Outline of Recent SEC Enforcement Actions

Submitted by: 1 Joan McKown Chief Counsel Prepared by: 2 Michael Laskin

Division of Enforcement U.S. Securities and Exchange Commission Washington, D.C.

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or its staff. Parts of this outline have been used in other publications.

Table of Contents
CASES INVOLVING FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS .................................................................................................................. 2
In the Matter of International Business Machines Corporation ........................................................................2 In the Matter of Hewlett-Packard Company .......................................................................................................3 SEC v. The BISYS Group, Inc. .............................................................................................................................4 In the Matter of Motorola, Inc. .............................................................................................................................4 In the Matter of Terry M. Phillips (Take-Two Interactive Software, Inc.).......................................................5 SEC v. Tenet Healthcare Corporation, David L. Dennis, Thomas B. Mackey, Christi R. Sulzbach, and Raymond L. Mathiasen ....................................................................................................................................6 SEC v. Nicor, Inc. and Jeffrey L. Metz.................................................................................................................7 SEC v. Collins & Aikman Corporation, David A. Stockman, J. Michael Stepp, Gerald E. Jones, David R. Cosgrove, John G. Galante, Elkin B. McCallum, Paul C. Barnaba, Christopher M. Williams and Thomas V. Gougherty ......................................................................................................................................8 SEC v. Conrad M. Black, F. David Radler and Hollinger Inc., .........................................................................9 SEC v. Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill (a.k.a. Mary Anne Poland) (Nortel Networks Corp.) ........................................................................................................10 SEC v. MBIA Inc. .................................................................................................................................................10 SEC v. Michael Moran, James Sievers, Martin Zaepfel, James Cannataro, John Steele, Michael Crusemann and Michael Otto........................................................................................................................11 SEC v. Delphi Corporation, J.T. Battenberg, III, Alan Dawes, Paul Free, John Blahnik, Milan Belans, Catherine Rozanski, Judith Kudla, Scot McDonald, B.N Bahadur, Atul Pasricha, Laura Marion, Stuart Doyle and Kevin Curry.......................................................................................................................12 SEC v. Pinnacle Development Partners LLC ....................................................................................................13 SEC v. Salvatore Favata ......................................................................................................................................13 Securities and Exchange Commission v. Doral Financial Corporation...........................................................14 SEC v. Jacob Jon W. James; J.W. James & Associates; J.W. James Borrowing Entity, LLC; J.W. James Investment Group Fund One, LLC; The James Company Fund I, LLC; The James Company Borrowing Entity, LLC; Virtual Cash Flow Corporation; The Cloaking Device, Inc.; and J.W. James Acquisitions, LLC ...........................................................................................................................................15 SEC v. Raytheon Company, Daniel P. Burnham, and Aldo R. Servello .........................................................16 In the Matter of Raytheon Company, Daniel P. Burnham, and Aldo R. Servello..........................................16 SEC v. Scientific-Atlanta, Inc. .............................................................................................................................17 In the Matter of Wallace G. Haislip....................................................................................................................17 In the Matter of Julian W. Edison ......................................................................................................................18 In the Matter of Tribune Company ....................................................................................................................19 SEC v. Federal National Mortgage Association.................................................................................................19 SEC v. Henry C. Yuen..........................................................................................................................................20 SEC v. Elsie M. Leung..........................................................................................................................................20

In the Matter of Jonathan B. Orlick, Esq...........................................................................................................20 SEC v. Tyco International Ltd. ...........................................................................................................................21 SEC v. American International Group, Inc. ......................................................................................................22 SEC v. Ronald Ferguson, et al.............................................................................................................................22 SEC v. John Houldsworth and Richard Napier.................................................................................................23 SEC v. Alan C. Goldsworthy, Walter T. Hilger, and Mark E. Sullivan ..........................................................24 SEC v. McAfee, Inc...............................................................................................................................................25 SEC v. Charles C. Conaway and John T. McDonald, Jr. .................................................................................26 SEC v. Fredrick S. Schiff and Richard J. Lane .................................................................................................27 SEC v. Bernard J. Ebbers....................................................................................................................................28 SEC v. HealthSouth Corporation et al. ..............................................................................................................28 SEC v. Roys Poyiadjis, Lycourgos Kyprianou et al. .........................................................................................29 SEC v. Time Warner, Inc.....................................................................................................................................29 In the Matter of James W. Barge, Pascal Desroches, and Wayne H. Pace .....................................................29

CASES INVOLVING STOCK OPTION BACKDATING ................................................ 30

SEC v. Brocade Communications Systems, Inc. ................................................................................................30 SEC v. Gregory L. Reyes, et al. ...........................................................................................................................30 SEC v. Mercury Interactive, LLC (f/k/a Mercury Interactive Corporation), Amnon Landan, Sharlene Abrams, Douglas Smith, and Susan Skaer ...................................................................................................31 SEC v. Nancy R. Heinen and Fred D. Anderson (Apple, Inc.) .........................................................................33 SEC v. Jacob (Kobi) Alexander, David Kreinberg, and William F. Sorin .................................................34

CASES INVOLVING REGULATION FD....................................................................... 36

SEC v. Flowserve Corporation and C. Scott Greer...........................................................................................36 In the Matter of Flowserve Corporation, C. Scott Greer, and Michael Conley..............................................36

CASES INVOLVING ACCOUNTANTS AND AUDITORS ............................................ 37

In the Matter of Clete D. Madden, CPA, and David L. Huffman, CPA..........................................................37 In the Matter of Aron R. Carr, CPA ..................................................................................................................37 SEC v. KPMG LLP ..............................................................................................................................................38 SEC v. KPMG LLP, et al. ....................................................................................................................................38 SEC v. KPMG LLP ..............................................................................................................................................38 In the Matter of KPMG LLP...............................................................................................................................38 In the Matter of KPMG LLP, Gary Bentham, C.A., and John Gordon, C.A.................................................39 In the Matter of Deloitte & Touche LLP, Steven H. Barry, CPA, and Karen T. Baker, CPA......................40 SEC v. Deloitte & Touche LLP ...........................................................................................................................40 In the Matter of Deloitte & Touche LLP............................................................................................................40 In the Matter of KPMG LLP...............................................................................................................................41

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CASES INVOLVING FOREIGN PAYMENTS ............................................................... 42

SEC v. Baker Hughes Incorporated and Roy Fearnley ....................................................................................42 In the Matter of Schnitzer Steel Industries, Inc.................................................................................................43 SEC v. Statoil, ASA ..............................................................................................................................................44 In the Matter of Oil States International, Inc. ...................................................................................................45 In the Matter of Diagnostic Products Corporation ...........................................................................................45 SEC v. The Titan Corporation ............................................................................................................................46 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and the Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability..................46

CASES INVOLVING BROKER-DEALERS................................................................... 47

In the Matter of Morgan Stanley & Co. Incorporated......................................................................................47 In the Matter of Banc of America Securities LLC ............................................................................................48 In the Matter of Goldman Sachs Execution & Clearing, L.P. f/k/a Spear, Leeds & Kellogg, L.P................49 In the Matter of Emanuel J. Friedman...............................................................................................................50 In the Matter of Friedman, Billings, Ramsey & Co., Inc. .................................................................................50 In the Matter of 1st Global Capital Corp............................................................................................................51 SEC v. American-Amicable Life Insurance Company of Texas, et al. ............................................................51 In the Matter of IFMG Securities, Inc................................................................................................................53 In the Matter of Morgan Stanley & Co. Incorporated & Morgan Stanley DW Inc.......................................53 In the Matter of Bear, Stearns & Co., Inc., et al................................................................................................54 In the Matter of Crowell, Weedon & Co. ...........................................................................................................54 SEC v. Morgan Stanley & Co., Inc. ....................................................................................................................55 In the Matter of The Bank of New York ............................................................................................................56 In the Matter of INET ATS, Inc..........................................................................................................................57 In the Matter of Michael Yellin...........................................................................................................................57 SEC v. A.B. Watley Group, Inc., et al.................................................................................................................58 In the Matter of Sanjay Singh .............................................................................................................................58 SEC v. John J. Amore, et al. ................................................................................................................................58 In the Matter of Instinet, LLC and INET ATS, Inc. .........................................................................................59 In the Matter of UBS Securities LLC (f/k/a UBS Warburg LLC) ...................................................................60 In the Matter of David A. Finnerty, et al............................................................................................................60 SEC v. CIBC Mellon Trust Co. ...........................................................................................................................61 In the Matter of CIBC Mellon Trust Company.................................................................................................61 In the Matter of J.P. Morgan Securities Inc. .....................................................................................................61

CASES INVOLVING FAILURE TO SUPERVISE ......................................................... 62

In the Matter of Metropolitan Life Insurance Company..................................................................................62

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In the Matter of John B. Hoffmann and Kevin J. McCaffrey ..........................................................................63

CASES INVOLVING SELF REGULATORY ORGANIZATIONS .................................. 63

In the Matter of American Stock Exchange LLC..............................................................................................63 In the Matter of Richard Robinson.....................................................................................................................63 In the Matter of Salvatore F. Sodano .................................................................................................................64 In the Matter of Philadelphia Stock Exchange, Inc...........................................................................................65 SEC v. David Colker ............................................................................................................................................66 In the Matter of National Stock Exchange and David Colker..........................................................................66 In the Matter of New York Stock Exchange, Inc...............................................................................................66 Report of Investigation Regarding NASDAQ, as Overseen by Its Parent, NASD, Arising Out of Investigation of Suspicious Trading Activity and Net Capital Violations By MarketXT ........................67 In the Matter of MarketXT and Irfan Amanat .................................................................................................67

CASES INVOLVING MUNICIPAL BONDS .................................................................. 68

In the Matter of City of San Diego, California ..................................................................................................68

CASES INVOLVING HEDGE FUNDS .......................................................................... 69

SEC v. Viper Capital Management, LLC, et al. ................................................................................................69 In the Matter of Evan Misshula ..........................................................................................................................70 SEC v. CMG-Capital Management Group Holding Company, LLC and Keith G. Gilabert .......................70 SEC v. Langley Partners, et al.............................................................................................................................71 SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd. .....................................................................72 SEC v. Samuel Israel III, et al. ............................................................................................................................73 SEC v. K.L. Group, LLC, et al. ...........................................................................................................................73 In the Matter of Won Sok Lee and Yung Bae Kim ...........................................................................................74 SEC v. Northshore Asset Management et al. .....................................................................................................74

CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS .................... 75

A.G. Edwards & Sons, Inc. ..................................................................................................................................75 In the Matter of Thomas C. Bridge, James D. Edge, and Jeffrey K. Robles...................................................75 In the Matter of Fred Alger .................................................................................................................................76 In the Matter of Deutsche Bank Securities, Inc. ................................................................................................77 In the Matter of Deutsche Asset Management, Inc. and Deutsche Investment Management Americas, Inc.78 In the Matter of Hartford Financial Services, LLC, HL Investment Advisors, LLC and Hartford Securities Distribution Company, Inc...........................................................................................................78 In the Matter of BISYS Fund Services, Inc........................................................................................................79 In the Matter of Prudential Equity Griup, LLC................................................................................................80 SEC v. Frederick J. O'Meally, et al. ...................................................................................................................80 In the Matter of Warwick Capital Management, Inc. & Carl Lawrence........................................................81

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In the Matter of Weiss Research, Inc., Martin Weiss and Lawrence Edelson................................................82 SEC v. Terrys Tips and Terry F. Allen .............................................................................................................83 In the Matter of CapitalWorks Investment Partners, LLC and Mark J. Correnti........................................83 In the Matter of Bear, Stearns & Co., Inc., and Bear, Stearns Securities Corp. ............................................84 SEC v. BMA Ventures, Inc. and William Robert Kepler .................................................................................84 SEC v. Daniel Calugar and Security Brokerage, Inc. .......................................................................................85 SEC v. Karnig H. Durgarian, Jr., et al. ..............................................................................................................86 In the Matter of Veras Master Capital Fund, et al............................................................................................87 In the Matter of Millenium Partners, L.P., et al. ...............................................................................................88 In the Matter of Federated Investment Management Company, et al. ...........................................................89 In the Matter of Theodore Charles Sihpol III....................................................................................................89 SEC v. Theodore Charles Sihpol III ...................................................................................................................89 In the Matter of Legg Mason Wood Walker, Inc. .............................................................................................90 SEC v. Thomas W. Jones and Lewis E. Daidone ...............................................................................................91 In the Matter of Canadian Imperial Holdings Inc. and CIBC World Markets Corp....................................91 SEC v. Amerindo Investment Advisors Inc., et al. ............................................................................................92 In the Matter of Smith Barney Fund Management LLC and Citigroup Global Markets, Inc. ....................92 SEC v. Thomas J. Gerbasio, et al. .......................................................................................................................93 In the Matter of Charles J. Addeo ......................................................................................................................93 In the Matter of Raymond L. Braun, Jr.............................................................................................................93 In the Matter of Fiserv Securities, Inc. and Dennis J. Donnelly.......................................................................93 SEC v. Pension Fund of America, LC, et al. ......................................................................................................94

CASES INVOLVING INSIDER TRADING .................................................................... 95

SEC v. Christopher M. Balkenhol.......................................................................................................................95 SEC v. Jennifer Xujia Wang, et al. .....................................................................................................................96 SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp, Sunil Sehgal, Seema Sehga. Hafiz Naseem and Francisco Javier Garcia ............................................................97 SEC v. Martha Stewart and Peter Bacanovic ....................................................................................................98 SEC v. Deephaven Capital Management, LLC and Bruce Lieberman ...........................................................99 SEC v. Nelson J. Obus, et al.................................................................................................................................99 SEC v. Sonja Anticevic, et al. ............................................................................................................................100 SEC v. Gary Herwitz and Tracey A. Stanyer ..................................................................................................101 SEC v. Lohmus Haavel & Viisemann, et al......................................................................................................102 SEC v. Sonja Anticevic et al. .............................................................................................................................103 SEC v. Philip Evans and Paul Evans ................................................................................................................103 SEC v. Gary D. Force.........................................................................................................................................104

SEC v. Hilary L Shane .......................................................................................................................................105 In the Matter of Hilary L. Shane.......................................................................................................................105 SEC v. Ernesto Sibal, et al. ................................................................................................................................106 SEC v. Guillaume Pollet.....................................................................................................................................106

CASES INVOLVING MARKET MANIPULATION....................................................... 107

In the Matter of Park Financial Group, Inc. and Gordon C. Cantley...........................................................107 SEC v. Jaisankar Marimuthu, Chockalingam Ramanathan and Thirugnanam Ramanathan ..................108 Operation Spamalot ...........................................................................................................................................109 SEC v. Aleksey Kamardin .................................................................................................................................109 Securities and Exchange Commission v. Mervin George Fiessel and Robert Michael Doherty .................110 SEC v. Faisal Zafar and Sameer Thawani .......................................................................................................111 SEC v. Compania Internacional Financiera S.A. and Yomi Rodrig..............................................................111 SEC v. PacketPort.com, Inc., et al.....................................................................................................................112 SEC v. Joshua Yafa, Michael O. Pickens, et al. ...............................................................................................113 SEC v. Michael OGrady, et al. .........................................................................................................................114 SEC v. David E. Whittemore .............................................................................................................................114

CASES INVOLVING SECURITIES OFFERINGS ....................................................... 115

In the Matter of Amaranth Advisors L.C.C.....................................................................................................115 SEC v. Renaissance Asset Fund, Inc., Ronald J. Nadel, and Joseph M. Malone..........................................115 SEC v. Pittsford Capital Income Partners, L.L.C., et al. ................................................................................116 SEC v. Timothy M. Roberts ..............................................................................................................................117 SEC v. John P. Utsick, et al. ..............................................................................................................................117 SEC v. Kirk S. Wright, International Management Associates, et al. ...........................................................118 SEC v. Charis Johnson, Lifeclicks, LLC, and 12daily Pro .............................................................................119 SEC v. Allied Capital Management, Inc. and Shea Silva................................................................................120 SEC v. Lance Poulsen, Rebecca Parrett, Donald Ayers and Randolph Speer..............................................121 SEC v. Church Extension of the Church of God, Inc., et al. ..........................................................................122

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INTRODUCTION
As our capital markets continue to experience unprecedented growth and expansion, the U.S. Securities and Exchange Commissions enforcement program has been challenged to keep pace with market developments. Violations involving broker-dealers, mutual funds and investment advisers, fraudulent securities offerings, issuer disclosure, financial fraud, and insider trading continue to form the core of the enforcement program. This outline will review some of the Divisions significant recent actions. Copies of orders, administrative releases, and litigation releases concerning the cases discussed below can be accessed through the Commissions web site at www.sec.gov.

CASES INVOLVING FINANCIAL FRAUD & OTHER DISCLOSURE AND REPORTING VIOLATIONS
In the Matter of International Business Machines Corporation Admin. Proc. File No. 3-12652 (June 5, 2007) http://www.sec.gov/litigation/admin/2007/34-55858.pdf On June 5, 2007, the Commission announced a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning 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) financial results. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company. The Commission found that IBM provided the misleading information during an April 5, 2005 conference call with analysts. The call was simultaneously webcast, and a transcript and the accompanying exhibits were filed with the Commission in a Form 8-K. During the 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 EPS results and estimated a $0.39 impact on FY05 EPS results. However, IBM did not disclose this information. IBM included a misleading chart in its presentation which, to many analysts, conveyed that the EPS impact of IBM's stock options expense would be $0.14 for 1Q05 and $0.55 for FY05. After IBM's April 5 announcement, the majority of analysts reduced their EPS estimates by these amounts. The Commission's Order found that IBM did not disclose its expected stock options expense because it was concerned that analysts would add back to their EPS estimates any yearto-year reduction in the options expense instead of using the reduction to off-set an unrelated, previously-announced increased pension expense. According to the Order, management wanted to avoid this outcome 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-toyear increase in pension expense. On April 14, 2005, IBM announced its 1Q05 financial results and 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. The Commission found that IBM violated Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 12b-20 thereunder. Without admitting or denying the Commission's findings, IBM consented to the issuance of the Order, which required IBM to cease and desist from committing or causing violations of these provisions. In the Matter of Hewlett-Packard Company Admin. Proc. File No. 3-12643 (May 23, 2007) http://www.sec.gov/litigation/admin/2007/34-55801.pdf On May 23, 2007, the Commission filed settled administrative charges against HewlettPackard Company for failing to disclose the reasons for a directors abrupt resignation in the midst of HPs controversial investigation into boardroom leaks. As described in the Commissions order, in early 2006 HP initiated an investigation into leaks of confidential information about HP Board meetings to the press. By April, HP investigators had concluded one of HPs directors was responsible, and the companys Chairman and several senior executives decided to present the findings to the Board. During the course of a lengthy and heated Board meeting on May 18, 2006, the Board voted to ask the director to resign. According to the Commission, fellow Board member Thomas Perkins (who was not the director asked to resign) voiced strong objections to the manner in which the leak investigation findings were presented to the Board and to the decision to ask the director to resign. For these reasons, Perkins resigned from the Board and left the meeting. Federal securities laws require a public company to disclose by making a public filing with the Commission the circumstances of the disagreement if a director resigns because of a disagreement with the company on any matter relating to its operations, policies or practices. Notwithstanding this requirement, HP did not make the mandated disclosures, instead reporting only the fact that Mr. Perkins had stepped down. The Commission found Mr. Perkins disagreement related to HPs corporate governance and HPs policies regarding the handling of sensitive information, and therefore was a disagreement related to HPs operations, policies or practices which was required to be disclosed. The Commissions Order charged HP with violating the public reporting requirements of the Securities Exchange Act of 1934. Without admitting or denying the Commissions findings, HP consented to an order that it cease and desist from committing or causing violations of these provisions. 3

