UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55858 / June 5, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2616 / June 5, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12652 CORRECTED In the Matter of INTERNATIONAL BUSINESS MACHINES CORPORATION, Respondent. ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against International Business Machines Corporation (“IBM” or “Respondent”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. III. 2 On the basis of this Order and Respondent’s Offer, the Commission finds1 that: Respondent IBM, a New York corporation based in Armonk, New York, is a world-wide information technology corporation. IBM’s stock is registered pursuant to Section 12(b) of the Exchange Act. IBM stock trades on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange, and on other exchanges in the United States and around the world. Summary This matter involves a misleading chart presented by IBM during an April 5, 2005 conference call with analysts, which was simultaneously webcast, and included in a Form 8-K filed with the Commission, relating to the impact that the company’s decision to expense employee stock options would have on its first quarter 2005 (“1Q05”) and fiscal year 2005 (“FY05”) earnings results. During the conference call, IBM announced that beginning in 1Q05 it would report stock options as an expense in its financial statements and advised analysts to adjust their earnings models to account for the change. At the time, IBM expected that its stock options expense for 1Q05 would have a $0.10 impact on first quarter earnings per share results and estimated a $0.39 impact on FY05 earnings per share results. IBM did not disclose this information during the conference call or in its subsequently filed Form 8-K. IBM included a misleading chart in its presentation which was understood by many analysts to indicate that the earnings per share impact of the stock options expense would be $0.14 for 1Q05 and $0.55 for FY05, thereby causing analysts to lower their 1Q05 and FY05 earnings per share estimates by these amounts. By engaging in this conduct, IBM violated the reporting provisions of the federal securities laws. Discussion On April 5, 2005, one week after the SEC staff issued SAB 107 (regarding the reporting of employee stock options as an expense), and less than two weeks before IBM released its 1Q05 financial results, IBM announced that it would begin to report employee stock options as an expense in its financial statements for 1Q05. During the presentation (the text of which was filed with the Commission in a Form 8-K), IBM also advised analysts to update their 2004 models, for comparability, and their 2005 models to reflect the change. IBM explained to analysts that they should reduce their 2004 earnings per share figures by $0.14 for the first quarter and by $0.55 for the year, which were the actual amounts of stock options expense that IBM had disclosed in its 2004 pro-forma disclosures. IBM also said “(t)his is an accounting change and does not impact underlying business dynamics. Therefore, for purposes of your models, updated 2005 expectations should reflect the same level of year-to-year profit improvement as current estimates.” Furthermore, IBM said that it had taken steps that would result in lower stock options expense for 2005 compared to their 2004 pro-forma expense and that any savings would be used to offset a previously announced $1 billion year-to-year increase in pension expense for 2005. 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. 3 During IBM’s January 2005 earnings announcement, IBM had said that for 2005 it expected a $1 billion year-to-year increase in its pension expense. This was approximately $200 million more than the $800 million year-to-year increase IBM had anticipated for 2005 and had announced in October 2004. IBM had also said in January that it would take steps over the course of 2005 to overcome the $1 billion year-to-year increase in its pension expense. IBM identified “divesting the PC business,” “redesigning (its) equity program with premium priced options,” and “globalizing (its) business” as actions it would take to help overcome the increased pension expense. During the April 5, 2005 conference call, IBM’s management did not make any statements about the amount by which analysts should reduce their 2005 estimates to account for options expensing. IBM did present a chart which many analysts read to indicate that the stock option expense would reduce 1Q05 and FY05 earnings per share estimates by $0.14 and $0.55, respectively. At the time, IBM expected that its stock options expense would have only a $0.10 impact on 1Q05 earnings per share results, or $0.04 less than the first quarter 2004 pro-forma expense, and IBM estimated that its stock option expense would have only a $0.39 impact on FY05 earnings per share results, or $0.16 less than the pro-forma amount for the full year 2004. IBM did not disclose this information during the April 5 announcement or in its Form 8-K. Although IBM considered disclosing that its 1Q05 stock options expense would be $0.03 to $0.04 less than the first quarter 2004 pro-forma expense, management rejected the idea due, at least in part, to concern that analysts would add back the year-to-year reduction to their earnings per share estimates instead of using the reduction to offset the increase in pension expense. Management wanted to avoid this because it would have increased the expected growth rate that analysts had set for IBM, which would have been difficult for the company to achieve because of the year-to-year increase in pension expense. However, as discussed above, the amount of the increase in IBM’s pension expense for 2005 had been disclosed in October 2004 and updated in January 2005 and, therefore, had been available for analysts to factor into their 2005 models. After IBM’s April 5 announcement, many analysts reduced their earnings per share estimates for 2005 by the same amount as the 2004 pro-forma expense, $0.14 for 1Q05 and $0.55 for FY05. The average of analysts’ earnings per share estimates was reduced to $0.90 for 1Q05 and to $5.07 for FY05. Many analysts’ reports reflected that IBM’s earnings per share estimates were lowered by $0.14 and $0.55 per share for 1Q05 and FY05, respectively, to account for stock options expenses. On April 14, 2005, after the market’s close, IBM announced its 1Q05 financial results. The announcement of 1Q05 results was formerly scheduled for April 18, 2005. IBM disclosed earnings of $0.85 per share, which was $0.05 less than the amount that many analysts were expecting following the April 5 presentation. IBM also disclosed that its equity compensation expense was $0.10 per share for 1Q05, or $0.04 lower than what many analysts had understood IBM’s April 5 misleading chart to have indicated it would be. IBM’s stock price dropped $6.94 the next day, or over 8%, closing at $76.33. Violations 4 Section 13(a) of the Exchange Act and Rule 13a-11 thereunder require issuers of registered securities to file certain reports. 15 U.S.C. § 78m(a); 17 C.F.R. § 240.13a-11. Under Rule 13a-11, issuers are required to file current reports on material corporate developments on Form 8-K. 17 C.F.R. § 240.13a-11. In addition, issuers may choose to file certain reports on Form 8-K, as was done in this matter. Exchange Act Rule 12b-20 requires, in addition to information required to be in a report, any material information “necessary to make the required statements, in the light of the circumstances under which they are made not misleading.” 17 C.F.R. § 240.12b-20. Information is material if there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Information regarding a company’s earnings is one of the most important considerations in making an investment decision. IBM violated the above reporting provisions by filing with the Commission a materially misleading Form 8-K. The filing contained materially misleading information about the amount of IBM’s stock options expense and the impact it would have on IBM’s earnings per share. The Form 8-K created the impression that IBM’s stock options expense would be greater than what IBM actually expected it to be for 1Q05 and FY05. In light of the statements made in the Form 8-K, IBM should have also included in its Form 8-K additional information it knew at the time relating to its stock options expense for 1Q05 and FY05, (i.e., that it expected the expense to have a $0.10 impact on earnings per share in 1Q05, and that it estimated the expense to have a $0.39 impact on earnings per share for FY05). By failing to include this information in its disclosure, IBM violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder. IV. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent IBM’s Offer. Accordingly, it is hereby ORDERED that: Respondent IBM cease and desist from committing or causing any violations and any future violations of Sections 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder. By the Commission. Nancy M. Morris Secretary
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 55863 / June 5, 2007 Admin. Proc. File No. 3-12475 In the Matter of FUELNATION, INC., SDT HOLDING CORP., SAMESSA HOLDING CORP., SILVER QUEST, INC., and SYTRON, INC. ORDER DISMISSING PROCEEDING BASED ON LACK OF REGISTRATION On November 8, 2006, the Commission instituted an administrative proceeding against FuelNation, Inc. ("FuelNation") and four other respondents under Section 12(j) of the Securities Exchange Act of 1934. 1/ In the order instituting proceedings ("OIP"), the Division of Enforcement alleged that FuelNation had "a class of equity securities registered with the Commission pursuant to Exchange Act Section 12(g)" and was "delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10-QSB for the period ended March 31, 2004." The Commission instituted the proceeding to determine whether the allegations were true and whether it was "necessary and appropriate for the protection of investors to suspend for a period not exceeding twelve months or to revoke the registrations of each class of securities registered pursuant to Exchange Act Section 12 of" FuelNation. 2/ On December 6, 2006, the Division moved to dismiss FuelNation from the proceeding. According to the Division, at the time the Commission issued the OIP, the Division "believed that FuelNation was registered under Exchange Act Section 12(g) based on the issuer's most recent filings with the Commission that represented that it was so registered." In its motion, the Division stated that it "recently discovered . . . that FuelNation no longer had any class of securities registered pursuant to Exchange Act Section 12" and that "ecause FuelNation 1/ 15 U.S.C. § 78l(j). 2/ See id. (authorizing the Commission, "as it deems necessary or appropriate for the protection of investors to deny, to suspend the effective date of, to suspend for a period not exceeding twelve months, or to revoke the registration of a security, if the Commission finds . . . that the issuer of such security has failed to comply with any provision of [the Exchange Act] or the rules and regulations thereunder"). 2 currently has no classes of equity securities registered pursuant to Exchange Act Section 12, this proceeding is moot and should be dismissed by the Commission." We agree. FuelNation's predecessor, International Pizza Corporation, filed a Form 8-A on September 15, 1993, registering its common stock and warrants under Exchange Act Section 12(b) for listing on the Boston Stock Exchange. On February 17, 1998, however, the Commission's Division of Market Regulation, acting pursuant to delegated authority, entered an order on behalf of the Commission striking the common stock and warrants from listing on the Boston Stock Exchange and from registration under Exchange Act Section 12(b). 3/ A registrant, however, "may have section 12(g) reporting obligations following its termination of registration of a class of equity securities under section 12(b) . . . under Exchange Act Rule 12g-2." 4/ Under Exchange Act Rule 12g-2, [a]ny class of securities which would have been required to be registered pursuant to section 12(g)(1) of the Act except for the fact that it was exempt from such registration by section 12(g)(2)(A) because it was listed and registered on a national securities exchange . . . shall upon the termination of the listing and registration of such class . . . and without the filing of an additional registration statement be deemed to be registered pursuant to said section 12(g)(1) if at the time of such termination . . . securities of the class are not exempt from such registration pursuant to section 12 or rules thereunder . . . and all securities of such class are held of record by 300 or more persons. 5/ The Division represents that, as of February 17, 1998, FuelNation's transfer agent listed 110 shareholders of record for FuelNation's common stock. In a Form 10-KSB filed on July 10, 1998, Regenesis, another predecessor corporation to FuelNation, stated that, as of March 31, 1998, "there were 112 holders of record of" its common stock. According to the Division, FuelNation's transfer agent indicated that there were just thirty-one holders of record of the warrants in 1998 and that the warrants expired in September 1998. The Division thus moved to dismiss the proceeding against FuelNation because it "no longer had any class of securities registered pursuant to Exchange Act Section 12." FuelNation has not responded to the Division's motion. Because revocation or suspension of registration are 3/ Securities Exchange Act Rel. No. 39674 (Feb. 17, 1998), 66 SEC Docket 1707. 4/ See Exchange Act Rel. No. 55005 (Dec. 22, 2006), __ SEC Docket __, __ n.27. 5/ 17 C.F.R. § 240.12g-2. 3 the only remedies available in a proceeding instituted under Section 12(j) of the Exchange Act, we find that it is appropriate to dismiss the proceeding against FuelNation. 6/ Accordingly, it is ORDERED that this proceeding be, and it hereby is, dismissed with respect to FuelNation, Inc. By the Commission. Nancy M. Morris Secretary 6/ Cf. Enamelon, Inc., Exchange Act Rel. No. 52956 (Dec. 15, 2005), 86 SEC Docket 2944 (dismissing Section 12(j) proceeding with respect to respondent Semiconductor Laser International Corp. where respondent "no longer ha[d] a class of securities registered under Section 12 of the Exchange Act").
34-55868 Jun. 6, 2007 Franklin Advisers, Inc. Note: See also Proposed Distribution Plan Comments due: July 6, 2007 Submit comments on Proposed Distribution Plan http://www.sec.gov/litigation/admin/2007/34-55868.htm
UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55868 / June 6, 2007 ADMINISTRATIVE PROCEEDING File No. 3-11572
-------------------------------------------------------------------------------- : : : : : : : : NOTICE OF PROPOSED DISTRIBUTION PLAN AND OPPORTUNITY FOR COMMENT
Notice is hereby given, pursuant to Rule 1103 of the Securities and Exchange Commission's ("Commission") Rules on Fair Fund and Disgorgement Plans, 17 C.F.R. § 201.1103, that the Division of Enforcement has submitted to the Commission a proposed plan for the distribution of the Fair Fund in this matter ("Distribution Plan").
On August 2, 2004, the Commission issued an Order instituting and simultaneously settling public administrative and cease-and-desist proceedings ("the Order") against Franklin Advisers, Inc. ("Franklin") in this matter. In the Order, the Commission authorized and established a Fair Fund, comprised of $50 million in disgorgement and penalties paid by Franklin, for distribution to mutual fund investors affected by market timing in funds for which Franklin served as the investment adviser. The Order provided that the Fair Fund was to be distributed pursuant to a distribution plan developed by an Independent Distribution Consultant.
OPPORTUNITY FOR COMMENT
Pursuant to this Notice, all interested parties are advised that they may print a copy of the Distribution Plan from the Commission's public website, http://www.sec.gov/, or the Franklin Templeton Investments public website, http://www.franklintempleton.com. Interested parties may also obtain a written copy of the Distribution Plan by submitting a written request to Cary S. Robnett, Assistant Regional Director, United States Securities and Exchange Commission, 44 Montgomery Street, Suite 2600, San Francisco, CA 94104. All persons who desire to comment on the Distribution Plan may submit their comments, in writing, no later than July 6, 2007:
to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549-1090; by using the Commission's Internet comment form (http://www.sec.gov/litigation/admin.shtml); or
by sending an e-mail to rule-comments@sec.gov. Comments submitted by email or via the Commission's website should include "Administrative Proceeding File Number 3-11572" on the subject line. Comments received will be publicly available. Persons should submit only information that they wish to make publicly available.
THE DISTRIBUTION PLAN
The Fair Fund is comprised of the $50 million paid by Franklin, plus accumulated interest. The Distribution Plan provides for distribution of the Fair Fund to eligible investors in twenty-five mutual funds to compensate them for market timing at various times during the period of December 31, 1996 to October 18, 2001. If the Distribution Plan is approved, eligible investors will receive proportionate shares of the Fair Fund as calculated by the Independent Distribution Consultant. The shares will be calculated from information in Franklin's records and records obtained from third-party intermediaries. Investors will not need to go through a claims process.
For the Commission, by its Secretary, pursuant to delegated authority.
1 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55869 / June 6, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12653 In the Matter of CHRIS G. GUNDERSON, Esq. Respondent. ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS AND IMPOSING TEMPORARY SUSPENSION PURSUANT TO RULE 102(e)(3) OF THE COMMISSION’S RULES OF PRACTICE I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule 102(e)(3)1 of the Commission’s Rules of Practice against Chris G. Gunderson (“Respondent” or “Gunderson”). Rule 102(e)(3)(i) provides, in relevant part, that: The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . attorney . . . who has been by name . . . (A) permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating . . . any provision of the Federal securities laws or of the rules and regulations thereunder; or (B) found in any court of competent jurisdiction in an action brought by the Commission to which he or she is a party . . . to have violated (unless the violation was found not to have been willful) . . . any provision of the Federal securities laws or of the rules and regulations thereunder. II. The Commission finds that: A. RESPONDENT 1. Gunderson is and has been an attorney licensed to practice in the State of New York. He is currently the General Counsel of Universal Express, Inc., a position he has held since 1995. B. COURT FINDINGS & INJUNCTION 2. On February 21, 2007, the U.S. District Court for the Southern District of New York issued an order finding that Gunderson deliberately, or at least recklessly, violated Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On April 2, 2007 the court entered final judgment against Gunderson, permanently enjoining him from future violations of those securities laws. Securities and Exchange Commission v. Universal Express Inc., et al., Civil Action Number 04-2322. 3. The court found that Gunderson and others issued and distributed more than 500 million shares of unregistered shares in violation of Section 5 of the Securities Act of 1933. To create the appearance that the issuances qualified for registration on Form S-8, the court found that Gunderson prepared questionable “consulting agreements.” The court also found that Gunderson told Universal Express’s transfer agent that the stock was validly registered, even though it was not. 4. The court also found that Gunderson and others engaged in a fraudulent scheme to defraud investors by issuing false or misleading press releases announcing large funding commitments that would enable Universal Express to acquire other companies. The court found that Gunderson drafted or edited the press releases and then reviewed and approved them before their release, and that the statements in the releases were “at best misleading and sometimes wholly fantastical.” Each of these press releases was followed by a substantial increase in Universal Express’s share price and trading volume, permitting several of the defendants to dispose of large amounts of the unregistered shares. III. Based upon the foregoing, the Commission finds that a court of competent jurisdiction has permanently enjoined Gunderson, an attorney, from violating the Federal securities laws within the meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. The Commission also finds that a court of competent jurisdiction has found that Gunderson, an attorney, violated the Federal securities laws within the meaning of Rule 102(e)(3)(i)(B) of the Commission’s Rules of Practice. In view of these findings, the Commission deems it appropriate and in the public interest that Gunderson be temporarily suspended from appearing or practicing before the Commission. 2 IT IS HEREBY ORDERED that Gunderson be, and hereby is, temporarily suspended from appearing or practicing before the Commission. This Order will be effective upon service on the Respondent. IT IS FURTHER ORDERED that Gunderson may, within thirty days after service of this Order, file a petition with the Commission to lift the temporary suspension. If the Commission receives no petition within thirty days after service of the Order, the suspension will become permanent pursuant to Rule 102(e)(3)(ii). If a petition is received within thirty days after service of this Order, the Commission will, within thirty days after the filing of the petition, either lift the temporary suspension, or set the matter down for hearing at a time and place to be designated by the Commission, or both. If a hearing is ordered, following the hearing, the Commission may lift the suspension, censure the petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a period of time, or permanently, pursuant to Rule 102(e)(3)(iii). This Order shall be served upon Gunderson personally or by certified mail at his last known address. By the Commission. Nancy M. Morris Secretary 3
SECURITIES AND EXCHANGE COMMISSION Washington D.C. Securities Exchange Act of 1934 Release No. 55885 / June 8, 2007 Admin. Proceeding File No. 3-12654 The United States Securities and Exchange Commission (Commission) announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Notice of Hearing (Order) against Paul E. Knight (Knight), John L. Montana (Montana) and Worldwide T&P, Inc. (Worldwide T&P), based on the entry of permanent injunctions against them in United States Securities and Exchange Commission v. John L. Montana, et al., Civil Action Number 1:03-CV-1513, in the United States District Court for the Southern District of Indiana. The Commission’s Complaint in that action alleged that, from at least August 1999 until December 2000, in connection with the sale of interests in a purported trading program which would invest money in the trading of various instruments including medium term notes, Montana, through Worldwide T&P, made misrepresentations and omissions of material fact to investors regarding the purported trading program, including the investment’s rate of return, the safety of the investment and the use of investors’ funds. The Complaint further alleged that Montana, through Worldwide T&P, sold unregistered securities and acted as an unregistered broker-dealer by effectuating transactions in securities for the accounts of others. The Commission’s Complaint also alleged that, from at least October 1999 until April 2000, in connection with the sale of interests in the purported trading program, Knight made misrepresentations and omissions of material fact to investors regarding the purported trading program, including the investment’s rate of return, the safety of the investment and the use of investors’ funds. The Complaint further alleged that Knight sold unregistered securities and acted as an unregistered broker-dealer by effectuating transactions in securities for the accounts of others. On November 22, 2006, the Honorable Sarah Evans Barker of the United States District Court for the Southern District of Indiana granted summary judgment in favor of the Commission and against Montana and Knight, among others. Defendant Worldwide T&P had previously defaulted. The Court found that Knight and Montana had violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 15(a)(1) and 15(c)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On May 23, 2007, final judgments were entered against Knight, Montana and Worldwide T&P permanently enjoining them from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 15(a)(1) and 15(c)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Knight and his company, P.K. Trust & Holding, Inc., were also ordered to disgorge, jointly and severally, $1,750,945, representing profits or other financial gain resulting from the conduct alleged in the Commission’s Complaint, together with prejudgment interest thereon in the amount of $900,874, for a total payment of $2,651,819. Knight was further ordered to pay a civil penalty in the amount of $110,000. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide the Respondents an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest.
UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55887 / June 8, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2615 / June 8, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12655 : : : In the Matter of : ORDER INSTITUTING ADMINISTRATIVE : PROCEEDINGS PURSUANT TO RULE RAYMOND L. MATHIASEN, CPA : 102(e) OF THE COMMISSION’S RULES OF : PRACTICE, MAKING FINDINGS, AND Respondent. : IMPOSING REMEDIAL SANCTIONS : : ____________________________________ : I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Raymond L. Mathiasen (“Respondent” or “Mathiasen”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 1 Rule 102(e)(3)(i) provides, in relevant part, that: The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and regulations thereunder. 2 II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.3. below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds that: 1. Mathiasen is a resident of Los Angeles, California and was the former chief accounting officer of Tenet Healthcare Corporation (“Tenet”). Mathiasen joined Tenet (then known as National Medical Enterprises) in 1985 as a vice president in its accounting department. He became Tenet’s chief accounting officer in March 1996. He remained in that position until at least November 2002. Mathiasen retired from Tenet in April 2004. Mathiasen has been licensed as a CPA in California since 1969. His license is currently inactive. 2. Tenet is a Nevada corporation with its principal executive offices in Dallas, Texas. During the relevant time period, Tenet maintained its principal executive offices in Santa Barbara, California. Tenet is one of the largest publicly traded healthcare companies in the United States. 3. On April 2, 2007, the Commission filed a complaint against Mathiasen in SEC v. Tenet Healthcare Corp., et al., in the United States District Court for the Central District of California (the “Court”) (Civil Action No. CV 07-2144 RGK (AGRx)). On April 16, 2007, the Court entered a Final Judgment Of Permanent Injunction And Other Relief Against Defendant Raymond L. Mathiasen (“Judgment”) which (a) permanently enjoins Mathiasen from future violations of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder; (b) orders Mathiasen to pay $1 in disgorgement and a $240,000 civil penalty; and (c) prohibits Mathiasen from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, or that is required to file reports pursuant to Section 15(d) of the Exchange Act for a period of five years. Mathiasen consented to the entry of the Judgment without admitting or denying any of the allegations in the complaint. 4. The Commission alleged that Mathiasen participated in a fraudulent scheme, in which Tenet made misleading disclosures in the Form 10-K that it filed with the Commission for its year ended May 31, 2002 and in the Form 10-Q that it filed with the 3 Commission for Tenet’s first quarter of its fiscal year 2003 ending August 30, 2002. Mathiasen signed each filing and substantially participated in the preparation of these filings. Mathiasen also knew, or was reckless in not knowing, that each filing was misleading because it failed to disclose the material impact that Tenet’s increases in gross charges was having on the company’s Medicare outlier revenue, and thereby on its earnings. The complaint further alleged that Mathiasen authorized improper manual adjustments to Tenet’s contractual allowance reserve accounts from fiscal year 2000 through fiscal year 2003, in violation of Generally Accepted Accounting Principles. As a result of Mathiasen’s conduct, Tenet had to restate its financial statements from fiscal year 2000 through fiscal year 2004. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction agreed to in Respondent’s Offer. Accordingly, it is hereby ORDERED, effective immediately, that: Mathiasen is suspended from appearing or practicing before the Commission as an accountant. By the Commission. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55888 / June 8, 2007 Administrative Proceeding File No. 3-12540 ____________________________________ : In the Matter of : : FRED ALGER : MANAGEMENT, INC. AND : Order Appointing FRED ALGER & COMPANY, : Tax Administrator INCORPORATED, : : Respondents. : ____________________________________: By order dated January 30, 2007, the Commission issued the “Omnibus Order Directing the Appointment of Tax Administrator in Administrative Proceedings that Establish Distribution Funds” (“Omnibus Order”), Rel. No. 34-55196 authorizing the Secretary to issue orders during calendar year 2007 appointing, upon request by the Commission staff, Damasco and Associates (“Damasco”), a certified public accounting firm located in San Francisco, California, as tax administrator (“Tax Administrator”) in administrative proceedings where the distribution fund may incur tax-related obligations as a Qualified Settlement Fund (“QSF”) under the Department of the Treasury Regulation § 1.468B-1(c). On May 31, 2007, the Commission staff requested, pursuant to the Omnibus Order, the appointment of Damasco as the Tax Administrator for the QSF in the above-referenced proceeding. Accordingly, IT IS ORDERED that Damasco, pursuant to and in accordance with the Omnibus Order, is appointed the Tax Administrator for the QSF in the above-referenced proceeding. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary
34-55901 Jun. 13, 2007 Laminaire Corp. (n/k/a Cavico Corp.), TAM Restaurants, Inc. (n/k/a Aerofoam Metals, Inc.), and Upside Development, Inc. (n/k/a Amorocorp) Note: See also the Order in this matter http://www.sec.gov/litigation/admin/2007/34-55901.pdf
U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Release No. 55901 / June 13, 2007 Administrative Proceeding File No. 3- 12658 In the Matter of Laminaire Corp. (n/k/a Cavico Corp.), TAM Restaurants, Inc. (n/k/a Aerofoam Metals, Inc.), and Upside Development, Inc. (n/k/a Amorocorp) SECURITIES AND EXCHANGE COMMISSION INSTITUTES ADMINISTRATIVE PROCEEDINGS AGAINST THREE COMPANIES FOR FAILURE TO MAKE REQUIRED PERIODIC FILINGS The U.S. Securities and Exchange Commission today issued public administrative proceedings against three companies to determine whether the registration of each class of their securities should be revoked or suspended for a period not exceeding twelve months for failure to file required periodic reports: • Laminaire Corp. (n/k/a Cavico Corp.) (CVCP) • TAM Restaurants, Inc. (n/k/a Aerofoam Metals, Inc.) (AFML) • Upside Development, Inc. (n/k/a Amorocorp) (AORO) In this Order, the Division of Enforcement (Division) alleges that the three issuers are delinquent in their required periodic filings with the Commission. In this proceeding, instituted pursuant to Securities Exchange Act of 1934 (Exchange Act) Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute a failure to comply with violations of Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of the securities of these respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in this proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings.
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 CORRECTED Release No. 55905 / June 13, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12619 -------------------------------------------------------x : : In the Matter of : ORDER MAKING FINDINGS AND : IMPOSING REMEDIAL SANCTIONS : PURSUANT TO DANIEL LOVAGLIO : SECTION 15(b) OF THE : SECURITIES EXCHANGE ACT OF 1934 : Respondent. : : -------------------------------------------------------x I. On April 20, 2007, the Securities and Exchange Commission (“Commission”) instituted administrative proceedings, pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”), against Daniel Lovaglio (“Lovaglio” or “Respondent”). II. Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and the subject matter of these proceedings and the findings contained in Section III. 2, which are admitted, Respondent consents to the entry of this Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934, as to Daniel Lovaglio (“Order”), as set forth below. 2 III. On the basis of this Order and Respondent’s Offer, the Commission finds that: 1. Lovaglio, age 41, from at least as early as the year 2000 to September 2001 (the “relevant period”) was associated as an unregistered representative at Valley Forge Securities, Inc. (“Valley Forge”), a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. 2. On July 30, 2003, Lovaglio pled guilty to one count of conspiracy to commit securities fraud. United States v. Daniel Lovaglio, 03 Cr. 562 (D.N.J.). 3. The sole count of the criminal information to which Lovaglio pled guilty alleged, among other things, that Lovaglio contacted Valley Forge customers, posed as a registered broker, and used false and misleading sales practices to sell securities to Valley Forge customers in exchange for undisclosed commissions. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Lovaglio’s Offer. Accordingly, it is hereby ORDERED: Pursuant to Section 15(b)(6) of the Exchange Act that Lovaglio be, and hereby is barred from association with any broker or dealer. Any reapplication for association by Lovaglio will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against Lovaglio, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary
UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 55909 / June 14, 2007 Admin. Proc. File No. 3-12384 In the Matter of the Application of NASDAQ STOCK MARKET, LLC For Review of Action Taken by the CONSOLIDATED TAPE ASSOCIATION ORDER ACCEPTING JURISDICTION AND ESTABLISHING PROCEDURES The Nasdaq Stock Market, LLC (“Nasdaq”), a member of the Consolidated Tape Association (“CTA”), has filed a petition for review, pursuant to Section 11A(b)(5) of the Securities Exchange Act of 1934 1/ and Exchange Act Rule 608(d), 2/ (formerly Exchange Act Rule 11Aa3-2(e)), 3/ of action taken by the CTA Operating Committee. On March 23, 2006, the Operating Committee voted to impose a new participant entry fee of $833,862 for Nasdaq to join 1/ 15 U.S.C. § 78k-1(b)(5) (providing that, upon application by an aggrieved person, any prohibition or limitation of access to services by a registered securities information processor “shall” be subject to Commission review). The CTA is registered as an exclusive securities information processor. See Securities Exchange Act Rel. No. 12035 (Jan. 22, 1976), 8 SEC Docket 1099 (granting registration to the CTA). 2/ 17 C.F.R. § 242.608(d) (providing that the Commission “may, in its discretion,” entertain appeals in connection with the implementation or operation of any effective national market system plan). The Commission has held that its authority to review national market system plan action pursuant to Rule 608(d)’s predecessor, Rule 11Aa3-2(e), is discretionary. American Stock Exchange,Inc., 54 S.E.C. 491, 497-99 (2000). 3/ In June 2005, Rule 11Aa3-2(e) was redesignated as Rule 608(d) without any change in substance. See Regulation NMS, Exchange Act Rel. No. 51808 (June 9, 2005), 85 SEC Docket 2264, 2338 (stating that, while Rule 608 renumbers Rule 11Aa3-2, the substance of the provision “remains largely intact”). 2 the CTA Plan. 4/ Nasdaq alleges that the Operating Committee improperly calculated the fee by, among other things, including historical costs of operating the CTA’s systems that were incurred before Nasdaq joined the Plan. Nasdaq alleges that the resulting fee is excessive and constitutes a denial of access to the CTA’s systems. Nasdaq seeks a reversal of the Operating Committee’s March 23, 2006, action, and an order that the entry fee be assessed at $233,132. 5/ Because we find the record at this stage to be insufficient to permit the necessary determinations, we have decided that the best procedure under the circumstances is to designate an administrative law judge to preside over this matter and to conduct further proceedings consistent with this Order. I. Background In 1975, Congress directed the Commission, through enactment of Exchange Act Section 11A, to facilitate the establishment of a national market system for securities. 6/ Congress found that a national market system would link together the individual markets that trade securities. 7/ Congress contemplated that a national market system would encourage centralized trading and fair competition among markets. 8/ The Commission adopted a rule that required every national securities exchange and the NASD to file a plan for collecting, processing, and disseminating on a consolidated basis reports of completed transactions (“last sale reports”) in securities registered or admitted to trading on an 4/ Nasdaq also joined the Consolidated Quotation (“CQ”) Plan, pursuant to which the participants disseminate bid/ask quotation information for listed securities. The Operating Committee of that Plan is not a registered securities information processor. However, the entry fee that is the subject of Nasdaq’s petition for review also entitles Nasdaq to join the CQ Plan as a new participant in that Plan. Thus, Nasdaq also contests the application of the entry fee to Nasdaq’s entry into the CQ Plan. 5/ In addition, Nasdaq requests that any costs incurred by the CTA in defending this action, including the costs of counsel, be apportioned among the CTA Plan participants other than Nasdaq. We lack the authority to award costs. Cf. Richard J. Rouse, 51 S.E.C. 581, 587 n.20 (1993) (rejecting respondent’s request for attorney fees in appeal of NASD disciplinary action; stating that “[n]o statutory basis exists for the award of attorney fees and other costs in the context of appeals to the Commission of disciplinary action by self-regulatory organizations”). 6/ 15 U.S.C. § 78k-1(a)(2). 7/ 15 U.S.C. § 78k-1(a)(1)(D). 8/ 15 U.S.C. § 78k-1(a)(1)(C). 3 exchange or over-the-counter. To meet those requirements, various self-regulatory organizations filed with the Commission a joint industry plan (the “CTA Plan”) governing the implementation and operation of the consolidated reporting system. 9/ The CTA Plan establishes the terms, conditions, and procedures under which last sale reports are made available. The CTA Plan also engages the Securities Industry Automation Corporation, or SIAC, as the central processor of last sale information for inclusion in the consolidated tape. 10/ The CTA Plan is administered by the CTA, which currently consists of eleven participants, all of whom are competitors. 11/ In 1993, the Commission approved an amendment to the CTA Plan that added criteria for calculating the entry fee to be paid by new participants to the Plan. 12/ The amendment required a new entrant to pay the current participants an amount that “attributes an appropriate value to the assets, both tangible and intangible, that CTA has created and will make available to such new [p]articipant.” The CTA Plan allowed the participants to consider one or more of six factors in assessing an appropriate entry fee. In 2002, Nasdaq expressed interest in joining the CTA and CQ Plans and inquired about the amount of the entry fee. The CTA Participants engaged Deloitte & Touche to determine a proposed new entrant’s fee. In a report dated October 16, 2002, Deloitte & Touche concluded that the new entrant fee could be set at $3,307,000, consisting of $2,400,000 for “Historical Cost of the System,” $612,000 for a new processor, and $295,000 for modifications to the existing processor. 9/ Exchange Act Rel. No. 15250 (Oct. 20, 1978), 15 SEC Docket 1355, 1356. 10/ 15 SEC Docket at 1356. The CTA Plan provides for the collection and dissemination of “last sale” price information in “eligible securities.” The CTA Plan participants report to SIAC last sale prices relating to transactions in eligible securities. SIAC disseminates the data for a fee to vendors who, in turn, distribute the data to broker-dealers, investors, and other members of the public. The CTA Plan provides for the sharing of net income from the fees charged to vendors and others for the receipt or use of the CTA systems’ last sale price information. Each CTA Plan participant is entitled to receive its “annual share” of revenue, which is calculated according to the relative percentage of last sale transactions reported by that participant. 11/ The current participants are the American Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange (“CBOE”), Chicago Stock Exchange, International Securities Exchange (“ISE”), Nasdaq Stock Market, NASD, National Stock Exchange (formerly the Cincinnati Stock Exchange), New York Stock Exchange, NYSE Arca, and the Philadelphia Stock Exchange. 12/ See Exchange Act Rel. No. 33319 (Dec. 10, 1993), 55 SEC Docket 2062. 4 In 2003, the Division of Market Regulation (“Division”) expressed its concern to the CTA that the amount of the new entrant fee that the participants were considering might impose unnecessary competitive burdens on new entrants. 13/ In 2004, the Division twice urged the CTA to amend the CTA Plan to include “solely objective standards” for determining a new entry fee. 14/ On December 3, 2004, the CTA Plan participants proposed to amend the CTA Plan to include new standards for assessing a new entrant fee (the “Entry Fee Amendments”). 15/ The proposed Entry Fee Amendments provided, in pertinent part: In determining the amount of the Participation Fee to be paid by any new Participant, the Participants shall consider one or both of the following: ! the portion of costs previously paid by CTA for the development, expansion and maintenance of CTA’s facilities which, under generally accepted accounting principles, could have been treated as capital expenditures and, if so treated, would have been amortized over the five years preceding the admission of the new Participant (and for this purpose all such capital expenditures shall be deemed to have a five-year amortizable life); and ! previous Participation Fees paid by other new Participants. The Participant Fee shall be paid to the Participants in this CTA Plan and the “Participants” in the CQ Plan. A single Participation Fee allows the new Participant to participate in both Plans. If a new Participant does not agree with the calculation of the “Participation Fee,” it may subject the calculation to review by the Commission pursuant to Section 11A(b)(5) of the [Exchange] Act. (Emphasis supplied). 13/ See Order Approving the Seventh Substantive Amendment to the Second Restatement of the Consolidated Tape Association Plan and the Fifth Substantive Amendment to the Restated Consolidated Quotation Plan, Exchange Act Rel. No. 51391 (Mar. 17, 2005), 84 SEC Docket 4136, 4137 n.10. 14/ Id. at 4137 n.12. 15/ The proposal represented the seventh substantive amendment to the Second Restatement of the CTA Plan and the fifth substantive amendment to the Restated CQ Plan. Exchange Act Rel. No. 51012 (Jan. 10, 2005), 84 SEC Docket 2508. 5 In addition, the Entry Fee Amendments required new participants to reimburse the Plan processor for the costs incurred in modifying the CTA’s systems to accommodate the new participant and for any additional capacity costs. On March 17, 2005, the Commission, by delegated authority, approved the Entry Fee Amendments, 16/ which were incorporated into the CTA Plan as Section III(c). In its adopting release, the Commission stated that “the main purpose of a participation fee is to require each new party to the [CTA and CQ] Plans to pay a fair share of the costs previously paid by the CTA for the development, expansion, and maintenance of CTA’s facilities.” 17/ It stated further that the CTA and CQ Plan participants “should only consider the costs of tangible assets that could have been treated as capital expenditures under GAAP in the fee calculation, and if so treated, would have been amortized for a five-year period preceding the new party’s admission to the Plans.” 18/ However, the Commission cautioned that participants “must not consider any historical costs of operating the systems prior to the time a new party joins the Plans, or any subjective or intangible costs such as ‘good will’ or any future benefits to the new party.” 19/ The Commission concluded that “the proposed new standards, if appropriately employed by the [p]articipants, should foster a fair and reasonable method for determining the amount of a new [p]articipant’s entrance fee to be paid to the Plans.” 