 to $400,000 and takes 30 to 60 days. The other is merging with a nonreporting shell, a longer, more complicated process-it can take four to five months and costs about $150,000. By comparison, the cost of an IPO can run into the seven digits.
After going public via a reverse merger, a company has to win the support of research analysts and develop relations with investors. Without an underwriter, it has to do so on its own. China Automotive will have research starting in September as well as an investor relations firm, Halter said.
http://www.halterfinancial.com/article10.html
Note: China Automotive
http://www.otcbb.com/asp/mp_quotes.asp?Sort=4&Quotes=CAAS&Board.x=23&Board.y=9
http://www.chinaautomotivesystems.com/index.asp
Very interesting...
http://www.nasdr.com/pdf-text/nac0800_01.pdf
Where it's every investor for himself
On the free-wheeling OTC Bulletin Board, companies without much beyond a name and ticker symbol can make themselves seem like blue chips.
By Carrie Coolidge, Forbes
The investment sounded so good. New York-based 800America.com touted its Web sites, offering everything from online payment services to closed-out merchandise sales. Its site for teenagers, Youtopia.com, supposedly had up to 2 million members in North America. And 800America.com claimed to be pushing into fast-growing China with 150 independent sales reps.
This gem, however, traded in a nether region of the investing world called the OTC Bulletin Board, a newly popular electronic service that links market makers in the shares of small companies. Unlike the unregulated Pink Sheets, the Bulletin Board is policed by the Securities & Exchange Commission and surveilled by the National Association of Securities Dealers. And Bulletin Board companies must file audited financial statements with the SEC and comply with federal securities laws.
But don't be fooled: The filings can very well be garbage. The NASD has no real power over the 3,452 stocks listed on the system. The scams here are not of the magnitude seen at the New York Stock Exchange or Nasdaq (Enron (ENRNQ, news, msgs) or WorldCom (WCOEQ, news, msgs), for example), yet they are far more numerous.
"There are problems everywhere, but the Bulletin Board is the place they really fester," says Hartley Bernstein, a lawyer who pleaded guilty to conspiracy to commit securities fraud in 1999 (sentenced to probation). Bernstein now works the other side, running the Web site StockPatrol.com which alerts investors to fraud in the penny stock market.
A Web of deceit
Investors found to their dismay that 800America.com's biggest Web venture was the web of deceit it had spun. The company's chief executive, David Elie Rabi, portraying himself as a seasoned business leader, turned out to be an ex-con who had served a four-year term for previous securities fraud.Fast and easy.
Rabi was the subject of fresh fraud charges brought by the SEC, which declared that the balance sheet and income statements Rabi's company put out were fiction. The U.S. Attorney's Office for the Southern District of New York brought criminal charges against Rabi, and he was convicted on one count of securities fraud and one count of conspiracy to commit fraud. Rabi awaits sentencing. 800America.com is defunct. Its shares, which traded at $5 in 2000, are now worthless.
The horror stories are legion. Environmental Solutions Worldwide (ESWW, news, msgs) seems to have a good line of business making catalytic converters. But the SEC alleges this denizen of the Bulletin Board pumped the market with a fraudulent promotional campaign between 1999 and 2000. As a result, the stock bounced between $2 and $7. Meanwhile, company insiders dumped their stock on an unsuspecting market, profiting more than $15 million, according to the SEC. At the SEC's behest, the ex-chairman ended up paying a $25,000 civil penalty. The company insists this problem is in the past and there is new management. Environmental Solutions stock today bumps along at 72 cents.
In a similar case the SEC charges that Concentrax (CTRX, news, msgs), a manufacturer of vehicle-tracking systems, released inflated earnings projections, then raised $560,000 in a private stock offering. The chief executive paid a $35,000 fine. The company didn't return calls for comment. Its stock, which traded at a high of $3.15 in 2002, now goes for 20 cents.
Bullish on Bulletin Board
Despite all this unpleasantness, Bulletin Board stocks are in vogue lately, riding on the coattails of legitimate Nasdaq companies like Intel (INTC, news, msgs). In September, 41 billion shares traded on the Bulletin Board, up from 15.5 billion in September 2002. In share count, that put the Bulletin Board ahead of Nasdaq, at 40 billion, and the NYSE, at 29 billion. Of course, a lot less money changes hands on the Bulletin Board, where penny stocks litter the trading floor. On Oct. 29, diamond mining outfit Casavant (CMKM, news, msgs) traded 1.1 billion shares. At 1/100 of a penny each, that volume worked out to just $116,453.
Although you certainly can find good Bulletin Board stocks, such as upscale retailer Barneys New York (BNNY, news, msgs) and watchmaker Bulova (BULV), be warned that venturing onto the Bulletin Board requires immense due diligence. Many companies on the Bulletin Board are there after having been bounced from the major exchanges for failing to meet listing requirements: for falling below minimum market capitalization or for neglecting to mail out proxies. And even the best Bulletin Board stocks require patience. Barneys, once a private company, emerged from bankruptcy in 1999 and has slipped back into the red this year amid trying times for department stores. Bulova is solidly profitable but, while enjoying the security of being 97% owned by Loews Corp. (LTR, news, msgs), has a small public float.
Do your research before wading in
How do you separate the good from the bad? Read their filings, or even quiz companies directly. If you're interested in a bank or insurer, federal and state regulators can help. "Don't just buy a stock because a broker recommended it," says Walter Carucci, chief executive of Port Washington, N.Y.-based Carr Securities, an OTC market maker.
Walker's Manual, a 578-page book ($99 plus shipping at walkersmanual.com), contains research on Bulletin Board stocks as well as Pink Sheet names. The book's staff culls through thousands of companies to come up with high-quality selections. While chat rooms and message boards contain a lot of hype, you can gain good insights at such well-regarded sites as Motley Fool, Siliconinvestor.com and Ragingbull.com. And if you really want some dirt, go to Bernstein's StockPatrol.com.
The Bulletin Board was launched in June 1990 after Congress passed a law designed to clean up penny stocks. The hope was that the Bulletin Board would improve transparency and prevent rampant fraud among the OTC equities market, then trading only in the Pink Sheets.
And while the transparency helped raise the quality of trade execution, crooks used the false comfort of oversight as a way to market companies that had no value. "The Bulletin Board sounds like it's more of an institution than it really is," says veteran microcap investor James Mitchell of Mitchell Partners in Costa Mesa, Calif.
The system's weaknesses
Flabby rules. While Bulletin Board companies are required to file quarterly and annual reports, proxies and insider trading information to the SEC, neither the NASD nor the SEC checks to make sure filings are factual, and there are no minimums. "A company can qualify for the Bulletin Board if it has no assets, no revenues and no business -- provided it files regular reports," says Bernstein.
Unlike their brethren on the NYSE and Nasdaq, Bulletin Board companies aren't required to have corporate governance standards, independent audit committees or independent directors. Exchange-traded companies certainly have defrauded investors despite these safeguards, yet Bernstein argues that the absence of such strictures makes foul deeds easier to commit. Bernstein even has seen Bulletin Board company filings where the numbers are brazenly copied from quarter to quarter.
Lax oversight. The Nasdaq, charged by the SEC with operating the Bulletin Board, gets no listing fees from the companies there, as it does from its own listers. Hence there is little incentive for parent and regulator NASD to crack down, and it lacks the teeth to do so, anyway. NASD's jurisdiction extends only to the market makers and brokers who trade the stocks on the Bulletin Board. This isn't to say that the NASD isn't on the lookout for Bulletin Board fraud. It's simply that the NASD, lacking subpoena power, can only refer suspicions to the SEC. About the best NASD can do is attach the letter "e" to the ticker symbol of a delinquent Bulletin Board filer.
"Don't assume that because it has a four-letter ticker symbol, Cisco Systems (CSCO, news, msgs) and Joe's Auto have the same level of quality of regulation," says Stephen Luparello, executive vice president for market regulation at the NASD. He can compel the Nasdaq company executive to cough up even nonpublic information but has no similar clout with a Bulletin Board company. "He may say yes," Luparello notes, "but he might also tell me to get lost."
If the NASD's hands are bound, then why isn't the SEC calling for tighter controls on the Bulletin Board?The SEC says it has worked with the NASD in the past to improve standards, and they still continue to think of ways to improve regulatory structure. The agency may very well feel itself overburdened, as is. When SEC filings were first required for the Bulletin Board in 1999, commission staffers took at least a year simply to process all the new data. The SEC says that it has since adjusted its processes to accommodate filings from the Bulletin Board.
The BBX's failure. In fairness, Nasdaq did try to bring order to the freewheeling Bulletin Board -- and has taken a pratfall, recently scrapping the plan for the so-called Bulletin Board exchange. The BBX would impose corporate governance standards and -- ahem! -- charge listing fees. The top-tier OTCBB companies were supposed to sign up for the BBX. Trouble is, the Nasdaq had trouble enlisting enough support.
Vanishing market makers. Over the past few years many of the small-cap trading desks that made markets in Bulletin Board issues have been shut down or drastically reduced in size, including those run by Goldman Sachs (which bought Spear Leeds, the NYSE market specialist firm, in late 2000), Sherwood Securities and Fleet Securities. Herzog Heine Geduld's Bulletin Board trading desk was shut down shortly after the company was bought out by Merrill Lynch. In 1997 there were 430 marketmakers trading Bulletin Board stocks. Today there are 243.
The lack of dominant market makers has created less liquidity, more volatility and wider spreads for many Bulletin Board stocks. Some stocks have price swings of as much as 30% on a given day. For now, most Bulletin Board investors don't care. But if too many 800America.coms implode, they will.
© Copyright 2003 Forbes.com. All rights reserved.
http://moneycentral.msn.com/content/invest/forbes/P65632.asp
Where Are They Now?
What some people accused of white-collar crimes have done with their lives since then:
WHO: Leona Helmsley / Real-estate magnate
SCANDAL: Convicted of income-tax evasion in 1989
ACTIVITIES: Involved in philanthropy; facing libel suit for defaming associate
WHO: Nick Leeson / Derivatives trader
SCANDAL: Convicted of fraud in 1995
ACTIVITIES: Wrote "Rogue Trader," a dishy tell-all that became a movie
WHO: Joseph Jett / Bond trader
SCANDAL: Accused in 1994 of generating phony profits, but never charged criminally
ACTIVITIES: Wrote a book defending his innocence and probing racism on Wall Street; runs a hedge fund
http://www.sfgate.com/cgi-bin/article.cgi?file=/news/archive/2002/09/17/financial1106EDT0073.DTL
Stock Patrol, its principals, employees, and contributors do not receive any compensation of any kind (including, without limitation, stock, cash or other benefits) from any source, for writing, or refraining from writing any article that appears in this publication.
http://www.stockpatrol.com/about.html
A Penny for Your Stock
Hartley Bernstein sunk his first career in the fraud-infested world of the penny-stock market. He's starting a new one unmasking and revealing the techniques of the fraudsters.
INTERVIEW Hartley Bernstein hasn't always been one of the good guys. As a securities lawyer in the 1990s, he represented a number of now-notorious penny-stock manipulators. When Bernstein became aware of some insider trading at a client company, he kept that knowledge to himself. In 1998, he discovered that the government intended to charge him with failing to disclose that incident. He agreed to enter a guilty plea and cooperate with their investigation. He was sentenced to two years probation. Through that process, Bernstein discovered that he had a knack for unearthing stock market fraud. It led him to found StockPatrol.com, an online investigative finance journal that he runs out of his Manhattan apartment. We spoke to Bernstein about fraud, his rehabilitation and the future of his stock-snooping company.
CSO: Why is the penny-stock market so ripe for fraud?
Hartley Bernstein: A lot [of fraud] can be seen in the penny-stock industry, but it's not limited to it. The same practices take place no matter what the size of the company. For years, a lot of penny-stock fraud was perpetrated by so-called boiler rooms—huge telephone banks where [brokers] intimidated customers into buying stock. In the 1990s, they were replaced by the Internet. One way it's used is by sending out spam by the hundreds of thousands. Those e-mails promote companies, and the promoters hire investment advisory firms to say that they're wonderful companies. They never tell you any of the problems, but those are easy to find if you know where to look. That's what I do.
How did you get the idea for StockPatrol.com?
The impetus came from my experience representing firms that didn't do right by investors. I wanted to be on the other side, to use my insight to expose stock frauds. What I discovered is that there are so many frauds out there that a day doesn't go by that I couldn't write about a new one. It sounds scary, but when you realize that there are 3,700 companies trading on the over-the-counter market alone and another 3,900 on pink sheets, in addition to the companies traded on the organized exchanges, there are well over 12,000 public companies. Only a few hundred may be doing wrong at a given time, but that's still significant to the people losing money.
What are some indicators of potential penny-stock fraud?
When companies file reports, that information is easily accessible. From looking at that, I can at least get a picture of whether a company is struggling and can't pay its bills, or if it's likely to be able to develop a business plan. A lot of it is looking at who's been getting stock. I look at stock volume and check the daily volume for unusual spikes—especially for spikes that come in advance of news. That smacks of insider trading.
Has it been hard for you to convince potential clients and regulators that you've turned over a new leaf?
When I said what I was going to do, many took a wait-and-see attitude. However, a lot of regulators and prosecutors have become very supportive. The regulators at the SEC are very active readers of StockPatrol.com. I've done my best to establish credibility, and many incidents of fraud have been prosecuted by the SEC or NASD after I brought them to their attention.
PHOTO OF HARTLEY BERNSTEIN BY MICHELE ASSELIN
http://www.csoonline.com/read/050103/briefing_stock.html
Disgraced White-Collar Crooks Say It's Not Too Late
To Start Doing Good
By JEFFREY ZASLOW
Staff Reporter of The Wall Street Journal
Hartley Bernstein used to be a prominent New York attorney, a self-described “rainmaker.” But he represented stock-manipulation schemers who were cheating investors out of $150 million.
He became aware of certain aspects of their crimes, didn’t tell regulators, and in 1999 pleaded guilty to perjury and conspiracy to commit securities fraud. He has since paid court-ordered restitution of $850,000, returning his profits from several deals. Because he helped prosecutors nab bigger fish, he avoided jail and received two years probation.
Hartley Bernstein
So what is Mr. Bernstein, a 51-year-old disbarred lawyer, doing with his life? At his sentencing hearing in June 2001, Assistant U.S. Attorney Richard Owens said Mr. Bernstein is doing “a great public service” that is “unique in all of my experience as a federal prosecutor.”
For three years, Mr. Bernstein has run a free Web site, StockPatrol.com, that warns investors away from the kinds of crooks he once served. “I’m now trying to make a different type of restitution, by helping people,” he says. He has no illusions. “I know that reclaiming my reputation will be a lifelong process.”
‘Look People in the Eye’
As a growing parade of reviled white-collar bad guys marches into court this year, those who’ve already done wrong and done time caution that a sentence never really ends. How do you look in the mirror each day and face up to what you did? How do you make amends to shamed and disheartened loved ones?
“To redeem yourself, the first step is to accept full responsibility for your offense,” says David Novak, a former flight-school operator who served nine months in prison for staging a plane crash to collect insurance. “Look people in the eye and say, ‘As a result of poor choices I made, I was imprisoned. Thank goodness I’ve re-evaluated my value system and I’m putting my life back together.’”
“It’s never too late to start doing what’s right,” says Barry Minkow, 36, who in the 1980s defrauded investors of more than $26 million through a sham carpet-cleaning company. “My mother says the best day to plant a tree is 20 years ago. The next best day is today.”
Mr. Minkow served seven years in prison and is now a pastor at a San Diego church. He encourages the guilty to stop fighting the charges and fess up. “When you’re digging yourself deeper and deeper, the first thing to do is put down the shovel.” Be prepared for loved ones to doubt you for years, he says. “Truth plus time equals trust.”
Such talk doesn’t impress attorney Philp Aidikoff, president of the Public Investors Arbitration Bar Association, which represents individual investors. “When someone lies, cheats and robs innocent people,” he says, “just one thing can redeem them—if they give all the money back.”
In prison, Mr. Minkow vowed to pay back everyone he cheated. But he has so far delivered less than $200,000 of the $26 million. He says he is still working at it.
Mr. Novak, who now runs a business helping white-collar felons prepare for prison, says he made full court-ordered restitution of $78,000. That included $28,000 to cover a search by the Coast Guard, which assumed he had died after he ditched his small plane in Seattle’s Elliott Bay in 1996. Like many of his clients, he says, he suffered from greediness and an egocentric sense of entitlement.
Such observations remind me of my 1984 visit to a federal prison to interview Gary Lewellyn for The Wall Street Journal. A former broker from Iowa, he embezzled money from a bank run by his father, and used it to engineer a stock-manipulation scheme. When the scheme ultimately collapsed, he ended up losing $18 million. He then spent three desperate weeks in a Nevada casino, trying to win the money back.
From prison, he vowed to pay back at least a nickel or dime on each dollar stolen. “More than anything,” he said at the time, “I feel a responsibility for restitution.”
Joe Dodgen, then chairman of First National Bank of Humboldt (Iowa), lost $3 million and the bank as a result of Mr. Lewellyn’s embezzlement. But he died in 1995 without receiving a penny or even an apology, says his widow, Dorothy. “Joe spent what was supposed to be our golden years trying to make us right after the devastation Gary caused. It was a deep, deep hurt.”
Paroled in 1988, Mr. Lewellyn has since been a Texas businessman who had a serious regulatory run-in with the SEC, as well as the Food and Drug Administration. He declined to comment for this article.
Judged Every Day
In New York, Mr. Bernstein knows people will be judging him every day for the rest of his life. He once led a firm with a dozen attorneys. Now, 13 of his former clients are in jail, and he spends 45 hours a week alone at his computer, tending to StockPatrol.com. His wife, an attorney, pays the bills.
In 2001, their three-year-old daughter, Raine, had a severe asthma attack, and died in Mr. Bernstein’s arms. Because he had been disbarred and wasn’t working, he spent a great deal of time with his only child in her short life. The collapse of his career, he now realizes, gave him the gift of those years with Raine.
He vows to be the sort of law-abiding citizen she would have been proud of had she lived. “I plan to never screw up again in any way,” he says. “I make sure I wait until the light changes before I cross the street.”
http://www.classroomedition.com/archive/03jan/POLI.htm
Money Patrol with Hartley Bernstein
Saturdays 10:00am-11:00 am
Hartley Bernstein is widely recognized as one of Wall Street’s leading watchdogs, who used to be a prominent New York attorney—a self-described “rainmaker”.