SEC v. The BISYS Group, Inc. Litigation Release No. 20125 (May 23, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20125.htm On May 23, 2007, the Commission announced the filing and settlement of charges that The BISYS Group, Inc., a leading provider of financial products and support services, violated the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. The Commission alleged that from July 2000 through December 2003, former BISYS officers and employees engaged in a variety of improper accounting practices that resulted in an overstatement of the company's reported financial results for the fiscal years ended June 30, 2001, 2002, and 2003 by roughly $180 million. The improper accounting practices were primarily based in the company's Insurance Services division, but also occurred in other divisions of the company. The alleged improper accounting practices were a product of a corporate focus by former management on meeting aggressive, short-term earnings targets and a lax internal control environment. As a result of these improper accounting practices, BISYS filed annual and quarterly reports with the Commission that included financial statements that were inaccurate and misleading. In addition, the company's overstated financial results were incorporated in annual reports to shareholders, press releases, and offering documents including registration statements. The Commission alleged that BISYS violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The Commission further alleged that BISYS received approximately $20 million in ill-gotten gains as a result of its issuance of convertible debt, stock, and options at prices that were inflated as a result of its violations. Without admitting or denying the Commission's allegations, BISYS agreed to settle the charges by consenting to a permanent injunction against further violations of the relevant reporting, books-and-records, and internal controls provisions of the federal securities laws, and it agreed to pay disgorgement and prejudgment interest totaling approximately $25 million. In the Matter of Motorola, Inc. Admin. Proc. File No. 3-12630 (May 8, 2007) http://www.sec.gov/litigation/admin/2007/34-55725.pdf On May 8, 2007, the Commission in a settled administrative proceeding issued an 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 against Motorola, Inc. The Order found that, in 2001, Motorola, Inc., a vendor of digital cable television set-top boxes, entered into a round-trip cash transaction with Adelphia Communications Corporation, a cable television systems operator. Under a purported marketing support agreement, Adelphia paid money to Motorola which was immediately returned to Adelphia in the form of marketing 4

support payments. The agreement, which was backdated and applied retroactively to the prior fiscal year, provided that Motorola would increase the price of digital cable television set-top boxes it was selling to Adelphia and pay the amount of the price increase back to Adelphia in the form of payments to market Motorola's cable television set-top boxes. Adelphia did not use the marketing support payments to market Motorola's cable television set-top boxes. Instead, Adelphia recorded the price increase it paid Motorola as a capital expense, and recognized the marketing support payments as a contra-expense to marketing costs, thereby artificially reducing its marketing expense and increasing Earnings Before Interest, Taxes, Depreciation and Amortization. The Commission ordered Motorola to cease and desist from committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. The Order also required Motorola to pay $25 million in disgorgement and prejudgment interest. Motorola agreed to the settlement without admitting or denying the findings in the Commission's Order. In the Matter of Terry M. Phillips (Take-Two Interactive Software, Inc.) Admin. Proc. File No. 3-12627 (May 2, 2007) http://www.sec.gov/litigation/admin/2007/34-55696.pdf On May 2, 2007, the Commission filed a settled civil action in federal district court against video game distributor Capitol Distributing, L.L.C. (Capitol) and one of its owners, Terry M. Phillips (Phillips). The Commission charged Capitol, a privately-owned, Virginia-based video game distributor, with aiding and abetting video game publisher Take-Two Interactive Software, Inc. (Take-Two) in Take-Two's violations of the antifraud, reporting and recordkeeping provisions of the federal securities laws during fiscal years 2000 and 2001 through a fraudulent video game parking scheme. The Commission also charged Phillips with liability as a controlling person for Capitol's violations and instituted a settled administrative cease-and-desist order against Phillips, which found that Phillips was a cause of Capitol's violations. Specifically, the complaint alleged that Take-Two shipped to Capitol hundreds of thousands of video games, typically at the end of reporting periods, and fraudulently recorded those shipments as sales when, in actuality, Capitol only temporarily parked the games for TakeTwo and did not intend to sell them. The complaint alleged that in furtherance of the scheme Take-Two twice provided funds to Capitol or another Phillips-owned entity known as Phillips Land Company (PLC), for transmission to Take-Two to create the false appearance that Capitol or PLC were paying for the games. According to the complaint, Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product." The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol. Capitol, without admitting or denying the allegations in the complaint, consented to the entry of a final judgment permanently enjoining it from violating Section 10(b) of the Exchange

Act and Exchange Act Rule 10b-5, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13 and 13b2-1. The complaint alleged that Phillips, as Capitol's founder, 20 percent owner, and principal operator was a control person of Capitol within the meaning of Section 20(a) of the Exchange Act. Phillips, without admitting or denying the allegations in the complaint, consented to entry of a final judgment ordering him to pay a civil money penalty of $50,000 as a control person of Capitol for its aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1. In a related administrative proceeding, Phillips consented, without admitting or denying the Commission's findings, to the entry of a Commission order to cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b20, 13a-1 and 13a-13. The Commission in its order found that Phillips and Take-Two began discussing Capitol's participation in the parking arrangement in July 2000. In October 2000, Take-Two discussed the first parking transaction with Phillips, asking Phillips if he had another company that Take Two could issue a purchase order to for the games in lieu of Capitol sending the games back as a return. Phillips mentioned PLC, then instructed a Capitol employee to work out the details with Take-Two. On June 9, 2005, the Commission filed and simultaneously settled civil charges against Take-Two and former and current members of senior management in connection with the parking scheme. SEC v. Tenet Healthcare Corporation, David L. Dennis, Thomas B. Mackey, Christi R. Sulzbach, and Raymond L. Mathiasen Litigation Release No. 20067 (April 2, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20067.htm On April 2, 2007, the Commission filed settled civil fraud charges against Tenet Healthcare Corporation for failing to disclose to investors that Tenet's strong earnings growth from 1999 to 2002 was driven largely by its exploitation of a loophole in the Medicare reimbursement system. Once Tenet finally revealed its scheme to the investing public and admitted that its strategy was not sustainable, the market value of Tenet's stock plunged by over $11 billion. During the relevant time, Tenet was based in Santa Barbara, Calif., and was the second largest publicly traded healthcare company in the United States. In addition to Tenet, the SEC's complaint named Thomas B. Mackey, Tenet's former chief operating officer and copresident; Christi R. Sulzbach, the former general counsel and chief compliance officer; David L. Dennis, the former chief financial officer and co-president; and Raymond L. Mathiasen, the former chief accounting officer. Dennis and Mathiasen each agreed to settle the charges against them. The Commission alleged that between 1999 and 2002, Tenet engaged in an unsustainable strategy to reach its earnings targets by deliberately exploiting the Medicare reimbursement system. Tenet's scheme involved a loophole in the Medicare reimbursement system related to 6

"outlier payments," which are designed to compensate hospitals for caring for extraordinarily sick Medicare patients. Tenet's management realized that Tenet could inflate its revenue from outlier payments by simply increasing the gross charges set by its hospitals. The complaint alleged that Tenet, acting through Dennis, Mathiasen, Mackey, and Sulzbach, misled the investing public by failing to disclose Tenet's strategy, its impact on revenues and earnings, and its unsustainability in its public filings with the Commission. In part as a result of its outlier scheme, Tenet received enough income to set aside funds in improper general reserves. Tenet, with Mathiasen's approval, created general reserves totaling approximately $107 million by the end of Tenet's 2002 fiscal year. These inappropriate reserves resulted in material misstatements to Tenet's financial statements for fiscal years 2000 through 2004. To settle the charges, Tenet agreed to pay a civil penalty of $10 million. The SEC will seek to have these funds placed into a Fair Fund for distribution to harmed investors pursuant to the Sarbanes-Oxley Act. Without admitting or denying the allegations in the SEC's complaint, Tenet also agreed to be permanently enjoined from violating the antifraud, reporting, and recordkeeping provisions of the federal securities laws. Mathiasen and Dennis each agreed to settle the Commission's charges without admitting or denying the allegations. Mathiasen agreed to be permanently enjoined from violating Section 17(a) of the Securities Act and Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder, to pay a civil penalty of $240,000, and to be barred from serving as an officer or director of a public company for five years. A certified public accountant, Mathiasen also agreed to be permanently denied the privilege of appearing or practicing before the Commission as an accountant under Rule 102(e) of the Commission's rules of practice. Dennis agreed to be permanently enjoined from future violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder and to pay a $150,000 civil penalty. The penalties paid by Mathiasen and Dennis personally will also be added to the Fair Fund for investors along with Tenet's payment. The Commission's complaint charged Mackey and Sulzbach with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aiding and abetting Tenets violations of Section 13(a) of the Exchange Act and Rules 12b20, 13a-1, and 13a-13 thereunder. The complaint sought permanent injunctions against future violations of these provisions, orders barring each of them from serving as an officer or director of a public company, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties.

SEC v. Nicor, Inc. and Jeffrey L. Metz Litigation Release No. 20060 (March 29, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20060.htm

On March 29, 2007, the Commission announced that Nicor, Inc., a major Chicago-area natural gas distributor, and Jeffrey Metz, its former Assistant Vice President and Controller, would pay more than $10 million to settle charges that they engaged in improper transactions, made material misrepresentations, and failed to disclose material information regarding Nicor's gas inventory. The Commission alleged that from 1999 to 2002, Nicor, acting through Metz and other senior officers, devised a method by which it could enter into a series of improper transactions to shift inventory off of its books and profit by accessing a substantial portion of its low-cost, lastin-first-out (LIFO) layers of inventory. These transactions allowed Nicor to ensure that it met its earnings targets by inflating its income for 2000 and 2001, and for each of the quarters within those years, as reported in its financial statements for those periods. Additionally, Nicor failed to disclose, in either its Management's Discussion & Analysis section of its periodic reports, or its financial statements filed with those reports, that it had recorded material non-recurring income resulting from LIFO liquidations. The funds Nicor and Metz agreed to pay in disgorgement and civil penalties were placed in a Fair Fund for distribution to affected shareholders. Nicor also agreed to be permanently enjoined from violating the antifraud and reporting provisions of the federal securities laws. Metz settled the civil action filed against him by consenting to a permanent injunction, a fiveyear officer-and-director bar, and a payment of more than $60,000, which included the surrender of bonuses and a civil penalty. SEC v. Collins & Aikman Corporation, David A. Stockman, J. Michael Stepp, Gerald E. Jones, David R. Cosgrove, John G. Galante, Elkin B. McCallum, Paul C. Barnaba, Christopher M. Williams and Thomas V. Gougherty Litigation Release No. 20055 (March 26, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20055.htm On March 26, 2007, the Commission filed civil fraud charges against auto parts manufacturer Collins & Aikman Corporation (C&A), David A. Stockman, C&A's former Chief Executive Officer and Chairman of the Board of Directors, and eight other former C&A directors and officers. The SEC alleged that between 2001 and 2005, Stockman personally directed fraudulent schemes to inflate C&A's reported income by accounting improperly for supplier payments. In furtherance of those schemes, the complaint alleged that Stockman and other defendants obtained false documents from suppliers designed to mislead C&A's external auditors. According to the complaint, when aspects of the schemes were discovered in March 2005, Stockman embarked on a public campaign to mislead investors, potential financiers and others by minimizing the extent of the fraudulent accounting and hiding C&A's dire financial condition. The other former officers, including the Chief Financial Officer, Corporate Controller, and Treasurer, and a former member of C&A's Board of Directors, are alleged to have participated in the accounting schemes or the campaign to mislead investors.

The Commission charged violations of the antifraud, reporting, record-keeping, certification and lying to auditors provisions of the federal securities laws. The complaint sought permanent injunctions against future violations of these provisions, officer-and-director bars, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties. C&A simultaneously settled the charges, without admitting or denying the Commission's allegations, by consenting to the entry of a final judgment permanently enjoining it from violating 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 Securities Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The case against the other defendants is ongoing. SEC v. Conrad M. Black, F. David Radler and Hollinger Inc., Litigation Release No. 20043 (March 16, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20043.htm On March 16, 2007, the Commission announced that it settled its enforcement action against F. David Radler, the former Deputy Chairman and COO of Hollinger International, Inc. Under the terms of the settlement, Radler was ordered to pay approximately $23.7 million in disgorgement and prejudgment interest; ordered to pay a $5 million civil penalty; barred from serving as an officer or director of a public company; and enjoined from violations of the antifraud, proxy, books and records, reporting, and internal control provisions of the federal securities laws. On Nov. 15, 2004, the Commission filed its action against Radler, Conrad M. Black, Hollinger International's former Chairman and CEO, and Hollinger, Inc., Hollinger International's controlling shareholder, alleging that from approximately 1999 through 2003, the defendants engaged in a fraudulent and deceptive scheme to divert cash and assets from Hollinger International, Inc., through a series of related party transactions. The Commission's complaint alleged, among other things, that Black and Radler diverted to themselves, other corporate insiders and Hollinger, Inc. approximately $85 million of the proceeds from Hollinger International's sale of newspaper publications through purported "noncompetition" payments. The complaint also alleged that Black and Radler orchestrated the sale of certain of Hollinger International's newspaper publications at below-market prices to another privately-held company owned and controlled by Black and Radler, including the sale of one publication for $1.00. The complaint further alleged that in order to perpetrate their fraudulent scheme, Black and Radler misled Hollinger International's Audit Committee and Board of Directors concerning the related party transactions and also misrepresented and omitted to state material facts regarding these transactions in Hollinger International's filings with the Commission and during shareholder meetings. Radler, without admitting or denying the allegations in the complaint, consented to the entry of a final judgment which permanently enjoined him from violations of Sections 10(b), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 14a-3 and 14a-9 thereunder, and, as a control person, Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the 9

Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The Final Judgment also barred Radler from acting as an officer and director of a public company and orders Radler to pay a total of $23,695,227 in disgorgement and prejudgment interest and a $5,000,000 civil penalty. The $28,695,227 shall be distributed to The Sun-Times Media Group, Inc., formerly known as Hollinger International, Inc., pursuant to the Fair Funds provisions of Section 308 of the Sarbanes-Oxley Act of 2002. The case against the other defendants is ongoing. SEC v. Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill (a.k.a. Mary Anne Poland) (Nortel Networks Corp.) Litigation Release No. 20036 (March 12, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20036.htm On March 12, 2007, the Commission filed civil fraud charges against four former senior executives of Nortel Networks Corporation for repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment. Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill. The complaint alleged that these individuals engaged in this misconduct while serving as top corporate executives of Nortel between September 2000 and January 2004. During that time, Dunn served as Chief Financial Officer and Chief Executive Officer; Beatty as Controller and Chief Financial Officer; Gollogly as Controller; and Pahapill as Assistant Controller and Vice President of Corporate Reporting. According to the Commission's complaint, from late 2000 through January 2001, Dunn, Beatty and Pahapill allegedly altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts and, from at least July 2002 through June 2003, Dunn, Beatty and Gollogly allegedly improperly established, maintained and released reserves to meet earnings targets, fabricate profits and pay performance-related bonuses. The complaint charged Dunn, Beatty, Gollogly and Pahapill with violating and/or aiding and abetting violations of the antifraud, reporting, books and records, internal controls and lying to auditors provisions of the federal securities laws. Dunn and Beatty were separately charged with violations of the officer certification provisions instituted by the Sarbanes-Oxley Act. The Commission sought a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants. SEC v. MBIA Inc. Litigation Release No. 19982 (Jan. 29, 2007) http://www.sec.gov/litigation/litreleases/2007/lr19982.htm On January 29, 2007, the Commission announced that it filed a settled civil action in the Southern District of New York alleging securities fraud charges against MBIA Inc., one of the nation's largest insurers of municipal bonds. To avoid suffering a loss of $170 million resulting from the Allegheny Health, Education and Research Foundations default on bonds guaranteed 10

by MBIA, MBIA represented that it had obtained reinsurance coverage for the bonds. However, MBIA had improperly obtained the coverage through retroactive contracts. The improper use of the reinsurance contracts enabled MBIA to convert what would otherwise have been the company's first-ever quarterly loss into a profit and reverse the decline in MBIA's stock price. In addition, MBIA secretly entered a side agreement with one of the reinsurers whereby it orally agreed to re-assume virtually all of the risk given to the reinsurer on the future business, leaving the reinsurer with all the premiums and virtually no risk. In connection with the settlement, MBIA has agreed, without admitting or denying the Commissions, to pay a $50 million penalty, plus $1 in disgorgement. In a related administrative proceeding, MBIA has agreed, without admitting or denying the Commission's findings, to the issuance of a cease-and-desist order that requires MBIA to cease and desist from further violations of 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 of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11,13a-13, and 13b2-1 thereunder, and to comply with various undertakings, including an undertaking to retain an independent consultant to examine a number of specified transactions. SEC v. Michael Moran, James Sievers, Martin Zaepfel, James Cannataro, John Steele, Michael Crusemann and Michael Otto Litigation Release No. 19897 (Nov. 2, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19897.htm On November 2, 2006, the Commission filed settled enforcement actions against former officers and directors of Spiegel, Inc., an Illinois-based public company. During the relevant period, Spiegel owned and operated catalogue retailers Spiegel, Eddie Bauer and Newport News. The Commission filed settled charges against the former Co-Presidents of Spiegel, Michael Moran and James Sievers, former CEO Martin Zaepfel, former CFO James Cannataro, and former Treasurer John Steele, in connection with the overstatement of the performance of Spiegel's credit card receivables portfolio. In addition, the Commission settled with the former Chairman of Spiegel's Board of Directors, Michael Otto, and a former director, Michael Crusemann, and former CEO Martin Zaepfel in connection with the decision to withhold Spiegel's required financial reports to avoid issuance by its outside auditor of a "going concern" opinion. The Commission alleges in its complaints that Moran, Sievers, Zaepfel, Cannataro and Steele improperly increased inter-company fees between Spiegel's retail subsidiaries and Spiegel's bank subsidiary, which had the effect of hiding the deteriorating performance of the company's credit card receivables portfolio. Spiegel was thus able to benefit improperly from the securitization of that portfolio. The Commission also alleged that former Directors Otto and Crusemann and former CEO Zaepfel all participated in the decision to not file Spiegel's 2001 Form 10-K and first quarter 2002 Form 10-Q on a timely basis. Prior to the deadline for the filing of the Form 10-K, Spiegel's outside auditor informed the company that a "going concern" opinion would accompany the filing unless Spiegel was able to resolve its underlying financial problems. When it failed to resolve those problems by the April 15, 2002 deadline, the company

11

improperly elected to withhold its filing rather than make the required disclosures to the investing public. In light of the above, the Commission alleged that Moran, Sievers, Zaepfel, Cannataro and Steele violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and violated and aided and abetted violations of various books and records and financial reporting provisions of the Securities Exchange Act of 1934. The Commission also alleged that Otto, Crusemann and Zaepfel aided and abetted Spiegel's violations of the financial reporting provisions of the Exchange Act. Without admitting or denying the Commission's allegations, Moran, Sievers, Cannataro, Steele, Otto, Crusemann and Zaepfel have consented to the Court's issuance of an order of permanent injunction enjoining them from future violations of the federal securities laws. In addition, Moran, Sievers, Cannataro and Steele have consented to each pay a civil penalty of $120,000. Otto and Crusemann have consented to each pay a civil penalty of $100,000. Zaepfel has consented to pay a civil penalty of $170,000. SEC v. Delphi Corporation, J.T. Battenberg, III, Alan Dawes, Paul Free, John Blahnik, Milan Belans, Catherine Rozanski, Judith Kudla, Scot McDonald, B.N Bahadur, Atul Pasricha, Laura Marion, Stuart Doyle and Kevin Curry Litigation Release No. 19891 (Oct. 30, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19891.htm On October 30, 2006, the Commission filed settled financial fraud charges in federal court in Detroit against Delphi Corporation, a Troy, Mich., auto parts supplier. In its complaint, the Commission charges Delphi with engaging in a pattern of fraudulent conduct between 2000 and 2004 that resulted in Delphi materially misstating its financial condition and operating results in filings with the Commission, offering documents, press releases, and other documents and statements. The Commission also charges thirteen individuals for their alleged roles in the fraudulent conduct and/or in related reporting and books-and-records violations by Delphi. The Commissions complaint alleges that in 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which had the purpose of and ultimately resulted in Delphi hiding a $237 million warranty claim asserted by its former parent company and inflating its net income by $202 million. In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi providing new business to the IT company. However, in order to meet earnings forecasts for the quarter, Delphi improperly accounted for the $20 million payment as if it was a nonrefundable rebate on past business, rather than a liability. From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost non-GAAP, pro forma measures of Delphi's financial performance that were relied upon by investors, analysts and rating agencies. Delphi simultaneously settled the charges, without admitting or denying the Commission's allegations, by consenting to the entry of a final judgment permanently enjoining it from violating 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 Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. In addition to settling with Delphi, the Commission 12

simultaneously settled with six individuals, who also neither admitted nor denied the Commission's allegations, requiring payment of disgorgement, prejudgment interest, and civil penalties. Each of the settlements is subject to court approval, and Delphi's settlement is also subject to approval by the U.S. Bankruptcy Court overseeing Delphi's bankruptcy. SEC v. Pinnacle Development Partners LLC Press Release 2006-173 (Oct. 12, 2006) http://www.sec.gov/news/press/2006/2006-173.htm On October 11, 2006, the Commission filed a complaint in the Northern District of Georgia against Pinnacle Development Partners LLC, a Georgia limited liability company with its principal place of business in Atlanta, Ga., and Gene A. O'Neal, its managing member. The complaint was filed to halt a Ponzi scheme that raised at least $30 million from approximately 2,000 investors in fraudulent real estate development partnerships. The Commission alleges that, from at least October 2005 through the present, Pinnacle and O'Neal have fraudulently offered and sold interests in real estate development partnerships through a nationwide advertising campaign, which included general solicitations for investors in more that 40 magazines and newspapers. Pinnacle also sold notes to some investors. According to the complaint, Pinnacle promised investors a 25% return in 45 or 60 days, and a second 25% return and the return of investor capital after 90 days. Pinnacle represented that the profits would be earned by the respective partnership purchasing foreclosed real estate, making minor repairs and reselling the property within 45 to 60 days. The Commission alleged that, in fact, without disclosure to investors, Pinnacle itself, or O'Neal, purchased property from third parties and sold it to its investor partnerships at high mark-ups. The exorbitant returns promised to investors were generated by the respective partnership selling the property to other investor partnerships controlled by Pinnacle. The Court entered an order freezing the defendants' assets, appointing a receiver for Pinnacle and investor partnerships controlled by Pinnacle, imposing a preliminary injunction against the defendants enjoining future violations of the registration and antifraud provisions of the federal securities laws, and providing other relief. The defendants consented to the order without admitting or denying the allegations in the complaint.