20/ II. Facts In 2005, Nasdaq requested approval to join the CTA. The last entrant in the CTA Plan had been the CBOE in 1991. Nasdaq’s request thus presented the first occasion for the CTA to calculate a new entrant fee based on the criteria set forth in the Entry Fee Amendments. The CTA directed SIAC to calculate a new entrant fee. In a presentation to the CTA dated October 12, 2005, SIAC calculated that Nasdaq’s entry fee should be assessed at $947,035, 16/ Order Approving the Seventh Substantive Amendment to the Second Restatement of the Consolidated Tape Association Plan and the Fifth Substantive Amendment to the Restated Consolidated Quotation Plan, Exchange Act Rel. No. 51391 (Mar. 17, 2005), 84 SEC Docket 4136. 17/ Id. at 4138. 18/ Id. 19/ Id. (Emphasis supplied). 20/ Id. 6 consisting of $308,488 in “development amortization” costs and $638,547 in “production amortization” costs. 21/ SIAC calculated the “development amortization” costs by ! totaling CTA development costs for 2000 through 2004; ! identifying “included” development costs that could be capitalized under Generally Accepted Accounting Principles (“GAAP”); ! amortizing included development costs over five years; ! adjusting that amortized amount by the Consumer Price Index (“CPI”); and ! dividing the result by ten, the then-current number of CTA Plan participants. 22/ SIAC calculated the “production amortization” costs in the same manner. In its presentation, SIAC quoted the language of the Entry Fee Amendments, but did not address the Commission’s admonition in the March 2005 adopting release that the CTA “must not consider any historical costs of operating the systems prior to the time a new party joins the Plans.” SIAC also did not attach any work papers in support of its calculations. On November 4, 2005, Nasdaq formally requested entry into the CTA and CQ Plans. In its request, Nasdaq questioned whether SIAC had properly calculated the entry fee. It expressed concern that “production costs that are more on the order of operating expenses and should not be capitalized may have been included in the [entry fee] calculation.” It sought to meet with SIAC to ascertain the nature of the expenses included in both development costs and production costs. In a memorandum dated January 9, 2006, SIAC’s Internal Audit Department reported on an “Agreed-Upon Procedures” engagement that it had performed for the purpose of “validat[ing] the assumptions used in the calculation of the Participation Fee.” 23/ The memorandum recited that SIAC’s auditors were asked to validate the “assumptions” that SIAC used in calculating the new entry fee for Nasdaq. However, the memorandum was silent as to what those assumptions were. Nor did the memorandum indicate the “clearly defined criteria” on which the “Agreed-Upon Procedures” engagement was based. In the memorandum, SIAC’s auditors focused solely on whether an expense could be capitalized under GAAP. SIAC’s auditors did not address the question whether an expense was an historical cost of operating the CTA’s systems. Nor did 21/ From the record, it appears that SIAC and the CTA traditionally billed participants for two categories of expenses, “development” and “production.” 22/ The calculation was performed for only a tenth CTA Plan Participant because ISE had not yet asked to have the entry fee calculated for it. 23/ According to the January 9, 2006, memorandum, an Agreed-Upon Procedures engagement was “one in which the auditor agrees to perform specific audit procedures based upon a set of clearly defined criteria. The client or customer sets forth the procedures and is solely responsible for their sufficiency.” 7 they identify any category of historical operating costs to be excluded from the calculation. Rather, SIAC’s auditors simply identified one category of costs that should be “included” under GAAP and another that should be “excluded” under GAAP. SIAC’s auditors concluded that they found the costs and assumptions used in the calculations to be “reasonable.” At the CTA’s January 20, 2006, meeting, SIAC presented its January 9, 2006, audit memorandum. When NASD, Nasdaq’s parent at the time, raised questions regarding SIAC’s calculations, the CTA granted NASD an opportunity to have its accountants meet with SIAC’s accountants to address NASD’s concerns. In its brief, the CTA asserts, and Nasdaq does not dispute, that NASD availed itself of the opportunity on February 2, 2006. On February 9, 2006, SIAC issued a second estimate of Nasdaq’s new entry fee. SIAC applied the same methodology used in making the first estimate, but arrived at a slightly lower fee of $912,918, which reflected the exclusion of certain production costs that were previously included in the calculation. In a memorandum to the CTA dated March 6, 2006, Nasdaq objected to SIAC’s inclusion of production costs in the calculation of Nasdaq’s entry fee. Nasdaq stated, in pertinent part: In the absence of instructions from the Operating Committee, however, SIAC included in its figures all expenditures that could have been capitalized for a five-year period not only for development, but also for production. Fortunately, SIAC did separate expenditures into two categories, development expenses which are permitted under the Plan and operating or production expenses which are not. As a result, impermissible operating expenses can readily be excluded by striking all production expenses in the presentation provided by SIAC. Nasdaq also objected to SIAC’s use of a CPI inflator. Based on SIAC’s February 9, 2006, presentation, which identified $2,839,747 in total development expenses without a CPI inflator, Nasdaq proposed that it pay an entry fee of $283,975 ($2,839,747 divided by ten, the then-current number of CTA Participants). On March 22, 2006, SIAC issued an updated calculation of CTA costs based on the five-year period ending December 2005. The calculation also reflected the fact that the International Securities Exchange, or ISE, had requested to join the CTA Plan. This circumstance required the CTA to calculate entry fees for both a tenth and an eleventh participant. SIAC’s calculation showed that a tenth entrant should pay $873,381, and that an eleventh entrant should pay $793,983. At the CTA’s March 23, 2006, meeting, the participants discussed costs to be included in the calculation of the new entry fee. Nasdaq moved for a vote on its proposal to pay a $283,975 entry fee, but no participant seconded the motion. Another motion was made to admit Nasdaq 8 and ISE as participants for an entry fee of $833,682 each ($873,381 + $793,983 = 1,667,364 divided by two is $833,682). This motion was seconded and approved. At the CTA’s May 10, 2006, meeting, the participants determined that Nasdaq and ISE could each pay their $833,682 entry fee in two equal installments, one within thirty days of that meeting and the other by the end of calendar year 2006. On June 16, 2006, Nasdaq wired payment of the first half of the entry fee. 24/ This petition for review followed. 25/ III. Parties’ Contentions A. Nasdaq Nasdaq contends that the CTA made three errors in calculating the entry fee. First, the CTA improperly included $492,678 of historical operating costs in the calculation. As SIAC’s documents reveal, the CTA historically has segregated all of its costs into one of two categories: development costs, i.e., the costs of developing, expanding, and maintaining the CTA’s facilities, and production or operating costs, i.e., the costs of operating the CTA’s systems. To calculate Nasdaq’s fee, the CTA began with its “existing separation of Development Costs and Production Costs and then excluded costs in each category that could not be capitalized under GAAP.” In Nasdaq’s view, “[w]hat [the CTA] should have done – to adhere to the Commission’s warning that the Participants must not consider any historical costs of operating the systems prior to the time a new party joins the Plans – was to begin with its existing Development Costs and then exclude those Development Costs that could be capitalized under GAAP.” Nasdaq contends that the CTA, by including production, or operating, costs in its fee calculation, erroneously included $492,678 of historical operating costs. 26/ Second, the CTA improperly applied a CPI inflator. Nasdaq argues that the Entry Fee Amendments do not authorize application of a CPI inflator or the practice of inflating historical costs to present day dollars. Moreover, application of a CPI inflator runs counter to accounting 24/ The record does not indicate whether Nasdaq has paid the second half of the entry fee. 25/ ISE has not petitioned for review. 26/ Nasdaq states that it arrived at this figure by taking SIAC’s Production Cost Amortization Through December 2005 of $5,419,466 and dividing it by eleven, the number of CTA Plan participants including Nasdaq and ISE. 9 principles of fixed assets. By applying a CPI inflator, the CTA overstated its costs by $68,172. 27/ Third, the CTA improperly treated Nasdaq and ISE as the tenth and eleventh participants, respectively, of the CTA Plan, and averaged the entry fees. In Nasdaq’s view, Nasdaq and ISE each should be treated as the eleventh participant. B. CTA The CTA responds that it properly excluded historical operating costs in calculating the entry fee. It deliberated over the fee calculation at no fewer than eight meetings, with three different presentations from SIAC. Commission staff members were present at each of the meetings and presentations and never suggested that the CTA had performed the calculation improperly. The CTA acknowledges that, for recordkeeping purposes, it categorizes costs as either “development” costs or “production” costs. However, contrary to Nasdaq’s claim, “production” costs are not synonymous with “operating” costs. The CTA asserts that whether it categorizes a cost as a “development” or “production” cost for recordkeeping purposes is irrelevant to the calculation of an entry fee. “What is relevant is whether a cost that CTA has placed in the ‘production cost’ category is a cost that CTA incurs in order to enhance or maintain the system or a cost that CTA incurred in order to operate the system.” The CTA asserts that the “CTA incurs a portion of total production costs in enhancing and maintaining CTA systems, separate and apart from the production costs that [the] CTA incurs in operating the systems. The [Entry Fee Amendments] require [the] CTA to include the former in the entry-fee calculation, but prohibits [the] CTA from including the latter.” The CTA notes that, in an exhibit (“Exhibit A”) to its December 3, 2004, letter transmitting the Entry Fee Amendments to the Commission for approval, the CTA included a hypothetical example of the calculation of an entry fee. The example set forth total production costs. It then carved out of total production costs those costs that were to be included in the calculation. The CTA asserts that it calculated Nasdaq’s entry fee according to the methodology reflected in the hypothetical calculation. 28/ It suggests that the Commission’s staff, which had 27/ Using SIAC’s March 22, 2006 Presentation, Nasdaq subtracted “Development Cost Amortization – CPI Adjusted” from “Development Cost Amortization” and then divided by eleven, the number of CTA Plan participants. Nasdaq then repeated the same process for Production costs. As set forth above, Nasdaq argues that all Production Costs should be excluded from the calculation of the new entry fee. 28/ In its reply brief, Nasdaq asserts that the CTA’s hypothetical calculation has no place in the record because it was not included in the Entry Fee Amendments presented to, and (continued...) 10 “considerable” input into the methodology, placed its imprimatur on the CTA’s calculation of Nasdaq’s entry fee. 29/ The CTA acknowledges that it applied a CPI inflator, but asserts that it did so in compliance with the hypothetical calculation contained in Exhibit A. Exhibit A demonstrates that the CTA Plan participants, acting under the Commission’s guidance, “clearly intended” that changes in the CPI would be factored into the calculation. The CTA states, moreover, that it is “perfectly appropriate” to take into account the time value of money by adding back the inflation factor. The CTA acknowledges that the CTA Plan is silent on the sharing of new entrant fees by multiple participants who enter the Plan in the same year. As a strict time priority, Nasdaq would be the tenth, and not the eleventh, CTA Plan participant because Nasdaq took the necessary steps to become a new participant sooner than ISE did. Having Nasdaq and ISE share the entry fees payable by the tenth and eleventh participants was considered by the participants to be a fair and reasonable way to proceed since Nasdaq and ISE were proposing to enter the CTA Plan at approximately the same time. IV. Analysis As a threshold matter, we believe that Exchange Act Section 11A(b)(5) provides us with authority to review Nasdaq’s petition. Section 11A(b)(5)(A) authorizes the Commission, on its own motion or upon application by an aggrieved party, to review any prohibition or limitation of access to services provided by a registered securities information processor, in this case, the 28/ (...continued) approved by, the CTA Plan participants, not included in the Commission’s release approving the Entry Fee Amendments, and not published in the Federal Register. 29/ The CTA relies on SIAC’s February 9, 2006, presentation as evidence that it included only those production costs that could be capitalized under GAAP. The February 9, 2006, presentation cites as included production costs “Data Processing, e.g., System Hardware (Non-Stop CPU’s, UNIX/Linux Servers),” “Communications Equipment Leases, e.g., Network Routers and Switches,”and “Afterhours Development/ Testing (Shared Data Center).” The CTA further relies on the January 9, 2006, audit report as providing verification that its calculations were proper. In its reply brief, Nasdaq disputes the propriety of the CTA’s inclusion of the costs of Data Processing and Communications Equipment Leases. Nasdaq also takes issue with the CTA’s apparent capitalization of its direct labor costs under the labels “Product Planning” and “Communications Engineering.” 11 CTA. Section 11A(b)(5)(B) provides that if the Commission finds, after notice and opportunity for a hearing, that the prohibition or limitation is consistent with the provisions of the Exchange Act and the rules and regulations thereunder, and the aggrieved party has not been discriminated against unfairly, the Commission, by order, must dismiss the proceeding. Section 11A(b)(5)(B) also provides that if the Commission does not make any such finding, or if the Commission finds that the prohibition or limitation imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, the Commission, by order, must set aside the prohibition or limitation and require the securities information processor to permit the aggrieved party access to the services offered by the processor. Section 11A(b)(5) thus vests the Commission with the substantive power to review prohibitions or limitations on access by registered securities information processors. The Commission previously has concluded that “the level of charges, or the terms at which facilities and services are offered by a registered securities information processor, can constitute a prohibition or limitation on access to those facilities and services.” 30/ In the March 2005 release adopting the Entry Fee Amendments, the Commission stated that any disagreement among Plan participants and a new entrant regarding the calculation of a proper fee would be subject to review by the Commission under Section 11A(b)(5). 31/ Turning to the merits, we have reviewed the record assembled by the CTA. It consists primarily of minutes of CTA/CQ meetings between January 2005 and May 2006, the January 9, 2006, memorandum from SIAC’s auditors, and SIAC’s proposed calculations of the entry fee, as reflected in its presentations of October 12, 2005, February 9, 2006, and March 22, 2006. We conclude that, at this stage, we lack sufficient information to make the necessary determinations under Section 11A(b)(5). Accordingly, we direct the parties to address the following questions: (1) Does the CTA maintain its books and records on a GAAP basis? (a) If so, what is the CTA’s policy regarding the capitalization of costs? (b) Does that policy establish a capitalization threshold? (c) What literature does the CTA rely on to capitalize its costs? (2) Did the CTA include in its calculation any development, expansion, or maintenance expenditures that are not capitalizable under GAAP? (a) If so, what was the nature of those expenditures and the basis for including them in the calculation of Nasdaq’s entry fee? 30/ Institutional Networks Corp., Exchange Act Rel. No. 20088 (Aug. 16, 1983), 28 SEC Docket 980, 982 & n.18 (Order Instituting Proceedings and Granting Temporary Stay). 31/ Exchange Act Rel. No. 51391 (Mar. 17, 2005), 84 SEC Docket 4136, 4138 n.23. 12 (3) How did CTA construe the phrase “could have been treated as capital expenditures” (as that phrase is used in CTA Plan Section III(c)) for purposes of calculating Nasdaq’s entry fee? (a) What was the total amount of costs included in the fee calculation which were not actually capitalized in CTA’s books and records? (b) What was the reason for not capitalizing the costs identified in (3)(a)? (c) What portion of the costs identified in (3)(a) related to development, expansion, and maintenance expenditures? (4) Describe the types of costs within each category (development, expansion, and maintenance) that the CTA treated as capitalizable under GAAP for purposes of the fee calculation. (a) In calculating Nasdaq’s entry fee, what was the total amount of costs for each category (development, expansion, and maintenance)? (5) What is meant by “CTA’s facilities” (as that term is used in CTA Plan Section III(c)) for purposes of calculating Nasdaq’s entry fee? (6) What software development activities were capitalized in accordance with Statement of Position 98-1 32/? (7) Were any assets reviewed for impairment following the guidance in FASB Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets? (a) If so, how was the impairment of those assets considered in the calculation of Nasdaq’s entry fee? (8) Did the CTA include any leases in its calculation of Nasdaq’s entry fee? (a) If so, which leases were included in the fee calculation? (b) How were those leases accounted for under GAAP? (9) In its amortization of capitalized expenditures, how did the CTA treat those capitalized expenditures that were incurred before the five-year period set forth in CTA Plan Section III(c), i.e., were all, some, or none of the amortized expenditures included? 32/ American Institute of Certified Public Accountants (“AICPA”) Statements of Position (“SOP”) provide guidance on financial accounting and reporting issues. Statement of Position 98-1 was cited by SIAC’s auditors in the January 9, 2006, memorandum. 13 (10) What weight should be given to the hypothetical calculations contained in Exhibit A to the CTA’s December 3, 2004, letter transmitting the Entry Fee Amendments to the Commission for approval? The parties are free to address any other matters that they deem relevant. We also invite any interested persons, including the Division of Market Regulation, to address these issues. 33/ Disputes involving registered securities information processors, national market system plans, or transaction reporting plans under Exchange Act Section 11A and the rules thereunder are governed by the Rules of Practice. 34/ We have determined to appoint a law judge to preside over this proceeding. 35/ Accordingly, it is ORDERED that the petition for review of the Nasdaq Stock Market, LLC, be, and it hereby is, accepted; and it is further ORDERED that the Chief Administrative Law Judge Brenda P. Murray shall designate an administrative law judge to preside over this proceeding in accordance with this Order; and it is further ORDERED that submissions may be received from the parties and any interested party, as well as from our Division of Market Regulation. By the Commission. Nancy M. Morris Secretary 33/ See Rule of Practice 210(d), 17 C.F.R. § 201.210(d) (providing for amicus participation and setting forth procedure for filing amicus brief). 34/ 17 C.F.R. § 201.101(a)(9); see 17 C.F.R. § 201.100(c) (authorizing the Commission, by order, to direct an alternative procedure if it determines that doing so would serve the interests of justice and not result in prejudice to any party). 35/ See, e.g., Cincinnati Stock Exchange, 54 S.E.C. 857 (2000) (in Section 11A(b)(5) case in which record required further development, Commission appointed law judge to preside over proceeding and directed parties to address certain issues).