He represented stock-manipulation schemers who were cheating investors out of $150 million. He became aware of certain aspects of their crimes, but didn’t tell regulators—and was subsequently disbarred.
Featured in The New York Times, The Wall Street Journal, Details Magazine & Investment Dealers Digest, Hartley is a frequent guest on CNBC, CNN and Bloomberg television.
Whether his is questioning Wall Street “insiders” and members of the financial community about issues facing the securities markets, addressing concerns by consumer advocates, or gathering information and developing strategies for business or personal investing by members of the listening audience...Hartley Bernstein is a voice for the pulse of financial matters.
http://www.kbnp.com/moneypatrol.htm
NOTE: Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions and to the entry of findings.
2004
NASD CASES OF NOTE
The Buckingham Research Group Incorporated
(AWC/C05040005/February 2004)
Permitted a research analyst to act as a general securities representative of the firm by allowing him to generate research reports that identified him by name while failing to be registered in such capacity.
Allowed individuals to act in the capacity of registered representatives while their registrations were deemed inactive due to their failure to satisfy the Regulatory Element of NASD's Continuing Education Requirement.
Reported proprietary short sale transactions through ACT without a short sale modifier and one long sale transaction was reported as short.
Failed to report to ACT the correct symbol indicating that the firm executed transactions in eligible securities in an agency capacity.
Failed to preserve e-mail communications sent to institutional investors for three years, the first two years in an easily accessible place.
The Buckingham Research Group Incorporated
Censured; Fined $29,000 (includes $10,000 jointly and severally with undisclosed party)
Bill Singer's Comment
Another instructive enforcement case. First, in this new day and age of research scrutiny be careful to ensure that your analysts are appropriately registered. New rules require at least a refresher course in who's supposed to be registered. Also, make sure that you're preserving e-mails --- even if they're going to an institutional investor rather than a mere individual customer.
Paramount Capital, Inc.
(AWC/C9B040003/February 2004)
Without admitting or denying the allegations, the firm consented to the described allegations and to the entry of findings that, acting under the direction and control of an individual, it was a participating broker in a contingency offering of securities, and investor
funds raised in the offering were not transmitted to a separate bank escrow account meeting the requirements of Rule 15c2-4. The firm's supervisory system did not provide for supervision reasonably designed to achieve compliance with SEC Rule 15c2-4.
Paramount Capital, Inc.
Censured; Fined $10,000 (includes $5,000 joint and several with undisclosed party)
Bill Singer's Comments
With the market showing some signs of recovering from a long bearish sleep, we will likely see an increase in deal making. Remember to abide by the terms of the escrow agreement.
Cary Edwin Grant
(OS/C8A030013/February 2004)
Grant performed duties as a general securities principal and was the president of his member firm while his registration status with NASD was inactive due to his failure to timely complete the Regulatory Element of NASD's Continuing Education Rule. In contravention of his member firm's NASD membership agreement:
Grant failed to file timely a written application for change in ownership of his member firm, and
Acting through Grant, his member firm opened a branch office and failed to properly notify NASD of its intent.
Grant failed to establish and maintain a supervisory system over the activities of a branch office of his member firm reasonably designed to achieve compliance with applicable securities laws, regulations, and NASD rules in that Grant permitted his NASD Electronic Signature and password to be used by an individual at the firm who was not a registered principal and permitted new accounts to be opened and orders executed without the approval of a firm principal. Finally,Grant failed to respond promptly to NASD requests for information and documentation.
Cary Edwin Grant
In light of the financial status of Grant, no monetary sanction has been imposed. Suspended 3 months all capacities and for 6 months thereafter suspended in principal/supervisory capacities.
Bill Singer's Comment
So many violations and so little time. Wow . . . where to begin? This is almost a classic case-study for Compliance professionals. First, make sure that your CE program is up to date. Second, ownership changes likely require a formal modification of your NASD Membership Agreement. Third, under the Safe Harbor provisions of the NASD's membership rules you may be able to open a branch office without approval but you should also double-check your membership agreement before embarking upon such a prospect. Fourth, generally, when NASD gives you a password, the regulator expects you to guard it with your life. And finally, the ever-popular make sure you respond (or at least timely respond) to all regulatory requests.
Berry-Shino Securities, Inc. and
Ralph Matthew Shino
(C3A030001/February 2004)
Acting through Shino, the firm
charged public customers excessive and unfair commissions on listed option transactions. The commissions were greater than the amount of commission warranted by market conditions, the cost of executing the transactions, the value of services rendered to the customer by the firm, and other pertinent factors; and
accepted and executed, or caused the execution of, orders to purchase listed options in customer accounts without having obtained required information and documentation from the customers as required by NASD Conduct Rule 2860(B)(16)(A).
Berry-Shino Securities, Inc.
Fined $52,500, jointly and severally
Ralph Matthew Shino
Fined $52,500, jointly and severally; Suspended 10 business days in principal capacity.
Bill Singer's Comment
An interesting issue --- what constitutes an "excessive" commission, and keep in mind that we're not talking about a mark-up/mark-down (which, at least, is subject to the 5% Guideline).
Timothy Daniel Skelly
(AWC/C11040004/February 2004)
Skelly purchased various municipal bonds for public customers and prepared "fact sheets" that provided specific details about the bonds being purchased, including their creditworthiness, as requested by the customers; however, certain municipal bonds purchased by the customers were inaccurately represented as "county guaranteed" or "moral obligation bonds" when in fact the bonds contained neither guarantees nor pledges.
Timothy Daniel Skelly
Fined $5,000; Suspended 10 business days in all capacities.
James Robert Snyder
(AWC/C8B040002/February 2004)
Snyder settled a customer complaint that had been filed against him and entered into written agreements with the plaintiffs that included improper confidentiality provisions in each settlement agreement that effectively prohibited the customers from disclosing the underlying facts of their complaints and the settlement terms to anyone, including NASD. Snyder failed to respond to NASD requests for information.
James Robert Snyder
Barred
Bill Singer's Comments
SEC held that it is a violation for a settlement agreement to prevent BD customers from cooperating with an NASD investigation. Read In the Matter of the Application of Stratton Oakmont, Inc. For Review of Disciplinary Action Taken by NASD (Securities and Exchange Act of 1934 Rel. No. 38390 / March 12, 1997 at http://www.sec.gov/litigation/opinions/3438390.txt
NASD Notice to Members 86-36, dated May 14, 1986, states that settlement agreements that preclude customers from testifying in NASD proceedings may violate applicable Rules.
John Philip Warner
(AWC/C05040001/February 2004)
Warner borrowed $31,219.17 from a public customer and recommended and executed the liquidation of mutual funds in the account of the customer for the purpose of funding the loan to himself. Warner had persuaded the customer to loan him the funds by offering a nine percent return, thereby replacing the customer's original investment with an unsecured loan. NASD charged that the recommendation/transactions were not suitable.
John Philip Warner
Fined $10,000; Suspended 90 days in all capacities.
Bill Singer's Comments
Yet another in a long line of cases involving RRs lending/borrowing money from customers. Compliance officers would be well advised to discuss recently revised NASD Rule 2370, which prohibits registered persons from borrowing money from or lending money to a customer unless
the member has written procedures allowing such lending arrangements consistent with the rule;
the loan falls within one of five prescribed permissible types of lending arrangements set forth in the rule; and
the member pre-approves the loan in writing
Exempt from the rule's notice and approval requirements are lending arrangements involving a registered person where the customer (Rule 2370 limits the scope of the rule to lending arrangements between registered persons and their customers, rather than any customer of the firm) is:
a member of the RR's immediate family (as defined in the rule); or
a financial institution regularly engaged in the business of providing credit, financing, or loans (or other entity or person that regularly arranges or extends credit in the ordinary course of business), provided the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose, and creditworthiness.
Scott Alan Webster
(C07030050/February 2004)
Webster
opened securities accounts at other member firms while he was associated with a member firm,
failed to provide written notice to his member firm, and
failed to advise the other member firms that he was a representative prior to opening the accounts or placing initial orders in the accounts.
Scott Alan Webster
Fined $5,000; Suspended 10 business days in all capacities
Victor O. Zevallos
(AWC/C11030040/January 2004)
Without his firm's knowledge, using firm letterhead, Zevallos created fictitious undated documents that he sent to a public customer that misrepresented that he had made a partial repayment of a personal loan from the customer by depositing funds in the customer's brokerage account at his member firm when, in fact, he had made no such payments.
Victor O. Zevallos
Barred
Pietro Joseph Passalacqua
(AWC/C9B030082/January 2004)
Without authorization from his member firm, Passalacqua paid a total of $215,000 in commissions to a registered representative based on referred variable annuity transactions.
Pietro Joseph Passalacqua
Fined $7,500; Suspended 10 business days all capacities
Bill Singer's Comment
See the Berardi case immediately below. Seems you can't pay referral fees to unregistered entities or registered persons. I think it's time the industry called for the scrapping of this policy and permitted the payment of referral fees provided that they are 1) fully disclosed to the effected customers, and 2) undertaken pursuant to a written fee agreement approved by the member firm prior to any payment.
Michael Stewart Berardi
(AWC/C9B030079/January 2004)
Berardi paid $526,250 to unregistered entities in connection with securities business referrals that he received.
Michael Stewart Berardi
Fined $5,000; Suspended 15 business days all capacities
Bill Singer's Comment
Prospecting is the lifeblood of RRs, but you can't pay some fees to certain types of entities. Generally, if you've been asked to pay a percentage of any commissions/transactions, it's going to be a no-no. Before you enter into any referral fee deals, speak with a lawyer and make certain your BD approves the proposal in writing. However, for the record, I don't approve of this prohibition. I believe that as long as any type of referral is fully disclosed to customers and the underlying arrangement is in writing that the practice is acceptable. I know of few businesses that prohibit referral fees for forwarded prospects. See the Passalacqua case above for a variation on this theme.
Michael Nelson Barnett
(OS/C9A030029/January 2004)
Registered Supervisor Barnett failed to reasonably and properly supervise an individual so as to detect and prevent violations of NASD rules regarding discretionary power.
Michael Nelson Barnett
Fined $5,000; Suspended 10 business days all capacities
Bill Singer's Comment
That's a hefty suspension --- 10 business days --- merely for failing to detect/prevent discretionary power tradings. Nonetheless, improper discretion, whether resulting from the failure to get prior written authorization or to abide by the terms of the power, exposes a firm to significant liability. Frankly, it's not often a simple thing to detect. After all, if an RR is engaged in unauthorized discretion and there are no customer complaints, how are you supposed to spot the signs? Things to look out for: sudden increases in trading and increased short-term trading (particularly when the account's history is more stable). Also, one of the reasons you should make a point of becoming aware of RRs' personal financial condition is to keep an eye out for brokers trying to fix their cash woes by unauthorized trading designed to generate commissions.
World Financial Capital Markets, Inc. and Frank Richard Bell
(AWC/CAF030057/January 2004)
World sold shares of a security to foreign customers through unregistered persons; there was no prior customer contact by the firm's RRs and no prior authorization to accept orders from unregistered third parties. BD acting through Bell, knowingly accepted and recorded such orders, improperly exercised discretion, and created/ maintained inaccurate books and records. Further, at the direction of Bell, BD posted research reports on issuers that contained exaggerated, unwarranted, or misleading statements and failed to disclose material facts. BD's systems/procedures were inadequate regarding publishing/distributing research, the handling of customer orders by third persons, and discretionary trading. Furthermore, the respondents failed to establish and implement adequate policies/procedures (and training) pertaining to suspicious transactions and the Bank Secrecy Act.
World Financial Capital Markets, Inc.
Censured; Fined $100,000 ($40,000 jt/sev with Bell); Required
not to post any research reports on its Web site for 2 years;
to revise Anti-Money Laundering Compliance Procedures within 30 days of AWC effectiveness;
to hire an outside consultant within 60 days of AWC effectiveness to independently test AML procedures (and implement consultant's recommendations within 30 days of his/her findings/recommendations.
Frank Richard Bell
Fined $40,000 (jt/sev); Barred in principal capacity; and Suspended for 8 months in all capacities.
Bill Singer's Comment
As U.S. BDs seek new customers, more efforts are being made to find foreign customers. As this case demonstrates, many domestic securities laws/regulations apply regardless of where the customer is located --- here, the BD wrongly sold through unregistered persons. The decision suggests that one possibl cure would have been for the foreign customer to grant a discretionary power to the unregistered third party, and for the BD to file that power and deal with the intermediary. Similarly, there is a worthwhile better-practices pointer that all new accounts (including foreign) should likely preliminarily pass through at least one RR before initiating any activity. Additionally, in this post-9/11 world, U.S. regulators will show no flexibility with Anti-Money Laundering noncompliance. Separately, the sanction prohibiting the posting of any research reports on the firm's website for 2 years is a likely harbinger of things to come. If you're starting to attract increasing numbers of offshore accounts and/or your marketing efforts include a website, you'd be well advised to hire an outside consultant to audit your applicable policies and procedures. Otherwise, you might have an 8-month vacation to think about your shortcomings.
Balfour Investors, Inc. and Carl Goldfarb (AWC/ C10030103/January 2004)
Paul Samuel Ehrenstein (AWC/ C10030104/January 2004)
During an NASD examination, the Staff asked for new account forms. For reasons not explained, Balfour couldn't locate originals of everything requested and acting through Goldfarb prepared substitute replacements for those forms missing. Those substitutes were provided to NASD without affirmatively indicating that the forms were not original, that the names on the "preparer" signature lines had been added to some of the forms without authorization or consent of those whose names were added, and the firm and its personnel lacked documentary confirmation that the substitute forms contained the same customer information, investment objectives, and risk exposure information as contained on the missing forms. Ehrenstein advised his BD to prepare substitute new account forms for missing account forms requested by NASD during an examination. The new forms were "furnished to NASD without Ehrenstein's participation" and without affirmatively indicating that the forms were not original, the names on the "preparer" signature lines had been added without authorization or consent of those whose names were added, the forms were backdated, and that the firm and its personnel lacked documentary confirmation that the substitute forms contained the same information. Ehrenstein failed to ensure that the firm would advise NASD that the forms were not originals and of the manner in which the forms had been prepared prior to the production of the substitute forms.
Additionally, the BD allowed unregistered individuals to act as limited representative-equity traders and to execute transactions. Also, the BD failed to preserve for not less than three years, the first two in an accessible place, brokerage order memoranda and their confirmations. Finally, the BD failed to report to NASD's Fixed Income Pricing SystemSM (FIPSSM) the firm's sell transactions in high-yield securities to public customers.
Balfour Investors, Inc.
Censured; Fined $37,000 ($15,000 jt/sev with Goldfarb)
Carl Goldfarb
Fined $15,000 (jt/sev); Suspended 9 months all capacities
Paul Samuel Ehrenstein
Fined $7,500; Suspended 10 business days in all capacities.
Bill Singer's Comment
Although the index numbers in Balfour/Goldfarb and Ehrenstein are sequentially 103 and 104 and the allegations are remarkably similar, there's nothing in the respective NASD official reports cross-referencing the cases. I'm going to go out on a limb here and guess that the matters are related. Consequently, readers (whether public customers, industry professionals, or regulators) may miss the connections between and among various cases and parties. The mechanics of pleadings aside, I see little reason for NASD not to provide a minimal indication of commonality when reporting a settlement or decision. For another example see the MSDW and Rogers cases below. Further, in many reported cases the explanations are so terse as to raise troubling questions as to the meaning of a case --- what is it that happened here and what "lesson" does NASD seek to teach?
It's an oft-quoted lament that on any given day there's at least one mismarked order ticket (and that's the one the regulators always seem to ask for). Nonetheless, there's a right way and a wrong way to deal with such deficiencies. If you have the ability to "recreate" a document (that is, legitimately fill-in a form based upon existing information at your disposal), it's sounder practice to inform the NASD of the missing original, provide the recreation by prominently disclosing such status, and to submit the supporting documentation upon which you relied --- otherwise, you look like you're trying to pull a fast one.
Finally, as charged, Ehrenstein seems to have merely "advised" his firm to substitute the recreated forms, but apparently Goldfarb "furnished [the forms] to NASD without Ehrenstein's participation." What was the overt, violative act Ehrenstein committed? The NASD's report is unsatisfactory in that it fails to note Ehrenstein's capacity (Director of Compliance?) and doesn't really indicate what act he committed. Was he aware that Goldfarb prepared all the forms without adequate supports? Did he know that Goldfarb had submitted the recreations without prior explanation to the NASD of that status? Did Ehrenstein believe that it was acceptable to prepare the recreations because they incorporated data that he felt was either available on other documents or easily inferred? Or, is Wall Street now hiring Thought Police to prosecute registered persons for giving advice and opinions?
Morgan Stanley DW, Inc. (AWC/ CAF030066/January 2004)
Brian James Rogers (AWC/CAF030065/January 2004)
RRs in a Morgan Stanley DW branch solicited public customers to purchase shares in a start-up technology company for which the BD did not provide research, and falsely recorded the solicited trades as "unsolicited" in the books and records (also causing inaccurate books and records).
Rogers was unaware of the solicitation by RRs at a branch for a start-up technology company not covered by his firm, and failed to take reasonable action to assure they had a reasonable basis for the recommendation. Accordingly, he failed to enforce the firm's solicitation policies and failed to take reasonable steps to prevent and detect the falsification of firm records. Moreover, Rogers orally delegated supervisory responsibilities over inexperienced RRs to an RR engaged in the solicitation of the stock, but failed to act reasonably to ensure that those delegated responsibilities were carried out.
Morgan Stanley DW, Inc.
Fined $25,000: (jt/sev); Required to prepare/implement procedures and computer exception reports reasonably designed to detect and prevent the mis-marking of order tickets regarding the solicitation of securities transactions with public customers where the firm did not provide research for the securities (and provide NASD with a copy of its written supervisory procedures within 30 days after they are implemented, together with a certification of same). In the interim, the BD shall reiterate to its RRs the importance of its policies regarding solicited and unsolicited trades.
Brian James Rogers
Fined $20,000; Suspended 30 days in principal capacity.