SEC v. Salvatore Favata Litigation Release No. 19861 (Oct. 10, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19861.htm On October 6, 2006, the Commission filed a settled securities fraud action in the United States District Court for the Central District of California against Salvatore Favata ("Favata"), the former President of National Consumer Mortgage, LLC ("NCM"), an Orange County, California company that purportedly brokered residential mortgages. The Commission's complaint alleges that from 2001 through 2006, Favata, acting through NCM, operated a massive 13

Ponzi scheme, which raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals. The Commission's complaint also alleges that Favata solicited investors in face-to-face settings, including church gatherings and investment seminars and persuaded mortgage refinance clients to take cash out of their refinancing and use that cash to invest in NCM investment notes. Favata falsely told potential investors that NCM would loan investor funds to homeowners who could not qualify for traditional mortgages. Investors were also told that the return on the notes would stem from the interest NCM received on the mortgage loans. Favata further claimed that the notes were guaranteed by the real estate securing the underlying residential loans and that NCM only lends on properties that have a 65 percent or lower loan to value ratio ensuring a low default rate and the investors' principal in the event of a foreclosure. Favata went so far as to represent that NCM maintained deeds of trust for the real estate securing the investments. Without admitting or denying the allegations of the Commission's complaint, Favata consented to the entry of final judgment permanently enjoining him from violating the antifraud and registration provisions of the federal securities laws. Specifically, Favata consented to the entry of a final judgment permanently enjoining him from violating Section 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Pursuant to Section 15(b) of the Exchange Act, Favata has also consented to the entry of an administrative order permanently barring him from associating with any broker or dealer in the future. On the same day the Commission filed its complaint, the U.S. Attorney's office for the Central District of California filed an information and plea agreement in which Favata agrees to plead guilty to one count of mail fraud, to pay restitution in excess of $20 million, and to forfeit his residence in connection with the same scheme. Pursuant to the plea agreement, Favata faces a possible 60month prison sentence.

Securities and Exchange Commission v. Doral Financial Corporation Litigation Release No. 19837 (Sept. 19, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19837.htm On September 19, 2006, the Commission filed financial fraud charges against Doral Financial Corporation, a NYSE-listed Puerto Rican bank holding company. The Commission alleges that Doral Financial overstated income by approximately $921 million or 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that accounting irregularities enabled the company to report an apparent 28-quarter streak of "record earnings" and facilitated the placement of over $1 billion of debt and equity. Since Doral 14

Financial's accounting and disclosure problems began to surface in early 2005, the market price of the company's common stock plummeted from almost $50 to under $10, thereby reducing equity market value by over $4 billion. According to the Commission's complaint, Doral Financial improperly accounted for the purported sale of non-conforming mortgage loans to other Puerto Rican financial institutions in two respects. First, Doral Financial improperly recognized gain on sales of approximately $3.9 billion in mortgages to FirstBank Puerto Rico, a wholly owned banking subsidiary of First BanCorp. These transactions were not true sales under generally accepted accounting standards because of oral agreements or understandings between Doral Financial's former treasurer and former director emeritus and FirstBank senior management providing recourse beyond the limited recourse established in the written contracts. Second, Doral Financial senior management significantly overvalued interest-only strips retained by the company in its mortgage loan sale transactions. The Commission further alleges that Doral Financial managed earnings through a series of contemporaneous purchase and sale transactions with other Puerto Rican financial institutions totaling approximately $847 million. The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, charges Doral Financial with violating 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 Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 13a-1 and 13a-13. Without admitting or denying the Commission's allegations, Doral Financial has consented to the entry of a court order enjoining it from violating those antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty. SEC v. Jacob Jon W. James; J.W. James & Associates; J.W. James Borrowing Entity, LLC; J.W. James Investment Group Fund One, LLC; The James Company Fund I, LLC; The James Company Borrowing Entity, LLC; Virtual Cash Flow Corporation; The Cloaking Device, Inc.; and J.W. James Acquisitions, LLC Litigation Release No. 19801 (Aug. 10, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19801.htm On August 10, 2006, the Commission filed an emergency action to halt an ongoing securities fraud targeted at retirement funds. The fraud has raised over $22 million to date. Named in the Commissions complaint are Jon W. James, age 29 and a resident of Manhattan Beach, Calif., and several companies that he controls, including Jon W. James & Associates (JWJA), based in El Segundo, Calif. The Honorable Florence-Marie Cooper, United States District Judge for the Central District of California, issued an order appointing a temporary receiver over the companies controlled by James and freezing assets. According to the Commissions complaint, since at least January 2004, James, through JWJA, has solicited investors with direct mail invitations to free dinner seminars focusing on retirement planning. As alleged in the complaint, the invitations include statements such as Retirement Secrets of the Rich: What your Accountant and Stockbroker dont want you to know. The complaint further alleges that the invitations and seminars claim JWJA will help 15

investors retire in just seven short years by investing their IRA funds to take advantage of the booming real estate market and to produce double-digit returns. As alleged in the complaint, investors are falsely told that their funds will be used for profitable real estate transactions that will provide returns, which at times were represented to be as high as 24%. The complaint alleges that the defendants offered and sold promissory notes and, later, interests in limited liability companies. The Commissions complaint alleges that, throughout 2004 and 2005, defendants did not purchase any real estate or real estate related assets from which to pay investor returns. Additionally, the complaint alleges that the defendants misrepresented to investors that their investments would be secured by real property or by monies owed to JWJA from real estate transactions. The complaint also alleges that defendants fraudulently failed to disclose that they used new investor money to pay returns to previous investors. The Court issued an order temporarily enjoining defendants from future violations of the securities registration and antifraud provisions of the federal securities laws, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and orders (1) freezing assets; (2) appointing a temporary receiver; (3) prohibiting the destruction of documents; (4) expediting discovery; and (5) requiring accountings. The Commission also seeks preliminary and permanent injunctions, return of illgotten gains with prejudgment interest, and penalties against all defendants. SEC v. Raytheon Company, Daniel P. Burnham, and Aldo R. Servello Litigation Release No. 19747 (June 28, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19747.htm In the Matter of Raytheon Company, Daniel P. Burnham, and Aldo R. Servello Admin. Proc. File No. 3-12345 (June 28, 2006) http://www.sec.gov/litigation/admin/2006/33-8715.pdf On June 28, 2006, the Commission announced that it instituted settled enforcement proceedings against Raytheon Company, its former Chairman and CEO, Daniel P. Burnham, and the former Deputy CFO and Controller of Raytheon Aircraft Company (RAC), Aldo R. Servello. The SEC charged that, in periodic reports filed with the Commission from 1997 to 2001, Raytheon made false and misleading disclosures and used improper accounting practices that failed to adequately disclose the declining financial results and deteriorating business of Raytheons commercial aircraft manufacturing subsidiary, RAC. The SEC also charged that certain of these disclosures and accounting practices were undertaken with the knowledge of Burnham and Servello. Without admitting or denying the SECs findings, Raytheon, Burnham, and Servello agreed to settle these charges by consenting to the entry of a Cease-and-Desist Order by the Commission. The SECs Order found that, between 1997 and 1999, Raytheon improperly recognized revenue on RACs sale of unfinished aircraft through bill and hold sales transactions that did not comply with GAAP. These practices resulted in material overstatements of RACs reported 16

annual net sales revenue and operating income in 1997 and 1998 and enabled both Raytheon and RAC to meet certain internal and external earnings targets. The SECs Order also found that, between 1997 and 2001, Raytheon engaged in improper disclosure and accounting practices related to RACs commuter aircraft business, including the failure to adequately disclose in the companys periodic reports material risks, trends, and uncertainties associated with that business line. According to the SECs Order, these practices resulted in the failure to recognize between $67 million and $240 million in losses, which would have reduced Raytheons 2000 profit before taxes by 8 to 27 percent. The SECs Order found that these losses were instead improperly taken during the third quarter of 2001, when Raytheon recorded a $693 million charge related to its commuter assets after September 11, 2001, and that Raytheons third quarter 2001 commuter loss provision was overstated by 10 to 53 percent. Each respondent agreed to cease and desist from committing or causing the violations charged as well as any future violations of these provisions. Raytheon, Burnham, and Servello also consented to the entry of a final judgment in a related civil action filed on June 28, 2006 in the U.S. District Court for the District of Columbia for the purposes of awarding civil monetary penalties and disgorgement. As part of the settlement, Raytheon consented to pay a penalty of $12 million and $1 in disgorgement. Burnham and Servello agreed to pay disgorgement of certain past bonus amounts, pre-judgment interest, and penalties in the total amounts of $1,238,344 and $34,628, respectively. On March 15, 2007, the Commission announced that it instituted settled enforcement proceedings against three former financial officers of Raytheon. The SEC charged that they were allegedly each involved in or aware of certain improper accounting practices that operated as a fraud by failing to adequately and accurately disclose the deteriorating financial results and business of Raytheon's commercial aircraft manufacturing subsidiary. The SEC also charged that each officer was involved in or aware of certain false and misleading disclosures in Raytheon's periodic reports. Named in the SEC's March 15th enforcement actions were Franklyn A. Caine, the former CFO of Raytheon, Edward S. Pliner, Raytheon's former Controller and former lead auditor, and James E. Gray, the former CFO of Raytheon Aircraft Company (RAC). Without admitting or denying the SEC's allegations or findings, Caine, Pliner, and Gray agreed to pay more than $1.5 million combined to settle the Commission's charges. SEC v. Scientific-Atlanta, Inc. Litigation Release No. 19735 (June 22, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19735.htm In the Matter of Wallace G. Haislip Admin. Proc. File No. 3-12339 (June 22, 2006) http://www.sec.gov/litigation/admin/2006/34-54031.pdf http://www.sec.gov/litigation/admin/2006/34-54030.pdf 17

In the Matter of Julian W. Edison Admin. Proc. File No. 3-154031 (June 22, 2006) http://www.sec.gov/litigation/admin/2006/34-54031.pdf On June 22, 2006, the Commission charged Scientific-Atlanta, Inc. with aiding and abetting certain of Adelphia Communications Corporations violations of the reporting, books and records, and internal controls provisions of the federal securities laws. Scientific-Atlanta entered into a marketing support agreement with Adelphia in 2000 that Adelphia misused to inflate its earnings by approximately $43 million. Scientific-Atlanta has agreed to pay $20 million in disgorgement in settlement of the charges. The SEC also announced that Wallace G. Haislip, Scientific-Atlantas Senior Vice President, Operations, and Julian W. Eidson, ScientificAtlantas Senior Vice President, have consented to the issuance of cease-and-desist Orders for their respective roles in causing Adelphias violations. The SECs complaint alleged that in August 2000, Adelphia requested that ScientificAtlanta increase the price of digital cable television boxes it was selling to Adelphia and pay the amount of the price increase back to Adelphia in the form of marketing support for the stated purpose of marketing the Scientific-Atlanta cable television boxes. Adelphia did not use the marketing support payments to market Scientific-Atlanta cable television boxes, recorded the price increase as a capital expense, and recognized the marketing support payments as a contra marketing expense, thereby artificially reducing its marketing expense and increasing EBITDA. The transaction did not affect Scientific-Atlantas public financial statements. The complaint alleged that Scientific-Atlanta was aware of a number of facts that together demonstrated that Adelphia was misusing the marketing support agreement. Those facts included, among others, (i) a retroactive price increase on set-top boxes previously delivered to Adelphia; (ii) Adelphias request for a commercially unreasonable high dollar amount in marketing support payments; (iii) repeated requests for higher levels of marketing support in later periods even though the major marketing push was to have occurred in earlier periods; (iv) knowledge that Adelphias request for the marketing support agreement was driven by its desire to obtain an accounting benefit; and (v) the inclusion of a false reason for the price increase in one of the contracts documenting the marketing support agreement. Scientific-Atlanta, without admitting or denying the allegations in the Complaint, consented to the entry of a final judgment, subject to court approval, that requires ScientificAtlanta to pay $20 million in disgorgement and enjoins Scientific-Atlanta from violating and aiding and abetting any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. The SECs Orders against Haislip and Eidson, the most senior Scientific-Atlanta executives responsible for approving the form of the marketing support agreement, found that they should have been on notice that Adelphia was unlikely to be using the marketing support agreement to market Scientific-Atlanta boxes. Haislip and Eidson were ordered to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 18

13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Haislip and Eidson agreed to the settlements without admitting or denying the findings in the SECs Orders. In the Matter of Tribune Company Admin. Proc. File No. 3-12304 (May 30, 2006) http://www.sec.gov/litigation/admin/2006/34-53882.pdf On May 30, 2006 the Commission charged publisher Tribune Company with reporting falsified circulation figures from at least January 2002 to March 2004 for two of its newspapers in New York, Newsday and the Spanish-language Hoy. In addition, Tribune misstated its accounts receivable and payable, as well as its circulation revenues and expenses, because the company did not have sufficient internal controls to detect the circulation inflation schemes at Newsday and Hoy. Tribunes failure to detect the schemes led it to report inflated circulation figures and trends and misstate its circulation revenues and expenses in annual and quarterly reports it filed with the Commission from January 2002 to March 2004. Relying on the inflated figures, Tribune also reported in press releases, earnings conferences and other public statements that Newsday was successfully competing against other daily newspapers in its market and that Hoy was the largest Spanish-language newspaper in New York. The Commissions order directed Tribune to cease-and-desist from committing or causing any violations or any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13, thereunder. Tribune consented to the issuance of the order without admitting or denying any of the Commissions findings. In a separate proceeding, nine former employees and contractors of Newsday and Hoy pleaded guilty to various criminal charges in connection with the same scheme.

SEC v. Federal National Mortgage Association Litigation Release No. 19710 (May 23, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19710.htm On May 23, 2006 the Commission and the Office of Federal Housing Enterprise Oversight (OFHEO) announced that the Federal National Mortgage Association (Fannie Mae) agreed to settle charges relating to the misstatement of its financial statements from at least 1998 through 2004. Fannie Mae agreed to the entry of a permanent injunction and to pay a $400 million penalty. In its settlement with the Commission, the company agreed, without admitting or denying the allegations, to the entry of a final judgment that permanently enjoins the company from violations of the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws. The root cause of the accounting fraud, as described in the Commissions Complaint, was a corporate culture that placed significant emphasis on stable 19

earnings growth and avoidance of income statement volatility and insufficient emphasis on ensuring compliance with applicable accounting regulations and federal securities laws. The Commission alleged that, from at least 1998 through 2004, the companys financial results were smoothed as a result of the misapplication of certain GAAP, namely rules relating to the amortization of loan fees, premiums and discounts, known as SFAS 91, and rules relating to hedge accounting, known as SFAS 133. In both instances, while Fannie Mae recognized that the company was departing from GAAP, it failed properly to consider whether the departures were material. These failures to comply with SFAS 91 and SFAS 133 led to the Company publicly issuing materially false and misleading financial statements from at least 1998 through the second quarter of 2004. Fannie Mae agreed, without admitting or denying these allegations, to an injunction for violations of Section 17(a)(2) and (3) of the Securities Act of 1933. As a result of the violations described in the Commissions complaint, Fannie Mae expects to restate its historical financial statements for the years ended Dec. 31, 2003, and 2002, and for the quarters ended June 30, 2004, and March 31, 2004. The company currently estimates that its restatement will result in at least an $11 billion reduction of previously reported net income. The terms of the settlement require Fannie Mae to pay a $400 million penalty that has been negotiated jointly with OFHEO and the SEC. The Commissions investigation is continuing.

SEC v. Henry C. Yuen Litigation Release No. 19694 (May 10, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19694.htm SEC v. Elsie M. Leung Litigation Release No. 19558 (Feb. 8, 2006) http://www.sec.gov/litigation/litreleases/lr19558.htm In the Matter of Jonathan B. Orlick, Esq. Admin. Proc. File No. 3-11801 (Jan. 26, 2005) http://www.sec.gov/litigation/admin/34-51081.htm On May 10, 2006 the Commission announced that Henry C. Yuen, the former chairman and chief executive officer of Gemstar-TV Guide International, Inc., was ordered to pay over $22 million for his role in a scheme to defraud investors by inflating Gemstars licensing and

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advertising revenues. In addition, Yuen was permanently barred from serving as an officer or director of a public company. After a three week trial in December 2005 in the Central District of California, the judge found in favor of the Commission and against Yuen on all of the SECs charges. In a written decision filed on March 20, 2006, the court found that Yuen had committed securities fraud by making misrepresentations and omissions of material fact about certain Gemstar revenues, that Yuen aided and abetted Gemstars primary violations of the periodic reporting and record keeping control requirements, and that Yuen lied to Gemstars auditors. On May 8, 2006, the court ordered Yuen to pay a total of $22,327,231 in disgorgement, penalties, and interest, and entered a permanent injunction against future securities law violations and a permanent bar from serving as an officer or director of a public company. The court found that Yuen received $10,577,692 in ill-gotten gains from his fraudulent conduct. The court ordered Yuen to pay a civil money penalty equal to the amount of disgorgement. Gemstar is a Los Angeles-based media and technology company that publishes TV Guide magazine and an interactive program guide (IPG) for televisions that enables consumers to navigate through and select television programs. In statements to securities analysts and the investing public, Gemstar repeatedly touted the IPG technology and IPG advertising revenues as the companys future and as the value driver of the companys stock, and downplayed expected declines in revenue from TV Guide magazine. When Gemstar announced for the first time that certain of its IPG licensing and advertising revenue may have been improperly recorded, its stock price declined by approximately 37%, causing a market loss in excess of $3 billion. On January 20, 2005, in a related proceeding, the court entered a consent judgment permanently enjoining Jonathan B. Orlick, a former deputy general counsel and senior vice president of Gemstar, from future violations or aiding and abetting violations of antifraud, reporting, books and records, and other violations of the federal securities laws. Orlick was also ordered to pay $150,000 in disgorgement, $5,510.62 in prejudgment interest, and a $150,000 penalty for his role in the financial fraud. Orlick also consented to a ten-year officer and director bar. In a related administrative action, Orlick agreed to be suspended from appearing or practicing before the Commission as an attorney. Orlick consented to the relief without admitting or denying the Commissions allegations. On February 8, 2006, the Commission announced that Elsie M.Leung, Gemstars former CFO, agreed to pay over $1.3M to settle the Commissions charges alleging that she participated in a scheme to defraud investors by inflating Gemstars licensing and advertising revenues. As part of the settlement, Leung, who also served as co-president, COO, and a member of the board of directors of Gemstar, will be permanently barred from serving as an officer or director of a public company. In addition, Leung consented to a Commission order barring her from appearing or practicing before the Commission as an accountant. Leung consented to the final judgment and Commission order without admitting or denying the allegations. SEC v. Tyco International Ltd. 21