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55911 / June 15, 2007 Administrative Proceeding File No. 3-12631 ____________________________________ : In the Matter of : : Order Appointing Morgan Stanley & Co. : Tax Administrator Incorporated, : : Respondent. : ____________________________________: By order dated January 30, 2007, the Commission issued the “Omnibus Order Directing the Appointment of Tax Administrator in Administrative Proceedings that Establish Distribution Funds” (“Omnibus Order”), Rel. No. 34-55196 authorizing the Secretary to issue orders during calendar year 2007 appointing, upon request by the Commission staff, Damasco and Associates (“Damasco”), a certified public accounting firm located in San Francisco, California, as tax administrator (“Tax Administrator”) in administrative proceedings where the distribution fund may incur tax-related obligations as a Qualified Settlement Fund (“QSF”) under the Department of the Treasury Regulation § 1.468B-1(c). On June 8, 2007, the Commission staff requested, pursuant to the Omnibus Order, the appointment of Damasco as the Tax Administrator for the QSF in the above-referenced proceeding. Accordingly, IT IS ORDERED that Damasco, pursuant to and in accordance with the Omnibus Order, is appointed the Tax Administrator for the QSF in the above-referenced proceeding. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55914 / June 15, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12660 In the Matter of STANISLAV KAMINSKY, Respondent. ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) against Stanislav Kaminsky (“Respondent” or “Kaminsky”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds that: Summary This matter involves unauthorized trading by Stanislav Kaminsky (“Kaminsky”) while he was associated with Marquis Financial Services, Inc. (“Marquis Financial”), a broker-dealer based in Burbank, California. Between February 2005 and April 2005, Kaminsky executed unauthorized trades in the accounts of at least two of his customers which, combined with margin and/or commission charges, caused each account to lose more than 40% of its value. Previously, in January 2003, the Commission ordered Kaminsky to cease and desist from violations of the antifraud provisions of the federal securities laws and suspended him from association with any broker or dealer for twelve months for engaging in sales practice abuses, including unauthorized trading, between April 1997 and November 1997. Kaminsky has also been a respondent in several NASD arbitration actions, one of which was resolved against him. Respondent 1. Kaminsky, age 30, is a resident of Brooklyn, New York. Kaminsky holds NASD Series 7, 24, and 63 licenses. Between July 2004 and November 2005, Kaminsky was associated with Marquis Financial. Other Relevant Entity 2. Marquis Financial is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. The firm is currently headquartered in Burbank, California, and has two branch offices located in Spring Hill, Florida and Brooklyn, New York. It was previously headquartered in Hicksville, New York. Kaminsky’s Prior Sales Practice Abuses 3. On January 29, 2003, the Commission, in In the Matter of Stanislav Kaminsky, Admin. Proc. File No. 3-11023 (January 29, 2003), found that Kaminsky had engaged in fraudulent sales practices, including churning and unauthorized and unsuitable trading, in the accounts of five customers while he was associated with W.J. Nolan and Co., a broker-dealer registered with the Commission. The Commission ordered Kaminsky to cease and desist from committing or causing any future violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10b of the Exchange Act and Rule 10b-5 thereunder, and from causing violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder. In addition to suspending Kaminsky from association with any broker or dealer for twelve months, the Commission ordered Kaminsky to pay disgorgement and prejudgment interest in the amount of $30,454 and a civil penalty in the amount of $20,509. 2 4. As a result of conduct that took place between 2000 and 2002, Kaminsky was charged in at least four NASD arbitration claims with executing unauthorized transactions in customers’ accounts. One of the arbitration claims resulted in Kaminsky and the broker-dealer with whom he was then employed being found jointly and severally liable to the customer for $30,381 in compensatory damages and $10,000 in attorney fees. Kaminsky’s Current Sales Practice Abuses 5. Between February 2005 and April 2005, Kaminsky executed transactions in the accounts of at least two customers without the customers’ authorization. Kaminsky also traded on margin without the customer’s authorization in one of the accounts. 6. In early February 2005, Kaminsky recommended to one customer that certain investments in the customer’s account be sold to purchase shares in two stocks Kaminsky recommended. The customer rejected Kaminsky’s recommendation, and told him to not execute the trades. Nevertheless, in direct contravention of the customer’s instructions, Kaminsky, later in February, sold more than $9,500 of securities in the customer’s account, and used the proceeds to purchase the stocks he recommended. 7. Subsequently, in March 2005 and again in April 2005, without the customer’s authorization, Kaminsky purchased, on margin, 3,000 additional shares of one of the stocks Kaminsky recommended. In addition, in April 2005, Kaminsky, without the customer’s authorization, sold two investments from the customer’s account for $29,481 and $4,874. 8. Kaminsky earned more than $1,212 in commissions from the unauthorized trades in the customer’s account. As a result of the unauthorized transactions in the customer’s account, and the attendant commissions and margin charges, the value of the customer’s account decreased by more than 40%. 9. In early February 2005, Kaminsky sold more than $9,000 worth of government securities from a second customer’s account, and used the proceeds from the sale to purchase shares in one of the same stocks Kaminsky recommended to the first customer. The customer did not authorize either transaction. 10. When the customer discovered the unauthorized trades, he complained to Kaminsky and demanded that his account positions be restored. Kaminsky tried to convince the customer to keep the trades, but the customer refused. The customer’s account was never restored to its prior positions. 11. Kaminsky earned approximately $298 in commissions from the unauthorized trades in the customer’s account. As a result of the unauthorized transactions in this customer’s account, and the attendant commissions, the value of the customer’s account decreased by more than 50%. 3 Violations 12. As a result of the conduct described above, Kaminsky willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities, in that he employed devices, schemes, or artifices to defraud; obtained money or property by means of untrue statements of material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engaged in any transaction, act, practice, or courses of business which operated or would operate as a fraud or deceit upon any person, in connection with the offer, purchase or sale of any security. An unauthorized trade is fraudulent where it is accompanied by deception, misrepresentation, or non-disclosure. SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of Edgar B. Alacan, 83 SEC Docket 842, 845 (July 6, 2004); In the Matter of Sandra K. Simpson and Daphne Pattee, 77 SEC Docket 1983, 2001 (May 14, 2002) (quoting Donald A. Roche, 53 S.E.C. 16, 24 (1997)). Disgorgement and Civil Penalties 13. Respondent has submitted a sworn Statement of Financial Condition dated April 5, 2007 and other evidence and has asserted his inability to pay a civil penalty and the full amount of disgorgement and prejudgment interest. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Kaminsky’s Offer. Accordingly, pursuant to Section 15(b) of the Exchange Act, it is hereby ORDERED that: A. Respondent Kaminsky be, and hereby is barred from association with any broker or dealer. B. Any reapplication for association by the Respondent will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order. C. Respondent shall pay $1,510 in disgorgement and $167 in prejudgment interest, but payment of all but $400 is waived based upon Respondent’s sworn representations in his Statement of Financial Condition dated April 5, 2007 and other documents submitted to the Commission. 4 D. Based upon Respondent’s sworn representations in his Statement of Financial Condition dated April 5, 2007 and other documents submitted to the Commission, the Commission is not imposing a penalty against Respondent. E. The Division of Enforcement (“Division”) may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of the full amount of disgorgement plus pre-judgment interest and the maximum civil penalty allowable under the law. No other issue shall be considered in connection with the petition other than whether the financial information provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of the full amount of disgorgement plus prejudgment interest and a penalty should not be ordered; (3) contest the amount of disgorgement and interest to be ordered and the imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense. F. IT IS FURTHER ORDERED that Respondent shall, within ten days of the entry of this Order, pay disgorgement of $400 to the Securities and Exchange Commission. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Stanislav Kaminsky as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Timothy Warren, Associate Director, Division of Enforcement, Securities and Exchange Commission, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604. By the Commission. Nancy M. Morris Secretary 5
34-55915 Jun. 15, 2007 Bear Wagner Specialists LLC; Fleet Specialist, Inc.; LaBranche & Co. LLC; Spear, Leeds & Kellogg Specialists LLC; Van der Moolen Specialists USA, LLC; Performance Specialist Group LLC; SIG Specialists, Inc. http://www.sec.gov/litigation/admin/2007/34-55915.pdf
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55915 / June 15, 2007 : In the Matters of : : Bear Wagner Specialists LLC : Admin. Proc. File No. 3-11445 : Fleet Specialist, Inc. : Admin. Proc. File No. 3-11446 : LaBranche & Co. LLC : ORDER APPROVING A Admin. Proc. File No. 3-11447 : DISTRIBUTION, Spear, Leeds & Kellogg Specialists LLC : AUTHORIZING Admin. Proc. File No. 3-11448 : DISBURSEMENT OF FUNDS, Van der Moolen Specialists USA, LLC : MODIFYING PRIOR ORDER, Admin. Proc. File No. 3-11449 : AND MODIFYING DISTRIBUTION Performance Specialist Group LLC : PLAN Admin. Proc. File No. 3-11558 : SIG Specialists, Inc. : Admin. Proc. File No. 3-11559 : : Respondents. : : I. FACTS 1. In March and July 2004, the Commission entered into settlements with the seven specialist firms operating on the New York Stock Exchange. The Commission’s orders (Securities Exchange Act Release Nos. 49498 – 49502 and Nos. 50075 – 50076) (the “Settlement Orders”) provided, among other things, for payment of disgorgement and civil penalties totaling, in the aggregate, over $247 million. The Settlement Orders further provided that the disgorgement and civil penalties were to be placed in Fair Funds to be distributed pursuant to a distribution plan (the “Plan”) drawn up by a fund administrator. Heffler, Radetich & Saitta L.L.P. (“Heffler”) was appointed the fund administrator in October 2004. 2. On May 17, 2006, the Commission issued an order (the “May 2006 Order”) approving Heffler’s Plan. Pursuant to the Plan, Heffler must identify the customers who were injured as a result of the previously identified violative trades, calculate each injured customer’s distribution amount – which is the sum of the disgorgement amount, and the prejudgment and post-judgment interest thereon – and make distributions to the injured customers. The distributions are to be made on a rolling basis. 3. Pursuant to previous Commission orders, Heffler has thus far made two distributions under the Plan, totaling, in the aggregate, over $95 million. a. The initial distribution was made on July 19, 2006, pursuant to a Commission Order dated July 5, 2006. This initial distribution involved a total disbursement of $52,732,921.43, which was comprised of $42,082,144.95 in disgorgement, $6,101,253.76 in prejudgment interest, and $4,549,522.72 in post-judgment interest. b. On November 30, 2006, Heffler made a second rolling distribution under the Plan, pursuant to a Commission Order dated November 24, 2006. This second distribution involved a total disbursement of $42,765,263.59, which was comprised of $33,548,991.43 in disgorgement, $4,942,721.04 in prejudgment interest, and $4,273,551.12 in post-judgment interest. 4. Heffler has notified the staff that it is now prepared to make the third rolling distribution in this matter. Section III of the Plan provides that the Commission must approve all distributions to injured customers. 5. In accordance with the Plan, Heffler has submitted, for Commission approval, a report dated May 21, 2007 (the “Distribution Report”), identifying the injured customers who will receive a distribution check, and their distribution amount, with respect to the third rolling distribution in this matter. This third distribution involves a total disbursement of $14,305,053.02, comprised of $10,923,205.08 in disgorgement, $1,606,357.24 in prejudgment interest, and $1,775,490.70 in post-judgment interest. The Plan calls for post-judgment interest on each transaction to be calculated starting from the day following the entry of the Settlement Orders and ending on the date of distribution. For purposes of calculating the post-judgment interest in this distribution, Heffler has selected June 19, 2007, as the date of distribution. 6. Heffler has also submitted a schedule of estimated printing and mailing costs (the “Distribution Costs”) that will be incurred in connection with this third distribution, and has requested that the Commission authorize a member of the Enforcement staff at or above the level of Associate Regional Director at the Commission’s New York Regional Office (the “SEC Representative”) to approve the advance payment of such costs. The Distribution Costs are estimated at $71,000. Citizens Bank of Pennsylvania (“Citizens Bank”), the escrow agent and disbursing agent in this matter, has also requested that the Commission authorize the SEC Representative to approve the payment of estimated banking fees (the “Bank Fees”) as they relate to the third distribution when they are incurred. Citizens Bank had previously provided the staff with an estimate of Bank Fees amounting to $38,220 for services in connection with processing the first 500,000 checks issued in the distributions. 7. In the Plan, and as provided by the May 2006 Order, Heffler proposed December 31, 2006, as the termination date of the Distribution Funds, with the proviso that “such date may be subsequently amended in light of Heffler’s recommendation for periodic distributions, which is based on future responses received from Clearing Members and Nominees.” The Plan 2 provides that Heffler will continue to work with the clearing member firms and nominees to identify the injured customers, and when Heffler determines that “efforts to identify the Injured Customers have been exhausted,” it will submit a final report to the Commission recommending that the Distribution Funds be terminated. 8. Heffler has notified the staff that it is continuing to receive responses from the clearing member firms and nominees identifying the injured customers, and, therefore, Heffler believes that its efforts to identify the injured customers have not been exhausted. Heffler believes that it will be able to make additional distributions in the near future. Accordingly, Heffler has requested that the Commission modify the Plan to extend Heffler’s proposed date of termination of the Distribution Funds to June 30, 2008, or such other date as ordered by the Commission. II. In view of the foregoing, it is ORDERED that: 1. The third rolling distribution of $14,305,053.02, in accordance with the Distribution Report submitted by Heffler, is hereby approved. 2. The SEC Representative is hereby authorized to approve the advance payment of the Distribution Costs, and authorized to approve the payment of the Bank Fees as they are incurred in connection with this third distribution. Heffler and Citizens Bank shall provide adequate supporting documentation for the Distribution Costs and the Bank Fees, respectively, to the SEC Representative. Any disbursements from the Fair Funds with respect to Distribution Costs and Bank Fees shall be made only upon the written authorization of the SEC Representative to Citizens Bank followed by a verbal confirmation from the SEC Representative of such written authorization. 3. The May 2006 Order and the Plan are hereby modified to extend Heffler’s proposed date of termination of the Distribution Funds to June 30, 2008, or such other date as may be further ordered by the Commission. By the Commission. Nancy M. Morris Secretary 3
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55922 / June 18, 2007 ADMINISTRATIVE PROCEEDING File No. 3-11814 In the Matter of COLUMBIA MANAGEMENT ADVISORS, INC. and COLUMBIA FUNDS DISTRIBUTOR, INC. Respondents. ORDER DIRECTING DISBURSEMENT OF FAIR FUND On July 19, 2006, the Commission published a notice of the Plan of Distribution (“Plan”) proposed by the Division of Enforcement in connection with this proceeding (Securities Exchange Act Release No. 34-54175). The Commission received comments and on April 6, 2007 the Plan was approved. The Plan of Distribution provides that a Fair Fund consisting of $140,000,000 in disgorgement and civil penalties, plus any accrued interest, be transferred to Deutsche Bank to be distributed by the Plan Administrator to injured investors according to the methodology set forth in the Plan. The Plan provides that the Commission will arrange for distribution of the Fair Fund when a Payment File listing the payees with the identification information required to make the distribution has been received and accepted. The Payment File has been received and accepted. Accordingly, it is ORDERED that the Commission staff shall transfer $37,761,807.19 of the Fair Fund to Deutsche Bank and the Plan Administrator shall distribute such monies to investors, as provided for in the Plan of Distribution. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary 2
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55931 / June 20, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2618 / June 20, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12661 In the Matter of ALLIED CAPITAL CORPORATION, Respondent. ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Allied Capital Corporation (“Allied” or “Respondent”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and over the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds that: 2 Respondent 1. Allied Capital Corporation, incorporated in Maryland and headquartered in Washington, D.C., is a closed-end management investment company that has elected to be regulated as a business development company (“BDC”) pursuant to Section 54 of the Investment Company Act of 1940 (“Investment Company Act”). Allied provides privately negotiated debt and equity financing to middle market companies, with a primary focus on private finance. Allied’s securities are registered pursuant to Section 12(g) of the Exchange Act. Allied makes periodic filings with the Commission pursuant to Section 13(a) of the Exchange Act. Summary 2. From the quarter ended June 30, 2001 through the quarter ended March 31, 2003, Allied violated recordkeeping and internal controls provisions of the federal securities laws relating to the valuation of certain securities in its private finance portfolio for which market quotations were not readily available. During the relevant period, Allied failed to make and keep books, records, and accounts which, in reasonable detail, supported or accurately and fairly reflected certain valuations it recorded on a quarterly basis for some of its securities. In addition, Allied’s internal controls failed to provide reasonable assurances that Allied would value these securities in accordance with generally accepted accounting principles. Further, from the quarter ended June 30, 2001 through the quarter ended March 31, 2002, Allied failed to provide reasonable assurances that the recorded accountability for certain securities in its private finance portfolio was compared with existing fair value of those same securities at reasonable intervals by failing to: (a) provide its board of directors (“Board”) with sufficient contemporaneous valuation documentation during Allied’s March and September quarterly valuation processes; and (b) maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that had gone into bankruptcy. 3. Allied has implemented new valuation processes, more detailed recordkeeping, and a series of additional controls and procedures over its valuation processes. Background 4. As a BDC, Allied is required to value its private finance security portfolio pursuant to the requirements in Section 2(a)(41) of the Investment Company Act. Because the large majority of Allied’s investments in its private finance portfolio are securities for which market quotations are not readily available, Section 2(a)(41)(B)(ii) of the Investment Company Act requires that Allied’s Board determine the fair value of its portfolio securities in good faith. The fair value of securities for which market quotations are not readily available is the price Allied would reasonably expect to receive on a current sale of the security.1 By the end of the relevant 1 See AICPA Audit and Accounting Guide - Investment Companies (Sect. 2.35-2.39), which incorporates Accounting Series Release No. 118 (“ASR 118”). The Commission has provided interpretative guidance related to financial reporting in the Accounting Series Releases, which is included in the Codification of Financial Reporting Policies. Thus, conformity with the ASR 118 is required by Commission rules and is consistent with GAAP. See also Articles 1-01(a) and 6.03 of Regulation S-X. 3 period, Allied’s private finance portfolio recorded at fair value grew to over $1.7 billion, which represented approximately 65% of Allied’s total assets, and included investments in approximately 152 portfolio companies. 5. From the quarter ended June 30, 2001 through the quarter ended March 31, 2003, however, Allied failed to make and keep books, records, and accounts which, in reasonable detail, supported the valuations of certain of its securities for which market quotations are not readily available (“private finance investments”). With respect to 15 private finance investments reviewed by staff, Allied could not produce sufficient contemporaneous documentation to support, or which accurately and fairly reflected, its Board’s determination of fair value. Instead, in some instances, the written valuation documentation Allied presented to its Board for these investments failed to include certain relevant indications of value available to it (as further discussed below) and sometimes introduced changes to key inputs used to calculate fair value from quarter to quarter without sufficient written explanation of the rationale for the changes (e.g., changes from EBITDA to revenue-based valuations and in some instances, changes in multiples used to derive enterprise value). The written valuation documentation retained by Allied for these private finance investments does not reflect reasonable detail to support the private finance investment valuations recorded by Allied in its periodic filings during the relevant period. 6. The following are three examples of insufficient recordkeeping of Allied’s private finance investments during the relevant period. 7. Company A - During the relevant period, Allied held a debt investment in Company A, a telecommunications company. Allied was unable to produce contemporaneous written documentation, in reasonable detail, to support its valuation of Company A during the quarters ended June 30, 2001 and September 30, 2001. Specifically, Allied’s valuation of Company A for these quarters was derived, in part, by including revenues from discontinued lines of business to establish fair value. Allied maintains that it used a reduced multiple to offset any potential overstatement that would have otherwise resulted from the inclusion of those revenues, but it did not provide the Board with contemporaneous written documentation, in reasonable detail, to support this claim. In addition, Allied did not retain the valuation documentation it presented to the Board for Company A for the quarters ended December 31, 2001 and March 31, 2002. Allied valued its $20 million subordinated debt investment in Company A at $20 million (i.e., cost) in its Forms 10-Q for the quarters ended June 30, 2001 and September 30, 2001. In its 2001 Form 10-K and its Form 10-Q for the period ended March 31, 2002, Allied valued its $20 million subordinated debt investment in Company A at $10.3 million. Allied subsequently wrote down its subordinated debt investment in Company A to $245,000 in its Form 10-Q for the quarter ended June 30, 2002. 