Bill Singer's Comment
Once again (as in Balfour/Godlfarb and Ehrenstein) we have sequential docket numbers 065 and 066, remarkably similar allegations, but nothing in the respective NASD official reports cross-referencing the cases. Again, I’m going to go out on a limb here and guess that the matters are related. Nonetheless, why isn’t Rogers named as a respondent in the MSDW case --- when Bell is named in the World case and Goldfarb in the Balfour matter . . . worse, how come Ehrenstein wasn’t named with Goldfarb and Balfour? Still, NASD makes a very valid point in the MSDW/Rogers cases. If you have a number of RRs at one branch entering purchases for the same start-up tech company, then someone should notice the warning flares --- and certainly should be troubled by the non-research-coverage aspect and the “unsolicited” tickets. You just can’t go through the motions and expect that to constitute a defense.
Thomas Jayson Feight (AWC/CMS030261/January 2004)
Feight used high-pressure sales practices; made repeated telephone calls; knowingly and recklessly employed fraudulent misrepresentations, including baseless price predictions and guarantees; and omitted to state material facts about the precarious financial condition of a company with questionable business operations, virtually no assets, and little or no revenue. He failed to research the company's financial condition and knew virtually nothing about the company (including the fact that its most recent SEC filing showed its total cash-on-hand was only $356 and contained a "going concern" clause.) Nonetheless, he claimed that respected institutions were investing in the company, that he had attended meetings with bankers who would obtain financing for the company and, that its per-share value would rise to $5.00 in six months and double in a year.
Thomas Jayson Feight
Barred in all capacities
Bill Singer's Comment
RRs must be careful about getting carried away with the puffery of selling. The old expression is still quite apt: Never write a check your body can't cash. Before you start pumping a stock it's always a good idea to check the most recent SEC filings.
Mark Warren Lamb and David Scott Cacchione (OS/CAF020053/January 2004)
Respondents sold unregistered (non-exempt) securities to public customers while the firm acted as an underwriter (an unauthorized third party was involved in the sale and pricing). Lamb failed to promptly inform his firm's trading department of his receipt of order tickets so that the trades could be reported within 90 seconds of execution. In addition, he failed to disclose that the prices given to certain purchasers were materially different from prices given to others who purchased at virtually the same time, and that his firm delayed for several hours the inputting and trade reporting of the sales.
Mark Warren Lamb
Fined $50,000; Suspended 30 days in all capacities.
David Scott Cacchione
Fined $35,000; Suspended 30 days in all capacities.
RRBDLAW.COM AND SECURITIES INDUSTRY COMMENTATOR™ © 2004 BILL SINGER
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SEC: Toothless No More?
By Shannon Zimmerman
April 2, 2004
OK, time to give credit where it's due -- at least a little of it.
Though it took a high-voltage shock to the system (in the form of Eliot Spitzer's investigation of trading improprieties at scads of fund families), the Securities and Exchange Commission seems to have finally gotten religion on the topic of fund industry reform. No, really.
Along with Spitzer's office, the SEC has slapped fines on the likes of Alliance Capital (NYSE: AC), Bank of America (NYSE: BAC), and FleetBoston (NYSE: FBF). Additionally, the commission is taking a cold hard look at 12b-1 marketing fees and considering whether to require funds to impose mandatory redemption fees on short-term traders. It's enough to make you wonder if maybe SEC Chairman Bill Donaldson has been reading Champion Funds, the new Fool service designed to help you make heads and tails of the scandal-ridden mutual fund industry.
But wait, it gets even better. Now comes an indication that the SEC is looking to clamp down on the financial incentives that some fund shops give to brokers in exchange for pushing their funds. Most objective observers would agree that such a cozy financial arrangement represents a clear conflict of interest. Brokers, after all, should provide advice based on their assessment of their clients' needs, not on which fund company has greased their palms.
Unfortunately, such incentives are legal -- at least so long as they're adequately disclosed.
And that's where the SEC comes in: In November 2003, Morgan Stanley ponied up a cool $50 million for failing to adequately disclose that it had been paid to provide "shelf space" for certain mutual funds. And on Wednesday, the SEC announced that Boston-based money manager MFS would fork over $50 million for doing a poor job of acknowledging that it had been providing such incentives to brokers.
To be sure, the fines here could certainly be stiffer. But the action this week against MFS represents the first time a fund shop has been called on the carpet for this particular practice, a rare instance of the SEC beating Spitzer to the punch on a matter related to fund industry improprieties.
In settling, MFS didn't admit wrongdoing, but the fact that the shop is paying the fine speaks volumes. And so does this none-too-cryptic remark from Stephen Cutler, director of the SEC's enforcement division. "The Commission continues to investigate whether the managers of other mutual funds and the brokerage firms that sold those funds have similarly failed to disclose such conflicts."
In other words, look out, fiduciaries: The hunt is on.
Shannon Zimmerman, editor and analyst of Motley Fool Champion Funds, doesn't own shares of any companies mentioned in this article, but he does own a pretty large collection of vintage 8-tracks.
SEC to Take Hard Look at Off-Balance-Sheet Disclosures
AccountingWEB.com - March 24, 2004 - Off-balance-sheet transactions, once abused by Enron to hide debt and overstate profits, will be closely scrutinized as regulators look for ways to improve financial disclosures.
That warning came from Donald T. Nicolaisen, chief accountant of the Securities and Exchange Commission, according to the Wall Street Journal. Nicolaisen said at a Financial Accounting Standards Advisory Council meeting Tuesday that the agency will study the details about off-balance-sheet activity that companies provided in their latest filings. The SEC will provide Congress with a report on the issue later this year, he said.
In the past, companies have not been required to report how their current or future financial conditions might be affected by off-balance-sheet arrangements, which often involve entities formed to diversify risk and issue securities, leasing arrangements and other contractual obligations, the Journal reported.
Companies are beginning to report on their connection to an unconsolidated entity, including nature, size and amount of risk in SEC filings, but studies have shown that not all companies are embracing the requirements.
Nicolaisen also told the advisory council that the SEC will continue helping companies disclose more useful, understandable financial information. For example, the SEC issued guidance late last year intended to improve disclosures in the "management discussion and analysis" section, or MD&A, in companies' stockholder reports.
The advisory council, which acts as a "sounding board" to the Financial Accounting Standards Board, also heard a report from FASB Chairman Robert Herz. In the next few days, FASB is expected to reveal its plan to require companies to recognize employee stock-option compensation as an expense on income statements. The board then plans to hold public roundtable discussions in late June before it enacts a final rule, Herz said.
In recent weeks, executives of technology firms and other options-dependent companies have stepped up their lobbying campaign to persuade lawmakers to intervene.
Vaso Active's Claims Prompt SEC to Step In
By Matthew Goldstein
TheStreet.com Senior Writer
Vaso Active Pharmaceuticals (VAPH:Nasdaq - commentary - research), one of the hottest stocks of the year, was stopped dead in its tracks Thursday by securities regulators.
The Securities and Exchange Commission suspended trading in shares of the tiny Massachusetts company, which claims to have developed a miracle treatment for athlete's foot and a "revolutionary" transdermal delivery system for over-the-counter drugs.
The SEC imposed the suspension "because of questions regarding the accuracy of assertions" by the company in press releases, its annual report and other corporate filings. SEC officials have been investigating the company, which went public in a mid-December IPO, for a little over month.
The action followed a series of articles on TheStreet.com questioning the company's statements about its clinical trials and medical endorsements and noting troubling aspects of its corporate pedigree.
In a press release announcing the temporary suspension, the SEC says the questions surround statements Vaso Active made about Food and Drug Administration approval of "certain key products" and "the regulatory consequences of the future application of their primary product."
The trading suspension expires at midnight on April 15, and it gives time for the SEC to gather information and possibly bring an emergency enforcement action against a company.
Mark Kreitman, an SEC assistant chief litigation counsel, declined to comment on the suspension, but he said the investigation is continuing. The company did not return telephone calls seeking comment.
Matt Meister, president of Kashner Davidson, the small Florida brokerage that was the underwriter on the IPO, declined to comment.
Shares of Vaso Active were frozen at $7.59 a share. The stock is up 314% since its December 2003 initial public offering, after adjusting for a 3-for-1 stock split last month.
The past few months have been a helter-skelter ride for Vaso Active, a money-losing company with just seven employees and less than $60,000 in annual sales. The stock soared on the company's claim that its Termin8 foot lotion and its patented transdermal technology system will revolutionize the over-the-counter drug market.
Last week, in a conference call with investors, Vaso Active Chief Executive John Masiz read a statement predicting that the company's annual sales will climb from $53,000 in 2003 to a "run rate" of $12 million next year because of a number of strategic deals it has reached. The conference call sparked controversy, because Masiz abruptly ended it without fielding questions, even though more than 100 people were listening in.
Controversy is nothing new to Vaso Active. The company has had to fend off questions about an endorsement for its athlete's foot lotion Termin8 and the authorship of a six-year-old clinical study of the foot lotion.
Regulators also have raised questions about the high level of trading in the stock. In the weeks before the stock split, the shares skyrocketed from $8 to $39. The trading volume rose from just a few thousand shares changing hands each day to several million.
Despite all the controversy, Vaso Active was able to ink a $7.5 million private placement with Millennium Partners, a big New York hedge fund led by Wall Street impresario Israel Englander. The financing arrangement consisted of an 18-month convertible 2% note that can be turned into roughly 833,000 shares of Vaso Active stock, if the share price reaches $9. The deal also included warrants to purchase 166,667 shares of Vaso stock at an exercise price of $8.75.
A Millennium spokesman declined to comment on the trading suspension.
A familiar stench wafts from Vaso Active (VAPH:Nasdaq - commentary - research), the small Massachusetts company that claims to have developed a new treatment for athlete's foot.
The smell spawns memories of the late 1990s IPO market, when any company with a whiff of a business plan, vague stories and an investment bank could sell shares to the public and see them soar.
Skyrocket is the more apt verb for Vaso, which, since going public in mid-December, has seen its shares jump 440% to just below $27. This is for a company with no profits, less than $100,000 in annual sales and seven employees.
Trading in the 1.6 million Vaso shares sold to the public has been frenzied. Over the past two weeks, an average of 1 million shares have changed hands each day. The trading has been so frenetic that even the investment bankers at Kashner Davidson, the small Florida brokerage firm that led the IPO, are expressing dismay.
Perhaps investors also should worry.
For starters, there's the debate about just how amazing its foot-fungus-fighting treatment Termin8, really is.
The company contends the product, with its "revolutionary transdermal drug delivery technology," is a "highly advanced and remarkably effective cure for Athlete's Foot." The company has such high hopes for Termin8, which retails for $19.99, it recently told investors that it foresees a $365 million market for the product. Furthermore, Vaso Active boasts on its Web site that Termin8 has won the endorsement of The American Association of Medical Foot Specialists.
In a recent interview, David Z. Ascher, a New York podiatrist and the foot association's president, seemed more impressed with Termin8's packaging.
"There is no such thing as a miracle cure," Ascher said. "It is as good as any of the other products."
The doctor continued: "The packaging is fantastic. The box is so beautiful."
Vaso Active might be ruing ever getting involved with Ascher, who won't say how many members are in his medical association.
Last week, Ascher told Barron's he didn't recall endorsing the company's product. He has since amended that. Ascher told the TheStreet.com this week that he was confused when he talked to Barron's because Termin8 used to be called something else, deFEET. Ascher said his association stands behind its endorsement, but now he wants Vaso Active to make a donation to an association scholarship.
Whatever the connection, Ascher's group wants no part of a controversy. "We do not want to be involved with any hanky-panky," he commented.
A Vaso Active spokesman declined to comment.
If that doesn't give investors pause, consider the cast of Wall Street characters surrounding the tiny company.
TheStreet.com previously reported that Ray Dirks, a legendary analyst whom regulators have charged with pumping up a handful of penny stocks, initially had a hand in Vaso Active's IPO. Dirks' firm, Sky Capital, was going to be the lead underwriter on the deal, until Kashner Davidson replaced it at the last minute.
Still, sources familiar with the deal said, Sky Capital got an allocation of shares to sell to its customers. Also, one of Vaso Active's directors, Gary Fromm, also is a director of Sky Capital Ventures, a subsidiary of Sky Capital.
Kashner Davidson, the firm that ultimately took Vaso Active public, has also known controversy. The 27-year-old firm, which specializes in so-called microcap IPOs, has been fined or censured by securities regulators 19 times. The most serious infraction occurred in 1996 when state and federal regulators fined and sanctioned Kashner Davidson for having an improper relationship with a stock promoter.
Some of the investment firm's recent IPOs haven't fared too well.
EsafetyWorld, a Bohemia, N.Y., company that Kashner took public in 2000, is out of business. It imploded after regulators raised concerns about some of its financial filings and a post-Sept. 11 claim that it had developed a safe system for opening mail suspected of containing anthrax.
Two other companies, Able Energy (ABLE:Nasdaq - commentary - research) and BioDelivery Sciences (BDSI:Nasdaq - commentary - research), are both selling well below their IPO prices. Shares of Able, which went public at $7 a share, were most recently trading around $2.58, while BioDelivery, priced at $5.25, is trading around $3.75.
Matt Meister, Kashner Davidson's president and chief executive, defended his firm's reputation and underwriting track record. He said the regulatory issues at Kashner Davidson are in the past and there's always a risk in taking companies, especially small ones, public. Vaso Active's success, he said, doesn't depend on the sales of a single product, but the company's ability to develop its transdermal technology.
"This is a company we think that may have a technology platform for transdermal delivery," said Meister. "It's more the technology than the product itself. It looks like it could be pretty good, with some sound science behind it."
Wall Street wheeling and dealing can make for some strange relationships, such as the one entered into this week between Millennium Partners and Vaso Active Pharmaceuticals (VAPH:Nasdaq - news - research) .
On Tuesday, the embattled hedge fund led by legendary Wall Street trader Israel Englander made a big bet on the quirky little drug company that claims to have developed a miraculous cure for athlete's foot.
The private equity arm of Millennium, in a $7.5 million private placement, purchased an 18-month convertible 2% note that can be turned into roughly 833,000 shares of Vaso Active stock, if the share price reaches $9. The deal also included warrants to purchase 166,667 shares of Vaso stock at an exercise price of $8.75.
On Tuesday, the day the deal was inked, shares of the Danvers, Mass.-based company closed at $7.03. Vaso Active stock soared 15% Wednesday to $8.11 after the company announced the transaction, leaving the shares within striking distance of both magic numbers.
News of the deal comes as Millennium and Vaso Active face regulatory scrutiny.
With $3.2 billion in assets, Millennium is one of the big hedge funds at the center of the far-reaching investigation into improper trading in the mutual fund industry. Last year, one of Millennium's top traders pleaded guilty to making illegal trades in shares of mutual funds. Englander is bracing investors for the possibility the hedge fund could be ordered to pay a stiff fine when the investigation is completed.
Millennium Partners, one of the hedge funds at the center of the mutual fund trading scandal, has set aside 10% of its investors' money in preparation for a possible settlement with federal or state regulators.
Investors at the $3.2 billion hedge fund run by Israel Englander, the storied Wall Street trader and buyout specialist, learned in December that some of their money would be set aside for the firm's legal reserve, even as backers clamored for their cash. About $800 million has streamed out of two Millennium hedge funds since the firm surfaced in the mutual fund late-trading and market-timing scandal last October.
Millennium's decision to set up a legal reserve looks prudent, particularly after a former trader, Steve Markovitz, pleaded guilty in October to making illegal late trades in shares of mutual funds. The action is similar to one taken by Veras Investment Partners, a Sugar Land, Texas, hedge fund that put away up to $100 million to cover any fines and penalties regulators might impose in their investigation of its role in the mutual fund scandal.
Harry Davis, a partner with Schulte Roth & Zabel and one of Millennium's outside attorneys, didn't return repeated phone calls. Tom Daly, a Millennium spokesman, declined to comment. TheStreet.com reported Tuesday that a number of witnesses familiar with Millennium and Markovitz have appeared before a New York state special grand jury that is investigating the mutual fund industry.
While Millennium investors have been pulling out of funds, the situation would be worse if not for restrictions in their investment agreements that allow Millennium to bar larger withdrawals. Millennium's investors include Duke Management Co., which runs Duke University's $5 billion endowment; the Belzbergs, one of the richest families in Canada, and many funds of hedge funds.
According to an investor that still has "a few million" in one of Millennium's hedge funds, word of the legal reserve was one of very few communications the beleaguered Englander has offered to his backers in recent months. While the fund was once open about market-timing, a legal-if-frowned-upon strategy involving frequent trades, it clammed up around the time of the Markowitz late-trading plea, the investor said.
The ice is beginning to crack beneath Millennium Partners, the big New York hedge fund run by Wall Street trader and buyout specialist Israel Englander.
Over the past several months, lawyers and other sources say, investors have pulled $800 million out of Millennium, in the wake of a guilty plea last September by Millennium trader Steve Markovitz to making illegal mutual fund trades. The redemptions, which sources say coincide with the departure of several traders and back-office employees, have slashed Millennium's total assets under management to about $3.2 billion.
The drop in assets under management is particularly sharp -- Millennium had $3.3 billion in its offshore fund as of the end of December plus about $1 billion in its fund for domestic investors, according to the Center for International Securities and Derivatives at the University of Massachusetts.
More troubling, legal sources say, state and federal securities regulators looking into allegations of improper trading in the $7 trillion mutual fund industry are stepping up their inquiry into Millennium's role in the scandal. Lawyers familiar with the investigation believe the renewed focus on Millennium could be a prelude to the filing of additional criminal charges, or the imposition of a stiff fine on the giant hedge fund.
In recent weeks, a number of witnesses familiar with Millennium and Markovitz have appeared before a New York State special grand jury that is investigating the mutual fund industry, several sources said. One person familiar with the investigation said the grand jury has heard testimony from a number of people in the "Markovitz universe.'
Markovitz, one of the first people on Wall Street arrested in the far-reaching mutual fund trading scandal, pleaded guilty to making illegal late trades in shares of mutual funds. In pleading guilty, Markovitz agreed to cooperate with prosecutors and his sentencing has been delayed several times while Spitzer's office continues its investigation.
Late-trading and market-timing are the two main trading offenses at the center of the mutual fund investigation. Late-trading, which is illegal, involves buying shares of a mutual fund after the close of trading, but at an old price that doesn't reflect the impact of late-breaking market developments. Market-timing, which is not illegal, entails the frequent trading of mutual fund shares, often in violation of fund company rules.
Despite the increased grand jury activity, prosecutors are not believed to be close to filing criminal charges against anyone else at Millennium. People familiar with the inquiry said investigators with New York Attorney General Eliot Spitzer are still trying to determine what, if anything, Englander may have known about any improper mutual fund trading.