Litigation Release No. 19657 (Apr. 17, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19657.htm On April 17, 2006 the Commission filed a settled civil injunctive action against Tyco International Ltd. The Commissions complaint alleged that, from 1996 through 2002, Tyco violated the federal securities laws by, among other things, utilizing various improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars. The Commissions complaint alleged that Tyco inflated its operating income by at least $500 million as a result of improper accounting practices related to some of the many acquisitions that Tyco engaged in during that time. The complaint further alleged that, apart from its acquisition activities, Tyco improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance and smooth its publicly reported results and to meet earnings forecasts. The complaint alleged that Tyco inflated its operating income by $567 million from its fiscal year 1998 through its fiscal quarter ended Dec. 31, 2002, by means of connection fees that Tycos ADT Security Services, Inc. subsidiary charged to dealers from whom it purchased security monitoring contracts. The complaint further alleged that, from September 1996 through early 2002, Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related party transactions of its former senior management. Tyco also incorrectly accounted for certain executive bonuses it paid in its fiscal years 2000 and 2001, thereby excluding from its operating expenses the costs associated with those bonuses. Finally, the complaint alleged that Tyco violated the antibribery provisions of the Foreign Corrupt Practices Act when employees or agents of its Earth Tech Brasil Ltda. subsidiary made payments to Brazilian officials for the purpose of obtaining or retaining business for Tyco. Between 1996 and 2002, as a result of these various practices, Tyco made false and misleading statements or omissions in its filings with the Commission and its public statements to investors and analysts. Without admitting or denying the allegations in the Commissions complaint, Tyco consented to the entry of a final judgment permanently enjoining it from violating the antifraud, proxy disclosure, periodic reporting, corporate recordkeeping, and antibribery provisions of the federal securities laws. The proposed final judgment also ordered Tyco to pay $1 in disgorgement and a $50 million civil penalty. The penalty amount, which was provisionally negotiated in 2005, was reviewed and approved by the Commission in light of the considerations set forth in Statement of the Securities and Exchange Commission Concerning Financial Penalties. SEC v. American International Group, Inc. Litigation Release No. 19560 (Feb. 9, 2006) http://www.sec.gov/litigation/litreleases/lr19560.htm SEC v. Ronald Ferguson, et al. 22

Litigation Release No. 19522 (Feb. 2, 2006) http://www.sec.gov/litigation/litreleases/lr19552.htm SEC v. John Houldsworth and Richard Napier Litigation Release No. 19248 (June 6, 2005) http://www.sec.gov/litigation/litreleases/lr19248.htm Litigation Release No. 19264 (June 10, 2005) http://www.sec.gov/litigation/litreleases/lr19264.htm On February 9, 2006, the Commission announced the filing and settlement of charges that American International Group, Inc. (AIG) committed securities fraud. The settlement is part of a global resolution of federal and state actions under which AIG will pay in excess of $1.6 billion to resolve claims related to improper accounting, bid rigging and practices involving workers compensation funds. On February 2, 2006, the Commission also filed an enforcement action against five former senior executives of General Re Corporation (Gen Re) and AIG for helping AIG mislead investors through the use of fraudulent reinsurance transactions. Four of the former executives, Ronald Ferguson, Elizabeth Monrad, Robert Graham and Christopher Garand, were with Gen Re, while the fifth, Christian Milton, was with AIG. As to the individual defendants, the Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company. The DOJ has also filed federal criminal charges against Ferguson, Monrad, Graham, and Milton. The Commission alleges that AIGs reinsurance transactions with Gen Re were designed to falsely inflate AIGs loss reserves by $500 million in order to quell analyst criticism that AIGs reserves had been declining. Specifically, the Commission alleges that AIG fraudulently improved its financial results by: 1) entering into two sham reinsurance transactions with Gen Re, between December 2000 and March 2001, that had no economic substance but were designed to allow AIG to improperly add a total of $500 million in phony loss reserves to its balance sheet in the fourth quarter of 2000 and the first quarter of 2001; 2) engaging in a transaction with Capco Reinsurance Company, Ltd. (Capco) in 2000 to conceal approximately $200 million in underwriting losses in its general insurance business by improperly converting them to capital (or investment) losses to make those losses less embarrassing to AIG; and 3) establishing Union Excess Reinsurance Company Ltd. (Union Excess), an offshore reinsurer, in 1991, to which it ultimately ceded approximately 50 reinsurance contracts for its own benefit. Although AIG controlled Union Excess, it improperly failed to consolidate Union Excesss financial results with its own, and in fact took steps to conceal its control over Union Excess from its auditors and regulators. Shortly after federal and state regulators contacted AIG about the Gen Re transaction, AIG commenced an internal investigation that eventually led to a restatement of its prior accounting for approximately 66 transactions or items. As a result of the restatement, AIG reduced its shareholders equity at December 31, 2004 by approximately $2.26 billion (or 2.7%). Without admitting or denying the allegations of the complaint, AIG has agreed to the entry of a Court order enjoining it from violating the antifraud, books and records, internal controls, and 23

periodic reporting provisions of the federal securities laws. The order requires AIG to pay a civil penalty of $100 million and disgorge ill-gotten gains of $700 million. AIG has also agreed to certain undertakings designed to assure the Commission that future transactions will be properly accounted for and that senior AIG officers and executives receive adequate training concerning their obligations under the federal securities laws. The settlement is subject to court approval and takes into consideration AIGs cooperation during the investigation and its remediation efforts in response to material weaknesses identified by its internal review. The Commission, in June 2005, had previously filed an enforcement action against John Houldsworth and Richard Napier, senior executives of Gen Re, for their role in the alleged fraud. In partial settlement of the Commissions claims, without admitting or denying the Commissions allegations, both Houldsworth and Napier consented to the entry of a partial final judgment which resolves all issues of liability against them but defers the determination of disgorgement and penalties until a later date. As part of their settlement, Houldsworth and Napier have agreed to cooperate fully with the Commission in its continuing investigation of this matter. In addition, the settlement enjoins both Houldsworth and Napier from future violations of the above provisions and imposes a permanent officer and director bar against Houldsworth and a five-year officer and director bar against Napier. Houldsworth has also agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant. In connection with the same conduct, both Napier and Houldsworth have also entered guilty pleas to criminal charges filed by the U.S. Department of Justice.

SEC v. Alan C. Goldsworthy, Walter T. Hilger, and Mark E. Sullivan Litigation Release No. 19521 (Jan. 4, 2006) http://www.sec.gov/litigation/litreleases/lr19521.htm On January 4, 2006, the Commission brought civil fraud charges against two former officers and a current executive of Applix, Inc., an Internet software company. The Commission alleged that former CEO Alan C. Goldsworthy, former CFO Walter T. Hilger, and Mark E. Sullivan, Applixs current Director of World-Wide Operations participated in two fraudulent revenue recognition schemes, causing Applix to report inflated revenue and understated net loss figures for the year ended December 31, 2001 and for the quarter ended June 30, 2002. The complaint alleges that the three defendants engaged in two separate schemes to inflate revenue reported in Applixs publicly-filed financial statements and heralded in press releases, despite knowing that Applix was prohibited from doing so under generally accepted accounting principles. By reporting this revenue, Applix was able to falsely trumpet a 74% improvement in Net Loss. The Commission alleges that Goldsworthy and Hilger both received bonuses based on the false ear-end revenue figures. On February 28, 2003, Applix announced that the company would restate its financial statements for the two periods involved and that Goldsworthy had resigned. Thereafter, on March 31, 2003, Applix filed its Form 10-K for the 24

year ended December 31, 2002, a restated Form 10-K for December 31, 2001, and restated Forms 10-Q for the first three quarters of 2002. Applix also filed a restated Form 8-K on April 4, 2003. In its complaint, the Commission requests that the court issue a final judgment permanently enjoining Goldsworthy, Hilger and Sullivan from violating or aiding and abetting violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws. The Commission also seeks disgorgement of the bonuses Goldsworthy and Hilger received based on the fraudulent financial statements. In addition, the Commissions complaint asks the court to impose civil monetary penalties and an order permanently barring the defendants from acting as officers or directors of any public company. In a related administrative proceeding, the Commission issued a settled Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 against Applix, Inc. The Order finds that Applix materially overstated net income in the two periodic reports and a registration statement filed with the Commission. Applix, while neither admitting nor denying the Orders findings, consented to the entry of the Order and agreed to undertakings, including the hiring of an independent Financial Policies Consultant to review the companys internal controls, board oversight and business practices.

SEC v. McAfee, Inc. Litigation Release No. 19520 (Jan. 4, 2006) http://www.sec.gov/litigation/litreleases/lr19520.htm On January 4, 2006, the Commission filed securities fraud charges against McAfee, Inc. (formerly known as Network Associates, Inc.), a Santa Clara, California-based manufacturer and supplier of computer security and antivirus tools. The Commission alleges that from the second quarter of 1998 through 2000, McAfee inflated its cumulative net revenues by $622 million and that, for 1998 alone, McAfee overstated revenues by $562 million (a misstatement of 131 percent). The Commission claims that McAfee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and Wall Street earnings estimates during the 1998 through 2000 period by using a variety of undisclosed ploys during the period to aggressively oversell its products to distributors in amounts that far exceeded the publics demand for the products, including: 1) engaging in channel stuffing by offering its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile McAfee products and then improperly recording the sales to distributors as revenue; 2) secretly paying distributors millions of dollars to hold the 25

excess inventory, rather than return it to McAfee for a refund and consequent reduction in McAfees revenues; and 3) using an undisclosed, wholly-owned subsidiary, Net Tools, Inc., to repurchase inventory that McAfee had oversold to its distributors. All of these actions were inconsistent with Generally Accepted Accounting Principles and led to McAfees October 2003 restatement of its financial results for 1997 through 2003. The complaint further alleges that McAfee took action to conceal the fraud from investors by wrongly recording in its books the payments and discounts that it offered to distributors, improperly manipulating reserve accounts to increase inadequate sales reserves and cover the costs of the distributor payments, and reporting false and materially misleading financial and other information in periodic reports, financial statements, and securities registration statements that McAfee filed with the Commission, in press releases, and in other public statements. Subject to court approval, McAfee has consented, without admitting or denying the allegations of the complaint, to the entry of a Court order: 1) enjoining it from violating federal securities laws; 2) requiring McAfee to pay a $50 million civil penalty, which the Commission will seek to distribute to harmed investors pursuant to the Fair Funds provision of the SarbanesOxley Act of 2002; and 3) appoint an Independent Consultant to examine and recommend improvements to McAfees internal accounting controls and revenue recognition and reserves practices to better ensure compliance with the federal securities laws.

SEC v. Charles C. Conaway and John T. McDonald, Jr. Litigation Release No. 19344 (Aug. 23, 2005) http://www.sec.gov/litigation/litreleases/lr19344.htm On August 23, 2005, the Commission filed charges against two former top Kmart executives for misleading investors about Kmarts financial condition in the months preceding the companys bankruptcy. According to the Commissions complaint, former Chief Executive Officer Charles C. Conaway and former Chief Financial Officer John T. McDonald are responsible for materially false and misleading disclosure about the companys liquidity and related matters in the Managements Discussion and Analysis (MD&A) section of Kmarts Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors. The Commission alleged that Conaway and McDonald failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the companys liquidity. For example, the MD&A disclosure attributed increases in inventory to seasonal inventory fluctuations and actions taken to improve our overall in-stock position. The Commission alleges that this disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officers reckless and unilateral purchase of $850 million of excess inventory. The Commission further alleged that the 26

defendants dealt with Kmarts liquidity problems by slowing down payments owed vendors, thereby withholding $570 million from them by the end of the third quarter. According to the complaint, Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmarts liquidity problems had on the companys relationship with its vendors, many of whom stopped shipping product to Kmart during the fall of 2001. Kmart filed for bankruptcy on Jan. 22, 2002. The Commission seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties and officer and director bars. SEC v. Fredrick S. Schiff and Richard J. Lane Litigation Release No. 19343 (Aug. 22, 2005) http://www.sec.gov/litigation/litreleases/lr19343.htm On August 22, 2005, the Commission announced the filing of a civil fraud action against Frederick S. Schiff and Richard J. Lane. The Commissions Complaint alleged that Schiff and Lane participated in a fraudulent earnings management scheme by Bristol-Myers Squibb Company to deceive the investing public about the true performance, profitability and growth trends of the Company and its U.S. medicines business. The Complaint alleged that from the first quarter of 2000 through the fourth quarter of 2001, at Schiff and Lanes direction, BristolMyers stuffed its distribution channels with excessive amounts of its pharmaceutical products ahead of demand to meet the Companys internal earnings targets and the consensus estimate of Wall Street securities analysts, and improperly recognized revenue from $1.5 billion of such sales to its two largest wholesalers. According to the Commissions Complaint, when BristolMyers results still fell short of its targets and the consensus estimate, at Schiffs direction, the Company used cookie jar reserves to further inflate its earnings. The Complaint also alleges that at Schiffs direction, and as a result of the channel-stuffing, Bristol-Myers also underaccrued for Medicaid and prime vendor rebate liabilities. As a result of its channel-stuffing and improper accounting measures, Bristol-Myers reported results that met or exceeded the consensus estimate every quarter during the scheme. The Complaint alleged that Schiff signed numerous periodic reports and registration statements in connection with a $5 billion securities offering in September 2001 that failed to disclose the scheme. Schiff and Lane also made misstatements in conference calls with securities analysts that concealed Bristol-Myers channel-stuffing activities and the extraordinary buildup in excess wholesaler inventory. The Commissions Complaint charged Schiff with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The Complaint charged Lane with violations of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rule 10b-5 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, 13a-13 thereunder. The Commissions Complaint also sought the entry of orders of permanent injunction, disgorgement, civil penalties and officer and director bars against Schiff and Lane.

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On August 4, 2004, Bristol-Myers settled the Commissions action against it by agreeing to pay $150 million dollars and perform numerous remedial undertakings, including the appointment of an independent adviser to review and monitor its accounting practices, financial reporting and internal controls. SEC v. Bernard J. Ebbers Litigation Release No. 19301 (July 13, 2005) http://www.sec.gov/litigation/litreleases/lr19301.htm On July 13, 2005, the Commission filed a civil fraud action against Bernard J. Ebbers, the former CEO of WorldCom, Inc. (now known as MCI, Inc.), for his role in the WorldCom fraud. The complaint alleged that Ebbers, along with other WorldCom senior officers, caused numerous fraudulent adjustments and entries in WorldComs books and records, often in the hundreds of millions of dollars, in furtherance of a scheme to make WorldComs publicly reported financial results appear to meet analysts expectations. The complaint further alleged that these market expectations were based, in some instances, on financial performance targets set by Ebbers that Ebbers knew could not be attained by legitimate means. In addition, the Commission alleged that Ebbers made numerous false and misleading public statements about WorldComs financial condition and performance, and signed multiple Commission filings that contained false and misleading material information. Ebbers has agreed to settle the matter by consenting, without admitting or denying the allegations in the Commissions complaint, to the entry of a final judgment enjoining him from violating the prohibition on lying to auditors and antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The Commissions action against Ebbers is its sixth civil enforcement action related to the WorldCom fraud. In a parallel criminal proceeding, Ebbers was found guilty of criminal charges on March 15, 2005 and later sentenced to 25 years in federal prison. Ebbers will be required to transfer substantially all of his assets either directly to the class in the private WorldCom Securities Class Action Litigation or to a liquidation trust that will be established to sell off his assets for the benefit of that class and WorldCom. SEC v. HealthSouth Corporation et al. Litigation Release No. 19280 (June 23, 2005) http://www.sec.gov/litigation/litreleases/lr19280.htm On June 22, 2005, a federal judge in Alabama entered a final judgment against HealthSouth Corporation. The Commissions complaint, filed on March 19, 2003 and amended April 3, 2003, alleged that shortly after the company became public in 1986, the company began to artificially inflate its earnings to meet analysts expectations and maintain the market price for HealthSouths stock and that since 1999, HealthSouth systematically overstated its earnings by at least $1.4 billion.

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The final judgment enjoins HealthSouth from violating antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The judgment will also require HealthSouth to pay a civil penalty of $100 million and disgorge $100, to pay the costs of any distribution of disgorgement and penalties to investors, and to comply with numerous undertakings. HealthSouth, in consenting to the judgment, neither admitted nor denied the allegations of the complaint. The Commission noted HealthSouths cooperation in this matter. The penalty amount will be distributed to defrauded investors. SEC v. Roys Poyiadjis, Lycourgos Kyprianou et al. Litigation Release No. 19259 (June 9, 2005) http://www.sec.gov/litigation/litreleases/lr19259.htm On June 9, 2005, the Commission announced that Roys Poyiadjis, a former CEO at AremisSoft Corporation, which was a software company with offices in New Jersey, London, Cyprus, and India, agreed to final resolution of fraud charges brought against him by the Commission in October 2001. In documents filed in federal district court, Poyiadjis consented to disgorge approximately $200 million of unlawful profit from his trading in AremisSoft stock among the largest recoveries the Commission has obtained from an individual. The disgorged funds are to be distributed to defrauded investors. The Commissions complaint, filed in the Southern District of New York, charged that AremisSoft, its co-chairmen and co-CEOs Poyiadjis and Lycourgos Kyprianou, made fraudulent statements in public filings and press releases. The complaint further alleged that Poyiadjis and Kyprianou, acting through offshore entities, engaged in massive insider trading during the period of the fraud, selling millions of shares of AremisSoft stock. Poyiadjis also agreed to a final judgment permanently enjoining him from future violations of antifraud, reporting, and other provisions of the federal securities laws and to a permanent officer and director bar. Poyiadjis consented without admitting or denying the allegations in the Commissions complaint. SEC v. Time Warner, Inc. Litigation Release No. 19147 (Mar. 21, 2005) http://www.sec.gov/litigation/litreleases/lr19147.htm In the Matter of James W. Barge, Pascal Desroches, and Wayne H. Pace Admin. Proc. File No. 3-11862 (Mar. 21, 2005) http://www.sec.gov/litigation/admin/34-51400.pdf On March 21, 2005, the Commission charged Time Warner Inc. (formerly known as AOL Time Warner) with materially overstating online advertising revenue and the number of its Internet subscribers, and with aiding and abetting three other securities frauds. The Commission also charged that the company violated a Commission cease-and-desist order issued against America Online, Inc. on May 15, 2000. The Commissions complaint alleged that, among other things, the company employed fraudulent round-trip transactions that boosted its online slow29

down, artificially inflated the number of AOL subscribers so it could report to the investment community that it had met its new subscriber targets, and failed to properly consolidate the financial results of AOL Europe in its financial statements. The Commission alleged that Time Warner violated antifraud, reporting, and books and records provisions of the federal securities laws. Without admitting or denying the allegations in the complaint, Time Warner consented to the entry of a judgment that, among other things, enjoins the company from violating these provisions and orders it to pay $300 million in civil penalties, which the Commission will request be distributed to harmed investors. As part of the settlement, Time Warner agreed to restate its historical financial results to reduce its reported online advertising revenues by approximately $500 million for the fourth quarter of 2000 through 2002 and to properly reflect the consolidation of AOL Europe in the companys 2000 and 2001 financial statements. In a separate administrative proceeding, the Commission charged Time Warner CFO Wayne H. Pace, controller James W. Barge, and deputy controller Pascal Desroches with causing reporting violations by the company. They consented, without admitting or denying the allegations, to the entry of a Commission cease-and-desist order that finds that they caused reporting violations by the company based on their roles in accounting for $400 million paid to the company by Bertelsmann AG in two sets of transactions. The order directs them to ceaseand-desist from any future violations of the reporting provisions of the federal securities laws.