8. Company B - During the relevant period, Allied held a subordinated-debt investment in Company B, a direct marketing company. Allied was unable to produce contemporaneous documentation, in reasonable detail, to support the basis for its valuation of Company B for the quarter ended March 31, 2003. Specifically, Allied’s valuation was based, in large part, on a potential future buyout event by Allied that was preliminary in nature. Allied maintains that – as a general practice – the Board would have discussed why this particular potential future buyout event was significant enough to form the basis of its valuation of Company 4 B, but it could not provide contemporaneous written documentation in reasonable detail to support this claim. Further, Allied’s valuation documentation did not fully reflect Allied’s consideration of competing buyout offers for Company B, which, if accepted, would have reduced the fair value of Allied’s investment. Allied valued its $16.5 million subordinated debt investment in Company B at $14.3 million in its Form 10-Q for the quarter ended March 2003. Allied subsequently wrote down its subordinated debt investment in Company B from $14.3 million to $50,000 in its Form 10-Q for the quarter ended June 30, 2003. 9. Company C - During the relevant period, Allied held a subordinated debt investment in Company C, an office supply company. Allied was unable to produce contemporaneous documentation, in reasonable detail, to support the basis for its valuation of Company C from the quarter ended September 30, 2001 through the quarter ended March 31, 2002. For example, Allied’s written valuation documentation failed to include all relevant facts available to it regarding Company C’s deteriorating financial condition, including the fact that Company C had lost one of its largest customers as a result of the terrorist attack on the World Trade Center. Allied valued its subordinated debt investment in Company C at $8 million in its Forms 10-Q and Form 10-K for the quarters ended September 30, 2001 through March 31, 2002 and subsequently wrote that investment down to $50,000 in its Form 10-Q for the quarter ended June 30, 2002. 10. Allied also failed to implement internal accounting controls relating to its private finance investment valuations that were sufficient to provide reasonable assurances that these valuations were fairly stated in accordance with generally accepted accounting principles, or other criteria applicable to its financial statements. For example, there were certain instances where Allied did not provide its Board (or its valuation committee) with sufficient written information to support the Board’s determinations of fair value.2 For example, in several instances, the written valuation documentation presented to the Board was incomplete or inadequate to support the fair value recorded by Allied (e.g., enterprise values were listed on worksheets without any explanation; necessary inputs and/or calculations were either missing or incomplete). In other instances, Allied’s valuation documentation during the relevant period contained unexplained departures from, or changes to, key inputs from quarter to quarter. During the relevant period, Allied did not provide its Board with written valuation documentation from prior periods. At least one Board member, however, maintained prior period valuation documentation during a portion of the relevant period, but Allied did not regularly provide the Board with comparative information about prior period inputs until the quarter ended September 30, 2003. 11. In addition, from the quarter ended June 30, 2001 through the quarter ended March 31, 2002, the valuation documentation presented to Allied’s Board during the March and September quarterly valuation processes consisted of quantitative worksheets that failed to provide an adequate explanation of the various inputs. For example, changes in valuations from quarter to quarter were not always explained in reasonable detail in the written documentation. Moreover, Allied did not prepare a written description of the quantitative and qualitative analyses used to 2 Allied’s failure to provide the Board with such information is inconsistent with the guidance in ASR 118 that a fund’s board must satisfy itself that “all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered . . .” See supra n.1. 5 develop its valuations until the quarter ended June 30, 2002. During this period, Allied also failed to maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that had gone into bankruptcy. While Allied maintains that its Board members and employees engaged in discussions before and during the Board meetings to satisfy themselves with the recorded valuations for Allied’s private finance investments, the written valuation documentation retained by Allied for certain private finance investments does not reflect reasonable detail to support the private finance investment valuations recorded by Allied in its periodic filings during the relevant period.3 12. During the relevant period, Allied private finance department personnel typically recommended the initial valuations on the investment deals on which they worked. While there were some existing independent checks of Allied’s valuation process, these checks, standing alone, did not provide a sufficient assessment of the objectivity of valuations of the private finance investments. For example, the valuation committee assigned to review each investment on a quarterly basis was comprised, in large part, of private finance managing directors and principals. Allied has since implemented new valuation processes, more detailed recordkeeping, and a series of additional controls and procedures over its valuation processes, including, but not limited to: quarterly valuation assistance from third-parties; and the establishment of a new Chief Valuation Officer position to oversee the valuation process. 13. As a result of the conduct described above, Allied violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. See, e.g., In the Matter of Morgan Stanley, Admin. Proc. File No. 3-11725, Exchange Act Release No. 50632, 2004 SEC Lexis 2573 (Nov. 4, 2004) (finding, in relevant part, that Morgan Stanley’s failure to maintain documentation to support its bond valuations violated Section 13(b)(2)(A)). 14. As a result of the conduct described above, Allied also violated Section 13(b)(2)(B)(ii) of the Exchange Act, which requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, or other criteria applicable to its financial statements. See, e.g., In the Matter of Morgan Stanley, Admin. Proc. File No. 3-11725, Exchange Act Release No. 50632, 2004 SEC Lexis 2573 (Nov. 4, 2004) (finding, in relevant part, that Morgan Stanley’s failure to maintain internal controls sufficient to ensure that it valued its bond positions and its aircraft in accordance with GAAP violated Section 13(b)(2)(B)). 15. As a result of the conduct described above, Allied also violated Section 13(b)(2)(B)(iv) of the Exchange Act, which requires reporting companies to provide reasonable 3 Commission guidance provides that “. . . directors should take into consideration all indications of value available to them in determining the ‘fair value’ assigned to a particular security. The information so considered together with, to the extent practicable, judgment factors considered by the board of directors in reaching its decisions should be documented in the minutes of the directors’ meeting and the supporting data retained for the inspection of the company’s independent accountant.” See ASR 118. 6 assurances that the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. IV. In determining to accept the Offer, the Commission considered remedial acts that were undertaken by Respondent and the cooperation that Respondent afforded the Commission staff. V. Undertakings Respondent has undertaken for a period of two years from the entry of this Order to: 1. Continue to employ a Chief Valuation Officer, or a similarly structured officer-level employee, to oversee its quarterly valuation process. 2. Continue to employ third-party valuation consultants to assist in its quarterly valuation process for private finance investments in a manner consistent with the Respondent’s current practices. VI. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Allied’s Offer. Accordingly, the Commission HEREBY ORDERS, pursuant to Section 21C of the Exchange Act, that: A. Respondent Allied cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A); 13(b)(2)(B)(ii) and 13(b)(2)(B)(iv) of the Exchange Act; and B. Respondent shall comply with the undertakings enumerated in Section V above. By the Commission. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55933 / June 20, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2620 / June 20, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12662 In the Matter of CAMBREX CORPORATION, Respondent. ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Cambrex Corporation (“Cambrex” or “Respondent”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. 2 III. On the basis of this Order and Respondent’s Offer, the Commission finds that: Respondent 1. Cambrex is a Delaware corporation with headquarters in East Rutherford, New Jersey. Cambrex supplies human health and bioscience products to the life sciences industry, produces feed additives and intermediates for the animal health/agriculture markets, and manufactures other specialty and fine chemicals. For the fiscal year ended December 31, 2005, Cambrex had net revenues of $455,097,000 and a net loss of $110,458,000. Cambrex’s common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the New York Stock Exchange. Summary 2. Between at least 1997 through 2001, Cambrex accrued an imbalance of approximately $17.1 million in its intercompany accounts. Of that amount, approximately $3.5 million was erroneously reflected as income when it in fact should have been accounted for as an operating expense, and Cambrex could not ascertain whether another $2.6 million was similarly booked improperly, though it also treated this figure as if it had been reflected as income. As a result, Cambrex issued erroneous periodic and annual reports. 3. The erroneous filings occurred because Cambrex failed to reconcile its intercompany accounts on a monthly basis. Cambrex failed to reconcile its intercompany accounts for three principal reasons. First, Cambrex did not adequately staff its internal accounting function. Second, Cambrex lacked a functional intercompany transaction policy. Third, when Cambrex instituted projects to perform a historical reconciliation of its intercompany accounts, the projects were not completed. Cambrex failed to reconcile the intercompany accounts even though its outside auditor provided Cambrex with several management letters that warned of potential ramifications if the imbalance was not fixed. 4. Cambrex’s failure to reconcile its intercompany accounts continued until the end of 2002, when Cambrex was forced to address the issue because of the certification requirements of the newly-enacted Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). A Cambrex subsidiary’s controller initially refused to sign a Sarbanes-Oxley-related internal sub-certification because of his awareness of the problems reconciling the intercompany accounts. His refusal triggered a series of discussions by Cambrex’s audit committee concerning the issue. In December 2002, Cambrex hired a new CFO with a strong accounting background, who finally devoted adequate resources to the task of reconciling the historical imbalances. 5. As a result, in January 2003, Cambrex announced that it would restate its financial results for the years ending December 31, 1997, through December 31, 2001 (the “Restatement 3 Period”). Cambrex stated that it had overstated pre-tax income by a total of $6.1 million, or $5.1 million after taxes, over the fiscal years 1997 through 2001. Net income was overstated by $1.3 million, $2.9 million, $0.2 million and $0.8 million in 2001, 2000, 1999, and 1998, respectively, and understated by $0.1 million in 1997. Background A. Intercompany Accounts at Cambrex 6. Cambrex has approximately fourteen operating subsidiaries located throughout the world. In order to record and account for activity, such as the transfer of expenses, assets, or liabilities, conducted between these affiliated companies, Cambrex utilizes intercompany accounts. 7. Intercompany transactions are supposed to be booked through an identical corresponding charge by each side of a given transaction or expense, which, if done properly, would have no impact on Cambrex’s consolidated assets, liabilities, expenses, or revenues. For example, if Cambrex corporate (“Corporate”) agrees to absorb an expense incurred by a subsidiary, if recorded correctly, Corporate should record a debit to an expense account, increasing the expense on Corporate’s income statement, and a credit to an intercompany account on its balance sheet. The subsidiary should record a credit to an expense account on its income statement and a debit to an intercompany account on its balance sheet. If Corporate were to initially record and pay for an expense that should be charged to a subsidiary, the above entries should be reversed. In both instances, as a result of these identical credits and debits, the accounts would net to zero and there would be no impact on Cambrex’s consolidated assets, liabilities, expenses, or revenues. 8. Within Corporate, Cambrex’s internal accounting group, known as the finance department (“Finance Department”), was responsible for, among other things, reviewing and reconciling the intercompany accounts. During the relevant time periods, the Corporate Finance Department was supervised by the Controller. A designated employee, usually the most junior, was supposed to review the intercompany accounts as part of a process to ensure that all intercompany accounts balanced and were properly netted-out in consolidation. To do this, the employee used computer software that alerted the employee if an imbalance existed, in which case the employee was then supposed to access separate software that essentially operated as Cambrex’s general ledger, to view the detail behind the specific transactions that caused an imbalance within a particular intercompany or group loan account. 9. Once discrepancies were identified, the Finance Department was tasked with resolving the difference through discussions with relevant personnel at the subsidiary. If no agreement could be reached, the Corporate Controller was supposed to make a unilateral, final decision about how to treat the discrepancy. During the Restatement Period, this process did not occur. Instead of reconciling the difference, the designated Finance Department employee simply logged the discrepancies. 10. The intercompany accounts were incorporated into Cambrex’s financial statements during the monthly consolidation process. Because of its many subsidiaries, Cambrex performed a 4 multi-level consolidation that generated a single, final balance sheet, incorporating Corporate as well as both the domestic and international subsidiaries. The consolidation was performed at the close of every month, in order to generate monthly financial reports, comparing the actual results reported by the sites with their forecasted and prior year’s results. During the consolidation process, Cambrex would identify the sum of all intercompany imbalances (those entries where both sides to an intercompany transaction did not book the same dollar figure). Under Generally Accepted Accounting Principles, it is necessary to eliminate intercompany transactions in the consolidation process. Cambrex erroneously believed it eliminated its intercompany imbalances by entering the sum of all the imbalances in a line item, known as a “top side adjustment,” on its consolidated balance sheet. The top-side adjustment was only made on the balance sheet – and not the income statement – because of a long-standing but erroneous assumption that the imbalanced intercompany accounts did not affect Cambrex’s income statement. 11. In fact, under certain circumstances, Cambrex’s imbalanced intercompany accounts did affect its income statement. This occurred when, for example, a subsidiary recorded an expense that it intended to transfer to Corporate where, in order to transfer the expense, it should have recorded a credit to an expense account to reduce its operating expenses on its income statement and a debit to an intercompany account on its balance sheet. When Corporate, however, did not book an offsetting entry to increase its expenses and adjust its intercompany account, this resulted in an understatement of consolidated expenses and an overstatement of consolidated income in Cambrex’s consolidated financial statement. Similarly, there were instances where Corporate intended to transfer certain fringe benefit expenses to a subsidiary and Corporate recorded one amount and the subsidiary recorded a different amount resulting in a corresponding understatement or overstatement of consolidated expenses, which also affected Cambrex’s consolidated income statement. B. Cambrex Failed to Perform Monthly Reconciliations of the Intercompany Accounts. 12. During the Restatement Period, Cambrex did not reconcile its intercompany accounts on a monthly basis. This failure contributed to a growing imbalance that needed to be corrected through a historical reconciliation. Although Cambrex executives were aware of the problem – and were specifically told by its auditor in 1999 that the failure to reconcile intercompany accounts could ultimately impact earnings – they took only limited and inadequate steps to address the issue. The historical reconciliation project was started several times, only to be quickly abandoned. Throughout, Cambrex failed to provide adequate staffing to the reconciliation project. 13. The Corporate Finance Department was inadequately staffed to reconcile the intercompany accounts. In addition, Cambrex’s limited accounting staff prioritized other responsibilities, such as monthly and periodic financial reporting, over the monthly intercompany reconciliation. In fact, Finance Department personnel believed that other group responsibilities took precedence over the monthly intercompany reconciliation. As a result, most personnel responsible for the internal accounting function made only a limited effort, if any, to perform a monthly reconciliation. These personnel rarely communicated with Cambrex subsidiaries concerning discrepancies in intercompany accounts, and did not ensure that such discrepancies 5 were remedied, but only logged the existence of these unresolved balances. Furthermore, the Finance Department experienced considerable staff turnover and new employees were not trained to handle the monthly reconciliation. 14. The individuals directly responsible for supervising these employees were aware that the intercompany imbalances were not being fully reconciled on a monthly basis and that the Finance Department was not properly staffed to do so. As a result, these individuals took insufficient steps to ensure that the intercompany accounts were regularly reconciled. 15. Although Cambrex maintained an intercompany transaction policy, it was not shown to various employees responsible for its implementation. The policy’s instructions were not followed because several individuals tasked with reconciling the intercompany accounts never saw the document. In addition, this document offered conflicting guidance by simultaneously mandating that the accounts be reconciled on a monthly basis and allowing unreconciled items to be carried into the following month. It was also unclear whether the document was intended to cover all intercompany transactions or a more limited subset of transactions. Moreover, while the document required that a schedule of all intercompany balances be completed and sent to Corporate as part of the quarterly reporting process, such schedules were not always prepared. 16. A supervisor responsible for the reconciliation of the intercompany accounts was aware of an intercompany transaction policy and knew that certain steps outlined in the policy were being taken, yet he did not recall reviewing it or consulting it. Although at various times the company set out to perform a historical reconciliation – often terming the project a “high priority” – the project was never completed. Cambrex failed to complete the historical reconciliation even though Cambrex’s auditor warned that Cambrex’s failure to properly reconcile the unbalanced accounts could affect the reported income statement in its financial disclosures. C. Cambrex Failed to Reconcile the Historical Imbalance in its Intercompany Accounts. 17. By failing to reconcile the intercompany accounts on a monthly basis, Cambrex generated a lengthy backlog of unreconciled entries. In order to determine the proper treatment of the entries underlying the imbalance, it became necessary to perform a historical reconciliation of the intercompany accounts. 18. However, during the Restatement Period, Cambrex did not reconcile the historical imbalance. This failure occurred because Cambrex did not employ sufficient personnel to perform the historical reconciliation and Cambrex never completed several reconciliation initiatives. These failures occurred even though Cambrex’s auditor warned that Cambrex’s failure to properly reconcile the unbalanced accounts could affect the reported income statement in Cambrex’s financial disclosures. 19. Cambrex relied on its internal accounting personnel to reconcile the imbalanced historical entries. However, much like the monthly reconciliation process, Cambrex did not employ sufficient manpower or devote adequate resources to complete the historical reconciliations. Again, supervisors were aware that the Finance Department was not performing 6 the historical intercompany reconciliation and was not properly staffed to do so. In fact, there were two substantial periods of time, each lasting several months, when Corporate performed no work to reconcile the historical imbalance. 20. Each year between 1999 and 2001, Cambrex instituted projects, at the direction of Finance Department supervisors, to reconcile the historical intercompany account imbalance. None of the reconciliation projects, one of which included assistance from an employee outside the Finance Department and an accountant employed by Cambrex’s outside auditor, was completed, and many steps set forth in the various plans were either not taken or left incomplete. Furthermore, Cambrex supervisors never took adequate steps to determine whether the internal accounting personnel had reconciled the intercompany account imbalances or why these tasks had not been completed. 21. Even when Cambrex identified a serious problem within the intercompany accounts, it took insufficient corrective steps. For instance, during 2001, Cambrex discovered that a subsidiary had been consistently incorrectly booking payments for fringe benefits. Upon discovering these errors, Cambrex and its personnel had direct evidence that a certain portion of the reconciliation resulted in an income effect on its P&L, which refuted a long-standing assumption about the nature of the imbalances. Yet, even after learning of this error, Cambrex did not take adequate measures to complete the historical reconciliation and determine the full extent of any adjustment needed to be made. D. Cambrex Did Not Adequately Address Management Letters From its Auditor. 22. Cambrex failed to reconcile the historical intercompany imbalance in spite of several annual warnings by its auditor of the consequences of such a failure. 23. In early 1999, Cambrex’s outside auditor issued a management letter to Cambrex for its audit for the year ended December 31, 1998 (“1998 Management Letter”). The 1998 Management Letter outlined key issues arising from that year’s audit and recommended changes. Among the suggestions was a recommendation titled: “Reconciliations over Intercompany Transactions Should Be Improved.” The recommendation stated the following: The Company should improve the adequacy of intercompany balance reconciliations. This issue, if not addressed, may result in a misstatement of intercompany accounts and not allow for proper elimination of such at the consolidated level. This could result in an unfavorable impact to earnings in the period discovered. We recommend that the Company implement procedures to identify and reconcile intercompany transactions. 24. In its response to the 1998 Management Letter, Cambrex’s management stated that it agreed with its outside auditor’s observation and recommendation. It also stated that, “[a] draft policy is currently issued which addresses the procedures required to confirm intercompany balances between subsidiaries on a monthly basis.” The 1998 Management Letter, along with 7 Cambrex management’s response, were provided to Cambrex’s audit committee. 25. After receiving the 1998 Management Letter, neither Cambrex management, nor its audit committee, took the necessary steps to reconcile the historical imbalances or address the failures to reconcile the accounts on a monthly basis. Furthermore, no steps were taken to determine if Cambrex’s accounting department was following the intercompany policy. 26. Cambrex’s auditor issued another management letter to Cambrex in the beginning of 2000, which covered the 1999 audit. In this letter, the auditor stated that Cambrex did not have an intercompany policy and did not perform periodic reconciliation of balances. Cambrex’s auditor warned that, if unchecked, the unreconciled accounts could result in an inability to “detect a misstatement” and “an unexpected and unfavorable impact to earnings in the period discovered.” Cambrex’s auditor recommended that Cambrex “implement procedures to reconcile intercompany account balances at least quarterly.” In its response, Cambrex noted that it had “initiated a project to bring intercompany accounts into balance” and, once finished, they would be “reconciled formally as part of the quarterly management reporting process.” Cambrex also claimed to be evaluating “the feasibility of implementing an automated balancing feature for intercompany transactions in the [computer] system.” The management letter for the 1999 audit, and Cambrex management’s response were provided to Cambrex’s audit committee. 