Englander, because of his past dealings with some of Wall Street's more notable characters, would represent a high-profile catch for securities regulators.
Back in the 1980s, Englander was a friend of convicted Wall Street felon Ivan Boesky. Later, he was partner in a buyout firm with John Mulheren, the storied arbitrager who was arrested on gun charges in 1988. Mulheren, who died late last year, was convicted of insider trading in the investigation that brought down Boesky. The conviction was later thrown out on appeal.
A Spitzer spokesman declined to comment. A Millennium attorney, Martin Pershetz, a former federal prosecutor and a partner at Schulte Roth & Zabel in New York, didn't return phone calls over a period of several days. Harry Davis, another Schulte Roth attorney who does work for Millennium, declined to comment. Tom Daly, a spokesman for the fund, also declined to comment.
The increased grand jury activity comes at a time when Millennium is taking steps to fortify its regulatory and compliance operation. Last month the hedge fund hired Simon Lorne, a former Securities and Exchange Commission general counsel, as a vice chairman and chief legal officer.
Some people familiar with the Millennium investigation see Lorne's hiring as setting the stage for a possible settlement between Millennium and regulators and prosecutors.
Regulators have long eyed the dozens of hedge funds that reaped big profits from improper trading as potential deep pockets for reimbursing mutual fund shareholders.
TheStreet.com previously reported that Spitzer's office and the SEC advised Veras Investment Partners, another hedge fund, to set aside more than $100 million to cover the cost of a possible settlement for its role in the trading scandal. The Sugar Land, Texas, hedge fund, which is in the process of closing down, allegedly made improper trades in shares of funds sold by Fred Alger Management and Federated Investors (FII:NYSE - commentary - research).
The mutual fund investigation began last September with Spitzer's announcement that he had reached a $40 million settlement with Canary Capital Partners, the New Jersey hedge fund run by Edward Stern.
Meanwhile, the exodus of investors from Millennium could have been far worse than the $800 million that's already been taken out. Under Millennium's partnership agreements, investors are generally obliged to leave their money in the funds for a minimum of three years.
A spokesman for the fund also declined to comment on the investor withdrawals.
And who are the investors still left behind Millennium?
UPDATE - SEC suspends trading in Vaso Active stock
Thursday April 1, 7:21 pm ET
(Adds company comment, changes dateline from WASHINGTON)
NEW YORK, April 1 (Reuters) - U.S. securities regulators on Thursday halted trading of Vaso Active Pharmaceuticals Inc. (NasdaqSC:VAPH - News), a marketer of over-the-counter pharmaceuticals, through April 15.
The Securities and Exchange Commission questioned assertions made by the Danvers, Massachusetts-based company of regarding an FDA approval of certain key products, among other issues.
Vaso Active said in a statement it is "committed to providing the company's full cooperation," but that it would be "inappropriate to provide a more detailed comment at this time."
The SEC said it questioned the accuracy of assertions made in the company's press releases, annual report, registration statement, and public statements to investors.
Vaso shares closed at $7.59 Wednesday on the Nasdaq.
Vaso Active Pharmaceuticals Statement in Response to SEC April 1st Release
Thursday April 1, 7:00 pm ET
DANVERS, Mass.--(BUSINESS WIRE)--April 1, 2004--Vaso Active Pharmaceuticals (NasdaqSC: VAPH) is committed to providing the company's full cooperation in addressing the concerns raised by the Commission in its release issued April 1, 2004. As this matter is in its early stages, it would be inappropriate to provide a more detailed comment at this time.
--------------------------------------------------------------------------------
Contact:
Vaso Active Pharmaceuticals
Matt Carter, 978-750-1991x28
mcarter@vasoactive.us
Naked Shorts on Earth
Published: 3/23/2004 by Tastes Like Chicken
Greetings, cuz!
No, I have no pictures of Martha behind bars, and I am shocked that you would even want to see such a thing!
Yes, I know what a floorless convertible is.
No it is not a rusted out 1958 Chevrolet that covers you with water from under the dashboard if you drive through a puddle.
Once again, these stock market people have their own little language. I think they obfuscate things on purpose, but hey, what do I know?
Grab a snack and relax, and let’s start at the beginning.
Don’t skip over any of this, OK? Your girlfriend gets naked somewhere in the middle, and you don’t want to miss that, right?
A “floorless convertible” is a kind of bond.
A bond is a “note” or “debt instrument” issued by a company in exchange for money.
The company borrows money from the person they issue the bond to, in exchange for a promise to pay that money back, usually with interest.
Yes, it’s just like an “IOU”. The company owes the bondholder money.
The purchaser of the bond receives principal or interest payments (or both). Some bonds are “secured” by assets of the company, and some are not.
A secured bond allows the holder of that bond to lay claim to the assets of the company if the company fails to meet its obligation to pay the promised principal or interest on the bond.
A debenture is an unsecured bond.
Unlike a secured bond, a debenture is not secured by company assets, and the holder is not entitled to claim any assets of the company if the company defaults on the note.
One particular debenture has a very creative feature attached to it.
A convertible debenture means the bond can be changed, or “converted” from one form to another form. The most common form of change is conversion into common stock.
There are advantages and disadvantages to the company when it issues a convertible debenture. Advantages include the ability to raise money without issuing additional stock (thus avoiding immediate dilution of the stockholder’s earnings per share), and the ability to issue the debenture at a lower interest rate than another form of bond, because the purchaser will accept a lower interest rate for the privilege of converting the debenture into common stock at some point in the future.
Disadvantages to the company include a higher taxable income, dilution of stockholder earnings, and a potential shift in specific shareholder’s control of stock (and their control of the company) when the conversion takes place.
Conversion takes place according to the “conversion ratio”; debenture value X is converted into Y shares of common stock.
The number of shares to be received in the conversion is governed by a formula. Usually, the convertible security is exchanged for common stock of the issuer at the holder's request by dividing the face value of the debenture by a market price of the common stock that is discounted at the time of the conversion.
Now to the specific convertible debenture you asked about:
A floorless convertible debenture has a “floating” exchange rate built into the conversion agreement. The conversion rate (number of shares the debenture can be converted into) is “adjusted” to convert to more shares acquired (per dollar of investment) in the event the price of the stock goes down between the time the debenture is issued and the time when it is converted into stock. The lower the stock price goes, the more shares the holder of the debenture gets for his or her note.
It’s called “floorless” because there is no “bottom” to the lower price of the stock. Stocks can turn out to be worthless, as we all know.
Well, most of us, anyway.
Here’s a very simplified example of how a “floorless” conversion might work:
Nifty Alien Reptiles from Flamfoozie (ticker symbol NARF) issues a floorless convertible debenture with an interest rate of 2% simple interest per year to your sweetheart, Snookiepoo.
On April 1, 2004, the stock of NARF is trading at 1000 Intergalactic Credits per share. On April 1, 2004, Snookiepoo gives the company 1000 Intergalactic Credits in exchange for a piece of paper that says the company will pay her 2% interest (for example) every year for five years. At any time in those five years, Snookiepoo has the right to convert her little piece of paper into one share of stock in NARF.
Additionally, written into this particular note (the floorless convertible debenture) is a clause that says something like,
“If any time in the next five years the stock price is less than 1000 credits per share, and if Snookiepoo decides to exercise her option to convert her note into stock at that same time, then Snookiepoo gets more than one share of NARF (as calculated by the conversion ratio written into the note) when she converts her debenture into shares of stock. In fact, whatever the price is, if it is less than what it is now, she not only gets more than one share, and she not only gets all the stock she would expect to get at that future price, she gets to figure in a additional discount per share of the then-existing stock price when she converts.”
Fast forward…and the stock gets crushed.
Shocking, yes?
On December 25th, 2005, Snookiepoo decides to convert her note to stock. On that day, the stock is trading at 10 (for example). With the conversion rate in the note as her guide, and the discount she gets, she is allowed to convert her note into more than 100 shares of stock.
Sounds like a good deal for Snookiepoo, eh? It is.
But what if (and I say this with all due respect) Snookiepoo wanted to take advantage of the situation? In that case, the company that issued the floorless convertible debenture has a little problem.
Let’s say Snookiepoo happened to be an unscrupulous and very greedy individual with some extra cash to toss at a risky and unsecured bond issued by a company that for some reason couldn’t obtain conventional financing.
Let’s further say that Snookiepoo could short that same company’s stock without actually borrowing it.
Nobody who owns NARF stock and wants it to go higher would want to loan it out in order for it to be shorted, but Snookiepoo doesn’t worry about borrowing the stock.
She just sells it short without borrowing it from anyone first. (Remember, one of the “rules” of selling short is that you have to borrow the stock before you sell it.)
Shorting a stock without borrowing it is called “naked short selling”, or “naked shorting”, and although it is illegal in the United States, it’s not illegal in some other places.
I just realized that I suggested the idea of Snookiepoo being naked.
Not a pretty picture for the puny mammals on this planet.
Put all her clothes back on, and move along, cuz.
If she had the ability and the nefarious intention, and if she could short the stock naked, then she could buy the floorless convertible debenture, and then when the time came, she could convert her debenture into stock (at a discount to the prevailing price) and use the stock she receives to cover her naked short position!
It sounds like that should be illegal, right?
Yes, it probably should be, but there are some instances when it’s not. And that’s the reason why “floorless convertible debentures” are so dangerous to the company that issues them.
It might be possible for Snookiepoo (she is holding the note) to short the stock “naked”, drive the stock price down, and then convert the debenture into stock (at a discount) and cover her short position.
If the sum of the money she collected on the short trade and the money she saved on the discounted conversion were more than the money she put into the bond in the first place, then she would make money…maybe a lot of money if the stock were driven down to the point where it was almost worthless before she had to buy it and cover her short position.
What else could go wrong, you ax?
Plenty. If the company were planning on issuing additional stock to raise the funds to pay back the money it borrowed when it issued the bond, then the company is kinda screwed.
The stock is almost worthless, so the offering would have to be much, much larger than would have been anticipated when the bond was issued.
A large offering of additional shares would dilute the float considerably, and that is something the shareholders would not like at all. (Remember, Snookiepoo just diluted the float when she converted.) The ordinary shareholders would resemble charcoal briquettes at that point.
Here’s the point that a lot of investors miss:
Why would NARF issue a floorless convertible debenture in the first place?
To my way of thinking, there are only three reasons, and none of them are good.
Either the people that are running NARF are idiots, or the company is in so much financial trouble that it has no alternative, or the sellers are in cahoots with whoever buys the note and those sellers have no intention of using the money they raise for legitimate purposes.
No matter what the reason, no matter how “wonderful” the company claims it is or how much the investor likes the stock, the issuance of a floorless convertible debenture is about the biggest red flag you could possibly imagine.
The good news is that under most circumstances, the shareholders can (not necessarily will, but can) quickly learn about the issuance of a floorless convertible, and if they are nimble they may be able move on to a safer investment without too much pain.
I trust this assists your understanding, cuz!
My best wishes to you and Snookiepoo, and have a great week!
Your loving cousin,
Tastes Like Chicken
http://adserv.stocksite.com/commentary/commentary.asp?article=8
United Energy Announces $1.75 Million Financing Arrangement With Laurus Funds
SECAUCUS, N.J., March 25 /PRNewswire-FirstCall/ -- United Energy Corp. (OTC Bulletin Board: UNRG.OB - News) announced today that it has entered into a $1.75 million financing arrangement with Laurus Master Fund, Ltd. ("Laurus Funds"), a financial institution specializing in funding small and micro- capitalization companies. Under the arrangement, United Energy issued a $1.75 million secured convertible term note with a variable rate coupon based on the WSJ Prime Rate. The term note is convertible into equity at an initial conversion price of $1.00 per share. Laurus Funds was also issued warrants to purchase up to 300,000 shares of United Energy's common stock.
United Energy's Chairman and CEO, Ron Wilen stated, "The arrangement with Laurus Funds provides United Energy additional capital to grow through a more aggressive international sales campaign for its current line of specialty chemicals and possibly the acquisition of value-added operating companies producing other environmentally-friendly chemicals. We view this transaction as extremely positive for United Energy and our shareholders."
About United Energy
Headquartered in Secaucus, New Jersey, United Energy is actively engaged in the development, manufacture and sale of environmentally friendly specialty chemical products. United Energy's leading product is its KH-30® multifunctional dispersant and its line of related products, KX-91® and KH- 30S®, which have proven to be effective cleaners in oil and gas wells, pipelines and storage tanks.
Forward Looking Statements
Except for the historical information herein, the matters discussed in this news release include forward-looking statements that may involve a number of risks and uncertainties. Actual results may vary significantly based on a number of factors, including, but not limited to, risks in product and technology development, market acceptance of new products and continuing product demand, the impact of competitive products and pricing, changing economic conditions, including changes in short-term interest rates and foreign currency fluctuations and other risk factors detailed in United Energy's most recent annual report pursuant to the Securities Exchange Act of 1934 and other filings with the Securities and Exchange Commission.
Form 8-K for UNITED ENERGY CORP /NV/
--------------------------------------------------------------------------------
30-Mar-2004
Other Events and Financial Statements & Exhibits
ITEM 5. OTHER EVENT
United Energy Corp. ("United Energy") entered into a financing transaction with Laurus Master Fund, Ltd. ("Laurus") as of March 24, 2004, providing up to $1.75 million in financing. Under the arrangement, United Energy issued a $1,750,000 secured convertible term note at a conversion price of $1.00 per share to Laurus (the "Term Loan"). Laurus was also issued warrants to purchase up to 300,000 shares of United Energy's common stock.
The Term Loan has a term of three years and accrues interest at the greater of the prime rate of interest (as published in The Wall Street Journal) or 4% per anum. Interest shall be payable monthly in arrears commencing on May 1, 2004, and on the first day of each consecutive calendar month thereafter. Monthly amortization payments shall commence on October 1, 2004, at the rate of $58,333.00.
The interest rate is subject to adjustment in .25% increments on a month by month basis if specified conditions are met (including that the common stock underlying the conversion of the convertible term note and the warrant issued to Laurus are registered with the U.S. Securities and Exchange Commission and whether and to what extent the average price of the stock exceeds or is less than the fixed conversion price).
Laurus also has the option to convert all or a portion of the Term Loan into shares of United Energy's common stock at any time, subject to specified limitations, at a fixed conversion price of $1.00 per share. The Term Loan is secured by a first lien on all United Energy's assets. In connection with the Term Loan, Laurus was paid a fee of $61,250 and received a seven-year warrant to purchase up to 300,000 shares of United Energy's common stock at prices ranging from $1.25 per share to $1.75 per share. All stock conversion prices and exercise prices are subject to adjustment for stock splits, stock dividends or similar events.
United Energy agreed to file a registration statement with the U.S. Securities and Exchange Commission covering the shares issuable upon conversion of the Term Loan and the exercise of Laurus' warrants.
The principal documents involved in the transaction are a Securities Purchase Agreement, a Security Agreement, a Secured Convertible Term Note, a Common Stock Purchase Warrant and a Registration Rights Agreement, each of which is dated as of March 24, 2004 and a copy of which is attached hereto as an exhibit to this Current Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
10.1 Securities Purchase Agreement, dated March 24, 2004, between United Energy Corp. and Laurus Master Fund, Ltd.
10.2 Secured Convertible Term Note, dated March 24, 2004, made by United Energy Corp. in favor of Laurus Master Fund, Ltd.
10.3 Security Agreement, dated March 24, 2004, by and between United Energy Corp. and Laurus Master Fund, Ltd.
10.4 Registration Rights Agreement, dated March 24, 2004, by and between United Energy Corp. and Laurus Master Fund, Ltd.
10.5 Common Stock Purchase Warrant, dated March 24, 2004, issued by United Energy Corp., in favor of Laurus Master Fund, Ltd.
99.1 Press release of United Energy Corp., dated March 24, 2004.
Date Open High Low Close Volume Adj Close*
1-Apr-04 0.76 0.85 0.76 0.85 3,780 0.85
31-Mar-04 0.74 0.91 0.68 0.85 31,900 0.85
30-Mar-04 0.75 0.76 0.70 0.73 20,300 0.73
29-Mar-04 0.78 0.84 0.78 0.84 7,500 0.84
26-Mar-04 0.85 0.85 0.67 0.79 26,900 0.79
25-Mar-04 1.01 1.01 0.83 0.85 41,500 0.85
24-Mar-04 0.77 1.01 0.76 1.01 42,766 1.01
23-Mar-04 0.72 0.83 0.67 0.77 43,900 0.77
22-Mar-04 0.70 0.73 0.65 0.73 17,750 0.73
19-Mar-04 0.70 0.70 0.70 0.70 5,500 0.70
18-Mar-04 0.70 0.70 0.70 0.70 0 0.70
17-Mar-04 0.68 0.78 0.68 0.70 37,000 0.70
16-Mar-04 0.67 0.68 0.60 0.68 9,750 0.68
15-Mar-04 0.72 0.72 0.60 0.60 26,228 0.60
12-Mar-04 0.68 0.70 0.68 0.70 5,000 0.70
11-Mar-04 0.65 0.70 0.63 0.68 24,000 0.68
10-Mar-04 0.65 0.70 0.60 0.65 2,275 0.65
9-Mar-04 0.60 0.60 0.60 0.60 0 0.60
8-Mar-04 0.56 0.60 0.52 0.60 41,259 0.60
5-Mar-04 0.56 0.65 0.56 0.65 1,000 0.65
4-Mar-04 0.65 0.65 0.65 0.65 1,500 0.65
3-Mar-04 0.62 0.75 0.60 0.60 14,500 0.60
2-Mar-04 0.60 0.61 0.60 0.61 5,300 0.61
1-Mar-04 0.70 0.70 0.70 0.70 8,000 0.70
27-Feb-04 0.60 0.60 0.60 0.60 6,163 0.60
26-Feb-04 0.75 0.75 0.75 0.75 0 0.75
25-Feb-04 0.71 0.80 0.60 0.75 5,659 0.75
24-Feb-04 0.70 0.77 0.70 0.76 4,000 0.76
23-Feb-04 0.89 0.89 0.70 0.80 19,500 0.80
20-Feb-04 0.89 0.89 0.89 0.89 1,000 0.89
19-Feb-04 0.80 0.80 0.71 0.71 8,753 0.71
18-Feb-04 0.71 0.71 0.71 0.71 5,894 0.71
17-Feb-04 0.71 0.89 0.71 0.89 2,500 0.89
13-Feb-04 0.85 0.85 0.85 0.85 0 0.85
12-Feb-04 0.85 0.90 0.70 0.85 2,200 0.85
11-Feb-04 0.85 0.85 0.85 0.85 0 0.85
10-Feb-04 0.85 0.85 0.85 0.85 1,000 0.85
9-Feb-04 0.90 0.90 0.90 0.90 0 0.90
6-Feb-04 0.90 0.90 0.90 0.90 4,000 0.90
5-Feb-04 0.90 0.90 0.90 0.90 630 0.90
4-Feb-04 0.76 0.90 0.76 0.90 2,400 0.90
3-Feb-04 0.80 0.80 0.75 0.75 53,350 0.75
2-Feb-04 0.63 0.75 0.63 0.75 6,500 0.75
30-Jan-04 0.80 0.80 0.75 0.75 1,000 0.75
29-Jan-04 0.75 0.75 0.75 0.75 0 0.75
28-Jan-04 0.87 0.87 0.70 0.75 20,000 0.75
27-Jan-04 0.95 0.95 0.87 0.87 16,000 0.87
26-Jan-04 0.95 0.95 0.95 0.95 2,600 0.95
23-Jan-04 1.05 1.08 0.95 0.95 36,650 0.95
22-Jan-04 1.04 1.07 0.95 1.00 27,000 1.00
21-Jan-04 1.07 1.08 0.90 0.95 140,530 0.95
20-Jan-04 0.90 0.90 0.76 0.80 25,440 0.80
16-Jan-04 0.70 0.70 0.70 0.70 1,000 0.70
15-Jan-04 0.64 0.77 0.64 0.70 82,500 0.70
14-Jan-04 0.51 0.61 0.50 0.61 28,900 0.61
13-Jan-04 0.42 0.51 0.42 0.50 59,000 0.50
12-Jan-04 0.45 0.45 0.40 0.40 14,675 0.40
9-Jan-04 0.40 0.42 0.40 0.42 200 0.42
8-Jan-04 0.40 0.45 0.40 0.45 17,000 0.45
7-Jan-04 0.40 0.45 0.40 0.45 12,630 0.45
6-Jan-04 0.45 0.45 0.41 0.41 15,133 0.41
5-Jan-04 0.53 0.53 0.47 0.52 30,000 0.52
2-Jan-04 0.44 0.52 0.44 0.50 39,950 0.50
31-Dec-03 0.42 0.48 0.40 0.40 46,000 0.40
30-Dec-03 0.47 0.47 0.42 0.42 5,430 0.42
29-Dec-03 0.51 0.51 0.40 0.47 57,150 0.47
A new bill designed to fight foreign Web censorship has been introduced in Congress.