CASES INVOLVING STOCK OPTION BACKDATING

SEC v. Brocade Communications Systems, Inc. Litigation Release No. 20137 (May 31, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20137.htm SEC v. Gregory L. Reyes, et al. Litigation Release No. 19768 (July 20, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19768.htm On May 31, 2007, the Commission announced the filing of a settled civil action against Brocade Communications Systems, Inc., a San Jose, California computer networking company, for falsifying its reported income from 1999 through 2004. Brocade agreed to pay a penalty of $7 million to settle the charges that it committed fraud through its former CEO and other former executives who repeatedly granted backdated stock options, misstated compensation expenses, and concealed the conduct by falsifying documents. The Commission's complaint alleged that Brocade's former CEO, President, and Chairman, Gregory L. Reyes, routinely provided extra compensation to employees by granting valuable "in-the-money" stock options for which a financial statement expense was required. In order to avoid reporting to investors the hundreds of millions of dollars in undisclosed compensation expenses, Brocade's former executives allegedly concealed the fact that the

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options had been granted "in-the-money" by creating records making it falsely appear that the options had been granted at a lower price on an earlier date. As the Commission alleged in its complaint against the Company, as well as its earlier complaint against Reyes and other former executives, Brocade backdated dozens of grants for tens of millions of stock options. Among other things, Brocade personnel are alleged to have backdated large option grants for prized new hires to dates before the employees had even interviewed at the Company, creating false paperwork to make it appear the employees had been hired months earlier. When the stock option abuses surfaced, Brocade's audit committee conducted a thorough investigation, resulting in the resignation of Reyes and the restatement of the Company's previously-reported income. Without admitting or denying the Commission's allegations, Brocade agreed to settle the charges by consenting to a permanent injunction against further violations of Section 17(a) of the Securities, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and payment of a civil monetary penalty of $7 million. On July 20, 2006, the Commission charged Reyes, as well as former Vice President of Human Resources Stephanie Jensen, and former CFO Antonio Canova, with fraud and other securities law violations; that action is ongoing. SEC v. Mercury Interactive, LLC (f/k/a Mercury Interactive Corporation), Amnon Landan, Sharlene Abrams, Douglas Smith, and Susan Skaer Litigation Release No. 20136 (May 31, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20136.htm On May 31, 2007, the Commission filed civil fraud charges against California-based software maker Mercury Interactive, LLC (formerly known as Mercury Interactive Corporation) and four former senior officers of Mercury -- former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer. The case against Mercury is settled and remains ongoing against the other defendants. The SEC's complaint alleged that from 1997 to 2002, Mercury, acting through Landan and at various times Abrams, Smith and Skaer, backdated the date on which stock options were granted to executives and employees. The backdating made it appear that the options were granted at times corresponding to low points of the closing price of the company's stock -despite the fact that the purported grant date bore no relation to when the grant was actually approved -- and resulted in artificially and fraudulently low exercise prices for those options. The senior officers used hindsight to select the purported grant dates of the options, backdating the grants by over four months and making the grants in-the-money from 44 cents to $60 on the date they were actually approved. The complaint alleged that from 1997 through 2005, the accounting consequences of these benefits were then concealed as Landan, and at various times Abrams, Smith, Skaer and others, caused Mercury to fail to record over $258 million in 31

compensation expenses and to provide false and misleading compensation disclosures to Mercury's shareholders in filings with the Commission. Mercury and the senior executives continued the backdating for years in spite of a specific change mandated and approved by shareholders in 1998 that required the exercise price of all employee options to be 100% of the fair market value of the company's stock on the grant date. The SEC alleged that the company backdated 45 different stock option grants to executives and employees, representing every grant made by the company to executives and employees during 1997 to April 2002. As alleged in the complaint, Skaer, or others at her direction, prepared false documentation memorializing the grants, including false written consents and meeting minutes. The complaint alleged that Landan, Abrams, Smith and Skaer each personally benefited by receiving backdated stock options that were in-the-money by, in the aggregate, millions of dollars through the fraudulent scheme. The complaint also alleged that from 1998 through 2001, Mercury, acting through Landan, Abrams and Skaer, fraudulently backdated the date of option exercises of certain senior Mercury officers. According to the complaint, senior executives were given preferential treatment and on multiple occasions were permitted to backdate the date of exercise of stock options with the company. The company concealed from its shareholders the benefits reaped by these executives by making fraudulent proxy disclosures relating to officer stock option exercises, while Landan, Abrams and Skaer also concealed the backdated exercises in Forms 4 filed with the Commission. In addition, the complaint alleged that during at least 1997 through 2001, Mercury, through Landan, Abrams and others, secretly managed the company's reported earnings per share ("EPS") to meet or exceed financial analyst expectations by manipulating the recognition of revenue and making fraudulent disclosures concerning its sales orders. According to the complaint, Mercury stopped the shipment of its products once revenue targets for a period had been achieved, pushing the recognition of the revenue into subsequent periods. Between 1998 and 2001, it is alleged that this practice allowed the company to shift material amounts of revenue between reporting periods (from between $35 million to approximately $182 million in revenues). The company concealed the effect of this stop-shipment practice from the public through fraudulent and misleading statements and omissions concerning the "backlog" of its product bookings. Landan and Abrams understood that the backlog of revenues was material information that was being concealed from analysts and investors. For example, a 1999 PowerPoint presentation by Abrams to Landan and others concerning the company's financial picture stated in a slide: "Our Hidden Backlog . . . What Any Analyst Would Love to Get Their Hands On!" Finally, the complaint alleged that during 1999 through 2005, at various times Abrams, Skaer, and others participated in the fraudulent structuring of loans for stock option exercises by overseas employees of the company in order to conceal the variable accounting consequences of those transactions, causing the company to fail to report approximately $24 million in required compensation expenses, which materially overstated the company's reported pre-tax earnings during this period. 32

Without admitting or denying the SEC's allegations, Mercury agreed to pay a $28 million civil penalty to settle the Commission's charges. Mercury also agreed to an injunction that permanently enjoins it from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9. The complaint alleged that Landan, Abrams, Smith and Skaer violated or aided and abetted violations of the antifraud, record-keeping, financial reporting, internal controls, equity transaction reporting and proxy provisions of the federal securities laws. The complaint also alleged that Landan and Smith violated Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 that were false and misleading concerning Mercury's 2002 through 2005 periodic reports. The SEC's complaint sought against each of the individuals permanent injunctions, disgorgement with prejudgment interest, civil monetary penalties and officer and director bars. In addition, the complaint sought against Landan and Smith reimbursement of bonuses and profits from stock sales pursuant to Section 304 of the Sarbanes-Oxley Act.

SEC v. Nancy R. Heinen and Fred D. Anderson (Apple, Inc.) Litigation Release No. 20086 (April 24, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20086.htm On April 24, 2007, the Commission filed charges against two former senior executives of Apple, Inc. in a matter involving improper stock option backdating. The Commission accused former General Counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. The Commission also filed, and simultaneously settled, charges against former Apple Chief Financial Officer Fred D. Anderson, of Atherton, California, alleging that Anderson should have noticed Heinen's efforts to backdate the Executive Team grant but failed to take steps to ensure that Apple's financial statements were correct. According to the Commission's complaint, Apple granted 4.8 million options to six members of its executive team (including Heinen and Anderson) in February 2001. Because the options were in-the-money when granted (i.e. could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly-filed financial statements. The Commission alleged that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. Heinen was also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant. Anderson, who should have realized the implications of Heinen's actions, failed to disclose key information to Apple's auditors and neglected to ensure that the company's financial statements were accurate. It is alleged that both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating. 33

The Commission's complaint also alleged improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen as with the Executive Team grant allegedly caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleged that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleged that Heinen then signed fictitious Board minutes stating that the Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" a meeting that, in fact, never occurred. Heinen was charged with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1, 13b2-2, and 16a-3 thereunder, and Heinen was charged with aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. The Commission sought injunctive relief, disgorgement, and civil money penalties against Heinen, in addition to an order barring her from serving as an officer or director of a public company. Anderson, without admitting or denying the allegations in the Commission's complaint, agreed to a permanent injunction from further violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 16(a) of the Securities Exchange Act of 1934 and Rules 13b2-2 and 16a-3 thereunder, and from aiding and abetting further violations of Section 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. Anderson also will disgorge $2,953,125 in ill-gotten gains, plus prejudgment interest of $528,107.86 and will pay a civil monetary penalty of $150,000. SEC v. Jacob (Kobi) Alexander, David Kreinberg, and William F. Sorin Litigation Release No. 19964 (Jan. 10, 2007) http://www.sec.gov/litigation/litreleases/2007/lr19964.htm Litigation Release No. 19878 (Oct. 24, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19878.htm Litigation Release No. 19796 (Aug. 9, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19796.htm On August 9, 2006, the Commission filed a civil injunctive action in the United States District Court for the Eastern District of New York against Jacob Kobi Alexander, the cofounder and former Chairman and Chief Executive Officer of Comverse Technology, Inc. (Comverse), David Kreinberg, Comverses former Chief Financial Officer, and William F. Sorin, Comverses former General and Senior General Counsel, and a former Comverse director, alleging that they engaged in a decade-long fraudulent scheme to grant undisclosed, in-themoney options to themselves and to others by backdating stock option grants to coincide with historically low closing prices of Comverse common stock. In addition, the Complaint alleged that Alexander and Kreinberg created a slush fund of backdated options by causing options to be granted to fictitious employees and, later, used these options, some of which were made 34

immediately exercisable, to recruit and retain key personnel. The Complaint alleged that as part of the scheme, the former executives made material misrepresentations to Comverse investors regarding Comverses stock option grants and concealed from investors that Comverse had not recorded compensation expenses for option grants. As a result, Comverse materially overstated its net income and earnings per share between 1991 and at least 2002. As a result of the scheme, Alexander, Kreinberg, and Sorin received undisclosed, in-themoney options which had an immediate intrinsic gain because the exercise price of the option was lower than the market price of the underlying common stock on the date of the grant. Alexander realized actual gains of nearly $138 million from sales of stock underlying the exercises of backdated options that were granted during the 1991 to 2001 period. At least $6.4 million of this gain represents the in-the-money portion of the options at the time of the grant to Alexander. Kreinberg realized an actual gain of nearly $13 million from the sales of stock underlying the exercises of backdated options granted during the 1994 to 2001 period, with at least $1 million of this gain representing the in-the-money portion of the options at the time of the grant to Kreinberg. Sorin realized an actual gain of more than $14 million from the sales of stock underlying the exercises of backdated options granted during the 1991 to 2001 period, with approximately $1 million of this gain representing the in-the-money portion of the options at the time of the grant to Sorin. From fiscal year 2001 to 2002, Kreinberg, with Sorins knowledge, initiated a similar backdating scheme at Ulticom, Inc., a publicly-traded, majority-owned subsidiary of Comverse. The Commission is seeking permanent injunctions, officer and director bars, disgorgement with prejudgment interest, and civil money penalties. Without admitting or denying the allegations of the Commission's complaint, on October 24, 2006, Kreinberg consented to the entry of a final judgment permanently enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, false statements to auditors, Sarbanes-Oxley certification, and securities ownership reporting provisions of the federal securities laws. He is required to pay $1,769,255.80 in disgorgement, of which $989,434.00 represents the "in-the-money" benefit from exercises of backdated option grants. In addition, Kreinberg will pay $625,661.88 in prejudgment interest on the full disgorgement amount, for a total of $2,394,917.68. As part of the settlement, Kreinberg also has agreed to cooperate in the Commission's ongoing litigation. The settlement is subject to the approval of the United States District Court for the Eastern District of New York. In a separate matter also filed on October 24, 2006, in the United States District Court for the Eastern District of New York, Kreinberg pled guilty to one criminal count of conspiracy to commit securities fraud, mail fraud, and wire fraud, and one criminal count of securities fraud. On January 10, 2007, the Commission settled civil charges against William F. Sorin. Without admitting or denying the Commissions allegations, Sorin consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(b)(5), 14(a), and 16(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1, 13b2-2, 14a-9, and 16a-3 thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Sorin further agreed to refrain from acting as an 35

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. Pursuant to the order, Sorin is required to pay $1,670,915.03 in disgorgement. In addition, Sorin will pay $817,509.07 in prejudgment interest thereon, and a $600,000 civil penalty, for a total of $3,088,424.10. Sorin, consented to the entry of an administrative order, pursuant to Rule 102(e)(3) of the Commissions Rules of Practice, suspending him from appearing or practicing before the Commission as an attorney. The settlement is subject to the approval of the United States District Court for the Eastern District of New York. In a separate matter filed in the Eastern District of New York on November 2, 2006, Sorin pleaded guilty to one criminal count of conspiracy to commit securities fraud, mail fraud and wire fraud. The plea was the result of an agreement between Sorin and the United States Attorneys Office for the Eastern District of New York.

CASES INVOLVING REGULATION FD

SEC v. Flowserve Corporation and C. Scott Greer Litigation Release No. 19154 (Mar. 24, 2005) http://www.sec.gov/litigation/litreleases/lr19154.htm In the Matter of Flowserve Corporation, C. Scott Greer, and Michael Conley Admin. Proc. File No. 3-11872 (Mar. 24, 2005) http://www.sec.gov/litigation/admin/34-51427.pdf On March 24, 2005, the Commission charged Flowserve Corporation, a manufacturer of precision-engineered flow control equipment, with violating Regulation FD and reporting provisions of the federal securities laws. The Commission also charged its CEO, C. Scott Greer, and director of investor relations, Michael Conley, with causing Flowserves violations. Regulation FD prohibits issuers from selectively disclosing material nonpublic information to certain personssecurities analysts, broker-dealers, investment advisers, and institutional investorsbefore disclosing the same information to the public. This is the first Regulation FD case filed by the Commission involving a reaffirmation of earnings by an issuer and the first settled enforcement action against a director of investor relations for violating this rule. According to the Commissions order, Flowserve violated Regulation FD when, in a private meeting with analysts near the end of a reporting period, the company reaffirmed its previous earnings guidance. On November 19, 2002, forty-two days before the end of Flowserves fiscal year, Greer, along with Conley, met privately with analysts. At that meeting, one of the analysts asked about the Companys earnings guidance for the year. In response to the question, Greer reaffirmed the previous public guidance, which had been issued on Oct. 22, 2002, and thus provided additional material nonpublic information.

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On Nov. 20, 2002, an analyst who attended the meeting issued a report stating that Flowserve had reaffirmed its earnings guidance. The next day, on November 21, Flowserves closing stock price was approximately 6% higher than the closing price the day before, and volume increased 75%. After the market closed on November 21, Flowserve furnished a Form 8-K to the Commission acknowledging that it had reaffirmed its full year 2002 estimated earnings per share. Without admitting or denying the Commissions allegations and findings, Flowserve and Greer consented to the entry of a final judgment by the federal court that would require them to pay civil penalties of $350,000 and $50,000 respectively. Flowserve, Greer and Conley also consented to the Commissions issuance of a cease-and-desist order.

CASES INVOLVING ACCOUNTANTS AND AUDITORS

In the Matter of Clete D. Madden, CPA, and David L. Huffman, CPA Admin. Proc. File No. 3-12252 (Mar. 30, 2006) http://www.sec.gov/litigation/admin/34-53574.pdf In the Matter of Aron R. Carr, CPA Admin. Proc. File No. 3-12251 (Mar. 30, 2006) http://www.sec.gov/litigation/admin/34-53573.pdf On March 30, 2006 the Commission announced settled administrative actions finding improper professional conduct by a former KPMG engagement partner, a senior manager, and a manager for failing to properly complete the audit of Tenet Healthcare Corporations fiscal year 2002 financial statements and for making after-the-fact modifications to the audit working papers, which created the false impression that the audit had been adequately performed. The Commission found that the improper modifications included adding substantive comments to the working papers, backdating documents, and creating audit documentation after the fact. In all, the audit team spent over 500 hours altering more than 350 working papers. The audit team continued to alter the 2002 working papers even after receiving a Commission subpoena in July 2003. The Commissions orders charged Clete D. Madden, the KPMG partner in charge of the Tenet audit; David L. Huffman, the KPMG senior manager on the Tenet audit; and Aron R. Carr, a former KPMG manager. The Commissions orders found that Madden, Huffman, and Carr engaged in improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commissions Rules of Practice by failing to complete the 2002 audit before the issuance of the audit report and by modifying working papers after the issuance of the audit report. The orders also found that Madden and Huffman engaged in repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards that indicate a lack of competence to practice before the Commission. Further, by modifying the working papers after learning about the government investigations into Tenet, all three former auditors engaged in highly unreasonable conduct in circumstances in which they knew, or should have known, that heightened scrutiny was warranted.

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Without admitting or denying the Commissions findings, Madden, Huffman, and Carr settled the SECs charges by agreeing to be denied the privilege of appearing or practicing before the Commission as accountants. The orders provided that Huffman may apply for reinstatement after four years while Carr may apply for reinstatement after three years.

SEC v. KPMG LLP Litigation Release No. 19573 (Feb. 22, 2006) http://www.sec.gov/litigation/litreleases/lr19573.htm SEC v. KPMG LLP, et al. Litigation Release No. 19418 (Oct. 6, 2005) http://www.sec.gov/litigation/litreleases/lr19418.htm SEC v. KPMG LLP Litigation Release No. 19191 (Apr. 19, 2005) http://www.sec.gov/litigation/litreleases/lr19191.htm In the Matter of KPMG LLP Admin. Proc. File No. 3-11905 (Apr. 19, 2005) http://www.sec.gov/litigation/admin/34-51574.pdf On February 22, 2006, the Commission announced that the four remaining defendants in an action brought against them and KPMG LLP (KPMG) in connection with a $1.2 billion fraudulent earnings manipulation scheme by the Xerox Corporation from 1997 through 2000 have agreed to settle the charges against them. Without admitting or denying the SECs allegations or findings, Ronald Safran, the KPMG engagement partner on the Xerox audit for 1998 and 1999; Michael Conway, the senior engagement partner on the Xerox audit for 2000; Anthony Dolanski, the engagement partner on the Xerox audit for 1997; and Thomas Yoho, the SEC concurring review partner for KPMG on the Xerox engagement from 1997-2000, agreed to the entry of final judgments against them. The latest settlements relate to Xeroxs fraudulent scheme that involved various manipulations of accounting for leases of Xerox office equipment. The Commission alleged that the manipulations were necessary for Xerox to meet promises it made to Wall Street that its earnings would continue to grow by clos[ing] the gap between its actual performance and what it promised analysts. KPMG, as Xeroxs independent auditor each of those years, issued unqualified audit reports asserting that Xeroxs financial statements were consistent with Generally Accepted Accounting Principles (GAAP) and that KPMG had conducted an audit each year in accordance with Generally Accepted Auditing Standards (GAAS). The 38

Commission further alleged that these statements were materially false and misleading and aided and abetted Xeroxs filing of false financial reports with the Commission. When Xerox retained new auditors in 2002, it restated $6.1 billion in equipment revenues and $1.9 billion in pre-tax earnings for 1997-2000. The Commission alleged that KPMG and its partners knew or should have known about the improper topside adjustments that resulted in $3 billion of the restated revenues and $1.2 billion of the restated earnings and failed to comply with GAAP. The final judgments, which are subject to approval by district court, order the engagement partners to pay civil penalties that are the largest penalties ever imposed by the Commission against an individual auditor: Safran and Conway must each pay a civil penalty in the amount of $150,000; Dolanski must pay a penalty in the amount of $100,000. All three are permanently enjoined from violating certain provisions of the federal securities laws and from aiding and abetting violations of other securities laws. Each engagement partner also consented to the issuance of an SEC Order based on the entry of the injunctions which will suspend them from appearing or practicing before the SEC as accountants. Safran will be suspended with a right to reapply in three years, Conway in two, and Dolanski in one. Yoho agreed to the entry of a Commission order imposing a censure pursuant to Rule 102(e) of the SECs Rules of Practice. The Commission previously announced settled enforcement proceedings against KPMG LLP, a KPMG relationship partner on the Xerox audit, Xerox and six former senior executives of Xerox, all in connection with the fraudulent manipulative accounting. The Commission obtained civil penalties and disgorgement in all of these actions in excess of $55 million. In the Matter of KPMG LLP, Gary Bentham, C.A., and John Gordon, C.A. Admin. Proc. File No. 3-11970 (June 30, 2005) http://www.sec.gov/litigation/admin/34-51946.pdf On June 30, 2005, the Commission instituted settled administrative proceedings against KPMG LLP (KPMG Canada), a Canadian audit firm, and two of its partners, Gary Bentham, the audit engagement partner, and John Gordon, the concurring and Commission reviewing partner. The Commissions order found that KPMG Canada, Bentham and Gordon lacked independence when they audited the 1999 through 2002 financial statements of Southwestern Water Exploration Co., a now-bankrupt Colorado corporation. KPMG Canada provided bookkeeping services to Southwestern and then audited its own work. Specifically, after KPMG Canada prepared certain of Southwesterns basic accounting records and financial statements, it issued purportedly independent audit reports on those financial statements. KPMG Canadas audit reports were included in Southwesterns annual reports that were filed with the Commission. The Commission found that KPMG Canada, Bentham and Gordon engaged in improper professional conduct by virtue of their violations of the auditor independence requirements imposed by the Commissions rules and guidance and by GAAS in the United States.