27. Again, Cambrex did not follow through in its response and, as a result, did not fulfill the steps needed to reconcile the intercompany and group loan accounts. The project that Cambrex initiated to reconcile the accounts was never completed. Cambrex also did not begin formally reconciling the account balances on a quarterly basis, and an automated balancing feature was not implemented. 28. During the next two years, Cambrex’s auditor provided Cambrex with management letters for the 2000 and 2001 audits that were not distributed to the audit committee. In the management letters, the auditor stated that periodic reconciliations of intercompany balances were still not being performed, and reiterated their recommendation that Cambrex implement procedures to reconcile intercompany balances on a quarterly basis. It was also noted that the management letter from 2000 (for the 1999 audit) was still applicable. Cambrex management did not provide a response to these comments. E. Effect of Sarbanes-Oxley Act on the Reconciliation Project 29. Cambrex did not adequately address its historical reconciliation problems until the end of 2002, after issues were raised concerning the certification of Cambrex’s financial disclosures pursuant to Sarbanes-Oxley. In order to complete the CEO and CFO certifications required by Sarbanes-Oxley, Cambrex required sub-certifications from all of its Corporate and subsidiary Controllers concerning the accuracy of its financial reporting. When the controller for one of Cambrex’s subsidiaries initially refused to sign the sub-certification because of his awareness of the problems concerning the intercompany accounts, this refusal prompted a series of discussions by the Audit Committee. In December 2002, Cambrex hired a new CFO who engaged additional accounting staff and consultants and mobilized a strong reconciliation effort. As a 8 result, Cambrex finally devoted sufficient resources to reconcile all of the historical imbalances. F. Cambrex’s Restatement 30. At the close of trading on January 23, 2003, Cambrex issued a press release announcing that it would restate its financial results for the years ended December 31, 1997, through December 31, 2001, after discovering “certain discrepancies” in its intercompany accounts. In its annual report for fiscal year 2002 filed on March 20, 2003, Cambrex stated that “certain administrative and other charges were not properly expensed in [] prior periods” and, as a result, Cambrex had overstated pre-tax income by $6.1 million, or $5.1 million after taxes, for the fiscal years 1997 through 2001. Net income was overstated by $1.3 million, $2.9 million, $0.2 million and $0.8 million in 2001, 2000, 1999, and 1998, respectively, and understated by $0.1 million in 1997. 31. As a result of its 2003 restatement, Cambrex’s pre-tax earnings and net income were affected as follows: Increase (Decrease) in Reported Amounts ($Millions except EPS) Year Pre-tax Earnings Net Income EPS 1997-1999 ($0.9) ($.9) ($.03) 2000 ($3.5) ($2.9) ($.11) 2001 ($1.7) ($1.3) ($.05) The change in pre-tax earnings as a result of the restatement represented a downward revision of .60%, 5.29% and 4.79% for the years 1997-1999, 2000, and 2001, respectively. Pre-tax earnings for these years, following the restatement, were $152.2, $66.4, and $34.7 (millions) for 1997-1999, 2000, and 2001, respectively. Similarly, the restatement reflected a decrease in net income of .95%, 6.20% and 4.95% for 1997-1999, 2000, and 2001, respectively, corresponding to restated net income for those periods, of $94.2, $46.8, and $25.5 (millions), respectively. 32. Cambrex’s $6.1 million overstatement consisted of approximately $3.5 million that Cambrex identified as having been erroneously booked as a reduction of operating expenses, which resulted in an increase in the income reported on Cambrex’s income statement, and another $2.6 million that it was unable to determine whether to treat as having impacted its income or balance statement. To be conservative, Cambrex treated the $2.6 million as impacting income. 9 G. Legal Standards 33. Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect transactions and asset dispositions, and Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles. 34. Section 21C of the Exchange Act provides that the Commission may order any person who is or was a cause of a violation of any provision of the Exchange Act, due to an act or omission the person knew or should have known would contribute to the violation, to cease and desist from committing or causing such violation. H. Conclusions 35. Cambrex failed, over at least a five-year period, to correct long standing deficiencies in the handling of its intercompany accounts, and failed to reconcile its intercompany accounts on a monthly or periodic basis. As a result, Cambrex’s books, records and accounts did not, in reasonable detail, accurately and fairly reflect its intercompany accounts or income statement. 36. By its failure to implement a system of internal controls sufficient to prevent the intercompany and group loan accounts from becoming imbalanced, and its failure, on several occasions, to rectify the intercompany and group loan imbalance problem after becoming aware of it, Cambrex failed to implement internal accounting controls relating to its intercompany and group loan accounts which were sufficient to provide reasonable assurances that these accounts were accurately stated in accordance with generally accepted accounting principles. 37. As a result of the conduct described above, Cambrex violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. 38. Cambrex, as a result of the conduct described above, also violated Section 13(b)(2)(B) which requires all reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles. Cambrex’s Remedial Efforts 39. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. 1 0 Undertakings Cambrex has undertaken to: 40. Reconcile account balances between and among Cambrex and any of its related entities (hereinafter, the “intercompany accounts”) on a monthly, quarterly and annual basis; 41. Institute formal, written policies and procedures for reconciling the intercompany accounts on a monthly, quarterly and annual basis, including, but not limited to, the implementation of internal controls adopted to ensure that such reconciliation takes place; 42. For at least two (2) years from the date of the Order, Cambrex shall designate an experienced accountant within its Finance Department to function as the Intercompany and Group Loan Review Accountant. This individual will be responsible for ensuring compliance with paragraphs 40-41 above; 43. For at least two (2) years from the date of the Order, the Cambrex Controller (or individual with equivalent authority) will certify, at the end of each quarterly reporting period, that: (i) he or she has supervised the Intercompany and Group Loan Accountant; and (ii) Cambrex has complied with paragraphs 40-42 above; 44. For at least two (2) years from the date of the Order, Cambrex will employ its outside auditor to conduct an annual review of its intercompany accounts, the reconciliation of these accounts and the compliance with the undertakings in this settlement. The company shall cooperate fully with its outside auditor and shall provide the auditor with access to its files, books, records, and personnel as reasonably requested for the review. The results of the review will be presented, both in writing and orally, to both the Chief Financial Officer and the Chief Executive Officer no more than 30 days after the conclusion of the annual audit and in writing to the Commission’s staff no more than 30 days after the conclusion of the annual audit; 45. Maintain and preserve the certifications, pursuant to paragraph 43, for a period of ten (10) years from the date of the Order; 46. Provide a written report, within one hundred twenty (120) calendar days of the date of the Order to the Commission’s staff that details Cambrex’s implementation of the undertakings articulated in paragraphs 40-45; and 47. Cambrex shall send all reports, notices and other written communications with the Commission’s staff in connection with this Order to David Rosenfeld, Associate Regional Director, United States Securities and Exchange Commission, 3 World Financial Center, Room 4300, New York, New York 10281. 1 1 IV. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Cambrex’s Offer. Accordingly, it is hereby ORDERED that: A. Respondent Cambrex cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. B. Respondent shall comply with the undertakings in Section III above. By the Commission. Nancy M. Morris Secretary
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Release No. 55935 / June 21, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12663 IN THE MATTER OF AMERICAN TELETRONICS, INC., n/k/a SHINE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION INSTITUTES ADMINISTRATIVE PROCEEDINGS AGAINST AMERICAN TELETRONICS, INC., n/k/a SHINE HOLDINGS, INC., FOR FAILURE TO MAKE REQUIRED PERIODIC FILINGS The U.S. Securities and Exchange Commission today instituted public administrative proceedings against American Teletronics, Inc., n/k/a Shine Holdings, Inc. (American Teletronics) to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding twelve months. In the order instituting administrative proceedings (Order) against American Teletronics, the Division of Enforcement (the Division) alleges that American Teletronics’ securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Exchange Act). The Division also alleges that Exchange Act Section 13(a) and the rules promulgated thereunder require issuers with classes of securities registered pursuant to Exchange Act Section 12 to file with the Commission current and accurate information in periodic reports. The Division further alleges that American Teletronics is delinquent in its required periodic filings with the Commission, having last filed a periodic report for the period ending September 30, 1996. In addition, the Division alleges that American Teletronics has failed to respond to an inquiry by the Division of Corporation Finance as to whether it intends to comply with its periodic filing obligations. In these proceedings, instituted pursuant to Section 12(j) of the Exchange Act, a hearing will be scheduled before an Administrative Law Judge. At that hearing, the judge will hear evidence from the Division and American Teletronics to determine whether the allegations contained in the Order are true. The judge will then determine whether it is necessary and appropriate for the protection of investors to revoke or suspend for a period not exceeding twelve months the registration of each class of American Teletronics’ securities registered pursuant to Section 12 of the Exchange Act. The Commission has ordered that the administrative law judge issue an initial decision within 120 days from the service of the order instituting proceedings.
34-55946 Jun. 25, 2007 John Hancock Investment Management Services, LLC, John Hancock Distributors LLC, John Hancock Advisers, LLC, and John Hancock Funds, LLC Other Release Nos.: IA-2610, IC-27872 Note: See also the Order granting waiver http://www.sec.gov/litigation/admin/2007/34-55946.pdf
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55946 / June 25, 2007 INVESTMENT ADVISERS ACT OF 1940 Release No. 2610 / June 25, 2007 INVESTMENT COMPANY ACT OF 1940 Release No. 27872 / June 25, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12664 In the Matter of John Hancock Investment Management Services, LLC, John Hancock Distributors LLC, John Hancock Advisers, LLC, and John Hancock Funds, LLC, Respondents. ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934, SECTIONS 203(e) AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940, AND SECTIONS 9(b) AND 9(f) OF THE INVESTMENT COMPANY ACT OF 1940 I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted against: (1) John Hancock Investment Management Services, LLC, pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Investment Company Act”); (2) John Hancock Distributors LLC pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Sections 203(e) and 203(k) of the Advisers Act, and Sections 9(b) and 9(f) of the Investment Company Act; (3) John Hancock Advisers, LLC pursuant to Sections 203(e) and 203(k) of the Advisers Act, 2 and Sections 9(b) and 9(f) of the Investment Company Act and (4) John Hancock Funds, LLC, pursuant to Section 15(b) of the Exchange Act, Sections 203(e) and 203(k) of the Advisers Act, and Sections 9(b) and 9(f) of the Investment Company Act (collectively “Respondents”). II. In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 15(b) the Securities Exchange Act of 1934, Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offers, the Commission finds1 that: Summary 1. From at least 2001 until as late as 2004 (the “relevant period”), certain investment advisers and broker-dealers owned by Manulife Financial Corporation (“Manulife Financial”) and John Hancock Financial Services, Inc. (“John Hancock”), which Manulife Financial acquired in 2004 in a stock-for-stock merger, violated the federal securities laws when the investment adviser respondents failed to disclose their use of brokerage commissions to pay for their affiliated distributors’ marketing expenses concerning the sale of mutual fund and variable annuity products offered by related Manulife Financial and John Hancock entities. 2. Respondents John Hancock Investment Management Services, LLC (“John Hancock Management”) (known during the relevant period as Manufacturers Securities Services, LLC) and John Hancock Advisers, LLC (“John Hancock Advisers”), advisers respectively to the Manulife Financial variable annuity trust portfolios and the John Hancock retail mutual funds, directed brokerage commissions from transactions in the trust portfolios and retail mutual funds they advised to pay for marketing expenses their affiliated distributors incurred under the distributors’ own marketing arrangements with broker-dealers. These marketing arrangements are known as “revenue sharing” arrangements. The commissions were trust portfolio and retail mutual fund assets, and 1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other person or entity in this or any other proceeding. 3 were in addition to the distribution-related expenses that the variable series trust and mutual fund boards had authorized, but the investment adviser respondents did not disclose to the trust or retail mutual fund boards the use of these assets to pay their affiliates’ revenue sharing obligations, in breach of their fiduciary duty to the trust and retail mutual funds. John Hancock Distributors LLC (“John Hancock Distributors”) (known during the relevant period as Manulife Financial Services, LLC) and John Hancock Funds, LLC (“John Hancock Funds”), the broker-dealer affiliates that distributed the Manulife Financial variable annuity products and John Hancock’s retail mutual funds, negotiated and were obligated under the marketing arrangements. They knew or should have known that John Hancock Management and John Hancock Advisers failed to disclose to the trust and retail mutual fund boards the use of brokerage commissions to pay for these revenue sharing obligations. Respondents 3. John Hancock Management is a Delaware corporation with its headquarters in Boston, Massachusetts. During the relevant period, John Hancock Management was called Manufacturers Securities Services, LLC (“MSS”) and was owned and controlled by Manulife Financial. John Hancock Management is the investment adviser to the series investment company containing the investment options for Manulife Financial’s variable annuity products. John Hancock Management was registered with the Commission as an investment adviser throughout the relevant period and was registered as a broker-dealer during the relevant period until 2002. After Manulife Financial completed a stock-for-stock merger with John Hancock in April 2004, Manulife Financial changed MSS’s name to John Hancock Investment Management Services, LLC. 4. John Hancock Distributors is a Delaware Corporation with its headquarters in Toronto, Canada and is registered with the Commission as a broker-dealer. During the relevant period John Hancock Distributors was called Manulife Financial Services, LLC (“Manulife Services”). John Hancock Distributors was the principal underwriter and distributor of the variable annuity products issued by Manulife Financial. Manulife Financial owned and controlled Manulife Services during the relevant period. 5. John Hancock Advisers is a Delaware corporation with its headquarters in Boston, Massachusetts and is registered with the Commission as an investment adviser. John Hancock Advisers is the investment adviser to John Hancock mutual funds. John Hancock owned and controlled John Hancock Advisers during the relevant period. 6. John Hancock Funds is a Delaware corporation with its headquarters in Boston, Massachusetts and is registered with the Commission as a broker-dealer. John Hancock Funds is the underwriter and distributor of the mutual fund products offered by John Hancock. John Hancock owned and controlled John Hancock Funds during the relevant period. 4 Other Relevant Entities 7. During the relevant period, John Hancock was a Delaware corporation with its headquarters in Boston, Massachusetts. Its common stock traded on the New York Stock Exchange. John Hancock owned and controlled John Hancock Funds and John Hancock Advisers. In April 2004 Manulife Financial, a Canadian corporation with its headquarters in Toronto, Canada acquired John Hancock in a stock-for-stock merger. Manulife Financial common stock trades on the New York Stock Exchange. Since the merger John Hancock has operated as a Manulife Financial subsidiary. 8. During the relevant period, Manulife Financial owned directly or indirectly John Hancock Management, then known as MSS, John Hancock Distributors, then known as Manulife Financial Services and John Hancock Trust, then known as Manufacturers Investment Trust. 9. John Hancock Trust is a Massachusetts business trust with its headquarters in Boston, Massachusetts. During the relevant period, John Hancock Trust was called Manufacturers Investment Trust (“MIT”). It was a series investment company containing the investment options for Manulife Financial’s variable annuity products and was registered with the Commission as an investment company. After the Manulife Financial/John Hancock merger, MIT changed its name to John Hancock Trust. John Hancock Management’s and John Hancock Distributors’ Directed Brokerage and Revenue Sharing 10. John Hancock Management provided investment advisory and portfolio management services to John Hancock Trust. This included oversight of the sub-advisers John Hancock Trust used to manage its assets. The sub-advisers made investment decisions and placed orders for them through broker-dealers, some of whom were selected by John Hancock Management. John Hancock Distributors distributed the variable annuity products issued by John Hancock Trust. 11. During the relevant period, John Hancock Distributors negotiated and was obligated under revenue sharing arrangements with certain broker-dealers to compensate these broker-dealers to promote the sale of John Hancock Trust products. Under these arrangements, the broker-dealers agreed to provide special marketing services, such as the opportunity for John Hancock Management and John Hancock Distributors to participate in conferences and meetings in which John Hancock Trust products were presented to selling brokers and providing preferred placement of John Hancock Trust products in marketing programs or other favorable marketing of John Hancock Trust products. The fees ranged from 4 to 35 basis points (or 0.04% to 0.35%) on sales and up to 10 basis points (or 0.00% to 0.10%) on assets. In some instances, these broker-dealers agreed to accept brokerage commissions as payments under these revenue sharing arrangements. 5 12. During the relevant period, John Hancock Management stated in its filings with the Commission and in materials provided to the trust board that it may consider a broker or dealer’s sales in directing its brokerage commissions. For example, the Statement of Additional Information (“SAI”) for the relevant period stated that Sales Volume Considerations. Consistent with the foregoing considerations and the Rules of Fair Practice of the NASD, sales of insurance contracts which offer Trust portfolios may be considered as a factor in the selection of brokers or dealers. 13. Also, John Hancock Management stated in filings with the Commission and in materials provided to the trust board that John Hancock Distributors paid its own distribution costs. For example, a variable annuity prospectus for the relevant period said that John Hancock Distributors may pay broker-dealers additional compensation or reimbursement for their efforts in selling contracts 14. However, John Hancock Management knew that a portion of John Hancock Distributors’ revenue sharing expenses was satisfied when John Hancock Management directed brokerage commissions to the broker-dealers providing marketing services to John Hancock Distributors under the arrangements. The broker-dealers, John Hancock Management and John Hancock Distributors considered these commissions to be payments under the revenue sharing arrangements. John Hancock Management never disclosed this use of fund assets to the trust board. 15. Without knowledge of this use of trust brokerage commissions, the trust board was unaware of the conflict of interest it created and was unable adequately to evaluate the trust’s overall marketing expenses. 16. As a fiduciary, John Hancock Management had a duty to disclose to the trust this use of trust portfolio assets. John Hancock Management made no such disclosure. 17. John Hancock Management was primarily responsible for ensuring that the trust’s prospectuses and SAIs were in compliance with the requirements of Form N-1A in describing John Hancock Management’s trading practices for the John Hancock Trust. The information the Commission requires investment companies to disclose in its prospectuses and SAIs is set forth in Form N-1A. Specifically, Item 16(c) of the Form N-1A required a description in the SAI of “how the Fund will select brokers to effect securities transactions” and required that “if the Fund will consider the receipt of products or services other than brokerage or research services in selecting brokers, [the Fund should] specify those products or services.” During the relevant period, the SAIs disclosed that John Hancock Management may consider sales of shares of the Trust as a factor in selecting brokers or dealers, to execute the Trust’s portfolio transactions. The SAIs did not make the distinction between directing commissions “in consideration of fund sales” and using brokerage commissions to reduce its affiliate’s revenue sharing obligations. The SAIs failed to 6 disclose that John Hancock Management directed brokerage commissions to pay its affiliate’s revenue sharing obligations. 18. John Hancock Distributors knew when it offered and sold trust products that the brokerage commissions John Hancock Management directed to revenue sharing broker-dealers offset John Hancock Distributor’s own revenue sharing obligations and knew, or should have known, that John Hancock Management did not disclose this use of fund assets to the trust board. 19. John Hancock Management and John Hancock Distributors failed to ensure that the commissions were used only for the benefit of the funds that generated them. As a result, these commissions were used to pay revenue sharing obligations across the entire Manulife Financial complex. 20. John Hancock Management and John Hancock Distributors benefited from this use of trust portfolio assets. If the revenue sharing arrangements increased fund sales, John Hancock Management would benefit from an increase in its compensation, which was calculated as a percentage of net assets under management. John Hancock Distributors benefited from not having to pay for the marketing services provided under these arrangements from its own resources. 21. In total, John Hancock Management directed $14,838,943.65 in brokerage commissions to 55 broker-dealers during the relevant period as payment for John Hancock Distributors’ obligations under the revenue sharing arrangements. John Hancock Advisers’ and John Hancock Funds’ Directed Brokerage and Revenue Sharing 22. John Hancock Funds marketed and distributed John Hancock retail mutual funds through a number of broker-dealers. John Hancock Advisers provided investment advisory and portfolio management services to John Hancock’s retail mutual funds. During the relevant period, John Hancock Funds entered into revenue sharing arrangements with certain broker-dealers pursuant to which John Hancock Funds agreed to compensate these broker-dealers to promote the sale of John Hancock retail mutual funds. For example, these broker-dealers placed John Hancock mutual funds on “preferred lists” of mutual funds and gave John Hancock Funds increased access to registered representatives and sales conferences. In return John Hancock Funds agreed to make payments to these broker-dealers equal to a set percentage of gross sales and/or assets under management. These fees ranged from 10 to 25 basis points (or 0.1% to 0.25%) on sales and from 5 to 10 basis points (or 0.05% to 0.10%) on assets. In some instances, these broker-dealers agreed to accept brokerage commissions as payments under the revenue sharing arrangements. 