The legislation, unveiled Wednesday by Rep. Chris Cox, R-Calif., would create an Office of Global Internet Freedom charged with fighting Internet blocking and helping Web users in countries such as China and Syria get around censorship efforts and avoid punishment. The bill also would allocate $50 million each year over the next two years to develop and promote anti-blocking technology.
"Just as past governments have banned pamphlets, jammed radios and committed their gravest atrocities out of the range of TV cameras, many governments are attempting to restrict an individual's freedom to receive and exchange information by blocking the Internet," Cox said in a statement.
The bill, designed to counter authoritarian governments' efforts to block their citizens from the Internet, would provide technological means to circumvent censorship tools. The legislation's policy statement specifically mentions software, including SafeWeb's Triangle Boy, Peek-a-Booty and DynaWeb, and peer-to-peer network Freenet-China.
The bill also would require the submission of a United Nations resolution condemning countries that censor the Web and would require an annual report on nations that abuse Web freedoms.
Access to foreign Internet sites has exposed citizens of countries with restrictive governments to a wide range of news and material they were unable to read otherwise. As a result, countries such as China and North Korea have stepped up their censorship efforts.
For example, Chinese officials recently arrested a writer who posted information about that country's problems on U.S.-based Web pages, and China's government blocked access to Google and AltaVista last month.
Although the amount of money allocated to anti-censorship tools is relatively small, it could spark a proliferation of products designed to circumvent filters both abroad and in the United States.
As a result, the bill could create an unintended clash between U.S. efforts to protect children from inappropriate material and attempts to thwart foreign governments from blocking citizen Web access. For example, federal law in the United States currently requires schools to filter content or lose federal funding, but some of the anti-censorship technology could help children get around the blocking.
But that debate will likely be put off until next year, if it occurs at all. In the final days of a session, before congressmen return home and turn their efforts to election season, many congressmen introduce bills that cover issues important to the lawmakers and to their constituents--even if they aren't likely to get a hearing. The lawmakers are essentially previewing issues they plan resurrect next year.
A similar anti-censorship technology bill is expected in the Senate.
http://msnbc-cnet.com.com/2100-1023-960679.html
As a result of SEC investigations in the mid-1970's, over 400 U.S. companies admitted making questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties. The abuses ran the gamut from bribery of high foreign officials to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharged certain ministerial or clerical duties. Congress enacted the FCPA to bring a halt to the bribery of foreign officials and to restore public confidence in the integrity of the American business system.
http://www.usdoj.gov/criminal/fraud/fcpa/dojdocb.htm
It would appear that this practice would need to be revisited in light of the trillions of dollars being used to woo foriegn governments into Iraq.
Foreign Banks and the Federal Reserve
Foreign banking institutions, which include foreign bank branches, agencies, and U.S.-chartered bank subsidiaries, hold approximately one-fourth of all commercial banking assets in the United States.
Foreign bank branches and agencies operating in the United States are subject to Federal Reserve regulations, and the Federal Reserve examines most foreign bank branches and agencies annually.
Federal Reserve services and privileges are available to foreign bank branches and agencies, but U.S. deposit insurance is not available to branches established after December 1991.
Importance of Foreign Banking Institutions
Foreign banking organizations (FBOs) operate a variety of banking institutions in the United States: branches, agencies, and U.S.- or state-chartered Edge Act and Agreement corporations and banks. Foreign banking institutions play an important role in the U.S. financial system; in June 2000, foreign banking institutions held over $923 billion in assets, approximately 19 percent of the total commercial banking assets in the United States.
Because foreign banking institutions play an integral role in the U.S. financial system, they are supervised and regulated by U.S. banking authorities. The types of regulations faced by a particular foreign banking institution depend in part on whether its U.S. units are chartered in the United States or abroad. Foreign bank branches and agencies are legal extensions of their parent companies, and not freestanding entities in the United States. They do not have any capital of their own and face somewhat different regulations from other depository institutions in the United States. Edge and Agreement corporations and foreign banks' U.S. subsidiaries, on the other hand, are freestanding legal entities with U.S. or state charters and their own capital.
Regulation and Supervision
Before the International Banking Act of 1978 (IBA) was passed, rules governing foreign banking institutions were significantly different from those governing U.S. banking institutions. The IBA brought the different rules into closer alignment, particularly those relating to chartering, branching, and reserve requirements. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980, continuing in the same direction as the IBA, included provisions granting foreign bank branches and agencies operating in the Unites States direct access to Federal Reserve services and privileges such as check clearing, provision of coin and currency, Fedwire, and the discount window. Federal Reserve services and privileges are offered to foreign bank branches and agencies under the same rules and at the same prices as other depository institutions. Another important provision of DIDMCA was to subject all foreign banking institutions accepting deposits to Federal Reserve reserve requirements.
Some FBOs, called "qualified foreign banking organizations," are exempt from some Federal Reserve regulations. For an FBO to qualify for the exemptions, more than half its worldwide business must be banking, and more than half its banking activities must be outside the United States. Qualifying FBOs may undertake any activity outside the United States, and, under certain conditions, own voting shares of any foreign company operating in the United States. (Rules regarding FBOs can be found in Federal Reserve System Regulation K: International Banking Operations.)
Under the IBA, supervision of foreign branch and agency offices in the United States was primarily the responsibility of the state licensing authority and the Office of the Comptroller of the Currency (OCC). The Foreign Bank Supervision Enhancement Act of 1991 (FBSEA) switched this responsibility to the Federal Reserve. As a result, the Federal Reserve generally must examine foreign bank branches and agencies annually. Examiners assess branches and agencies based on their Risk management, Operational controls, Compliance, and Asset quality, or ROCA for short. In addition, the Federal Reserve assesses parent banks' financial conditions to ensure that the banks can manage and support their U.S. branches and agencies effectively. In response to the increasing sophistication and diversity of banks' financial practices, examiners pay particular attention to the risk management practices and controls of both domestic and foreign banks.
If the Federal Reserve or other banking supervisors find that a banking institution has problems with compliance, or engages in unsound banking practices, they may take various measures to address the problems. In less serious cases, supervisors usually take informal action, such as requiring letters of commitment from the problem institution. In more serious cases, however, a range of legal measures may be taken, varying in severity. In the most serious cases, the U.S. activities of a foreign banking institution can be terminated, and the institution can be expelled from the United States.
Establishing a Foreign Banking Institution
Federal Reserve approval is necessary to establish any foreign banking institution in the United States. In addition, foreign banks must obtain regulatory approval from the OCC or the state banking supervisor when establishing new branches and agencies. Although branches and agencies have no capital of their own, those that are federally licensed must deposit cash or eligible securities at approved depository banks to satisfy the "capital equivalency requirement" specified by the IBA. State-licensed branches and agencies also must meet capital equivalency requirements, which vary from state to state.
Types and Activities of Foreign Banking Institutions
Foreign bank branches, which may be federally or state-licenced may provide a full range of banking services. They make short- and long-term loans, make investments, and can accept certain types of deposits. Branches tend to be significantly less expensive to operate than subsidiary banks, and so they are the most common type of foreign banking institution operating in the United States.
Foreign bank branches face certain limitations, however. Although branches may receive deposits of any size from foreigners, they may accept deposits only in excess of $100,000 (wholesale deposits) from U.S. citizens and residents. Furthermore, as a result of the FBSEA, deposits in any foreign bank branch established after December 19, 1991, are not covered by U.S. deposit insurance; deposit insurance is now offered only to U.S.-chartered depository institutions. Foreign agencies specialize in making commercial loans to finance international transactions, and they may accept only short-term deposits related to such transactions.
Edge Act corporations are chartered by the Federal Reserve mainly to engage in international banking activities. Such activities include accepting deposits to finance projects abroad and providing international payment services. Agreement corporations essentially are the same as Edge corporations, but are chartered by states. U.S. subsidiaries of foreign banks, because they are chartered in the United States, may become members of the Federal Reserve and undertake any banking activities permitted U.S.-owned banks.
In December 2000, foreign banking organizations operated or controlled 348 branches, 111 agencies, 79 U.S. commercial banks, and 18 Edge or Agreement corporations. A significant portion of foreign banking institutions' assets is composed of commercial and industrial loans. In June 2000, foreign banking institutions held about $210 billion in commercial and industrial loans, roughly 20 percent of the total in the United States.
http://www.fednewyork.org/aboutthefed/fedpoint/fed26.html
Consumers Pay at the Pump While Oil Companies Pay Themselves
Pending Energy Legislation Worsens Price Problem
by Protecting Oil Companies, Not Consumers
WASHINGTON, D.C. - In the past decade, mergers in the oil industry have
resulted in an uncompetitive domestic oil market that keeps gas prices
artificially high for consumers while the top oil companies rake in
record-setting profits, Public Citizen said today in a new report,
Mergers, Manipulation and Mirages: How Oil Companies Keep Gasoline
Prices High, and Why the Energy Bill Doesn't Help, The national public
interest organization is calling on the U.S. government to fix the price
crisis through increased oversight and regulation, as well as stronger
fuel economy standards to reduce the United States' dependence on oil.
The five largest oil companies operating in the United States are
ExxonMobil, ChevronTexaco, ConocoPhillips, BP-Amoco-Arco and Royal Dutch
Shell. They control 14 percent of global oil production, 48 percent of
domestic oil production, 50 percent of domestic refinery capacity, and
nearly 62 percent of the retail gasoline market. These same companies
also control 21 percent of domestic natural gas production. Since 2001,
these top companies enjoyed cumulative after-tax profits exceeding $125
billion.
This control enables oil companies to manipulate prices by
intentionally withholding supplies. Indeed, a 2001 Federal Trade
Commission investigation into high gasoline prices concluded that oil
firms intentionally withheld or delayed shipping oil to keep prices up.
However, the government has done nothing to end these uncompetitive
practices.
"If the same company owns every step of the process, from crude oil
production to the gas station down the street from your house, it has
utter control over the price people pay at the pump," said Public
Citizen President Joan Claybrook. "Making it worse is our government's
lackadaisical approach to regulating these oil companies as they collect
billions of dollars from every American who drives a car."
A decade ago, the top five oil companies controlled only 8 percent of
global oil production, 34 percent of domestic oil production, 34 percent
of domestic refinery capacity, 27 percent of the retail market and just
13 percent of domestic natural gas production.
The lack of investigations into uncompetitive practices by these large
companies may be explained by the more than $67 million the oil industry
has contributed to federal politicians since 1999 - with 79 percent of
those contributions going to Republicans, according to an analysis of
Federal Election Commission data from the Center for Responsive
Politics. Further, the energy legislation first developed in Vice
President Dick Cheney's secret energy task force and then largely
written behind the closed doors of the congressional energy conference
committee would do nothing to lower oil and gas prices. Instead, it
contains more subsidies for oil and gas corporations.
"The stalled energy bill does nothing to address this worsening
crisis," said Wenonah Hauter, director of Public Citizen's Critical Mass
Energy and Environment Program. "In fact, as the legislation is
currently written, these giant oil companies are the greatest
benefactors, and consumers are the victims."
The most effective way to protect consumers is to restore competitive
markets. The Bush administration should take the following actions or
seek congressional authority to do so if necessary, according to the
report, available at http://www.citizen.org/documents/oilmergers.pdf.
These include:
- Releasing oil supplies from the Strategic Petroleum Reserve, or, at a
minimum, cease filling it.
- Enforcing antitrust laws, thereby making it illegal for companies to
intentionally withhold any energy commodity from the market for the sole
purpose of creating supply shortages in order to drive prices up.
- Assessing how recent mergers have made it easier for large oil
companies to engage in uncompetitive practices, and take concrete steps
- including forced divesture of assets to independent companies - to
remedy the problem of too few companies controlling too much of the
market.
- Requiring oil companies to increase the size of their storage
capacities, requiring them to hold significant amounts in that storage,
and reserving the right to order these companies to release this stored
oil and gas to address supply and demand fluctuations.
- Reducing the United States' oil consumption by 54 billion gallons of
oil by 2012 by improving passenger vehicle fuel economy standards.
- Restoring transparency to energy futures markets by re-regulating
trading exchanges that were exploited by Enron and continue to be abused
by other energy traders.
- Imposing a windfall profits tax to discourage price-gouging.
"Although the Bush administration blames environmental rules for
causing strains on refining capacity, prompting shortages and driving up
prices, company memos show that the largest oil companies have driven
smaller, independent refiners out of business to maximize profits,
resulting in tighter refinery capacity markets," said Tyson Slocum,
research director of Public Citizen's energy program and author of the
report. Ninety-seven percent of the more than 920,000 barrels of oil per
day of capacity that was shut down between 1995 and 2002 was owned and
operated by smaller, independent refiners. Were this capacity
operational today, refiners could use the excess capacity to better meet
today's reformulated gasoline blend needs.
Finally, taxes also have little to do with rising gasoline prices. The
federal gas tax (18.4 cents per gallon) hasn't been changed since 1997,
and the average state gas tax is 19 cents per gallon. Combined, taxes
make up 22 percent of the cost of a gallon of gas today.
http://www.investorshub.com/boards/read_msg.asp?message_id=2751295
FASB Proposes Expensing of Stock Options
The Financial Accounting Standards Board today issued an exposure
draft that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a)
equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be
settled by the issuance of such equity instruments. Proposed Statement of
Financial Accounting Standards: Share-Based Payment (Mar. 31, 2004).
The proposed statement generally would require that companies account
for share-based compensation transactions, such as a grant of stock
options, using a fair-value-based method (i.e., valuation at the amount at
which an asset could be bought or sold in a current transaction between
willing parties). It would reject the practice, currently used by a
majority of companies, of valuing stock options at their intrinsic value
(i.e., the amount by which the fair value of the underlying stock
exceeds the exercise price of an option). Since most stock options have a
fair value but no intrinsic value when granted, the majority of
companies currently do not book stock option grants as an expense.
Comments on the exposure draft are due by June 30, 2004. The proposal
is the most controversial ever made by FASB, and a large number of
comments is expected. The exposure draft contemplates that the proposed
statement would be applied to public entities (and nonpublic entities
that had adopted the fair-value-based method of accounting for recognition
or pro forma disclosures) prospectively for fiscal years beginning
after December 15, 2004, as if all share-based compensation awards granted,
modified, or settled after December 15, 1994, had been accounted for
using the fair-value-based method of accounting. Other nonpublic
entities would apply the proposed statement prospectively for fiscal years
beginning after December 15, 2005. The exposure draft is available online
at
http://www.fasb.org/draft/ed_intropg_share-based_payment.shtml
Over $11,000,000,000,000 of investment capital is available in the US alone.
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Taurus Global functions as your guide. Through our knowledge and experience we enable you to identify the appropriate capital resources and properly structure and execute an approach that can result in a very substantial net worth.
In many instances, Taurus Global has multiple decade relationships with its affiliations. We believe such comprehensive knowledge of prospective relationships is often invaluable.
Contact us immediately if you have a fund or business that could benefit from the resources of the global capital markets.
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Franco Scalamandre, President
Franco Scalamandre previously served as Chief Executive Officer of Franklin Financial, a Los Angeles based investment company which provides financial, technological, and management expertise to companies that enjoy a franchise in their respective fields and have the ability to achieve superior financial results. Franklin Financial arranged strategic distribution channels for its clients that reduced risk with respect to proforma revenues without significant expense and thereby made potential funding alternatives more attractive for all parties. Franklin Financial has participated in arranging over $250,000,000 in financings. Additionally, Mr. Scalamandre previously managed DM International, a worldwide distribution and direct marketing company.
Mr. Scalamandre previously served for three years as advisor to ASEAN Communications, Singapore, a technology and finance company providing capital and state of the art technologies to government clients in the areas of communications and business electronics. Prior to that, Mr. Scalamandre worked in the commercial real estate business with Franklin Associates and Andrex Development Company, an office and industrial real estate development company with over $500 million of office and industrial projects in Southern California. Mr. Scalamandre received his Bachelor of Arts Degree Magna Cum Laude in Economics from Harvard University in 1979 and was awarded the Harvard Scholarship for "Academic Distinction of the Highest Achievement during the Academic Year."