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KPMG Canada, without admitting or denying the Commissions findings, consented to the issuance of the order, which censured KPMG Canada and required it to make a number of remedial undertakings and pay $73,682 which represents its fees from the audit and bookkeeping services it performed for Southwestern plus prejudgment interest. In determining to accept KPMG Canadas offer of settlement, the Commission considered remedial acts promptly undertaken by KPMG Canada, cooperation afforded the Commission staff, and KPMG Canadas undertakings. Bentham and Gordon, without admitting or denying the Commissions findings, also agreed to settle the matter. The order bars Bentham from serving as an accountant for any publicly traded company for at least two years. Additionally, the order bars Gordon from serving as an accountant for any publicly traded company for at least nine months. In the Matter of Deloitte & Touche LLP, Steven H. Barry, CPA, and Karen T. Baker, CPA Admin. Proc. File No. 3-11911 (Apr. 26, 2005) http://www.sec.gov/litigation/admin/34-51607.pdf On April 26, 2005, the Commission instituted settled administrative proceedings against Deloitte & Touche LLP based upon its failed audit in 1999 of the fiscal 1998 financial statements of Just for Feet, Inc., a now-defunct shoe and sports apparel retailer, for which the firm received audit fees of approximately $361,000. The engagement partner, Steven H. Barry, CPA, and the audit manager, Karen T. Baker, CPA, were also charged. The order found that Just for Feet falsified its financial statements in numerous ways. These fraudulent financial statements were included in the companys annual report for fiscal 1998 and in two registration statements for the offering of securities filed with the Commission in 1999. The order finds that Deloitte, Barry, and Baker reasonably should have known that Just for Feets 1998 financial statements had not been prepared in accordance with GAAP. The order further found that Deloitte, Barry, and Baker did not comply with GAAS in the conduct of their audit and engaged in improper professional conduct through repeated instances of unreasonable conduct. Without admitting or denying the orders findings, Deloitte agreed to accept a censure and pay $375,000 to settle the charges, while Barry and Baker each consented to a bar from serving as an accountant for any publicly traded company. Barry can apply for reinstatement after two years; Baker can apply after one year. SEC v. Deloitte & Touche LLP Litigation Release No. 19202 (Apr. 26, 2005) http://www.sec.gov/litigation/litreleases/lr19202.htm In the Matter of Deloitte & Touche LLP Admin. Proc. File No. 3-11910 (Apr. 26, 2005) http://www.sec.gov/litigation/admin/34-51606.pdf

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On April 26, 2005, the Commission charged Deloitte & Touche LLP with engaging in improper professional conduct and causing Adelphias violations of reporting, books and records, and internal controls provisions of the federal securities laws because it failed to detect a massive fraud perpetrated by Adelphia and certain members of the Rigas family, who were officers and/or directors of Adelphia. According to the Commission, Deloitte failed to implement audit procedures designed to detect the illegal acts at Adelphia and failed to implement audit procedures designed to identify material related party transactions or related party transactions otherwise requiring disclosure. According to the Commission, Deloitte engaged in improper professional conduct by failing to act in accordance with GAAS and by failing to detect a massive fraud perpetrated by Adelphia and the Rigases. Even though Deloitte identified Adelphia as one of its highest risk clients, Deloitte failed to design an audit appropriately tailored to address audit risk areas that Deloitte had explicitly identified. Among other things, Adelphia understated its subsidiary debt by $1.6 billion, overstated equity by at least $368 million, improperly netted related party receivables and payables between Adelphia and related parties, and failed to disclose the extent of related party transactions. In settling the case filed in the Southern District of New York, Deloitte violated audit requirements of the federal securities laws. Deloitte has consented to the entry of an order requiring the firm to pay a civil money penalty of $25 million, which will be deposited into a fund to compensate victims of Adelphias fraud. In separate administrative proceedings, the Commission also censured Deloitte for improper professional conduct, and Deloitte agreed to pay an additional $25 million, which will also be deposited into a fund to compensate victims of Adelphias fraud. Deloitte also agreed in the administrative proceedings to substantive undertakings designed to address its audit of high-risk clients in the future. In the Matter of KPMG LLP Admin. Proc. File No. 3-11905 (Apr. 19, 2005) http://www.sec.gov/litigation/admin/34-51574.pdf On April 19, 2005, the Commission announced that KPMG LLP has agreed to settle the Commissions charges against it in connection with the audits of Xerox Corp. According to the Commission, from 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion gap between actual operating results and results reported to the investing public. The Commission alleges that Xerox used topside accounting actions at the end of financial reporting periods to increase equipment revenue and earnings through the improper acceleration of revenue from long term leases of Xerox copiers and through manipulation of excess or cookie jar reserves. Most of Xeroxs topside accounting actions violated GAAP and all of them inflated and distorted Xeroxs performance but were not disclosed to investors. These undisclosed actions overstated Xeroxs true equipment revenues by at least $3 billion and overstated its true earnings by approximately $1.5 billion during the four-year period.

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As part of the settlement, KPMG consented to the entry of a final judgment in the Commissions civil litigation against it in the Southern District of New York finding that it violated audit requirements of the federal securities laws. The final judgment orders KPMG to pay disgorgement of $9,800,000 (representing its audit fees for the 1997-2000 Xerox audits), prejudgment interest thereon in the amount of $2,675,000, and a $10,000,000 civil penalty, for a total payment of $22.475 million, and enjoins KPMG from future violations. In addition, the Commission entered an order finding that KPMG caused and willfully aided and abetted Xeroxs violations of antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The order also finds that KPMG violated its obligations to disclose to Xerox illegal acts that came to its attention during the Xerox audits. The order censures KPMG and orders it to cease and desist from committing or causing these violations. KPMG consented to the entry of the order without admitting or denying the Commissions findings.

CASES INVOLVING FOREIGN PAYMENTS

SEC v. Baker Hughes Incorporated and Roy Fearnley Litigation Release No. 20094 (April 26, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20094.htm On April 26, 2007, the Commission announced the filing of a settled enforcement action charging Baker Hughes Incorporated, a Houston, Texas-based global provider of oil field products and services, with violations of the Foreign Corrupt Practices Act (FCPA). In the same complaint, the SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. The action against Fearnley is ongoing. The SEC alleged that Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. Baker Hughes, the complaint alleged, paid one agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleged that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil. The SEC's complaint against Baker Hughes also alleged that between 1998 and 2005, Baker Hughes made payments in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records. In addition to violating the FCPA, certain of this conduct occurred after

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September 12, 2001, and consequently violated the Commission's 2001 cease-and-desist Order. In the Matter of Baker Hughes Incorporated, Admin. Proc. No. 3-10572 (September 12, 2001). Without admitting or denying the SECs allegations, Baker Hughes consented to the entry of a final judgment permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934. Baker Hughes also agreed to disgorge $19,944,778, and to pay prejudgment interest thereon in the amount of $3,133,237.41, and to pay $10,000,000 as a civil penalty for the company's violations of the prior Commission cease-and-desist Order. Under the terms of the final judgment, Baker Hughes will also retain an independent consultant to review the company's FCPA compliance and procedures. The Commission also filed, in the same complaint, a contested action against Roy Fearnley, a former business development manager for Baker Hughes, seeking to permanently enjoin Fearnley from alleged violations of Sections 30A and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and aiding and abetting Baker Hughes' violations of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and seeking disgorgement, prejudgment interest and civil penalties. In a related criminal proceeding, the United States Department of Justice filed criminal FCPA charges against Baker Hughes and its wholly-owned subsidiary Baker Hughes Services International, Inc., with an office in Atyrau, Kazakhstan. Baker Hughes Services International, Inc. agreed to plead guilty to one count of violating the anti-bribery provisions of the FCPA, one count of aiding and abetting the falsification of the books and records of Baker Hughes, and one count of conspiracy to violate the FCPA, and to pay a criminal fine of $11 million. The Department of Justice also entered into an agreement with Baker Hughes to defer prosecution for two years on charges of violating the anti-bribery and books and records provisions of the FCPA. Under the agreement, the company will retain for a period of three years a monitor to review and assess the company's compliance program and monitor its implementation of and compliance with new internal policies and procedures. In the Matter of Schnitzer Steel Industries, Inc. Admin Proc. File No. 3-12456 (Oct. 16, 2006) http://www.sec.gov/litigation/admin/2006/34-54606.pdf On October 16, 2006, the Commission instituted settled administrative cease-and-desist proceedings against Schnitzer Steel Industries, Inc., an Oregon-based steel company that sells scrap metal. In the order, the Commission alleges that from at least 1999 through 2004, Schnitzer paid cash kickbacks or made gifts to managers of government-controlled steel mills in China to induce those managers to purchase scrap metal from Schnitzer. Schnitzer made the payments on its own behalf and as a broker for Japanese steel companies. Schnitzer also paid bribes to managers of private steel mills in China and South Korea, and improperly concealed those payments in its books and records. The Commission alleges that Schnitzer made or authorized the making of illegal payments to foreign officials in violation of Section 30A of the Exchange Act. The Commission 43

also alleges that Schnitzer violated Section 13(b)(2)(A) by improperly recording in its books and records payments it made in the transactions involving its subsidiary in Korea. Finally, Schnitzer allegedly violated Section 13(b)(2)(B) by failing to devise and maintain an effective system of internal controls to prevent and detect violations of the Foreign Corrupt Practices Act. Without admitting or denying the allegations, Schnitzer consented to the Commissions order to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B), and 30A of the Exchange Act. The Commission further ordered Schnitzer to pay disgorgement of $6,279,095 and prejudgment interest of $1,446,106. Schnitzer also agreed to certain undertakings including the retention of a compliance consultant for three years to review and evaluate Schnitzers internal controls, record-keeping, and financial reporting policies and procedures as they relate to Schnitzers compliance with the FCPA. SEC v. Statoil, ASA Admin. Proc. File No. 3-12453 (Oct. 13, 2006) http://www.sec.gov/litigation/admin/2006/34-54599.pdf On October 13, 2006, the Commission announced the institution of a settled enforcement action against Statoil, ASA, a Norway-based and New York Stock Exchange listed multinational oil company, for violations of the Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign government officials. The Commission's Order finds that Statoil paid bribes to an Iranian government official in return for his influence to assist Statoil in obtaining a contract to develop a significant oil and gas field in Iran and to open doors to additional projects in the Iranian oil and gas industry. In June 2002 and January 2003, Statoil paid bribes to an Iranian government official intending to (i) induce the Iranian Official to use his influence with the Iranian state-run oil company; (ii) influence the Iranian state-run oil company's decision about whether to award Statoil a development contract; and (iii) secure improper advantage for Statoil by positioning it to obtain future business in Iran, potentially worth hundreds of millions of dollars. Statoil agreed to pay the Iranian official through a vaguely defined consulting contract with an offshore intermediary company organized in Turks and Caicos and owned by a third party located in London, England. The consulting contract obligated Statoil to make initial payments of $200,000 and $5 million, and ten subsequent annual payments of $1 million each. Statoil made the initial payments of $5.2 million to the Iranian official, but in June 2003, Statoil suspended further payments. In return for the payments, the Iranian official used his influence to assist Statoil in obtaining business in Iran by, for example, providing Statoil employees in Iran nonpublic information concerning oil and gas projects in Iran and showing Statoil copies of bid documents of competing companies that were otherwise not available to Statoil. In October 2002, Statoil obtained the contract to develop a significant oil and gas field. During the relevant time period, Statoil employees circumvented Statoil's internal controls and procedures that were in place to prevent illegal payments, and Statoil lacked sufficient internal controls. In addition, by mischaracterizing the payments as legitimate consulting fees, Statoil violated the books and records provisions of the federal securities laws.

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Without admitting or denying the Commission's allegations, Statoil consented to entry of an administrative Order that requires Statoil to pay disgorgement of $10.5 million. The Order also requires Statoil to cease and desist from committing violations of the antibribery, internal controls and books and records provisions of the FCPA and to retain an independent compliance consultant to review and report on Statoil's compliance with the FCPA. Statoil cooperated with the Commission's investigation and took a number of remedial steps as outlined in the Commission's Order. In a related criminal proceeding, Statoil has agreed to pay a criminal penalty of $10.5 million pursuant to a deferred prosecution agreement with the United States Department of Justice and the United States Attorney's Office for the Southern District of New York. Three million of the $10.5 million penalty is deemed satisfied by a penalty previously paid to the Norwegian criminal authorities. In the Matter of Oil States International, Inc. Admin. Proc. File No. 3-12280 (Apr. 27, 2006) http://www.sec.gov/litigation/admin/2006/34-53732.pdf On April 26, 2006 the Commission issued an Order against Oil States International, Inc., a specialty provider to oil and gas drilling and production companies. The Order found that Oil States violated the books-and-records and internal controls provisions of the Foreign Corrupt Practices Act, and ordered Oil States to cease and desist from such violations. Without admitting or denying the findings in the Order, Oil States consented to the entry of the Order. The Order found that from December 2003 to November 2004, Oil States, through certain employees of its wholly-owned subsidiary Hydraulic Well Control (HWC), provided approximately $348,350 in improper payments to employees of Petrleos de Venezuela, S.A. (PDVSA), an energy company owned by the government of Venezuela. In December 2003, a consultant for HWC was approached by three employees of PDVSA about a proposed kickback scheme. The PDVSA employees proposed that the consultant submit inflated bills to HWC for his services and kickback the excess to the PDVSA employees. At the same time, HWC would improperly bill PDVSA for services on jobs. If HWC did not comply with the proposed scheme, the PDVSA employees were capable of stopping or delaying HWCs work. After learning of the proposed scheme from the consultant, three HWC Venezuela employees acceded to and facilitated the improper activity. The consultant provided inflated invoices for his services and other documents inaccurately reflecting the services billable to PDVSA. HWC employees incorporated these documents into HWCs books and records and HWC passed on an undetermined amount of the improper payments in inflated invoices to PDVSA. In the Matter of Diagnostic Products Corporation Admin. Proc. File No. 3-11933 (May 20, 2005) http://www.sec.gov/litigation/admin/34-51724.pdf On May 20, 2005, the Commission instituted an Order against Diagnostic Products Corporation, a medical equipment company. The Order found that Diagnostic Products violated the anti-bribery, books-and-records, and internal controls provisions of the Foreign Corrupt Practices Act, and ordered Diagnostic Products to cease and desist from such violations, pay 45

$2,038,727 in disgorgement and $749,895 in prejudgment interest, and retain an independent consultant to review and report on its compliance with FCPA policies and procedures for three years. Without admitting or denying the findings in the Order, Diagnostic Products consented to the entry of the Order. The Order finds that, from 1991 through 2002, Diagnostic Products, through DePu Biotechnological & Medical Products Inc., its wholly-owned subsidiary in China, made improper commission payments totaling approximately $1.6 million to doctors and other individuals employed by hospitals which are owned by Chinese governmental authorities. The illegal payments were made with the purpose and effect of obtaining or retaining business with these hospitals, and were made with the knowledge and approval of senior officers of DePu. DePu improperly recorded the illegal payments as legitimate sales expenses in its books and records. In addition, during the relevant period, Diagnostic Products did not have effective internal accounting controls to prevent or detect FCPA violations. SEC v. The Titan Corporation Litigation Release No. 19107 (March 1, 2005) http://www.sec.gov/litigation/litreleases/lr19107.htm Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and the Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability Release No. 51283 (March 1, 2005) http://www.sec.gov/litigation/investreport/34-51238.htm On March 1, 2005, the Commission announced the filing of a settled enforcement action charging The Titan Corporation, a San Diego based military intelligence and communications company, with violating the anti-bribery, internal controls and books and records provisions of the Foreign Corrupt Practices Act (FCPA). The Commissions complaint alleges, among other things, that from 1999 to 2001, Titan paid more than $3.5 million to its agent in Benin, Africa, who was known at the time by Titan to be the business advisor of Benins president. In 2001, Titan funneled approximately $2 million towards the election campaign of Benins thenincumbent President. Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain an increase in the percentage of project management fees for it. The Commission also issued a Report of Investigation to provide guidance concerning potential liability under the antifraud and proxy provisions of the federal securities laws for publication of materially false or misleading disclosures regarding provisions in merger and other contractual agreements. The Report of Investigation states, among other things, that Titan affirmatively represented in a merger agreement with Lockheed Martin Corporation, dated September 15, 2003, that to its knowledge, neither the company nor any of its Subsidiaries, nor any director, officer, agent or employee of the Company or any of its Subsidiaries, has . . . taken any action which would cause the Company or any of its Subsidiaries to be in violation of the FCPA, which was disclosed in the proxy statement and the merger agreement. As the Report 46

highlights, when an issuer makes a public disclosure of information, the issuer is required to consider whether additional disclosure is necessary in order to put into context the information contained or incorporated in that publication so that such information is not misleading. The issuer cannot avoid this disclosure obligation simply because the information published was contained in an agreement or other document not prepared as a disclosure document. The Report also states that the Commission will consider bringing an action if it determines that the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted. Without admitting or denying the allegations in the complaint, Titan consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA and requiring it to pay approximately $15.5 million in disgorgement and prejudgment interest; pay a $13 million penalty, which will be deemed satisfied by Titans payment of criminal fines of that amount in parallel proceedings brought by the U.S. Attorneys Office for the Southern District of California and the U.S. Department of Justice, Fraud Section; and retain an independent consultant to review the companys FCPA compliance and procedures and to adopt and implement the consultants recommendations.

CASES INVOLVING BROKER-DEALERS

In the Matter of Morgan Stanley & Co. Incorporated Admin. Proc. File No. 3-12631 (May 9, 2007) http://www.sec.gov/litigation/admin/2007/34-55726.pdf On May 9, 2007, the Commission announced settled fraud charges against Morgan Stanley & Co. Incorporated (Morgan Stanley) for its failure to provide best execution to certain retail orders for over-the-counter (OTC) securities. In particular, Morgan Stanley allegedly embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation. Morgan Stanley will pay $7,957,200 in disgorgement and penalties to settle the Commission's charges. All of Morgan Stanley's revenue from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan. The Commission found that from Oct. 24, 2001, through Dec. 8, 2004, Morgan Stanley, a registered broker-dealer, failed to seek to obtain best execution for certain orders for OTC securities placed by retail customers of Morgan Stanley, Morgan Stanley DW, Inc. and third party broker-dealers that routed orders to Morgan Stanley for execution. As a result of this conduct, the Commission found that Morgan Stanley breached its duty of best execution with respect to these retail customers' orders. The Commission found that Morgan Stanley failed to provide best execution to more than 1.2 million executions valued at approximately $8 billion. The Commission also found that Morgan Stanley recognized revenue of $5,949,222 through its improper use of undisclosed mark-ups and mark-downs. As a result, Morgan Stanley willfully violated Section 15(c)(1)(A) of 47

the Securities Exchange Act of 1934, which prohibits broker-dealers from using manipulative, deceptive or fraudulent devices or contrivances to effect securities transactions. Without admitting or denying the Commission's findings, Morgan Stanley consented to the entry of an Order by the Commission that censured Morgan Stanley, and required it to cease and desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act. The Order also required Morgan Stanley to pay disgorgement of $5,949,222 and prejudgment interest thereon of $507,978, and imposed a civil money penalty of $1.5 million. Morgan Stanley also will retain an independent distribution consultant to develop and implement a distribution plan for the disgorgement ordered, and will retain an independent compliance consultant to conduct a comprehensive review and provide a report on its automated retail order handling practices. In the Matter of Banc of America Securities LLC Admin. Proc. File No. 3-12591 (March 14, 2007) http://www.sec.gov/litigation/admin/2007/34-55466.pdf On March 14, 2007, the Commission announced a settled enforcement action against Banc of America Securities LLC (BAS) for failing to safeguard its forthcoming research reports, including analyst upgrades and downgrades, and for issuing fraudulent research. The Commission's Order found that, from January 1999 through December 2001, BAS experienced a breakdown in its internal controls designed to detect and prevent the misuse of forthcoming research reports by the firm or its employees. BAS sales and trading employees learned of forthcoming research changes, including upgrades and downgrades, on multiple occasions during the period. At the same time, BAS did not provide clear or effective policies and procedures regarding the handling or control of such information. As a result, in at least two instances, BAS traded before research reports were issued. The Commission's Order also found that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts. These conflicts resulted in the publication of materially false and misleading research reports on Intel Corporation, TelCom Semiconductor, Inc., and E-Stamp Corp. In 2004, in connection with this investigation, the Commission censured BAS and ordered the firm to pay $10 million for failing to produce documents and engaging in dilatory tactics. This settled enforcement action ended the Commission's investigation. The Order issued found that BAS willfully violated Sections 15(f) and 15(c) of the Securities Exchange Act of 1934. The Commission censured the firm and ordered it to cease and desist from committing or causing violations or future violations of those provisions of the securities laws. Under the terms of the settlement, BAS will pay $26 million in disgorgement and penalties, which will be put into a Fair Fund to benefit customers of the firm. BAS will retain an independent consultant to conduct a comprehensive review of the firm's internal controls to prevent the misuse of material nonpublic information concerning forthcoming BAS research. The firm also agreed to certify that it has implemented structural and other reforms of its investment banking and research departments to bolster the integrity of the firm's equity 48

research. BAS consented to the entry of the Order without admitting or denying the Commission's findings. In the Matter of Goldman Sachs Execution & Clearing, L.P. f/k/a Spear, Leeds & Kellogg, L.P. Admin. Proc. File No. 3-12590 (March 14, 2007) http://www.sec.gov/litigation/admin/2007/34-55465.pdf On March 14, 2007, the Commission and the NYSE Regulation, Inc. settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from an illegal trading scheme carried out by customers through their accounts at the firm. The SEC Order and the NYSE's Decision alleged that Goldman's customers carried out the illegal short-selling scheme by placing their orders to sell through the firm's REDI System - Goldman's direct market access, automated trading system and falsely marking the orders "long." Relying solely on the way its customers marked their orders, Goldman executed the transactions as long sales. In addition, because the customers had sold the securities short and did not have the securities at settlement date, Goldman delivered borrowed and proprietary securities to the brokers for the purchasers to settle the customers' purported "long" sales. Both the SEC Order and the NYSE Decision found that, as described in the Order and Decision, Goldman's exclusive reliance on its customers' representations that they owned the offered securities was unreasonable. The SEC's Order and the NYSE Decision against Goldman found that for more than two years, beginning in March 2000, the customers' pattern of trading and Goldman's own records reflected that they were selling the securities short in violation of Rule 105 and Rule 10a-1(a). The customers did not deliver to Goldman in time for settlement the securities they purported to sell long, but rather, had to borrow the securities from Goldman to settle all of their sales. Goldman's records also reflected that its customers covered their short positions with securities purchased in follow-on and secondary offerings after executing their sales. The Commission further found that had Goldman instituted and maintained procedures reasonably designed to detect these significant trading disparities, it could have discovered the pattern of unlawful trades by its customers. The SEC Order and NYSE Decision found that as a result of its failure to investigate the disparity between its customer's trading and the "long" designations on their sales orders, Goldman violated the Commission's short sale rules directly by allowing its customers to mark their orders "long" and lending them borrowed and proprietary securities to settle their sales. The order and decision also found that Goldman was a cause of its customers' violations of the short sale rules. The NYSE Decision further found that Goldman failed to reasonably supervise its business activities. The SEC Order and the NYSE Decision censured Goldman for its conduct and compelled the firm to pay $2 million in civil penalties and fines. The SEC Order also directed Goldman to cease and desist from committing or causing any violations or future violations of Section 10(a) of the Securities Exchange Act of 1934 and Rule 10a-1(a), thereunder, and Rules 200(g) and 49