23. In calculating the amount of brokerage commissions used to reduce revenue sharing payments, in some instances, broker-dealers used a formula that required John Hancock Funds to spend a higher amount in brokerage commissions than it would have 7 paid in cash. In these instances, John Hancock Funds and the broker-dealers used a ratio to convert brokerage commission amounts into a cash equivalent amount. 24. During the relevant period, John Hancock Advisers stated in its filings with the Commission and materials provided to the mutual fund boards and shareholders that John Hancock Funds may have paid broker-dealers from its own resources for services they provided in connection with their sales of John Hancock mutual fund products. For example, the prospectus for the funds stated that: [John Hancock Funds] may pay significant compensation out of its own resources to your broker-dealer. Also, during the relevant period, the SAI for the funds stated that: [John Hancock Funds], at its expense, and without additional cost to the Fund or its shareholders may provide significant additional compensation to Selling Firms in connection with their promotion of the Fund or sale of shares of the Fund. 25. However, John Hancock Advisers knew that a portion of John Hancock Funds’ revenue sharing expenses was satisfied when John Hancock Advisers directed brokerage commissions for fund portfolio transactions to certain broker-dealers. John Hancock Advisers never disclosed to the retail mutual fund boards this use of fund assets. 26. As a fiduciary, John Hancock Advisers had a duty to disclose to the retail mutual funds this use of fund assets. John Hancock Advisers made no such disclosure. 27. John Hancock Advisers was primarily responsible for ensuring that the John Hancock retail mutual fund prospectuses and SAIs were in compliance with the requirements of Form N-1A in describing John Hancock Funds’ trading practices for the John Hancock retail mutual funds. The information the Commission required investment companies to disclose in their prospectuses and SAIs is set forth in Form N-1A. Specifically, during the relevant period, Item 16(c) of the Form N-1A requires a description in the SAI of “how the Fund will select brokers to effect securities transactions” and required that “if the Fund will consider the receipt of products or services other than brokerage or research services in selecting brokers, [the Fund should] specify those products or services.” During the relevant period, the SAIs disclosed that John Hancock Advisers may consider sales of shares of the Funds as a factor in selecting brokers or dealers to execute the Fund’s portfolio transactions. The SAIs did not make the distinction between directing commissions “in consideration of fund sales” and using brokerage commissions to reduce revenue sharing obligations. The SAIs failed to disclose that John Hancock Advisers directed brokerage commissions to pay its affiliate’s revenue sharing obligations. 28. John Hancock Funds knew when it offered and sold these products that the brokerage commissions John Hancock Advisers directed to revenue sharing broker-dealers 8 offset John Hancock Funds’ own revenue sharing obligations and knew, or should have known, that John Hancock Advisers did not disclose this use of fund assets to the fund boards. 29. Nor did John Hancock Funds or John Hancock Advisers ensure that the commissions were used only in connection with revenue sharing expenses associated with the funds that generated them. As a result, commissions generated by particular funds were used to pay revenue sharing obligations relating to the marketing of other funds in the John Hancock mutual fund complex. 30. In total, John Hancock Advisers directed $2,899,907 in brokerage commissions to 12 broker-dealers during the relevant period as payment for John Hancock Funds’ payment obligations under the revenue sharing arrangements. Based on the application of ratios that converted brokerage commissions into cash, John Hancock Funds received credit against revenue sharing obligations of approximately $2,087,477.46, which is the amount it benefited from the use of these commissions to satisfy its revenue sharing arrangements. Violations 31. As a result of the conduct described above, Respondents John Hancock Advisers and John Hancock Management willfully2 violated Section 206(2) of the Advisers Act in that they engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon clients or prospective clients. Specifically, John Hancock Advisers and John Hancock Management failed to disclose to the trust and retail mutual fund boards the conflict of interest created by the use of brokerage commissions, which were assets of the funds and trusts they advised, to pay revenue sharing expenses incurred by John Hancock Funds and John Hancock Distributors. 32. As a result of the conduct described above, John Hancock Distributors and John Hancock Funds willfully3 aided and abetted and caused violations of Sections 206(2) of the Advisers Act, which prohibits fraudulent conduct by an investment adviser, when they offered products while knowing that brokerage commissions generated by John Hancock Management and John Hancock Advisers’ transactions in the trust portfolios and retail mutual funds they advised were used to pay John Hancock Distributors’ and John Hancock Funds’ revenue sharing obligations and knew, or should have known, that John 2 “Willfully” as used with respect to direct violations in this Order means intentionally committing the act which constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that it is violating one of the Rules or Acts. 3 “Willfully” as used with respect to aiding and abetting violations in this Order means knowingly committing the act which constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the actor also be aware that it is violating one of the Rules or Acts. 9 Hancock Management and John Hancock Advisers failed to disclose this use of fund assets to the trust and retail mutual fund boards. 33. As a result of the conduct described above, John Hancock Management and John Hancock Advisers willfully violated Section 34(b) of the Investment Company Act in that they made untrue statements of material fact in a registration statement, application, report, account, record, or other document filed or transmitted pursuant to the Investment Company Act, or omitted to state therein, any fact necessary in order to prevent the statements made therein, in the light of the circumstances under which they were made, from being materially misleading. 34. As a result of the conduct described above, John Hancock Management, John Hancock Distributors, John Hancock Advisers and John Hancock Funds willfully violated Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder, which provide in pertinent part that it is unlawful for any “affiliated person of or principal underwriter for any registered investment company …, acting as principal, [to] participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement or profit-sharing plan in which any such registered company … is a participant …unless an application regarding such joint enterprise or profit-sharing plan has been filed with the Commission and has been granted by an order entered prior to the submission of such plan[.]” Respondents’ Cooperation 35. In determining to accept the Offers, the Commission considered the cooperation afforded the Commission staff by the Respondents. Undertakings 36. The Respondents undertake the following: a. Written Compliance Policies and Procedures. Each Respondent shall, within 90 days from the entry of the Order, require a senior level employee to implement and maintain the following written compliance policies and procedures: i. Procedures designed to ensure that when Respondent’s traders place trades with a broker-dealer that also sells Respondent’s mutual fund or variable annuity products, the person responsible for selecting such broker-dealer is not informed of, and does not take into account, the broker-dealer’s promotion or sale of fund shares or variable annuity products; ii. Procedures requiring the documentation of all revenue sharing arrangements and requiring each Respondent to enter into written contracts memorializing revenue sharing arrangements between Respondent and the broker-dealer or other intermediary. The documentation of each revenue sharing 1 0 arrangement will set forth the payment schedule and the services that the broker-dealer or other intermediary will provide and include a provision preventing the broker-dealer or other intermediary from accepting compensation for promoting or selling Respondent’s fund shares or variable annuity products in the form of commissions for brokerage transactions directed to it from a Respondent’s portfolio transactions; iii. All revenue sharing arrangements concerning the sale of John Hancock retail fund shares must be approved in writing by the Respondent’s Chief Compliance Officer and the form of any such arrangements, or any material deviation therefrom, presented to the fund boards prior to implementation; iv. All revenue sharing arrangements concerning the sale of variable annuities offered through John Hancock registered separate accounts that invest in the John Hancock Trust must be approved in writing by the Respondent’s Chief Compliance Officer and the form of any such arrangements, or any material deviation therefrom, presented to the trust board no later than the next regularly scheduled meeting; v. Each Respondent will supplement its compliance manual to establish guidelines for entering into revenue sharing arrangements which shall not be inconsistent with the terms of this order; vi. Subject to the approval of the Respondents’ boards, Respondents will prepare disclosures for the mutual funds and variable series trust portfolios to include in their prospectuses or SAIs information about payments made by Respondents to broker-dealers or other intermediaries in respect of the sale of fund shares in addition to dealer concessions, shareholder servicing payments, and payments for services that Respondents or an affiliate otherwise would provide, such as sub-accounting, and state that such payments are intended to compensate broker-dealers for various services, including without limitation, placement on the broker-dealer’s preferred or recommended list, access to the broker-dealers’ registered representatives, assistance in training and education of personnel, marketing support and other specified services; vii. Respondents shall cause there to be a senior level employee whose responsibilities shall include compliance matters regarding conflicts of interest relating to the Respondents’ businesses, as the case may be; viii. Respondents shall develop policies and procedures to ensure that fund brokerage expenses are not used to finance distribution of funds; ix. At least once per year, John Hancock Management and John Hancock Advisers will make a presentation to the boards, including an overview of their revenue sharing arrangements and policies, including any material changes to 1 1 such policies, the number and types of such arrangements, the types of services received, the identity of participating broker-dealers and the total dollar amounts paid. John Hancock Management and John Hancock Advisers will also provide the Boards with a summary quarterly report setting forth amounts paid by Respondent for revenue sharing arrangements and the broker-dealers that received such payments. 37. Certification. No later than twenty-four months after the entry date of the Order, the chief executive officer of each Respondent shall certify to the Commission in writing that the Respondent has fully adopted and complied in all material respects with the undertakings set forth in this section, or in the event of material non-adoption or non-compliance, shall describe such material non-adoption or non-compliance. 38. Recordkeeping. Respondents shall preserve for a period not less than six years from the end of the fiscal year last used, the first two years in an easily accessible place, any record of Respondents’ compliance with the undertakings set forth in paragraph 36. 39. Deadlines. For good cause shown, the Commission’s staff may extend any of the procedural dates set forth above. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondents’ Offers. Accordingly, it is hereby ORDERED that: A. Pursuant to Section 203(e) of the Advisers Act, Respondents John Hancock Advisers and John Hancock Management are hereby censured. B. Pursuant to Section 15(b)(4) of the Exchange Act, Respondents John Hancock Funds and John Hancock Distributors are hereby censured. C. Pursuant to Section 203(k) of the Advisers Act, and Section 9(f) of the Investment Company Act, Respondents John Hancock Management, John Hancock Distributors, John Hancock Advisers and John Hancock Funds shall cease and desist from committing or causing any violations and any future violations of Sections 206(2) of the Advisers Act, Respondents John Hancock Management and John Hancock Advisers shall cease and desist from committing or causing any violations and any future violations of Section 34(b) of the Investment Company Act, and Respondents John Hancock Management, John Hancock Distributors, John Hancock Advisers and John Hancock Funds shall cease and desist from committing or causing any violations and any future violations of Section 17(d) of the Investment Company Act and Rule 17d-1 thereunder; 1 2 D. IT IS FURTHER ORDERED that: 1. John Hancock Management and John Hancock Distributors shall, within 30 days from the date of entry of the Order, on a joint and several basis, pay disgorgement of $14,838,943.65 and prejudgment interest of $2,001,999.21 to the John Hancock Trust portfolios,4 based upon the amount of cash payments that the Respondents avoided paying under revenue sharing arrangements by using portfolio brokerage commissions to pay for revenue sharing obligations. John Hancock Management and John Hancock Distributors shall also provide evidence of a wire transfer that is acceptable to the Securities and Exchange Commission staff as proof of such payment. The amounts that will be paid to each John Hancock Trust portfolio are detailed below: Fund Amount All Cap Core $ 655,372.00 All Cap Growth $ 731,112.07 All Cap Value $ 176,133.60 Blue Chip Growth $ 708,820.67 Capital Appreciation $ 725,943.97 Dynamic Growth $ 146,759.93 Emerging Growth $ 13,181.32 Emerging Small Company $ 333,109.47 Equity-Income $ 417,364.61 Financial Services Trust $ 36,472.87 Fundamental Value $ 136,967.18 Global $ 806,885.41 Global Allocation $ 13,405.03 Health Sciences $ 70,129.00 Income & Value $ 441,367.45 International Core $ 355,158.90 International Equity Index A $ 55,798.31 International Small Cap $ 422,206.61 International Value $ 1,147,276.86 Large Cap Trust $ 2,789,923.76 Large Cap Value $ 185,990.04 Mid Cap Index $ 155,880.34 Mid Cap Stock $ 798,213.56 Mid Cap Value $ 459,569.65 Natural Resources $ 21,208.73 Quantitative All Cap $ 1,141.27 Quantitative Mid Cap $ 232,155.25 Real Estate Securities $ 161,839.32 Science & Technology $ 505,747.40 Small Cap Opportunities $ 187,019.04 4 The disgorgement and prejudgment interest amounts will be paid to the affected portfolios or their successors. 1 3 Small Company Value $ 83,600.86 Special Value $ 15,855.45 U.S. Core $ 2,116,692.27 U.S. Global Leaders Growth $ 293,517.27 U.S. Large Cap $ 857,469.77 Utilities Trust $ 69,129.97 Value $ 512,523.65 Total $ 16,840,942.86 2. John Hancock Advisers and John Hancock Funds shall, within 30 days from the date of entry of the Order, on a joint and several basis, pay disgorgement of $2,087,477.46 and prejudgment interest of $359,460.63 to the John Hancock mutual funds,5 based upon the amount of cash payments that the Respondents avoided paying under revenue sharing arrangements by using fund brokerage commission to pay for revenue sharing obligations. John Hancock Advisers and John Hancock Funds shall also provide evidence of a wire transfer that is acceptable to the Securities and Exchange Commission staff as proof of such payment. The amounts that will be paid to each fund are detailed below: Fund / Account Amount Balanced $ 3,144.97 Bank & Thrift Opportunity $ 129,567.26 Classic Value $ 4,200.25 Financial Industries $ 442,273.26 Financial Trends $ 19,769.61 Focused Equity $ 1,867.79 Growth Trends $ 45,781.17 Health Sciences $ 31,056.08 High Yield $ 1,529.79 Institutional Accounts $ 99,623.67 JHT Blue Chip Growth6 $ 808.82 JHT Financial Services $ 16,180.36 JHT Growth & Income $ 20,949.10 JHT Mid Cap Stock $ 1,248.95 JHT Small Cap Growth $ 18,374.57 Large Cap Equity $ 614,955.42 Mid Cap Growth $ 172,696.75 Multi-Cap Growth $ 928.07 Patriot Global Dividend $ 2,512.96 Patriot Preferred Dividend $ 1,058.00 Patriot Premium Dividend I $ 1,913.63 Patriot Premium Dividend II $ 3,197.36 5 The disgorgement and prejudgment interest amounts will be paid to the affected portfolios or their successors. 6 This fund was formerly a John Hancock mutual fund, but has since merged into a portfolio of the John Hancock Trust. Thus, the payment will be made to the appropriate portfolio of the John Hancock Trust. 1 4 Patriot Select Dividend $ 2,202.52 Preferred Income III $ 1,050.07 Regional Bank $ 221,684.29 Small Cap Equity $ 229,809.55 Sovereign Investors $ 68,817.75 Technology $ 45,535.23 U.S. Global Leaders Growth $ 244,200.86 Total $ 2,446,938.09 3. Within 30 days from the date of the entry of the Order, John Hancock Management, John Hancock Distributors, John Hancock Advisers and John Hancock Funds shall each pay a civil monetary penalty in the amount of $500,000 to the United States Treasury. All such payments shall be made by United States postal money order(s), wire transfer, certified check(s), bank cashier's check(s) or bank money order(s); made payable to the Securities and Exchange Commission; hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria, Stop 0-3, VA 22312; and submitted under one or more cover letters that identify John Hancock Investment Management Services, LLC, John Hancock Distributors, LLC, John Hancock Funds, LLC and John Hancock Advisers, LLC as Respondents in these proceedings and the file number of these proceedings. A copy of the cover letter(s), wire transfer instructions, money order(s) or check(s) shall be sent to David Bergers, Director, Boston Regional Office, 23rd Floor, 33 Arch Street, Boston, MA 02110. E. Respondents shall comply with the undertakings set forth in paragraph 36. By the Commission. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55948 / June 25, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12665 In the Matter of William P. Sauer, Respondent. ORDER INSTITUTING ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 , MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS I. The Securities and Exchange Commission (“Commission”) deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) against William P. Sauer (“Sauer” or “Respondent”). II. In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. 2 III. On the basis of this Order and the Respondent’s Offer, the Commission finds that: 1. Sauer, age 59, resides in Marietta, Georgia. From at least July 1998 through September 11, 2001, Sauer sold investment contract securities in the form of sale-leaseback transactions for ETS Payphones, Inc. From at least February 2000 through at least September 2000, Sauer by himself and through an entity that he controlled sold investment contract securities in the form of sale-leaseback transactions for Global Telelink Services, Inc. (GTS) and Global Call Corporation (GCC). 2. On May 31, 2007, an order was entered against Sauer permanently enjoining him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. William P. Sauer, James M. Jordan and Phil D. Kerley, Civil Action Number 1:02-CV-2191, in the United States District Court for the Northern District of Georgia. Sauer’s consented to the order. 3. The Commission’s complaint alleged that, in connection with the unregistered sale of investment contracts, Sauer fraudulently sold at least $1 million each of the ETS and GTSW/GCC sale-leaseback investments. According to the complaint, the ETS, GTS and GCC investment agreements were substantially similar in structure, although each investment had a different purchase price and promised investors a slightly different return varying from 14 percent to 15 percent. The complaint also alleged that ETS, GTS and GCC depended on the sale of new investments in order to meet their current financial obligations, such as investor lease payments and refunds. The complaint alleged that Sauer knew, or was severely reckless in failing to discover, that ETS, GTS and GCC were functioning as Ponzi schemes. The Commission’s complaint also alleged that Sauer knew, or was severely reckless in not knowing, that his representations that ETS, GTS and GCC, were safe investments and that ETS, GTS and GCC were profitable companies, were false. 4. The complaint also alleged that by virtue of his conduct, Sauer engaged in business as a broker-dealer and induced and attempted to induce the purchase and sale of securities. Sauer was not registered with the Commission as a broker or dealer, and was not associated with any broker or dealer. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent Sauer’s Offer. Accordingly, it is hereby ORDERED: Pursuant to Section 15(b)(6) of the Exchange Act, that Respondent Sauer be, and hereby is barred from association with any broker or dealer. 3 Any reapplication for association by the Respondents will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondents, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order. For the Commission, by its Secretary, pursuant to delegated authority. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 55952 / June 25, 2007 Administrative Proceeding File No. 3-12341 ____________________________________ : ORDER GRANTING In the Matter of : EXTENSION OF TIME TO FILE : PROPOSED PLAN OF WEISS RESEARCH, INC., : DISTRIBUTION, APPROVING MARTIN WEISS, AND : PLAN ADMINISTRATOR, LAWRENCE EDELSON : AND APPROVING : ADMINISTRATOR BOND Respondents. : ____________________________________: The Division of Enforcement (“Division”) has filed a motion requesting an extension of time, until June 30, 2007, to file a proposed distribution plan under Rule 1101(a) of the Commission’s Rules on Fair Fund and Disgorgement Plans. The Division’s motion also seeks approval of the appointment of Raul Garcia as administrator of the proposed plan of distribution, and approval of Raul Garcia’s bond in the amount of $2,200,000. In its motion, the Division states that since the Commission’s October 27, 2006 Order Granting Motion for Extension of Time to File Distribution Plan, unexpected delays were encountered in securing a surety bond for the proposed distribution administrator. The Division further states that it located a cost effective and experienced distribution administrator and that an administrator bond has been secured in the full amount of the Weiss Research distribution fund. For good cause shown, IT IS HEREBY ORDERED that the Division’s request for an extension of time is granted. Furthermore, IT IS HEREBY ORDERED that the Division’s request for approval of the appointment of Raul Garcia as administrator and for approval of the administrator bond in the amount of $2,200,000 is granted. For the Commission. Nancy M. Morris Secretary
UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 55954 / June 25, 2007 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2623 / June 25, 2007 ADMINISTRATIVE PROCEEDING File No. 3-12666 In the Matter of INTERNATIONAL BUSINESS MACHINES CORPORATION, Respondent. ORDER INSTITUTING CEASE-AND- DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 I. The United States Securities and Exchange Commission (“Commission”) deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against International Business Machines Corporation (“IBM” or “Respondent”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. 2 III. On the basis of this Order and Respondent’s Offer, the Commission finds1 that: A. SUMMARY In 2000 and 2001, IBM assisted Dollar General Corporation’s commission of accounting fraud through a sham transaction. The transaction was conceived by an IBM Business Unit Executive (the “IBM BUE”) and was designed to achieve a particular accounting result for Dollar General. In addition, IBM maintained inaccurate books and records in 2000 and 2001 that resulted from, among other things, revenue recognition errors by various IBM business units in a number of countries around the world that departed from Generally Accepted Accounting Principles (“GAAP”). In 1999, IBM and Dollar General agreed that Dollar General would lease new electronic cash registers from IBM to replace Dollar General’s old Omron-brand cash registers. As originally planned, Dollar General would phase out the old registers and purchase the new IBM equipment over a multi-year period. In the second half of 2000, however, IBM, through the IBM BUE, suggested that Dollar General accelerate the roll-out of new IBM equipment by leasing for approximately $10 million all of the new equipment by the end of 2000. This would have the result of increasing IBM’s revenue for fiscal year 2000. Dollar General initially rejected the proposal, however, due to an accounting problem. Specifically, if Dollar General replaced all of the Omron equipment, it would be required to write off the book value of that equipment as an expense. This “book loss” problem, as it became known, in turn, would have a negative impact on Dollar General’s earnings for its fiscal year 2000, which ended February 2, 2001. IBM, through the IBM BUE, devised a way to solve Dollar General’s “book loss” problem. Specifically, the IBM BUE proposed that IBM would purchase the old Omron equipment for approximately $11 million. By selling the equipment at that price, Dollar General would avoid most of the negative consequences of having to write off the book value of the equipment that would have occurred if it simply replaced the old registers with the new IBM equipment. The proposed “purchase,” however, was not a bona fide transaction because, among other reasons, IBM’s purchase price for the Omron equipment was repaid to IBM by an offsetting increase in the amount that Dollar General was to pay for the new IBM equipment. In addition, although IBM agreed to buy the Omron equipment for more than Dollar General was going to pay for the new IBM registers, IBM knew that the Omron equipment was worthless, IBM intended to destroy it, and ultimately IBM never took possession of any of the sales registers. Nevertheless, the 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. 3 “purchase” occurred and Dollar General removed the Omron equipment from its books and minimized the negative impact on its earnings in fiscal year 2000. In addition, IBM in 2000 and 2001 maintained inaccurate books and records as a result of numerous discrete revenue recognition errors (many of which were errors with respect to the timing of recognition as between quarters and which were discovered and corrected by IBM) totaling approximately $577 million in revenues over that two-year period. B. RESPONDENT AND RELATED ENTITY IBM, headquartered in Armonk, New York, and incorporated in New York, manufactures and sells computer services, hardware and software. IBM stock is registered under Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. Dollar General Corporation, a Tennessee corporation headquartered in Goodlettsville, Tennessee, is a discount retailer of general merchandise. Dollar General’s common stock is registered under Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange.2 C. THE OMRON TRANSACTION 1. IBM Proposal For An Accelerated Roll-Out Is Rejected In 1999, Dollar General decided to lease new electronic cash registers from IBM’s Retail Store Solutions business unit to replace Dollar General’s old Omron-brand cash registers over a multi-year roll-out period. In November of 2000, IBM, through the IBM BUE, suggested that Dollar General accelerate the roll-out of the new electronic cash registers by leasing all the 4,224 remaining registers under the agreement before December 31, 2000. IBM offered to lease the new equipment to Dollar General for approximately $10 million, which included a one million dollar discount to encourage Dollar General to agree to the deal. After receiving the proposal, Dollar General concluded that the negative impact on Dollar General’s earnings for its fiscal year 2000 from writing off the remaining book value for the Omron registers would outweigh the benefit of the transaction. 2 On April 7, 2005, the SEC filed a settled enforcement action against Dollar General and certain of its former officers and employees in the United States District Court for the Middle District of Tennessee. Securities and Exchange Commission v. Dollar General Corp., et al., Civil Action No. 3:05-0283. Dollar General consented to the entry of a final judgment permanently enjoining it from violating the antifraud, internal controls, books and records, and periodic reporting provisions of the federal securities laws, specifically, Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, 13a-11, and 13a-13 thereunder. The Commission’s complaint included allegations relating to the Dollar General transaction with IBM that is one of the subjects of this Order. 4 Dollar General rejected IBM’s offer on November 29, 2000, explaining to the IBM BUE that it was not worth it to Dollar General to acquire the new registers in 2000 because of the additional expense Dollar General would incur in writing off the remaining book value of the company’s old equipment. Internal communications at IBM make clear that IBM understood Dollar General’s accounting issue, specifically the write-off of the remaining book value, was a significant obstacle to completing the December 2000 roll-out of the IBM equipment. 2. IBM Proposes “Purchase” of Omron Registers To Solve Dollar General’s Accounting Concern On behalf of IBM, the IBM BUE devised and proposed a solution to, as he wrote in an e-mail, “help fix [Dollar General’s] Omron book value issue.” Specifically, IBM offered to “purchase” the Omron registers from Dollar General to accomplish the goal of helping Dollar General to minimize the impact of writing off the book value of Dollar General’s Omron registers. On November 30, 2000, the IBM BUE contacted Dollar General’s Treasurer and Dollar General’s vice president of information services to discuss a proposal to address Dollar General’s “accounting concerns.” The proposal was that Dollar General lease, by December 31, 2000, all of the new equipment then currently scheduled to be leased in future years. If Dollar General agreed, IBM would “purchase” the Omron registers for a specified amount and would offset that purchase price by increasing the price Dollar General would pay to lease the new IBM registers by approximately the same amount. Initially, the proposal was that the Omron purchase price would be repaid immediately by Dollar General; ultimately, IBM agreed that its “purchase price” would be repaid over time by Dollar General as part of the financing arrangements for the new equipment. At the same time that IBM agreed to “purchase” the Omron registers, the IBM BUE and various other IBM personnel knew that the Omron equipment was worthless. For example, an IBM Asset Manager had determined by December 5, 2000, that the Omron registers had no value to IBM and communicated this to an IBM Client Manager. The IBM Client Manager also understood that IBM was going to dispose of the Omron equipment it was planning to purchase from Dollar General. In addition, an IBM Business Operations Manager for the North American sales team for IBM’s Retail Store Solutions checked with an IBM contractor to see if there was any market value for the Omron registers. The contractor told the IBM Business Operations Manager that there was no domestic resale value for the equipment. Finally, the IBM BUE ultimately told Dollar General that the Omron registers were worthless to IBM and that IBM intended to destroy them. IBM allowed Dollar General to set the “purchase” price for the equipment. After considering the book value of the Omron registers, Dollar General determined that the best price 5 would be between $10 million and $11 million and communicated that to IBM. Thus, IBM was asked to pay as much or more for the worthless Omron registers as IBM had proposed Dollar General would pay for the new IBM equipment. The IBM BUE and others at IBM also understood from the outset that the purchase price it proposed to pay for the older registers would not be at risk because it would be repaid by Dollar General in the form of an increased lease price for the new equipment. In effect, there was no “purchase” of Omron equipment; instead the amount was to be a loan from IBM to Dollar General. Internal IBM documents make clear the relationship between the Omron purchase price and the offsetting price increase for IBM equipment. For example, in a December 3, 2000, email, the IBM BUE described the new price for the IBM equipment as $20,530,000 – over double the approximately $10 million originally contemplated. The new purchase price now took into account the price of the Omron equipment, which, at that time, was specified in the email as $10,030,000. The entire transaction was to be financed by IBM. The financing terms for Dollar General were to involve “one payment of $10,030,000 in February 2001, and the rest [of the $20,530,000] deferred with a payment start date of August 2001.” Under these terms, the portion of the purchase price attributed to the Omron equipment would be promptly reimbursed, while the amount Dollar General owed on the new IBM equipment would be financed over a longer period. Moreover, during the course of negotiations, there was a nexus between the price of the Omron equipment and the final price. For example, in a December 15, 2000 email written by the IBM BUE, he explained that since Dollar General was “now asking for the $10,030,000 to go to $11,030,000, we will need to do a similar analysis for $19,620,480 + $1,000,000 more in Omron for a new total of $20,620,480 financed.” It was clear to certain IBM and Dollar General personnel that the only reason for the purported purchase of the Omron equipment was to solve Dollar General’s accounting issues. The IBM BUE, for example, wrote in a December 3, 2000 email that “a buyback of the Omron equipment will erase the book loss issue, removing this as an obstacle to a more rapid roll-out.” In the same email, the IBM BUE also stated that the proposed purchase should “significantly reduce or eliminate any negative P&L issues, and remove the lurking book loss issue.” In turn, as Dollar General evaluated the offer, the company was seeking to determine whether the new proposal put Dollar General in a better position than it would have been if it held to the original roll-out schedule. In a December 5, 2000 email, the IBM BUE wrote: “The Customer is evaluating two things. Can we help fix their Omron book value issue (which we can and have already agreed to) and what is the comparative [net present value] of our best offer in December versus their current plan of acquiring [the equipment] . . . .” 6 In addition, completing the Omron “purchase” would increase IBM’s earnings for the quarter by allowing it to close the accelerated roll-out transaction. The IBM BUE wrote in an email that “this would be quite a nice deal to put this much business this far forward at a time when IBM desperately needs to show revenue growth.” In addition, the IBM BUE had a direct incentive to close the deal. His annual bonus was based in part on the total revenue from the sales “price” for the new IBM equipment (which was artificially inflated to offset the purchase price for the Omron transaction). Specifically, almost 50% of the IBM BUE’s bonus for 2000 was attributable to the Dollar General transaction. 3. IBM and Dollar General Finalize Contract Terms After negotiating the terms of the financing and other arrangements over the course of a few weeks, IBM and Dollar General finalized the two-part transaction by agreements dated December 22, 2000. Under one agreement, IBM agreed to purchase 14,070 Omron registers from Dollar General for $11,098,672, with payment to be made to Dollar General no later than January 31, 2001 – just two days before the end of Dollar General’s fiscal year 2000. On the same day, Dollar General signed a separate agreement committing the company to lease 4,224 new IBM registers for approximately $21 million. That purchase price was to be financed by IBM Credit Corporation and would be repaid by Dollar General over five years, starting in January 2001. 4. IBM “Buys” the Omron Registers IBM and the IBM BUE understood that Dollar General needed to receive the check for the sale of the Omron registers by the end of January 2001 to achieve the desired accounting result. The written agreement also required that IBM make the payment to Dollar General no later than January 31, 2001. On January 17, 2001, the IBM BUE sent an internal email to several IBM employees seeking to have the check for the Omron registers issued. In the email, he stated: “It is critical that this check gets cut ASAP to Dollar General for $11,216,995. Their fiscal year ends 01/31/01 and this must be in house at DG.” Notably, the $11.2 million amount referenced in the IBM BUE’s email includes both the purchase price of $11,098,672 and an additional $118,323 that IBM was paying to cover the cost of disposal of the very equipment that it was purchasing. Although various IBM personnel saw the check request and one individual noted that the whole transaction seemed “a little peculiar and may be worth asking . . . questions [about],” the check request was approved and the check was issued to Dollar General shortly before January 31, 2001, two days before the end of Dollar General’s fiscal year 2000. 7 Despite the purchase agreement, almost two years later in late 2002, none of the Omron registers purportedly purchased by IBM had left Dollar General’s custody, nor were they destroyed. They were stored in Dollar General distribution centers awaiting disposal. 5. IBM and Dollar General’s Respective Accounting for the Transaction Dollar General received significant accounting benefits from the Omron transaction. Dollar General utilized the Omron purchase payment from IBM to improperly reduce certain expenses for its fiscal year 2000, thereby inflating its reported pre-tax income. Specifically, Dollar General improperly reduced the loss on Omron registers accounted for as having been removed from service in 2000. The Omron transaction also served to enable Dollar General to avoid addressing an unrelated accounting issue pertaining to the Omron equipment – specifically, the fact that Dollar General had not sufficiently depreciated the Omron equipment during fiscal year 2000. At the time Dollar General entered into the multi-year agreement with IBM to replace the Omron equipment, Dollar General should have reassessed the remaining useful lives of the Omron equipment and accelerated the depreciation on that equipment consistent with the equipment removal and replacement schedule. In the fourth quarter 2000, at the time Dollar General entered into the Omron transaction with IBM, Dollar General had not depreciated the Omron equipment sufficiently (by approximately $7.9 million) during fiscal year 2000. The Omron transaction, which removed the assets from the books, alleviated the need for Dollar General to face this problem. Utilizing the cash received from IBM for the Omron equipment, Dollar General instead minimized the loss on disposal of Omron registers and did not incur a substantial depreciation charge. By improperly reducing expenses that Dollar General should have recognized, the net effect of Dollar General’s accounting for the sham payment from IBM was to increase Dollar General’s pretax income for fiscal 2000 by $7.1 million, or 6.5% of Dollar General’s restated pretax fiscal year 2000 income. IBM, in contrast, ultimately accounted for the transaction by netting out the impact of the “purchase” of Omron equipment. IBM treated the purchase price for the Omron registers as a trade-in credit against the full purchase price of the new IBM equipment. IBM, however, did have to undertake unusual journal entries in order to accomplish this task because the transactions were separately documented. Consequently, as the IBM BUE wrote in a December 21, 2000 email, the “[l]edger amount to IBM Retail Store Solutions” was the net of the full purchase price, less the Omron price, for a total of approximately $10.1 million. As structured, however, certain IBM employees received credit for the full $21 million purchase price for purposes of bonus 8 calculations. Consequently, certain IBM employees, including the IBM BUE, received bonuses that were higher than they would have been but for the fraudulent Omron transaction. D. IBM’S INACCURATE BOOKS AND RECORDS As a result of numerous discrete incidents taking place in various IBM units, divisions, and wholly-owned subsidiaries in the United States, and in at least 23 other countries, IBM made at least $200 million in revenue recognition errors in its fiscal year 2000, and at least $377 million in revenue recognition errors in its fiscal year 2001. At least $281 million of this revenue involved the use of side letters, a substantial portion of which were side letters in which IBM granted rights of return. For example, in December 2000, several executives, managers, and employees of IBM Retail Store Solutions (the same unit involved in the Omron transaction) and Business Partner units caused IBM to improperly recognize $9.3 million in revenue in connection with the sale of 22,680 printers to a business partner. Revenue recognition was improper at the time because, among other reasons, IBM Retail Store Solutions employees had granted a full right of return for the equipment in a side letter to the business partner.3 This $9.3 million in improperly recognized revenue allowed the Retail Store Solutions unit to exceed its full-year sales target by $2 million. At least $171 million of this revenue recognized in error for IBM’s fiscal years 2000 and 2001 related to premature revenue recognition of product stored in warehouses not controlled by IBM’s customers. At least $100 million of this amount related to IBM’s Retail Store Solutions unit and its use of IBM-controlled warehouses to store merchandise that had not been shipped to the end-customer but for which IBM nonetheless recognized revenue.4 3 The mere fact that a side letter was used to grant a right of return to a customer and that the right is termed a “full right” indicates a more-than-normal likelihood that the sale might be reversed and the product returned. In such a situation, the probability that the product will be returned and the amount of returns cannot be reasonably estimated, and thus the sale cannot be recognized. Financial Accounting Standard (“FAS”) No. 48, Revenue Recognition When Right of Return Exists, includes, as a criterion for recognizing revenue when the right of return exists, that “the amount of future returns can be reasonably estimated.” 4 SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, states, “The staff believes that revenue generally is realized or realizable and earned when . . . [among other criteria] delivery has occurred or services have been rendered.” See also Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (stating that “if a sale or cash receipt (or both) precedes…delivery…, revenues may be recognized as earned by production and delivery”). Under the circumstances in this case, it was improper for IBM to recognize revenue at a time when it had not actually delivered the product. 9 The revenue recognition errors were, in many cases, errors with respect to the timing of recognition as between quarters. In most cases, the revenue recognition errors were discovered and corrected by IBM in advance of the Commission’s investigation. E. LEGAL DISCUSSION 1. IBM Caused Dollar General’s Fraud Section 21C of the Exchange Act provides that the Commission may order any person who is or was a cause of a violation of any provision of the Exchange Act, due to an act or omission the person knew or should have known would contribute to the violation, to cease and desist from causing such violations. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe a variety of fraudulent practices in connection with the purchase or sale of securities. Violations of Section 10(b) and Rule 10b-5 occur when an issuer makes material misstatements or omissions in periodic reports filed with the Commission, including financial statements, and trading thereafter occurs in the issuer's securities. SEC v. Texas Gulf Sulphur, 401 F.2d 833, 860-862 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969); SEC v. Great American Indus., 407 F.2d 453 (2d Cir.), cert. denied, 395 U.S. 920 (1968). The Supreme Court, in interpreting the securities laws, has held that a fact is material if there is a "substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Information regarding the financial condition of a company is presumptively material. SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985). Even financial misstatements that are not large in magnitude may be material if they are made intentionally to manage a company's income, hide a failure to meet analysts' expectations or sustain an earnings trend. See Ganino v. Citizens Utility Co., 228 F.3d 154, 166 (2d Cir. 2000). Dollar General violated Section 10(b) and Rule 10b-5 thereunder by fraudulently overstating its fiscal year 2000 income with the benefit of the Omron transaction. IBM was a cause of Dollar General’s violations because IBM knew or should have known that its creation of and participation in the Omron transaction to solve Dollar General’s “book loss” problem would contribute to Dollar General’s securities fraud. IBM knew the Omron purchase transaction was not a bona fide sale because the Omron equipment was worthless, would be destroyed, and that the purchase “price” was really a loan from IBM to Dollar General that would be repaid through the inflated price for IBM’s new equipment. In addition, IBM knew explicitly that it was an accounting impact on Dollar General’s earnings that was the obstacle in completing the transaction – and IBM agreed to participate in a transaction that would solve that accounting problem. By engaging in the transaction with Dollar General, IBM was a cause of Dollar General’s fraud. 10 2. IBM Caused Dollar General’s Books and Records and Reporting Violations Section 13(a) of the Exchange Act requires issuers with securities registered under Section 12 of the Exchange Act to file with the Commission such information and documents as required to keep reasonably current the information and documents required to be included in or filed with an application or registration statement. The requirement that issuers file such information and documents necessarily embodies the requirement that such reports be true and correct. See Great Sweet Grass Oils, Ltd., 37 S.E.C. 683, 684 n.1 (1957), aff’d, 256 F.2d 893 (D.C. Cir. 1958); see also SEC v. IMC Int’l, 384 F. Supp. 889, 893 (N.D. Tex. 1974) (“The reporting provisions of the Exchange Act are clear and unequivocal, and they are satisfied only by the filing of complete, accurate, and timely reports.”), aff’d, 505 F.2d 733 (5th Cir. 1974). Rule 13a-11 requires issuers to file current reports on Form 8-K. Rule 12b-20 further requires that such reports contain any further material information necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. Financial statements in Commission filings that do not comply with GAAP are presumed to be misleading. Regulation S-X, 17 C.F.R. § 210.4-01(a)(1). No showing of scienter is required to violate Section 13(a). See SEC v. McNulty, 137 F.3d 732, 740-741 (2d Cir. 1998). A person may be a cause of a non-scienter based violation through negligent conduct that contributes to the violation. See KPMG, LLP v. SEC, 289 F.3d 109, 120 (D.C. Cir. 2002). Dollar General violated Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder by filing inaccurate Forms 8-K on January 23, 2001 and February 28, 2001 relating to Dollar General’s fiscal 2000 earnings. These reports were inaccurate because they included overstated earnings as a result of the Omron transaction. IBM was a cause of Dollar General’s violations because it knew or should have known that it was contributing to Dollar General’s reporting of inaccurate financial statements by participating in the sham Omron transaction. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." Dollar General violated Section 13(b)(2)(A) by failing to make and keep books, records, and accounts, which accurately and fairly reflected the Omron transaction in reasonable detail. IBM was a cause of Dollar General’s violations of Section 13(b)(2)(A) because it knew or should have known that it was contributing to Dollar General’s participation in and inaccurate recording of the Omron transaction. 11 3. IBM Violated the Books and Records Provisions of the Securities Laws IBM violated Section 13(b)(2)(A) by failing to make and keep books, records, and accounts, which accurately and fairly reflected transactions in reasonable detail, in IBM’s own books, records, and accounts for its fiscal year 2000 and fiscal year 2001, as described in section D above. F. UNDERTAKING IBM undertakes, within ten (10) business days of the date of the issuance of this Order, to pay $7,000,000 to the Clerk of the United States District Court for the Middle District of Tennessee together with a cover letter specifying that this payment shall be deposited and joined to the funds currently held in SEC v. Dollar General Corporation, et al., C.A. No. 3:05-0283. IBM has agreed to refer to this administrative proceeding in the cover letter and to transmit photocopies of such payment and letter to Kevin M. Loftus, Branch Chief, Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. IBM has agreed not to seek the return of any portion of its payment. IV. In determining to accept the Offer, the Commission considered the Undertaking in Section III. F. and remedial acts that were undertaken by Respondent. V. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent IBM’s Offer. Accordingly, it is hereby ORDERED that Respondent IBM cease and desist from committing or causing any violations and any future violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act, and Rules 10b-5, 12b-20 and 13a-11 thereunder. By the Commission. Nancy M. Morris Secretary
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