Mr. Franco Scalamandre
President
Taurus Global, LLC
22287 Mulholland Highway
Suite 265
Calabasas, CA 91302
Phone 818 710-7650
Fax 818 710-1121
Cell 323-252-9200
e-mail fs@taurusglobal.com
Lending By Non-Canadians On The Security Of Real Estate
Weekly News Alerts
Edit or Add to your existing selection of 9 topics. >Edit<
Article by Silvana D'Alimonte
Non-Canadian investors who are considering real estate based lending in Canada should be aware of certain regulatory requirements or limitations in Canada.
Income Tax Act (Canada)
If a lender has a "permanent establishment" in Canada and carries on business in Canada, it will be subject to Canadian income taxes. A non-resident lender with no Canadian presence who lends to a Canadian borrower will not be subject to Canadian income tax on its business profits, even though some of its profits may be generated in Canada. However, the Canadian government does impose a withholding tax of 25% on most payments of interest by Canadian residents to foreign lenders. Bilateral tax treaties between Canada and the investor’s country may help by setting a lower withholding tax rate. As well, there are limited exemptions from Canadian withholding tax on interest. For example, there is no withholding tax on interest payable by a resident Canadian corporation to an arm’s length foreign lender, provided that no more than 25% of the principal amount of the loan is due within five years, except in certain circumstances, such as default in the scheduled payment of interest or principal.
Mortgage Brokers Act (Ontario)
A non-resident intending to provide mortgage loans in Ontario will have to consider the Mortgage Brokers Act (Ontario), which imposes certain constraints. In order to carry on a business involving lending on the security of real estate, a person or entity must be registered under the Act as a mortgage broker. Certain lenders are exempt, mainly financial institutions governed by other legislation, such as banks and trust companies. To become registered, an individual, partnership, association or corporation must be a Canadian citizen or permanent resident of Canada. The Mortgage Brokers Act (Ontario) does not permit corporations to carry on business as mortgage brokers if the total percentage of shares held by non-residents exceeds 25%, the percentage of shares held by a single non-resident exceeds 10%, or if the corporation has not been incorporated in Ontario or federally.
The requirement for permanent residency (essentially, being required to have an office in Ontario) may be problematic for foreign lenders who wish to lend into Canada without establishing a new business in Canada.
Bank Act (Canada)
The 1999 amendments to the Bank Act, enabling foreign banks to establish and operate full service or lending branches in Canada, provide investment opportunities by reducing both barriers to entry and costs of administration. Foreign banks no longer have to incorporate a Canadian subsidiary or open a representative office. The amendments will hopefully promote foreign bank presence in Canada and encourage competition in the financial services sector.
Foreign bank branches generally have the same abilities as domestic banks and foreign bank subsidiaries, with the exception of taking deposits. Generally, full-service foreign branches may not accept retail deposits, which are deposits of less than $150,000, and lending branches may not accept any deposits or borrow funds except from other financial institutions. For lending branches only a minimal capital deposit of $100,000 is required. For both branches, there is an increased ability to rely on the corporate governance processes of the parent and the branches are less regulated. For example, foreign bank branches cannot be members of Canada Deposit Insurance Corporation and thus can avoid the costly regulatory compliance process associated with being a member. The ability of a foreign bank branch to lever off the capital of its parent bank gives foreign banks a greater opportunity to focus on commercial banking and engage in various lending activities.
The Income Tax Act was also amended to ensure that foreign bank branches would be subject to tax treatment equivalent to that which applied to Canadian domestic banks. For example, Canadian borrowers can make interest payments to authorized foreign banks without withholding tax since those banks are deemed to be resident in Canada for the purposes of amounts paid or credited to the bank when the payments are in respect of that bank’s Canadian banking business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Australia: Australian Lenders Put On Notice
Article by Karen O'Flynn
Australia's relatively lenient attitude to tardy lenders may be about to change.
The Federal Court has questioned the use of judicial discretion to validate the late registration of debentures and other charges. If other courts adopt the same attitude, lenders (and other secured creditors) will have to tighten up their back office procedures.
Background
Australia's Corporations Act requires the public registration of charges over company property. When a company goes into liquidation, priority between secured creditors is determined by the chronological order in which they registered their charges.
Public registration allows other potential creditors to determine the extent to which the company's assets are pledged to the payment of particular secured creditors. In general terms, unsecured creditors are only entitled to be paid out of those assets - if any - left over after secured creditors have taken their cut. A company which has given charges over all or most of its assets may be seen a greater credit risk for unsecured creditors than a company which has no charges over its property.
This straightforward position is subject to some important qualifications.
A charge must be registered within 45 days of its creation. Late registration of charges has a number of consequences. The most important of these is that the charge will be voided if the company goes into liquidation within six months of the late registration.
The second important qualification is that the Court has the power to extend the time for registration of a charge. This can work in the following way:
1 January - company grants charge
14 February - time for registration expires
28 February - charge is registered
14 March - chargeholder successfully applies to court to extend time for registration of charge until 28 February
1 May - company goes into liquidation.
In practice, it's relatively common for chargeholders to lodge a charge late but not to apply for an extension of time. It's only when the company goes into liquidation that the creditor realises that the late registration will be useless without a court order to validate it.
Australian courts will hear extension applications made after the company has gone into liquidation. Although reluctantly, the courts will tend to grant an extension if they can be convinced that the late lodgement was a genuine accident and that other creditors' interests will not be prejudiced.
However, that may be about to change.
"The better view"
A Full Court of the Federal Court recently expressed strong doubts about whether courts actually have the power to hear extension applications after the company has gone into liquidation.
All three judges said that, when read correctly, the relevant statutory provision only allows applications before the date of winding up. Once winding up has begun, a court has no power to grant an extension. However, two of the judges also acknowledged that their reading of the statute was at odds with the prevailing line of cases. Faced with this, they opted to follow the existing authorities, rather than their own preferred interpretation.
The third judge, Whitlam J, held that the existing authorities were plainly wrong and should not be followed.
Implications
Although the Federal Court ended up granting this particular extension application, its comments will provide significant ammunition for unsecured creditors and liquidators.
It's now reasonable to expect that, sooner or later, this issue will be taken to the High Court for final pronouncement. Although it's impossible to predict how the High Court would rule, history shows that it doesn't hesitate to overturn entrenched authorities if it thinks that those authorities were incorrect.
A High Court ruling that extensions can't be granted after winding up has begun would not be a disaster for secured creditors. On the other hand, it would highlight the need for effective procedures for handling charges.
Many financial institutions already have compliance processes for ensuring timely registration. Nevertheless, the fact that applications for extensions regularly appear in court suggests that there may still be room for improvement across the industry as a whole.
Outside the finance industry, trade creditors who take a charge as a one-off transaction will have to rely on their professional advisers to avoid late registration and the risk of completely losing their security.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Cayman Stock Exchange Achieves Recognised Status With Inland Revenue, by Amanda Banks, Tax-News.com, London 12 March 2004
With effect from 4 March 2004, the Board of the Inland Revenue has designated the Cayman Islands Stock Exchange as a ‘recognised stock exchange’ under section 841 of ICTA.
Section 841 ICTA is exclusively concerned with recognition for tax purposes. Its scope does not cover recognition or approval for regulatory or other purposes, nor approval or recommendation of any investments listed or traded on an exchange.
The term ‘recognised stock exchange’ occurs throughout the Taxes Acts and in various tax regulations. For example it is used in the definition of a close company in section 415 ICTA 1988, and in the definition of investments which may be held in PEPs and ISAs. The term is often used in the phrase ‘listed on a recognised stock exchange’ or in similar or related expressions.
The definition of a recognised stock exchange includes the London Stock Exchange and any such stock exchange outside the UK as is designated in an Order of the Board of Inland Revenue.
http://www.tax-news.com/asp/story/story.asp?storyname=15365
HONG KONG IMPROVES SECURITIES LISTINGS..
Changes planned to enhance market quality..
Hong Kong Announces New Proposals To Improve Listing Regulations, by Mary Swire, Tax-News.com, Hong Kong 30 March 2004
Following a public consultation, the government of Hong Kong has announced new measures to improve listings regulation, to “enhance market quality.”
"We are pleased to note that there is overwhelming support for giving statutory backing to certain fundamental listing requirements and expanding the dual filing system," announced the Secretary for Financial Services and the Treasury, Mr Frederick Ma.
He continued: "The proposed improvement measures set out in the Consultation Conclusions will contribute towards a quality market. They will further strengthen our position as the premier capital formation centre for the Mainland and a major international financial centre in the region."
"We will work closely with the Securities and Futures Commission (SFC), the Hong Kong Exchanges and Clearing Limited (HKEx) and all market users towards this common goal," Mr Ma said.
The Consultation Conclusions recommend codifying in the statute the more important listing requirements, i.e. financial reporting and other periodic disclosure, disclosure of price-sensitive information and shareholders' approval for notifiable transactions. This will be achieved by subsidiary legislation to be made by the SFC under s.36 of the Securities and Futures Ordinance (SFO).
In parallel, the Government will introduce a Securities and Futures (Amendment) Bill into the Legislative Council to the effect that breaches of statutory listing requirements will become a new type of market misconduct. Any persons who breach the statutory listing requirements can either be subject to civil sanctions imposed by the Market Misconduct Tribunal under Part XIII of the SFO, or criminal sanctions under Part XIV of the SFO following prosecution.
Mr Ma added: "Any breach of statutory listing requirements would not only hurt our investors, but also tarnish the reputation of our equity market. By bringing the regulatory regime for listing in line with that for other types of market misconduct, such as insider dealing and stock market manipulation, we hope to demonstrate to the local and international investors our commitment to enhancing market quality."
To address market calls for swift action to be taken by the SFC, the Government will also amend the SFO to allow the SFC to impose direct civil sanctions, namely reprimands and disqualification orders, on specific, well-defined "primary targets" for breaches of the statutory listing requirements. It is the consensual view among the regulators that these "primary targets" should be the issuers, directors and corporate officers, who are primarily accountable for corporate disclosure and other corporate activities under the listing regime.
"We shall continue to rely on the regulatory framework under the SFO, in particular the licensing regime, for the SFC to regulate IPO sponsors. We note the efforts being made by the SFC and HKEx to upgrade the regulation of sponsors," Mr Ma observed. "We recommend that they should expedite action on this front."
Mr Ma noted that the Government aimed at introducing the Securities and Futures (Amendment) Bill into the Legislative Council in early 2005, as pledged by the Financial Secretary in his Budget Speech for 2004-05.
http://www.tax-news.com/asp/story/story.asp?storyname=15543
Authority to require additional information
If, as a result of adverse market conditions or based on reports provided pursuant to subparagraph (A) of this paragraph or other available information, the appropriate regulatory agency reasonably concludes that it has concerns regarding the financial or operational condition of any government securities broker or government securities dealer registered under this section, such agency may require the registered person to make reports concerning the financial and securities activities of any of such person's associated persons, other than a natural person, whose business activities are reasonably likely to have a material impact on the financial or operational condition of such registered person. The appropriate regulatory agency, in requiring reports pursuant to this subparagraph, shall specify the information required, the period for which it is required, the time and date on which the information must be furnished, and whether the information is to be furnished directly to the appropriate regulatory agency or to a self-regulatory organization with primary responsibility for examining the registered person's financial and operational condition.
http://www.law.uc.edu/CCL/34Act/sec15C.html
The primary functions of the Office of Inspector General are to
1) perform audits of Commission operations, programs, activities, functions, and organizations, and
2) conduct investigations of alleged staff (and contractor) misconduct.
The Office accepts written or oral complaints, as well as anonymous allegations, although investigations are usually most effective if the complainant can provide specific information or documents upon request. The Office is also interested in receiving suggestions for possible improvements to the SEC's programs and operations.
You may send information about possible staff or contractor misconduct, or suggestions for improvements, to this mailbox. If you are comfortable in doing so, we ask that you provide your name, postal address, e-mail address, and a daytime telephone number where you can be reached easily. Remember that your e-mail is not confidential and others may intercept and read your e-mail. If you do not wish to send information to us via e-mail, you may telephone us at (202) 942-4460, FAX us at (202) 942-9653, or write to the following address:
Office of Inspector General
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549-1107
oig@sec.gov
This mailbox may be used to contact the SEC's Office of Inspector General. This mailbox should not be used to report possible violations of the federal securities laws by persons outside the SEC (see Enforcement Complaint Center) or to make a complaint about your broker or an unfair sales practice (contact the Commission's Office of Investor Education and Assistance at 202-942-7040 or by e-mail at help@sec.gov.)
The Colorado Supreme Court Office of Attorney Regulation Counsel is authorized to investigate allegations of misconduct by:
1. Colorado Licensed Attorneys,
2. Colorado Magistrates,
3. Colorado Licensed Attorneys Serving as Municipal Court Judges,
4. Allegations of the Unauthorized Practice of Law,
5. Matters Related to an Applicant for Admission to the Colorado Bar, and
6. Matters Related to the Colorado Attorneys' Fund For Client Protection.
To file a complaint related to any of the above topics, you may contact the Office of Attorney Regulation Counsel by calling (303) 893-8121, or toll free 1-877-888-1370. Please do not file a complaint in writing before contacting the Office of Attorney Regulation Counsel by telephone. You will be informed if written information is helpful in evaluating your complaint. When you call the office regarding a complaint, you will be connected to the central intake division. A non-lawyer, support-staff person in the central intake division will initially question you regarding your allegations. The support-staff person may not provide legal advice or render an opinion regarding your complaint. Rather, your complaint will be assigned for investigation by an attorney in the central intake division. All of the attorneys working within the central intake division have extensive experience in the practice of law. Either the assigned attorney or a non-lawyer investigator will contact you regarding your complaint as soon as possible. Because of the number of complaints filed with the office, a delay of several days is possible. It is important to understand that Attorney Regulation Counsel cannot review a judicial decision made by a magistrate or judge. Additionally, the attorney assigned to your complaint does not represent you and cannot assist you in your legal matter. The jurisdiction of Regulation Counsel is limited to enforcement of the Colorado Rules of Professional Conduct.
When filing a complaint please have the following information available:
Your full name, address and phone number.
Attorney's full name, registration number, address, lawfirm, and phone number.
(For assistance with this information click here.)
Date of occurance and date of your awareness.
Court location and case numbers (if you have a court case).
When filing a complaint please be aware that:
This office will NOT accept anonymous complaints.
The attorney in question can NOT retaliate against you.
Your grievance will require approximately 20 minutes to file.
The average processing time for complaints is 10 days to 2 weeks.
http://www.coloradosupremecourt.com/Regulation/Complaints.htm
Colorado Supreme Court -Attorney Regulation Counsel
Attorneys Must Meet High Professional Standards
Becoming a licensed attorney requires many years of difficult studies and successful completion of a grueling state-administered bar exam. The Colorado Supreme Court has established high standards of ethics for attorneys. The standards are contained in the Court rules and the Colorado Rules of Professional Conduct (Volume 12 Colorado Revised Statutes Chapter 20 and the Appendix to Chapters 18-20).
The Court has also established procedures regarding the investigation of alleged unethical conduct. The procedures are designed to provide a thorough and objective review of the attorney's conduct, and to resolve the matter in a way that is fair to the complainant and to the attorney.
To administer the procedures, the Colorado Supreme Court has appointed an Office of Attorney Regulation Counsel; a nine-member Attorney Regulation Committee, composed of both attorneys and lay persons; and an Office of the Presiding Disciplinary Judge. (No tax dollars are used to fund the attorney regulation process.)
Ethics and Discipline
When attorneys enter the practice of law, they take an oath to uphold the law and to follow the standards of ethics established by the Colorado Supreme Court. An attorney who violates the law and/or those standards is subject to discipline. In cases involving minor misconduct, an attorney may be admonished, censured, or placed in a diversion program. In serious matters, attorneys face suspension of their license to practice law or disbarment.
The Office of Attorney Regulation Counsel receives many requests for investigation regarding conduct that does not constitute a violation of the standards of ethics. For example, attorneys who have honest disagreements with their clients about how a case should be handled - or should have been handled have not engaged in ethical misconduct. Similarly, an error in judgment is not necessarily unethical conduct. Attorneys, like everyone else, make mistakes. Only if the mistake constitutes gross negligence will it be a cause for discipline.
Except for unusual circumstances, a disagreement over legal fees is not evidence of misconduct. Persons having fee disputes will usually be referred to a voluntary committee of the Colorado Bar Association that arbitrates fee disputes. The CBA committee will attempt to help the parties reach a fair settlement of the problem.
Finally, there are situations which a client may find most annoying, but which do not constitute unethical conduct. An example would be the attorney's failure to explain fully what is going to happen in the client's case, or the attorney's failure to respond to each of the client's telephone calls. Nonetheless, the Office of Attorney Regulation Counsel is anxious to see that attorneys avoid these situations. The office will suggest steps that attorneys can take to prevent the recurrence of communication problems.
http://www.coloradosupremecourt.com/Regulation/Regulation.asp
Lies, Half-Truths, and Hubris
Corporate insiders are spouting lies, half-truths, and hubris to prevent investors from getting a whiff of fairer elections for boards of directors. You can help the SEC make the right choice with an email by Wednesday.
By Eliot Cohen
March 29, 2004
A Securities and Exchange Commission (SEC) proposal to allow investor nominees for boards of the directors on the proxy ballot has set off alarms in the normally somnolent realm of corporate governance. The SEC has already received a record 13,000-plus comments on its proposal. Commissioners have extended the commentary period until March 31, so you can still be heard with an email to the SEC.
Before discussing specifics of the proposal and why Foolish investors should support it, consider the election system that opponents of reform are struggling to preserve.
Incumbent board members control the nominating process. Generally, they think they do a great job so they re-nominate themselves. For vacancies, they invite their pals. The company ballot (printed and mailed at shareholder expense) offers just one candidate per available position. Although investors can accept or reject those candidates, even if 99.99% of shares withhold authority from a nominee, 0.01% affirmative means election.
Investors can nominate their own candidates but those nominees won't appear on the official company ballot. Challengers have to pay for a separate ballot and distribute it to all voters at a huge expense, in accordance with rules established by the incumbents, who are free to sue opponents, again, using shareholder money. Failure to follow those rules to the letter automatically grants all uncast votes to the company's candidates.