203(a) of Regulation SHO. (Rules 200(g) and 203(a) of Regulation SHO replaced Rule 10a-1(d) and Rule 10a-2, respectively, in January 2005.) Goldman consented to the order and decision without admitting or denying the findings made by the SEC or the NYSE. The SEC previously brought a settled civil injunctive action against two of Goldman's customers who had engaged in the illegal short sales and who, pursuant to the settlement, paid over $1 million in disgorgement and civil penalties. In the Matter of Emanuel J. Friedman Admin. Proc. File No. 3-12537 (January 12, 2007) http://www.sec.gov/litigation/admin/2007/34-55104.pdf On January 12, 2007, the Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934 against Emanuel J. Friedman. The Order finds that on December 22, 2006, the District Court for the District of Columbia entered a final judgment by consent against Friedman permanently enjoining him from violations of Section 5 of the Securities Act of 1933 and, as a controlling person, from violations of Sections 10(b) and 15(f) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission alleges that in September and October 2001, Friedman, along with others, had responsibility for, actively participated in and directed or controlled the day-to-day management of Friedman, Billings, Ramssy & Co., Inc. (FBR). In particular, the Commission alleges that Friedman, among other things, was a member of FBRs underwriting committee, participated in meetings regarding the progress of investment banking transactions and supervised FBRs compliance and trading departments. Accordingly, the Commission alleges that Friedman was a controlling person of FBR pursuant to Section 20(a) of the Exchange Act. The Commission further alleges that Friedman, as a controlling person, is liable for the companys misuse of material nonpublic information in connection with a PIPE offering. The Commission also alleges that FBR and Friedman engaged in unregistered sales of CompuDyne securities. Based on the above, the Order bars Friedman from association in a supervisory capacity with any broker or dealer with a right to reapply after two years. Friedman consented to the issuance of the Order without admitting or denying the findings in the Order that set forth the allegations in the civil injunctive action. In the Matter of Friedman, Billings, Ramsey & Co., Inc. Administrative Proceeding No. 34-55105 (Jan. 12, 2007) http://www.sec.gov/litigation/admin/2006/33-8761.pdf On January 12, 2007, the Commission initiated administrative proceedings against Friedman, Billings, Ramsey & Co., Inc. FBR is Delaware broker-dealer registered with the Commission. The Commission alleges that in connection with a Private Investment in Public Equity (PIPE) offering by CompuDyne Corporation, FBR failed to establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material, 50

nonpublic information and, in violation of the antifraud provisions of the federal securities laws, improperly traded CompuDyne stock in its market making account while aware of material, nonpublic information concerning the CompuDyne PIPE offering. Despite having limited procedures intended to prevent information abuse, these procedures were not implemented with regard to the CompuDyne offering. FBR submitted an offer of settlement that the Commission accepted. FBR agreed to bear the costs of hiring an independent consultant to review its current procedures aimed at preventing information abuse. The consultant would fashion reasonable recommendations for policy implementation subject to agreement by FBR and review by the Commission. In the Matter of 1st Global Capital Corp. Admin. Proc. File No. 3-12479 (Nov. 15, 2006) http://www.sec.gov/litigation/admin/2006/34-54754.pdf On November 15, 2006, the Commission announced that 1st Global Capital Corp., a Dallas broker-dealer, will pay a $100,000 penalty and consent to findings that it made unsuitable recommendations and sales of units of tax-advantaged qualified tuition savings plans, commonly known as Section 529 College Savings Plans. The order issued by the Commission finds that between 2001 and 2004, 1st Global recommended and sold investments in 529 plan units without understanding and evaluating the comparative costs for its customers. The order also finds that 1st Global's supervisory procedures were inadequate to determine whether its recommendations of particular classes of 529 plan units were suitable to investors, and that, to the extent the firm had procedures, they were ineffectively implemented. The order provides illustrations of the effects of comparative 529 plan unit costs over an anticipated lengthy holding period. For example, one 1st Global customer invested $11,000 each for five-month old twins in Class C units of a popular 529 plan investment. If he had purchased Class A units in the same investment, his investment for each child would be worth an estimated $4,100, or 9%, more than the value of Class C units when the children reach college age, assuming 10% growth. The order also gives illustrations of the effects of unique 529 plan cost structures on comparative unit costs. The order finds that as a result of its conduct, 1st Global willfully violated Municipal Securities Rulemaking Board Rules G-17 and G-19, and Section 15B(c)(1) of the Securities Exchange Act of 1934, by making unsuitable recommendations in connection with the offer and sale of 529 plan investments. In addition to imposing a $100,000 penalty, the order censures 1st Global and requires it to cease-and-desist from committing or causing any violations of those provisions. 1st Global consented to the entry of the Commission's order without admitting or denying the Commission's findings.

SEC v. American-Amicable Life Insurance Company of Texas, et al. Litigation Release No. 19791 (Aug. 3, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19791.htm 51

On August 3, 2006, the Commission sued a Waco, Texas, insurance company and its affiliates for targeting American military personnel with a deceptive sales program that misleadingly suggested that investing in the companys product would make one a millionaire. Since 2000, approximately 57,000 members of the United States military services purchased the product. The vast majority earned little or nothing on their investment. The Commissions complaint charged affiliated entities American-Amicable Life Insurance Company of Texas, Pioneer American Insurance Company, and Pioneer Security Life Insurance Company (together, American-Amicable), all based in Waco, Texas, with securities law violations. American-Amicable agreed to settle the action by paying $10 million to the approximately 57,000 military personnel who invested in the product sold as an investment known as Horizon Life. The settlement is part of a global settlement of claims brought by the Commission, state insurance regulators led by the Georgia Department of Insurance and the Texas Department of Insurance, and the United States Attorneys Office for the Eastern District of Pennsylvania. The settlement with the other regulators will provide additional relief, which the other regulators value at approximately $60 million. In the agreed settlement, the company neither admitted nor denied the Commissions allegations. Pursuant to the settlement, American-Amicable will discontinue sales of Horizon Life and will terminate the deceptive sales program, which it called the Building Success system. Unlike insurance products legitimately offered to a wide range of potential buyers with a potential interest in the insurance features of those products, Horizon Life was targeted at military personnel who had little or no interest in insurance because they already were provided access to low-cost insurance sponsored by the government. Instead, American-Amicable represented Horizon Life to military personnel as a security and a wealth-creating investment. As a material element of its marketing, American-Amicable senior staff trained its sales agents to hold themselves out as financial advisers or financial coaches. Purporting to play that role, the sales agents then misled military personnel to believe they could become millionaires if they invested in Horizon Life. At the same time, the agents denigrated other investment alternatives, claiming that mutual funds, bank savings accounts and government bonds were not sensible investments compared to Horizon Life. Although the written materials ultimately provided to investors apparently accurately described the Horizon Life product, the companys deceptive sales pitch did not. Contrary to the representations, the overwhelming majority of military personnel who purchased Horizon Life earned little or nothing from their investment. The Commissions complaint charged American-Amicable with violating Sections 17(a)(2) and (3) of the Securities Act of 1933, an antifraud statute. Without admitting or denying the allegations, American-Amicable agreed to be enjoined from further violations of these provisions, and to pay disgorgement of $10 million, which will be distributed to the affected investors.

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In related matters, Georgia Insurance Commissioner John W. Oxendine and Texas Insurance Commissioner Mike Geeslin announced a multi-state settlement with AmericanAmicable alleging violations of state insurance and consumer protection laws, and U.S. Attorney Patrick L. Meehan of the Eastern District of Pennsylvania announced the filing of a complaint, settlement and proposed consent decree with American-Amicable alleging civil claims of wire and mail fraud. In the Matter of IFMG Securities, Inc. Admin. Proc. File No. 3-12365 (July 13, 2006) http://www.sec.gov/litigation/admin/2006/33-8720.pdf On July 13, 2006, the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-andDesist Order Pursuant to Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange Act against IFMG Securities, Inc., a registered broker-dealer, for failing to disclose adequately material information to its customers in the offer and sale of mutual fund shares and variable insurance products. The Commission simultaneously accepted IFMGs Offer of Settlement, in which it consented to the entry of the Order without admitting or denying the findings contained therein. The Order found that, from at least January 2000 through November 2003, IFMG gave preferred sales treatment to certain mutual fund complexes and variable insurance product issuers participating in its revenue sharing program (the Preferred Program) in exchange for revenue sharing payments. Five mutual fund families and between six and twelve insurers offering variable insurance products (the Preferred Families), at various times, participated in IFMGs Preferred Program. IFMG provided financial incentives to its registered representatives, including reducing the commission paid for the sale of products whose advisers or insurers did not participate in its Preferred Program, to sell funds from the Preferred Families over other funds. Preferred Families received other forms of preferential sales treatment including placement on a preferred list, prominent billing in new business presentations and enhanced access to its sales force. IFMG did not adequately disclose the existence of its Preferred Program, the receipt of revenue sharing payments pursuant to the Preferred Program or the potential conflicts of interest created by these payments. Based on the foregoing conduct, the Order censured IFMG and required it to pay $2,827,408 in disgorgement and prejudgment interest and civil penalties in the amount of $1 million. The Order also required IFMG to comply with certain undertakings including the retention of an independent consultant to conduct a comprehensive review of its revenue sharing program.

In the Matter of Morgan Stanley & Co. Incorporated & Morgan Stanley DW Inc. Admin. Proc. File No. 3-12342 (June 27, 2006) http://www.sec.gov/litigation/admin/2006/34-54047.pdf

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On June 27, 2006, the Commission issued an Order Instituting Proceedings Pursuant to Sections 15(b)(4) and 21C of the Exchange Act, and Sections 203(e) and 203(k) of the Advisers Act, Making Findings, and Imposing Cease-and-Desist Orders, Penalties, and Other Relief against Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc. The Order found that, for several years, Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., both of which are registered broker-dealers and investment advisers, failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information. The Order further finds that Morgan Stanleys failures resulted in violations of Section 15(f) of the Exchange Act and Section 204A of the Advisers Act. Based on the above, the Order censured Morgan Stanley, ordered it to cease and desist from committing or causing any violations and any future violations of Section 15(f) of the Exchange Act and Section 204A of the Advisers Act, ordered Morgan Stanley to pay a $10 million penalty, and to retain an independent consultant to review Morgan Stanleys policies and procedures. Morgan Stanley consented to the issuance of the Order without admitting or denying any of the Commissions findings. In the Matter of Bear, Stearns & Co., Inc., et al. Admin. Proc. File No. 3-12310 (May 31, 2006) http://www.sec.gov/litigation/admin/2006/33-8684.pdf On May 31, 2006, the Commission announced the institution of proceedings against 15 broker-dealer firms for engaging in violative practices in the $200 billion plus auction rate securities market. Auction rate securities are municipal bonds, corporate bonds or preferred stocks with interest rates or dividend yields that are periodically re-set through Dutch auctions. Simultaneously with the institution of the proceedings, the firms, which neither admit nor deny the findings in the order, consented to the entry of an SEC cease-and-desist order providing for censures, undertakings, and more than $13 million in penalties. The SEC, in determining the structure of the settlement and the size of the penalties, considered the amount of investor harm and the firms conduct in the investigation to be factors that mitigated the serious and widespread nature of the violations. In particular, the firms voluntarily disclosed the practices they engaged in to the SEC, upon the staffs request for information, which allowed the SEC to conserve resources. The SEC order found that, between January 2003 and June 2004, each firm engaged in one or more practices that were not adequately disclosed to investors, which constituted violations of the securities laws. Some of these practices had the effect of favoring certain customers over others, and some had the effect of favoring the issuer of the securities over customers, or vice versa. In addition, since the firms were under no obligation to guarantee against a failed auction, investors may not have been aware of the liquidity and credit risks associated with certain securities. By engaging in these practices, the firms violated Section 17(a)(2) of the Securities Act of 1933. In the Matter of Crowell, Weedon & Co. 54

Admin. Proc. File No. 3-12300 (May 22, 2006) http://www.sec.gov/litigation/admin/2006/34-53847.pdf On May 22, 2006, the Commission announced that it sanctioned broker-dealer Crowell, Weedon & Co. for failing to comply with the record-keeping provisions of the Bank Secrecy Act, as amended by the USA PATRIOT Act. This was the Commissions first-ever enforcement action under the USA PATRIOT Act, which seeks to protect the U.S. financial system from money laundering and terrorist financing by requiring broker-dealers to implement and document identity verification procedures for all new accounts. From October 2003 to at least late April 2004, Crowell, Weedon failed to document its actual customer identity verification procedures in its written customer identification program (CIP). During this period, the firm opened approximately 2,900 new accounts for customers. While Crowell, Weedon made an effort to verify the identities of customers, it did not take the steps specified in its anti-money laundering manual. Specifically, Crowell, Weedons antimoney laundering manual required it to both check photo identification and perform an independent verification through a public database. Instead, Crowell relied on its registered representatives to verify the customers identifications. By using materially different steps than those specified in its anti-money laundering manual, Crowell, Weedon failed to accurately document is actual procedures. Crowell, Weedon thus did not comply with the recordkeeping requirements of the Bank Secrecy Act and therefore violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8. Without admitting or denying any of the findings, Crowell, Weedon consented to the issuance of an order that it cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8. SEC v. Morgan Stanley & Co., Inc. Litigation Release No. 19693 (May 10, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19693.htm On May 10, 2006 the Commission filed a civil injunctive action against Morgan Stanley for failing to produce tens of thousands of e-mails during the Commissions IPO and Research Analyst investigations from Dec. 11, 2000, through at least July 2005. The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e-mails until 2005. Morgan Stanley also failed to produce responsive e-mails because it over-wrote back-up tapes. The complaint further alleged that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions, the unavailability of certain documents, and its efforts to preserve requested e-mail. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to timely produce its records and documents to the Commission. Despite Morgan Stanleys assertion in both the IPO and Research Analyst investigations that it had not retained any 1999 tapes that backed-up e-mail, numerous back-up tapes from 1999 55

existed and were located by Morgan Stanley beginning in May 2004. However, Morgan Stanley did not disclose its discovery of these tapes until late October 2004, after the Commission began investigating Morgan Stanleys e-mail production failures. Morgan Stanley also failed for months to produce e-mails sought in the Research Analyst investigation because it delayed loading millions of e-mails into its e-mail archive database and searching them for responsive emails. In addition, Morgan Stanley failed to produce responsive e-mails by over-writing back-up tapes after receiving Commission subpoenas and requests despite its repeated representations to the Commission and the staff that all over-writing had ceased in January 2001. Through at least December 2002, Morgan Stanleys continued over-writing destroyed at least two hundred thousand e-mails, including some e-mails that likely were responsive to the Commissions subpoenas and requests in the IPO and Research Analyst investigations. Morgan Stanley agreed to settle this matter. Without admitting or denying the allegations of the complaint, Morgan Stanley consented to a permanent injunction and payment of a $15 million civil penalty, $5 million of which will be paid to NASD and the New York Stock Exchange, Inc. in separate related proceedings. Morgan Stanley also agreed to adopt and implement policies, procedures and training focused on the preservation and production of email communications. It also will hire an independent consultant to review these reforms. In the Matter of The Bank of New York Admin. Proc. File No. 3-12269 (Apr. 24, 2006) http://www.sec.gov/litigation/admin/2006/34-53709.pdf On April 24, 2006, the Commission issued an Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Exchange Act against The Bank of New York (BNY), a bank and registered transfer agent. Without admitting or denying the Commissions findings, BNY consented to entry of the Order, which ordered BNY to cease and desist from violations of Section 17A(d) of the Exchange Act and Rule 17Ad-17 thereunder. In the Order, BNY also agreed to certain voluntary undertakings. The Commissions Order finds that BNY violated Section 17A(d) of the Exchange Act and Rule 17Ad-17 thereunder when it failed as a transfer agent to exercise reasonable care to ascertain the correct addresses of lost securityholders. The Order found that, from January 1998 to September 2004, BNY failed to classify certain securityholders as lost despite the return of undeliverable correspondence. As a result, BNY omitted approximately 14,159 securityholders from the required searches, and escheated approximately $11.5 million in assets belonging to those securityholders to various states. In addition, coding errors affecting BNYs system used for compiling lists of lost securityholders caused BNY to omit other eligible securityholders from searches. These securityholders were forced to pay third parties $743,112 in unnecessary fees to recover their lost assets. The Order found that BNY violated Section 17A(d) of the Exchange Act and Rule 17Ad17 thereunder. In addition to the cease-and-desist order, BNY agreed to repay securityholders

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the fees paid to third parties, and will pay those securityholders whose assets were escheated the greater of the value of the asset at the time of escheatment or the assets current value. In the Matter of INET ATS, Inc. Admin. Proc. File No. 3-53631 (Apr. 12, 2006) http://www.sec.gov/litigation/admin/2006/34-53631.pdf On April 10, 2006, the Commission announced an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 against INET ATS, Inc. This was the Commissions first enforcement action under Regulation ATS, a Commission rule that provides a framework for alternative trading systems. The Order found that between February 2002 and July 2003, an alternative trading system (ATS) operated by Instinet Corporation (Instinets ATS) violated the fair access provisions of Regulation ATS by permitting some subscribers to provide to their customers Instinet ATSs BookStream productwhich allowed a subscriber the ability to view the full depth of book data contained in the ATS bookwhile prohibiting or limiting other similarly situated subscribers from doing so. The fair access provisions require an ATS that meets certain threshold criteria to establish written standards for granting access to trading on its system and not unreasonably prohibit or limit access to services offered by the ATS by applying such standards in an unfair or discriminatory manner. The Order further found that Instinets ATS violated the reporting requirements of Regulation ATS by failing to disclose all grants, denials, or limitation of access on its Form ATS-R. Based on the above, the Order required INET ATS, Inc. (INET), the successor entity to Instinets ATS, to pay a $350,000 penalty and cease and desist from committing or causing violations of Regulation ATS. The Commissions Order also censured INET. INET consented to the issuance of the Order without admitting or denying any of the findings in the Order. In the Matter of Michael Yellin Admin. Proc. File No. 3-12246 (Mar. 23, 2006) http://www.sec.gov/litigation/admin/ia-2501.pdf On March 23, 2006, the Commission announced settled charges against a former Citigroup executive relating to Citigroups creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. In its Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940 (Advisers Act), Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Michael Yellin, the Commission finds that Yellin willfully aided and abetted and caused Citigroups violations of Section 206(2) of the Advisers Act by, among other things, negotiating the self-interested transaction that permitted Citigroup to reap much of the profit that the funds third party transfer agent had been making.