That system makes the old Soviet Union look democratic and dissident-friendly. Of those 13,000-plus commentators, the only ones opposing reforms are corporate beneficiaries of the current system, supported by their lawyers, lobbyists, and other paid agents.
The SEC's proposed reforms aren't fruits of glasnost, but a response to the string of corporate scandals that keep coming. At the heart of the outrages at Enron (OTC: ENRNQ), Tyco (NYSE: TYC), WorldCom cum MCI (OTC: WCOEQ), Adelphia (OTC: ADELQ), and others that vaporized billions in shareholder equity, a board of directors neglected its legally mandated fiduciary duty to protect the interests of investors.
Many directors don't take that duty seriously due to their Soviet-style selection. Examine the process for a significant role for investors. You won't find one. That means shareholders can't hold directors accountable.
Since fellow directors rather than shareholders determine who stays on the board -- collecting fat fees and stock-option grants for a few days work a year -- there's a real incentive to make nice with board colleagues, particularly the members of management directors are supposed to be supervising. That reality also undermines director independence rules recently issued by the stock exchanges; even directors that start out truly independent don't stay that way for long. Bottom line: What's a $6,000 shower curtain among pals?
If adopted, the SEC proposal would barely change this rotten system. Investors representing 5% or more of company shares would be able to place one or two director candidates on the company proxy ballot sent to all shareholders alongside management's nominees, but only one year after some "triggering event" such as a 35% withhold vote for a director or the board's failure to act on a shareholder resolution that received majority support.
The rule's conditions and limits are nonsense, but its adoption would help establish two important rights: investor access to the proxy ballot and a meaningful shareholder role in the voting. This rule would bring the proverbial camel's nose into the boardroom toward a system that gives shareholders a real voice and choice in selecting directors to oversee the corporations they own.
Corporate insiders recognize the danger, and a who's who of anti-investor interests have lined up to oppose the reform. You can see chapter and verse in the public comments to the SEC and the transcript of a March 10 SEC Roundtable on the issue. Their arguments, many recycled from the battle against Sarbanes-Oxley accounting reforms, would be amusing if the issue wasn't so important.
The argument that perhaps best illustrates the mix of half-truths, lies, and hubris investors still get from corporate insiders is the assertion that this rule would allow "special interests masquerading as shareholder interests" (in the words of U.S. Chamber Commerce head Thomas J. Donohue) a place on the board.
That's nonsense because:
The current system already serves a single special interest exclusively -- that of incumbent directors. Insiders don't have a problem with that because they're sure they know what's best for shareholders.
If shareholders legitimately elect a director, then that director doesn't represent a "special interest" but the owners of the company. One CEO whined that putting an investor nominee on the ballot would be like one country invading a neighbor if they disagree. It's more like a homeowner knocking on her door to ask the butler for a look around. Insiders keep forgetting they work for investors instead of the other way around. Some insiders at the SEC Roundtable even argued, "Corporations are not in business to listen shareholders."
The SEC rule would simply allow investors to nominate a director on equal terms with management's choices; the rule wouldn't grant them an automatic seat. But corporate insiders have trouble envisioning a system where nomination is not tantamount to election (i.e., one where shareholder votes matter). Insiders contend that fair, honest elections for directors would prevent corporations from functioning. We use elections to choose our political leaders to make life and death decisions, but that system is too risky for corporations.
Whenever investors complain about company practices, insiders offer a simple solution: sell. That not only evades the question, but it's not a practical solution. First, for any number of reasons the investor may not want to sell -- from unwelcome tax consequences to having bought in order to remedy the situation prompting the complaint (such as trying to eliminate a conflict of interest in management or change the composition of the board).
Most importantly, as index investing increasingly becomes part of the landscape, shareholders don't have the luxury of choosing to invest only in companies practicing good corporate governance. They need to insist on better regulation that will force all companies to improve their practices. It takes a lot of chutzpah for Peter Wallison of the American Enterprise Institute to try to excuse bad corporate practices by telling investors, "But of course, you buy an index fund in part for the diversification. You take the good with the bad."
Alternatively, anti-reformers offer several riffs on the "we already get it" theme. Steve Odland, CEO of AutoZone (NYSE: AZO), recounts preaching the gospel of good governance since arriving at the car parts retailer three years ago, and how carefully he and his peers work to listen to shareholders. Like the overwhelming majority of his CEO peers, Odland also serves as chairman of the board at AutoZone. In other words, Chairman Odland supervises CEO Odland.
Even in this supposedly enlightened age, management's board nominees on the latest proxies I received from Oracle (Nasdaq: ORCL) or Applied Materials (Nasdaq: AMAT) included managers past and present, longtime directors who -- unlike investors -- have never risked a dime of their own money in the company, and so-called independent directors with longstanding connections to other officers. There wasn't a single one I could support in good conscience. Insiders might claim otherwise, but these problems aren't fixed (Sabranes-Oxley addresses accounting, not accountability), and it's not just a few bad apples.
Consider recent events at Disney (NYSE: DIS). The real shame isn't that 43% of shares withheld authority from Michael Eisner and embarrassed him into stepping down as chairman; it's that the board bounced Roy Disney after he voiced opposition to Eisner.
Similarly, after Walter Hewlett led the fight against Hewlett-Packard's (NYSE: HPQ) merger with Compaq and won support from just under half the shareholders (no other director had demonstrated that level of investor support), he wasn't nominated for another term.
Put simply, too many corporate insiders profess to welcome sharp-elbowed competition in the marketplace, but think board members should simply nod and agree with whatever the leaders say. Just like it was on the Politburo. Tell the SEC to tear down that wall.
Email the SEC your opinion and join the discussion about the proposal on our News & Commentary board.
Eliot Cohen is managing director of 8 1/2 Global Communications in Hong Kong, and a contributor to publications on three continents; the sun never sets on this native New Yorker's fight for investor rights. He owns shares in Applied Materials and Oracle. You can reach him via email.
http://www.fool.com/news/commentary/2004/commentary040329ec.htm?ref=btp
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FBI adds to wiretap wish list
By Declan McCullagh and Ben Charny
Staff Writer, CNET News.com
http://news.com.com/2100-1028-5172948.html
Story last modified March 12, 2004, 1:05 PM PST
A far-reaching proposal from the FBI, made public Friday, would require all broadband Internet providers, including cable modem and DSL companies, to rewire their networks to support easy wiretapping by police.
A far-reaching FBI proposal would require all broadband Net providers, including cable modem and DSL companies, to rewire their networks to support easy wiretapping by police.
Bottom line:
If approved as drafted, the proposal could dramatically expand the scope of the agency's wiretap powers, raise costs for cable broadband companies and complicate Internet product development.
More stories on this topic
The FBI's request to the Federal Communications Commission aims to give police ready access to any form of Internet-based communications. If approved as drafted, the proposal could dramatically expand the scope of the agency's wiretap powers, raise costs for cable broadband companies and complicate Internet product development.
Legal experts said the 85-page filing includes language that could be interpreted as forcing companies to build back doors into everything from instant messaging and voice over Internet Protocol (VoIP) programs to Microsoft's Xbox Live game service. The introduction of new services that did not support a back door for police would be outlawed, and companies would be given 15 months to make sure that existing services comply.
"The importance and the urgency of this task cannot be overstated," says the proposal, which is also backed by the U.S. Department of Justice and the Drug Enforcement Administration. "The ability of federal, state and local law enforcement to carry out critical electronic surveillance is being compromised today."
Because the eavesdropping scheme has the support of the Bush administration, the FCC is expected to take it very seriously. Last month, FCC Chairman Michael Powell stressed that "law enforcement access to IP-enabled communications is essential" and that police must have "access to communications infrastructure they need to protect our nation."
The request from federal police comes almost a year after representatives from the FBI's Electronic Surveillance Technology Section approached the FCC and asked that broadband providers be required to provide more efficient, standardized surveillance facilities. Such new rules were necessary, the FBI argued, because terrorists could otherwise frustrate legitimate wiretaps by placing phone calls over the Internet.
"It is a very big deal and will be very costly for the Internet and the deployment of new technologies," said Stewart Baker, who represents Internet providers as a partner at law firm Steptoe & Johnson. "Law enforcement is very serious about it. There is a lot of emotion behind this. They have stories that they're very convinced about in which they have not achieved access to communications and in which wiretaps have failed."
Broadband in the mix
Broadband providers say the FBI's request would, for the first time, force cable providers that sell broadband to come under the jurisdiction of 1994's Communications Assistance for Law Enforcement Act (CALEA), which further defined the already existing statutory obligations of telecommunications carriers to help police conduct electronic surveillance. Telephone companies that use their networks to sell broadband have already been following CALEA rules.
"For cable companies, it's all new," said Bill McCloskey, a BellSouth spokesman.
Several cable providers, including Comcast, Time Warner Cable and Cablevision Systems, had no immediate comment on the FBI's request.
The FBI proposal would also force Vonage, 8x8, AT&T and other prominent providers of broadband telephone services to comply with CALEA. Executives from these companies have said in the past that they all intend to comply with any request law enforcement makes, if technically possible.
Broadband phone service providers say they are already creating a code of conduct to cover some of the same issues the FBI is addressing--but on a voluntary basis, according to Jeff Pulver, founder of Free World Dialup. "We have our chance right now to prove to law enforcement that we can do this on a voluntary basis," Pulver said. "If we mandate and make rules, it will just complicate things."
Under CALEA, police must still follow legal procedures when wiretapping Internet communications. Depending on the situation, such wiretaps do not always require court approval, in part because of expanded wiretapping powers put in place by the USA Patriot Act.
A Verizon representative said Friday that the company has already complied with at least one law enforcement request to tap a DSL line.
This week's proposal surprised privacy advocates by reaching beyond broadband providers to target companies that offer communications applications such as instant-messaging clients.
"I don't think it's a reasonable claim," said Marc Rotenberg, director of the Electronic Privacy Information Center. "The FCC should seriously consider where the FBI believes its authority...to regulate new technologies would end. What about Bluetooth and USB?"
Baker agrees that the FBI's proposal means that IP-based services such as chat programs and videoconferencing "that are 'switched' in any fashion would be treated as telephony." If the FCC agrees, Baker said, "you would have to vet your designs with law enforcement before providing your service. There will be a queue. There will be politics involved. It would completely change the way services are introduced on the Internet."
As encryption becomes glued into more and more VoIP and instant-messaging systems like PSST, X-IM and CryptIM, eavesdropping methods like the FBI's Carnivore system (also called DCS1000) become less useful. Both Free World Dialup's Pulver, and Niklas Zennstrom, founder of Skype, said last month that their services currently offer no easy wiretap route for police, because VoIP calls travel along the Internet in tens of thousands of packets, each sometimes taking completely different routes.
Skype has become a hot button in the debate by automatically encrypting all calls that take place through the peer-to-peer voice application.
The origins of this debate date back to when the FBI persuaded Congress to enact the controversial CALEA. Louis Freeh, FBI director at the time, testified in 1994 that emerging technologies such as call forwarding, call waiting and cellular phones had frustrated surveillance efforts.
Congress responded to the FBI's concern by requiring that telecommunications services rewire their networks to provide police with guaranteed access for wiretaps. Legislators also granted the FCC substantial leeway in defining what types of companies must comply. So far, the FCC has interpreted CALEA's wiretap-ready requirements to cover only traditional analog and wireless telephone service, leaving broadband and Internet applications in a regulatory gray area.
Under the FBI's proposal, Internet companies would bear "sole financial responsibility for development and implementation of CALEA solutions" but would be authorized to raise prices to cover their costs.
Related News
VoIP: It's not so easy to listen in February 13, 2004
http://news.com.com/2100-7352-5159159.html
Feds seek wiretap access via VoIP January 8, 2004
http://news.com.com/2100-7352-5137344.html
FBI targets Net phoning July 29, 2003
http://news.com.com/2100-1028-5056424.html
FBI wants Carnivore powers for phone taps November 21, 2001
http://news.com.com/2100-1033-276115.html
Get this story's "Big Picture"
http://news.com.com/2104-1028-5172948.html
The OCC has updated two annual publications: Significant Precedents, a compilation of precedential legal determinations, corporate licensing decisions and community development investments permitted by the OCC, and Activities Permissible for a National Bank, a compilation of the OCC's authorizations of activities that the agency has determined to be part of, or incidental to, the business of banking.
http://www.occ.treas.gov/sigpre.pdf
http://www.occ.treas.gov/corpapps/BankAct.pdf
March 26, 2004 - Donald E. Powell Chairman Federal Deposit Insurance Corporation Remarks Before The National Association For Business Economics March 26, 2004 Washington, DC. www.fdic.gov/news/news/press/2004/pr3004.html
March 26, 2004 - Legal Interpretations Provision of fleet management services to some non-leased vehicles. www.federalreserve.gov/boarddocs/legalint/bhc_changeincontrol/2003/20031219/
March 26, 2004 - The Federal Reserve Board on Friday announced that public meetings will be held next month in New York and Chicago on the proposal by J. P. Morgan Chase & Co. to merge with Bank One Corporation. www.federalreserve.gov/boarddocs/press/orders/2004/20040326/default.htm
March 26, 2004 - Remarks by Governor Edward M. Gramlich At the Federal Reserve Board Models and Monetary Policy Conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/20040326/default.htm
March 26, 2004 - The Federal Reserve Board on Friday issued revisions to Regulation Z, which implements the Truth in Lending Act, and to the official staff commentary that applies and interprets the requirements of the regulation. www.federalreserve.gov/boarddocs/press/bcreg/2004/20040326/default.htm
March 25, 2004 - First Senior Deputy Comptroller Julie L. Williams Sets the Record Straight Regarding Nature, Consequences of OCC's Recent Preemption Regulations.
Press Release: www.occ.treas.gov/scripts/newsrelease.aspx?Doc=ZHFIGBB6.xml
Attachment: www.occ.treas.gov/ftp/release/2004-25a.pdf
March 25, 2004 - St. Louis Fed's Poole - Outsourcing, Globalization Bring "Important Long-Run Benefits" To United States as a Whole - Much of what William Poole hears and reads about international trade these days makes him apprehensive. Poole, president and CEO of the Federal Reserve Bank of St. Louis, addressed trade, wages and employment in remarks to students, faculty and businesspeople at LeMoyne-Owen College. www.stlouisfed.org/news/releases/2004/03_25_04.htm
March 25, 2004 - The Federal Reserve Board on Thursday released the minutes of its discount rate meetings from December 15, 2003, through January 26, 2004. www.federalreserve.gov/boarddocs/press/monetary/2004/20040325/default.htm
March 25, 2004 - Governor Donald L. Kohn Monetary Policy in a Time of Macroeconomic Transition At the 2004 Washington Economic Policy Conference, presented by the National Association for Business Economics and the Association for University Business and Economic Research, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/200403252/default.htm
March 25, 2004 - Chairman Alan Greenspan - Rural economic issues At New Approaches to Rural Policy: Lessons from Around the World, an international conference convened by the Federal Reserve Bank of Kansas City, Organization for Economic Cooperation and Development, Rural Policy Research Institute, and The Countryside Agency, Warrenton, Virginia www.federalreserve.gov/boarddocs/speeches/2004/20040325/default.htm
March 24, 2004 - OCC Issues Proposed Rule to Assist Consumers in Identifying Operating Subsidiaries Subject to OCC Supervisory Authority - The Office of the Comptroller of the Currency today published a proposed rule to assist consumers in identifying national bank operating subsidiaries that are subject to OCC supervisory authority.
Press Release: www.occ.treas.gov/scripts/newsrelease.aspx?Doc=TLMZJPDT.xml
Attachment: www.occ.treas.gov/ftp/release/2004-24a.pdf
March 24, 2004 - The Federal Reserve Board on Wednesday announced the execution of a Written Agreement by and between the Planters Bank and Trust Company, Staunton, Virginia and the Federal Reserve Bank of Richmond. www.federalreserve.gov/boarddocs/press/Enforcement/2004/20040324/default.htm
March 24, 2004 - The Federal Reserve Board on Wednesday announced the execution of a Written Agreement by and between the Virginia Heartland Bank, Fredericksburg, Virginia and the Federal Reserve Bank of Richmond. www.federalreserve.gov/boarddocs/press/Enforcement/2004/200403242/default.htm
March 24, 2004 - The Federal Reserve Board on Wednesday announced the execution of a Written Agreement by and among Midwest Banc Holdings, Inc., Melrose Park, Illinois; the Midwest Bank and Trust Company, Elmwood Park, Illinois; the State of Illinois Office of Banks and Real Estate, Springfield, Illinois; and the Federal Reserve Bank of Chicago. www.federalreserve.gov/boarddocs/press/Enforcement/2004/200403243/default.htm
March 23, 2004 - OCC Issues Contact Information for Questions Concerning Tying - The Office of the Comptroller of the Currency is publishing contact points at the OCC for banks and customers with questions and concerns about tying. The term "tying" refers to practices where the availability or price of one product or service is conditioned or "tied" to a customer also obtaining another product or service from the bank. Some types of tying are permissible, while others are prohibited. www.occ.treas.gov/scripts/newsrelease.aspx?Doc=5585SPNY.xml
March 23, 2004 - FDIC Bars from Banking Two Involved in Bestbank Failure - The Federal Deposit Insurance Corporation issued removal and prohibition orders against Glenn M. Gallant and Douglas R. Baetz. www.fdic.gov/news/news/press/2004/pr2904.html
March 23, 2004 - FDIC Issues Removal and Prohibition Order Against Former Minnesota Banker - The Federal Deposit Insurance Corporation issued a removal and prohibition order against Bradley J. Oeltjenbruns. www.fdic.gov/news/news/press/2004/pr2804.html
March 23, 2004 - FDIC Takes Disciplinary Action Against Former Massachusetts Banker - The Federal Deposit Insurance Corporation has reached agreement on a civil money penalty with Kenneth B. Osborn www.fdic.gov/news/news/press/2004/pr2704.html
March 23, 2004 - FDIC Issues Removal and Prohibition Order Against Former Tennessee Banker - The Federal Deposit Insurance Corporation issued a removal and prohibition order against Jimmy Lee Birdwell. www.fdic.gov/news/news/press/2004/pr2604.html
March 23, 2004 - FDIC Issues Removal and Prohibition Order Against Former Arkansas Banker - The Federal Deposit Insurance Corporation issued a removal and prohibition order against Linda G. Cameron. www.fdic.gov/news/news/press/2004/pr2504.html
March 23, 2004 - Exhibit Elements Fed Center - Exploring Our Nation's Central Bank - The Fed Center was designed to engage high school students and life long learners in the role the Federal Reserve plays in the regional and national economies. Thought-provoking icons and compelling interactive exhibits invite visitors to discover the importance of the Federal Reserve by making functions such as monetary policy, the payments system, and banking supervision and regulation understandable and relevant to our lives. www.frbsf.org/news/releases/2004/322elements.pdf
March 23, 2004 - Fed Center - Exploring Our Nation's Central Bank - The Fed Center is an interactive exhibit and museum designed to teach diverse audiences about the role the Federal Reserve plays in the national and regional economies. www.frbsf.org/news/releases/2004/322factsheet.pdf
March 22, 2004 - Cuban Asset Control Regulations - The Department of the Treasury's Office of Foreign Assets Control has updated its list of approved service providers to Cuba. http://www.fdic.gov/news/news/financial/2004/fil3204.html
March 22, 2004 - Statistical Release - E.2 Survey of Terms of Business Lending www.federalreserve.gov/releases/e2/current/default.htm
March 22, 2004 - The Federal Reserve Board on Monday announced the appointment of Sandra F. Braunstein as Director of the Division of Consumer and Community Affairs, effective April 1, 2004. www.federalreserve.gov/boarddocs/press/other/2004/20040322/default.htm
March 22, 2004 - Reports of Condition and Income for First Quarter 2004 - The enclosed materials pertain to the Reports of Condition and Income for the March 31, 2004, report date. www.fdic.gov/news/news/financial/2004/fil3104.html
ProActive Computer Services, Inc. Names Taylor Capitol, Inc. as their Primary Investor Relations Group
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24 March 2004, 10:18am ET
HOUSTON--(BUSINESS WIRE)--March 24, 2004--ProActive Computer Services Inc. (PAVP:Pink Sheets) is pleased to announce Taylor Capitol, Inc. as their primary investor relations group. Taylor Capitol, Inc. has a wide network of connections in the investment community. This network ranges from Retail Brokers, Fund Managers, Market Makers, Market Awareness companies, Investment Banks and Senior Level Management Consultants. Stephen Taylor, President of Taylor Capitol, Inc. has a background of working for UBS PaineWebber where he provided Equity Research and experience as an Investment Banker in which capacity he handled numerous Mergers and Acquisitions.
Mentioned Last Change
PAVP 0.005 0.0002dollars or (3.84%)
Taylor Capitol, Inc. President, Stephen Taylor states: "Based on initial discussions with ProActive Computer Services CEO, Andrea Cortellazzi, PAVP appears to be a true, emerging growth company. I have spoken with a majority of the senior management and have become very interested in all aspects of the company, especially the fingerprint technology. We have several initiatives planned for PAVP in the near future and look forward to working with Mr. Cortellazzi and his management in taking his Company to the next level."
For further information please contact Investor Relations at 973-351-3868.
Forward-Looking Statements
Please be advised that statements made herein, other than historical data, constitute forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those stated or implied by such forward-looking statements. The potential risks and uncertainties include, among others, potential volatility in the company's stock price, increased competition, customer acceptance of new products and services offered by the company, and uncertainty of future revenue and profitability and fluctuations in its quarterly operating results. More information about potential factors that could affect the company's business and financial results may be obtained by contacting the company by phone at 973-351-3868. Please also be advised that the company's stock is not currently registered with the Securities and Exchange Commission.
CONTACT: Taylor Capitol, Inc.
Stephen Taylor, 973-351-3868
STEPHTAYL9@AOL.COM
www.IPOmovers.com
SOURCE: ProActive Computer Services Inc.
NB Taylor Capital Shut down a hedge fund operation last year for its inability to raise capital according to sources in Washington D.C.
FreeStar Files $54 Million Fraud Claim Against vFinance and AffiliatesSeeks Damages for Fraud, Market Manipulation and Illegal Short SellingNEW YORK, May 6 /PRNewswire-FirstCall/ --FreeStar Technology Corporation(BULLETIN BOARD: FSRC) , a global technology company committed to setting the next generation standard for secure Internet commerce, announced it has filed an answer and substantial counter claim in the vFinance et al vs. FreeStar Technology Corporation et al action.The filing, which took place today in United States District Court, Southern District Of New York, states, in part, that FreeStar retained "vFinance Investments, Inc. ("vFinance"), a national publicly-traded broker-dealer ... with self-proclaimed 'expertise and superior service required to address the special needs of small and medium sized public companies' ... as the exclusive financial advisor for Freestar." The filing further states, "vFinance recommended and assisted Claimants to negotiate, draft and execute convertible debt financing through 'floorless' convertible notes with lenders controlled by vFinance, vFinance's own Chief Executive Officer, employees and affiliates. These notes and related transactions are referred to in the financial community as 'toxic convertibles' or 'death spiral convertibles' ... vFinance and Plaintiffs charged Freestar gigantic fees and otherwise ensured profits of multiples of their original investment by setting out to destroy vFinance's customer, Freestar." In addition, the filing states, "The dispute here arises because Freestar survived the 'death spiral' and vFinance's and Plaintiffs' expectation of gigantic gains was foiled ... Freestar and Paul Egan, in turn, file these Counterclaims to recover from vFinance and Plaintiffs damages suffered as a result of their 'death spiral' strategy, violations of the federal securities laws, breach of contracts, including over-conversion of the pledged securities, market manipulation, breach of fiduciary duty and fraud."Paul Egan, President and Chief Executive Officer of FreeStar, stated, "We want to be absolutely clear we believe that the actions of David Stefansky, Richard Rosenblum, Marc Siegel and their affiliated corporate entities were unconscionable and violated virtually every actual and implied legal and moral obligation of a financial advisor. We believe the litigation process will reveal that they perpetrated a massive fraud on our emerging company and its shareholders, while supposedly acting in a fiduciary capacity. Although there are always substantial risks in litigation, we are confident that we will prevail in the action. Mr. Egan went on to note, "This is not some frivolous action which will quietly be settled and forgotten. We are deadly serious in pursing our claims and in holding those so-called 'financial professionals' responsible for their conduct."Litigation BackgroundThis litigation has been initiated by vFinance Investments, Inc., Boat Basin Investors, LLC, Papell Holdings, Ltd., Marc Siegel, David Stefansky, Richard Rosenblum against FreeStar Technology Corporation, First American Stock Transfer, Inc., Paul Egan, Ciaran Egan, Phillip Young, and Margaux Investment Management Group, S.A.The Chapter 7 Petition for involuntary bankruptcy filed against FreeStar in January by vFinance, Inc., David Stefansky, Richard Rosenblum, Marc Siegel, Papell Holdings LLC and Boat Basin Investors Ltd. in the United States Bankruptcy Court for the Southern District of New York was dismissed pursuant to a ruling by Honorable Judge Allan L. Gropper. As contended in FreeStar's Motion to Dismiss of February 4, 2003, the Petitioners held no claims against FreeStar that were not the subject of a bona fide dispute.FreeStar is of the opinion that the Chapter 7 Petition was filed in bad faith in order to depress FreeStar's share price and thus allow the Petitioners to cover a substantial naked short position in FSRC stock. In connection with the bankruptcy filing Petitioners paid $40,000 in FreeStar's attorneys' fees.The 88 page answer and counter-claim filed by FreeStar can be viewed in its entirety by visiting FreeStar's corporate website at www.freestartech.com.Conference CallPaul Egan, the president of FreeStar, will conduct a conference call and webcast on Wednesday, May 7 at 9am Eastern. Investors may access the call by dialing 877.209.9922 in the United States or from an international location by calling 651.224.7472. Participants should identify the call as the "FreeStar Conference Call." A replay of the call will be available following the call in the United States at 800.475.6701 or internationally at 320.365.3844, access code 684317.About FreeStar Technology CorporationFreeStar Technology is a global technology force focused on exploiting a first-to-market advantage for enabling ATM and debit card transactions on the Internet and high-margin credit card processing. FreeStar Technology's Enhanced Transactional Secure Software ("ETSS") is a proprietary software package that empowers consumers to consummate e-commerce transactions on the Internet with a high level of security using credit, debit, ATM (with PIN) or smart cards. It sends an authorization number to the e-commerce merchant, rather than the consumer's credit card information, to provide a high level of security. The company maintains its corporate headquarters in Santo Domingo, Dominican Republic, and offices in Dublin, Ireland, and Helsinki, Finland. For more information, please visit the Company's web sites at www.freestartech.com, www.rahaxi.com and www.epaylatina.com.On April 24, 2003 the company announced that its Board of Directors accepted in principle a $74,480,000 non-binding letter of intent received from a privately held company, FreeStar Acquisition Corporation, to acquire all of FreeStar Technology Corporation's outstanding capital stock. Based on the number of FSRC shares currently issued and outstanding, the proposed letter of interest is valued at approximately $.49 per share (after payment of existing indebtedness, but excluding conversion of outstanding preferred stock and exercise of in-the-money stock options), would represent a 158% premium over the closing price of FreeStar's common stock on April 23, 2003. That offer is subject to various conditions including buyer's obtaining of financing and satisfactory due diligence.Forward Looking StatementsCertain statements in this news release may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release, including, without limitation, statements regarding potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. This litigation, like all litigation, is subject to inherent uncertainties, and unfavorable rulings could occur that would have an adverse impact on the FreeStar and its claims. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Technical and other complications which may arise could prevent the prompt implementation of any strategically significant plan(s) outlined above.Contact
Trilogy Capital Partners, Inc.,
461 5th Avenue, 11th Floor
New York, NY 10017
800.330.1860aj@trilogy-capital.com CONTACT: Trilogy Capital Partners, Inc., +1-800-330-1860, aj@trilogy-capital.com , for FreeStar Technology CorporationWeb site: http://www.freestartech.com/http://www.rahaxi.com/http://www.epaylatina.com/" target="_new">http://www.freestartech.com/http://www.freestartech.com/http://www.rahaxi.com/http://www.epaylatina....
Copyright 2003 PRNewswire
Issued: 05/06/2003 01:43 PM GMT
Investor Communications International, Inc. ("ICI") announced that on March 14, 2003 Steven D. Jones and Carol S. Remond ("Steve&Carol") created another article that appeared in a Dow Jones news wire in the same erroneous vein as a previous inaccurate news wire by Steve&Carol of October 11, 2002 pertaining to ICI and GeneMax Corp. (OTC Bulletin Board: GMXX) that provide the reader with inaccurate and false facts and erroneous conclusions.
Although Steve&Carol seemed to stop writing defamatory and incorrect articles about ICI and GeneMax Corp. for a period of time after ICI made public that December 9, 2002 and October 11, 2002 news wires by Steve&Carol contained numerous unfactual statements, Steve&Carol have begun writing inaccurate reports that mislead the public. For those who may have forgotten, GeneMax Corp. and Investor Communications International, Inc. formed the subject of the news wire story dated October 11, 2002 by Steve&Carol. There were at least sixteen inaccurate facts or statements made in the October 11, 2002 news wire story by Steve&Carol. There were only 990 words in the entire October 11, 2002 Steve&Carol news wire. Corrections were brought to the attention of the lead author Steven D. Jones and counsel to Dow Jones with request for retraction. Retractions were not subsequently made.
Further information obtained by Steve&Carol pertaining to a lawsuit filed in the Superior Court of the State of Washington against a GeneMax shareholder, Garth Braun (the "Lawsuit"), has led to numerous erroneous statements by Steve&Carol. In fact, ICI would like to make clear that all conclusions made by Steve&Carol in their latest March 14, 2003 Dow Jones news wire pertaining to information they have received relating to the Lawsuit are false and untrue, proving once and for all that a little knowledge is a dangerous thing. Like the October 11, 2002 news wire by Steve&Carol that contained at least sixteen inaccurate facts or statements, it would be too onerous to address and disclose the breadth and effect of the numerous inaccuracies in the March 14, 2003 Dow Jones news wire, or correct the inaccurate and untrue conclusions made therein. As a result ICI provides clarification as follows:
-- All statements and conclusions made by Steve&Carol in the
March 14, 2003 Dow Jones news wire regarding the float of GeneMax
being larger than it was in October of last year or at any other
time stated in the article are false and untrue.
-- All statements and conclusions made by Steve&Carol in the
March 14, 2003 Dow Jones news wire regarding share options granted
to ICI in the capital of GeneMax Corp. and any sale thereto are
false and untrue.
-- Information provided to Dow Jones reporter last fall by Grant Atkins
of GeneMax Corp. is accurate and correct. That information has been
misquoted, misstated, taken out of context, or generally distorted
by Steve Jones for purposes other than providing true and accurate
reporting.
-- Brent Pierce is neither a director nor officer of ICI. Steve Jones
has been advised of such facts in writing, but chooses to distort
and misguide the public by making false statements to the contrary.
Grant Atkins of GeneMax Corp. stated, "When it comes to yellow journalism, Steven D. Jones and Carol S. Remond are likely to be involved. Companies are guided by SEC regulations and ever-increasing public governance. It is amazing that the media is guided by no governing body other than ethical constraints of journalistic professionalism. When authors lose that, they mislead the public. In the case of Remond and Jones, freedom of the press includes the freedom to mislead."
SAFE HARBOR STATEMENT
THIS NEWS RELEASE MAY INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE UNITED STATES SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO ACHIEVING CORPORATE OBJECTIVES, DEVELOPING ADDITIONAL PROJECT INTERESTS, THE COMPANY'S ANALYSIS OF OPPORTUNITIES IN THE ACQUISITION AND DEVELOPMENT OF VARIOUS PROJECT INTERESTS AND CERTAIN OTHER MATTERS. THESE STATEMENTS ARE MADE UNDER THE "SAFE HARBOR" PROVISIONS OF THE UNITED STATES PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INVOLVE RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN."
SOURCE Investor Communications International, Inc.
CONTACT: Marcus Johnson of Investor Communications International, Inc.,
800-209-2260
(GMXX)
http://www.prnewswire.com
Wall Street's rogue mutual fund traders now have more to fear than the wrath of New York Attorney General Eliot Spitzer.
Last week, federal prosecutors in New York shocked securities experts by filing criminal charges against three brokerage executives who were involved in helping hedge funds market-time shares of mutual funds.
The charges against the former top executives of Mutuals.com, a Dallas brokerage, are the first to allege that mutual fund market-timing -- a theoretically legitimate arbitrage strategy -- can be a crime in certain circumstances. The case has defense lawyers fearing that prosecutors now may be gunning for other brokers who engaged in the practice.
In charging Richard Sapio, Eric McDonald and Michele Leftwich with securities fraud, prosecutors allege the "defendants engaged in a number of deceptive and fraudulent practices designed to conceal the identity" of the firm's hedge fund customers and their trading activity.
Prosecutors contend the Mutuals.com execs resorted to the deception after a number of mutual funds told them to stop market-timing because it was hurting long-term investors. Specifically, they allege the defendants conspired to evade detection by setting up multiple accounts and incorporating two affiliated brokerages to make their trades.
Sources familiar with the investigation said one of the clients that Mutuals.com did market-timing for was Veras Investment Partners.
Until now, state prosecutors in Spitzer's office and regulators at the Securities and Exchange Commission have spared brokers criminal prosecution. In the scandal's highest-profile broker case, regulators filed civil fraud charges against a group of Prudential Securities brokers alleged to have used deception to conceal their clients' abusive trading activity. The criminal charges against the Mutuals.com executives mirror those, but come with criminal penalties
Before last week's development, the only brokers, traders or mutual fund officials facing criminal charges were ones who allegedly had some connection to late-trading -- a practice in which favored investors are allowed to buy mutual fund shares that were priced prior to the emergence of market-moving news.
Now, even plain-vanilla market-timers could face criminal prosecution. Federal prosecutors in Massachusetts, sources said, are getting closer to filing criminal charges against the several former Prudential brokers who allegedly used deception to conceal their market-timing activity.
A source familiar with the investigation said Spitzer's office also hasn't ruled out filing criminal charges over market-timing, especially in cases involving egregious conduct. (Prudential is jointly owned by Wachovia (WB:NYSE - news - research) and Prudential Financial (PRU:NYSE - news - research) .)
Defense lawyers, however, say prosecutors make a big leap trying to turn market-timing into a crime.
"With each case, the regulators seem to be walking farther out on the limb," said James Walden, a partner with O'Melveny & Meyers in New York and a former federal prosecutor. "The prosecutors will have an extremely difficult time convincing a jury that market-timing is provable securities fraud without allegations of late-trading."
What prosecutors contend is deception, Walden says, arguably can be characterized as an attempt by savvy brokers and traders to "exploit gray areas of the system."
Indeed, if prosecutors intend to turn the gray areas surrounding market-timing into a crime, there could be plenty of criminal cases to pursue.
That's because using techniques such as multiple accounts was a standard operating strategy for market-timers trying to evade detection by the so-called "timing cops" -- employees mutual fund companies relied on to stop abusive trading.
"I didn't even think of that as illegal. That's how common it was," says James Nesfield, a mutual fund consultant who helped find market-timing opportunities for Canary Capital Partners, another hedge fund at the center of the inquiry.
One thing that often gets overshadowed in the mutual fund scandal is that many fund companies did try to deter market-timers. The problem is that many timing cops weren't particularly good at their jobs, and the mutual fund companies didn't consider deterring market-timing a high priority.
The lax enforcement meant it didn't take much subterfuge for market-timers to evade detection. It's one reason most market-timers didn't negotiate the kind of special trading arrangements that regulators have highlighted in settlements with several mutual fund companies, including Alliance Capital (AC:NYSE - news - research) and FleetBoston Financial's (FBF:NYSE - news - research) Columbia Funds.
"Most of it wasn't negotiated," says Nesfield. "It was a lot easier to change account names than call up a mutual fund company."
In fact, market-timers contend that most of the things they did to avoid detection, while possibly shady and unethical, were perfectly legal.
In a possible preview of their defense to the criminal charges, the defendants in the Mutuals.com case call the SEC an example of "strained" regulatory enforcement.
In court papers seeking the dismissal of the SEC action, lawyers for the brokerage executives accuse regulators of targeting them because market-timing is now seen as "extremely unpopular and politically incorrect in the current environment." The defendants contend the "SEC attempts to contort a series of legal acts into a fraudulent scheme."
By Matthew Goldstein
TheStreet.com Senior Writer
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