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Yellin will pay a civil monetary penalty of $50,000, and will be ordered to cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act. Yellin consented to the issuance of the Order without admitting or denying any of the allegations. SEC v. A.B. Watley Group, Inc., et al. Litigation Release No. 19616 (Mar. 21, 2006) http://www.sec.gov/litigation/litreleases/lr19616.htm In the Matter of Sanjay Singh Admin. Proc. File No. 3-12243 (Mar. 21, 2006) http://www.sec.gov/litigation/admin/33-8673.pdf SEC v. John J. Amore, et al. Litigation Release No. 19335 (Aug. 15, 2005) http://www.sec.gov/litigation/litreleases/lr19335.htm On March 21, 2006 the Commission charged a former Merrill Lynch broker and ten former day traders and managers from A.B. Watley, Inc., a broker-dealer, with participating in a fraudulent scheme that used squawk boxes to obtain the confidential institutional customer order flow of major brokerages. Squawk boxes are devices that broadcast, within a securities firm, institutional orders to buy and sell large blocks of securities. This broadcast information was used by traders to trade ahead of these large institutional orders. In a separate action in August 2005, the Commission charged five individuals as part of this scheme. The individuals charged were John J. Amore, a day trader, Ralph D. Casbarro, formerly at Citigroup Global Markets, David G. Ghysels, Jr., formerly at Lehman Brothers, Kenneth E. Mahaffy, Jr., formerly at Merrill Lynch and Citigroup, and Timothy J. OConnell, formerly at Merrill Lynch. The Commission alleged that the Watley day traders asked retail brokers at Citigroup, Lehman Brothers, and Merrill Lynch, to furnish access to their firms institutional equities squawk boxes. The brokers then placed their telephone receivers next to the squawk boxes and left open phone connections to the Watley office in place for virtually entire trading days. The Watley traders, listened for indications on the squawk boxes that these firms had received large customer orders and then traded ahead in the same securities, with the understanding that the prices of the securities would move in response to the subsequent filling of the customer orders. Between approximately June 2002 and January 2004, the Watley day traders traded ahead of customer orders they heard on the Citigroup, Merrill, and Lehman squawk boxes on more than 400 occasions, making gross profits of at least $675,000. In exchange for live audio access to the squawk boxes, Watley compensated the brokers with commission-generating trades and/or secret cash payments. Watley made over $5 million in processing fees from the Watley day traders from June 2002 through August 2003, in addition to receiving a percentage of the profits generated by the Watley traders.

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By divulging confidential information concerning customer orders, the brokers breached duties of confidentiality and trust they owed to their employers and to their employers customers. These brokers also violated their firms written policies requiring confidential treatment of customer information. The Commissions complaint sought disgorgement of illegal profits, penalties, and an injunction against future violations against the defendants. In a separate settled administrative and cease and desist proceeding instituted, the Commission issued an order against Sanjay Singh, a manager of Watleys day trading desk, who facilitated the trading ahead scheme. This order required Singh to cease and desist from committing and/or causing violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 15(c) of the Exchange Act; bars Singh from association with any broker or dealer; and orders Singh to pay disgorgement in the amount of $37,500. Singh consented to the entry of the order without admitting or denying any of the findings. In the Matter of Instinet, LLC and INET ATS, Inc. Admin. Proc. File No. 3-12088 (Oct. 18, 2005) http://www.sec.gov/litigation/admin/34-52623.pdf On October 18, 2005, the Commission announced a settled enforcement action against Instinet, LLC and Inet ATS, Inc., two electronic market centers, for repeated violations of Rule 11Ac1-5 of the Exchange Act. Rule 11Ac1-5 requires market centers to publish order execution quality reports (commonly referred to as Dash 5 reports) for each calendar month that provide detailed information about the price and speed at which market centers execute orders. As described in the SECs order, from June 2001 through May 2004 Instinet and Inet repeatedly published monthly execution reports containing inaccurate order execution quality information. The errors in the reports included the misclassification of shares, miscounting of cancelled shares, improper exclusion of orders, improper calculations based on erroneous times, improper categorizing of orders, inaccurate order execution information, incorrect calculation of spreads and other incorrect calculations. The order finds that Instinet and Inet relied heavily on automated systems, yet did not adequately test their systems and did not respond effectively after NASD staff, SEC staff and third parties detected repeated errors in the execution reports. The order notes that Instinet and Inets Dash 5 reports served a particularly important function to all market participants due to the high percentage of Nasdaq volume handled by Instinet and Inet. In settling the proceeding, the Commission ordered Instinet and Inet to cease and desist from committing or causing any violations and any future violations of Section 11A of the Exchange Act and Rule 11Ac1-5 thereunder. Instinet and Inet also agreed to pay a penalty of $350,000 each, and agreed to adopt a number of remedial undertakings, including retention of an independent third party to confirm the accuracy of their Dash 5 reports and retention of a third party regulatory auditor to conduct a comprehensive regulatory audit of their compliance programs relating to Rule 11Ac1-5. In determining to accept the Offers, the Commission considered remedial acts promptly undertaken by Instinet and Inet, cooperation afforded the Commission staff and the undertakings. 59

In the Matter of UBS Securities LLC (f/k/a UBS Warburg LLC) Admin. Proc. File No. 3-11980 (July 13, 2005) http://www.sec.gov/litigation/admin/34-52022.pdf On July 13, 2005 the Commission instituted settled administrative proceedings against UBS Securities LLC. The Commission found that UBS failed to preserve for three years, the first two of which in an easily accessible place, all electronic mail communications received and sent by its employees that related to its business as a member of an exchange, broker or dealer, and lacked adequate systems or procedures for the preservation of electronic mail communications as required by the federal securities laws. The Commission, NYSE, and NASD discovered these deficiencies during an inquiry into the supervision of UBSs research and investment banking activities. Without admitting or denying the Commissions findings, UBS agreed to pay penalties and fines totaling $2.1 million to resolve this proceeding and related actions by NYSE and NASD. Of the $2.1 million, UBS will pay $700,000 to the Commission. In addition, UBS agreed to cease and desist from committing future violations, to review its procedures regarding the preservation of electronic mail communications for compliance with the federal securities laws and regulations, and the rules of NYSE and NASD and to establish systems and procedures reasonably designed to achieve such compliance. In the Matter of David A. Finnerty, et al. Admin. Proc. File No. 3-11893 (Apr. 12, 2005) http://www.sec.gov/litigation/admin/33-8566.pdf On April 12, 2005, the Commission instituted administrative and cease-and-desist proceedings against 20 former NYSE specialists who engaged in fraudulent and improper trading practices. In separate proceedings, the Commission charged the NYSE for failing to supervise the specialists. The Commissions orders found that from 1999 through 2003, various NYSE specialists repeatedly engaged in unlawful proprietary trading, resulting in more than $158 million of customer harm. The improper trading took various forms, including interpositioning the firms dealer accounts between customer orders and trading ahead for their dealer accounts in front of executable agency orders on the same side of the market. From 1999 through almost all of 2002, the NYSE failed to adequately monitor and police specialist trading activity, allowing the vast majority of this unlawful conduct to continue. The Commission alleges that through their fraudulent trading, the specialists willfully violated antifraud and proprietary trading provisions of the federal securities laws and rules of the NYSE. The proceedings will determine what relief is in the public interest against the specialists, including disgorgement, prejudgment interest, civil penalties, and other remedial relief.

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Last year, the Commission brought settled enforcement actions against all seven specialist firms operating on the NYSE in connection with unlawful proprietary trading at the firms. Those enforcement actions resulted in payments of over $243 million in disgorgement and penalties, which have been placed in fair funds to be distributed to customers disadvantaged by improper specialist trading. SEC v. CIBC Mellon Trust Co. Litigation Release No. 19081 (Feb. 16, 2005) http://www.sec.gov/litigation/litreleases/lr19081.htm In the Matter of CIBC Mellon Trust Company Admin. Proc. File No. 3-11839 (Mar. 2, 2005) http://www.sec.gov/litigation/admin/34-51297.htm On February 16, 2005, the Commission filed settled enforcement proceedings against CIBC Mellon Trust Company, headquartered in Toronto, Canada. In its complaint, the Commission charged that, between July 1998 and September 1999, CIBC Mellon participated in a fraudulent scheme to promote, distribute and sell the stock of Pay Pop, Inc., a now-defunct British Columbia-based telecommunications company. The complaint alleges that, during the period CIBC Mellon acted as Pay Pops transfer agent, one of its senior managers was bribed by two of Pay Pops officers and directors to assist them in obtaining a ready supply of Pay Pop stock for these officers and directors to illegally distribute to investors. By its failure to have sufficient policies, procedures and internal controls in place, CIBC Mellon violated registration, antifraud, and broker-dealer registration provisions and anti-transfer agent registration regulations of the federal securities laws. Without admitting or denying wrongdoing, CIBC Mellon consented to the entry of a final judgment enjoining it from future violations of the foregoing provisions. CIBC Mellon has agreed to pay $889,773 in disgorgement plus $140,270 in prejudgment interest, and a $5 million civil penalty. The civil penalty was assessed, in part, for CIBC Mellons failure to cooperate in the investigation of this matter. In addition CIBC Mellon has agreed to the issuance of a settled administrative order requiring it to cease-and-desist from future violations of broker-dealer and transfer agent provisions of the federal securities laws. In addition, CIBC Mellon agreed to maintain its registration as a transfer agent for as long as it continues to act as a transfer agent for any publicly traded security and has retained a qualified independent consultant to conduct a comprehensive review of all aspects of CIBC Mellons business as a transfer agent and as a broker-dealer. In the Matter of J.P. Morgan Securities Inc. Admin. Proc. File No. 3-11828 (Feb. 14, 2005) http://www.sec.gov/litigation/admin/34-51200.htm

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On February 14, 2005 the Commission instituted settled administrative proceedings against J.P. Morgan Securities Inc. The Commission found that JPMSI failed to preserve for three years, the first two of which in an easily accessible place, all electronic mail communications received and sent by its employees that related to its business as a member of an exchange, broker or dealer, and lacked adequate systems or procedures for the preservation of electronic mail communications as required by the federal securities laws. The Commission, NYSE, and NASD discovered these deficiencies during an inquiry into the supervision of JPMSIs research and investment banking activities. Without admitting or denying the Commissions findings, JPMSI agreed to pay penalties and fines totaling $2.1 million to resolve this proceeding and related actions by NYSE and NASD. Of the $2.1 million, UBS will pay $700,000 to the Commission. In addition, JPMSI agreed to cease and desist from committing future violations, to review its procedures regarding the preservation of electronic mail communications for compliance with the federal securities laws and regulations, and the rules of NYSE and NASD and to establish systems and procedures reasonably designed to achieve such compliance.

CASES INVOLVING FAILURE TO SUPERVISE

In the Matter of Metropolitan Life Insurance Company Admin. Proc. File No. 3-12257 (Apr. 10, 2006) http://www.sec.gov/litigation/admin/2006/34-53624.pdf On April 10, 2006 the Commission issued an Order concerning an enforcement action against Metropolitan Life Insurance Company (MetLife) for failing to supervise reasonably a registered representative who defrauded the Fulton County, Georgia Sheriffs Office with respect to the investment of $7.2 million in public funds. MetLife also failed to retain certain required books and records relating to those investments. Without admitting or denying the Commissions findings, MetLife simultaneously agreed to settle the proceedings by consenting to a cease-and-desist order, a censure, and payment of a $250,000 civil penalty. MetLife also previously undertook to return almost the entire amount invested to the Sheriffs Office and to revise certain of its compliance policies and procedures. In its Order, the Commission found that a registered representative of MetLife violated the antifraud provisions of the federal securities laws by falsely representing to the Sheriffs Office that an entity receiving proceeds for investment from the Sheriffs Office was an affiliate of MetLife when it was not. The registered representative also caused bogus account statements to be sent to the Sheriffs Office. In its Order, the Commission found that MetLife had been on notice of compliance concerns concerning the registered representative from the time it first hired him in February 2000. Despite ongoing compliance concerns, MetLife permitted the registered representative to work at an offsite location, separate and apart from his primary supervisor and without any heightened supervisory procedures. After MetLife commenced an investigation, they revealed that the registered representative had recently been sued for securities fraud by a former customer. No personnel at MetLife, however, took any steps to investigate or follow-up on these allegations of securities fraud, choosing instead to rely on the 62

information provided by the registered representative. If MetLife had reasonably investigated and responded to the allegations of compliance violations against the registered representative, e.g., through heightened supervision and/or implementing procedures to review adequately his customer files and correspondence, it is likely that the firm could have prevented and/or detected the registered representatives fraud. In the Matter of John B. Hoffmann and Kevin J. McCaffrey Admin. Proc. File No. 3-11930 (May 19, 2005) http://www.sec.gov/litigation/admin/34-51713.pdf On May 19, 2005, the Commission instituted administrative proceedings against John B. Hoffmann, formerly the Global Head of Equity Research at Salomon Smith Barney, Inc. (SSB), now known as Citigroup Global Markets, Inc. (CGM), and Kevin J. McCaffrey, formerly the Head of North American Equity Research at SSB, based upon their failure reasonably to supervise former SSB equity research analyst Jack B. Grubman with a view to preventing him from aiding and abetting SSBs violations of antifraud provisions by publishing fraudulent research. In its April 2003 settled proceedings brought against Grubman and SSB as part of the Global Research Analyst Settlement, the Commission charged that Grubman issued fraudulent research reports and misleading or exaggerated research. The order finds that during 2000 and 2001, Hoffmann and McCaffrey were supervisors of Grubman. During that period, they failed to respond adequately to red flags that Grubman had unrealistically bullish ratings and price targets on companies he covered. In addition, Hoffmann and McCaffrey were aware of potential conflicts of interest posed by Grubmans involvement in the firms telecommunications investment banking activities and were aware of Grubmans importance to the firms telecom investment banking franchise, but failed to respond adequately to specific evidence of investment banking pressure on Grubman not to downgrade SSBs investment banking clients. Without admitting or denying the orders findings, Hoffmann and McCaffrey each consented to a fifteen-month bar from associating in a supervisory capacity with a broker, dealer, or investment adviser and to each pay disgorgement of $1 and civil penalties of $120,000.

CASES INVOLVING SELF REGULATORY ORGANIZATIONS

In the Matter of American Stock Exchange LLC Admin. Proc. File No. 3-12594 (March 22, 2007) http://www.sec.gov/litigation/admin/2007/34-55507.pdf In the Matter of Richard Robinson 63

Admin. Proc. File No. 3-12595 (March 22, 2007) http://www.sec.gov/litigation/admin/2007/34-55508.pdf In the Matter of Salvatore F. Sodano Admin. Proc. File No. 3-12596 (March 22, 2007) http://www.sec.gov/litigation/admin/2007/34-55509.pdf On March 22, 2007, the Commission issued a settled cease-and-desist order against American Stock Exchange LLC for failing to enforce compliance with securities laws and rules and failing to comply with its record-keeping obligations. In addition, the Commission instituted contested administrative proceedings against Salvatore F. Sodano, the Amex's former chairman and chief executive officer, alleging that he failed to enforce compliance with federal securities laws and exchange rules by Amex members and persons associated with those members. In its order against the Amex, the Commission found that, from at least 1999, the Amex was on notice that its surveillance, investigatory, and enforcement programs were inadequate. The Amex previously had consented to the issuance of a Sept. 11, 2000, order that, in part, directed the Amex to enhance and improve its regulatory programs for surveillance, investigation, and enforcement of the options order handling rules. The Commission found that, notwithstanding the September 2000 order, the Amex's surveillance programs for options order handling remained inadequate to detect violations of firm quote, customer priority, limit order display, and trade reporting, and other rules. When the Amex's surveillance programs detected rule violations, the Amex failed to investigate violations properly, improperly excused violations, and failed to pursue adequately disciplinary actions for rule violations. The Commission also found that as late as June 2004, the Amex had similar deficiencies in its surveillance for equity order handling and floor broker violations. In addition to the deficiencies in the Amex's surveillance, investigatory, and enforcement programs, the Commission found that the Amex failed to keep and furnish certain records relating to its surveillance, investigatory, and enforcement activities and further furnished the Commission with inaccurate documents. Pursuant to the order, the Commission censured the Amex and ordered it to cease and desist from violating Sections 17(a)(1) and 19(g)(1) of the Exchange Act and Exchange Act Rule 17a-1. The Commission further ordered the Amex to comply with undertakings (1) to file a rule proposal with the Commission to enhance its trading systems so that specialists systemically will be prevented from violating the Amex's customer priority rules; (2) to enhance the Amex's training programs so that floor members and members of the Amex's regulatory staff responsible for surveillance, investigation, and regulation will be required to receive annual training related to compliance with federal securities laws and Amex rules; and (3) to retain an auditor to conduct three biennial audits of the Amex's surveillance, examination, and disciplinary programs related to trading. Without admitting or denying the Commission's findings, the Amex consented to the issuance of the Commission's order. In the separate, related proceeding against Sodano the SEC alleged that the Amex's regulatory failures resulted in large part from Sodano's failures to make regulation an Amex priority, to pay adequate attention to regulation, to put in place an oversight structure to monitor 64

compliance, to ensure that regulatory staff was properly trained, and to dedicate sufficient resources to regulation. It is further alleged that these failures were particularly significant with respect to the Amex's options market because Sodano knew the Amex had been previously sanctioned by the Commission for its inadequate options regulation in the September 2000 order and that the Commission had ordered the Amex to enhance and improve its regulatory programs for surveillance, investigation, and enforcement of the options order handling rules. The proceedings instituted against Sodano, pursuant to Section 19(h) of the Exchange Act, will determine whether Sodano failed, without reasonable justification or excuse, to enforce compliance with the federal securities laws, rules, and regulations, and Amex rules, by members of the Amex and persons associated with those members. In a third, related settled proceeding, the Commission issued an order against Richard Robinson, a former Amex vice president responsible for overseeing the Amex's regulatory surveillance programs for the derivatives and options markets. The Commission found that Robinson was a cause of the Amex's violations by failing to oversee properly the Amex's surveillance program for derivatives and options, by failing to maintain properly Amex investigative files, and by signing and submitting an affirmation to the Commission on behalf of the Amex that contained inaccurate representations relating to the Amex's regulatory program. Without admitting or denying the Commission's findings, Robinson consented to the issuance of an order directing him to cease-and-desist from causing violation of Sections 17(a)(1) and 19(g)(1) of the Exchange Act and Exchange Act Rule 17a-1. In the Matter of Philadelphia Stock Exchange, Inc. Admin. Proc. File No. 3-12315 (June 1, 2006) http://www.sec.gov/litigation/admin/2006/34-53919.pdf On June 1, 2006, the Commission issued a settled cease and desist order against the Philadelphia Stock Exchange (Phlx) for its failure to enforce certain trading and order handling rule violations by its specialists from April 1999 through January 2002. The Order found that Phlx had several deficiencies in its surveillance programs to assure compliance with its own rules and the federal securities laws in both its options and equities markets. Specifically, the Commission found that Phlx had failed, in some instances, to develop programs to detect violations or, in other instances, that the programs in place were not adequate to detect such violations. The Commission also found that Phlx had similar deficiencies in its surveillance for order handling violations in its equities market and that Phlx inadequately surveiled for violations of equities trading rules relating to short sales, front-running, marking the close, and wash trades. Because of this inadequate surveillance, Phlx failed to detect violations by specialists. Pursuant to the Commissions Order Phlx has undertaken to retain in 2006 and 2008 a third party auditor to conduct a comprehensive audit of Phlxs surveillance, examination, investigation, and disciplinary programs relating to trading applicable to all floor members. Phlx has also undertaken to implement annual training program for all floor members and certain members of Phlxs regulatory staff. Based on the above, the SEC ordered Phlx to cease and 65

desist from committing or causing any violations of, and committing or causing any future violations of, Section 19(g) of the Exchange Act. Phlx consented to the issuance of the Order without admitting or denying any of the findings. SEC v. David Colker Litigation Release No. 19229 (May 19, 2005) http://www.sec.gov/litigation/litreleases/lr19229.htm In the Matter of National Stock Exchange and David Colker Admin. Proc. File No. 3-11931 (May 19, 2005) http://www.sec.gov/litigation/admin/34-51714.pdf On May 19, 2005, the Commission instituted a settled enforcement action against the National Stock Exchange (NSX) for its failure to enforce compliance by NSX dealers with certain exchange rules from 1997 through 2003. At the same time, the Commission instituted a settled administrative proceeding and civil action against NSXs president and CEO, David Colker, for his failure to enforce compliance with an NSX rule in violation of federal securities laws. The Commission found that NSX failed, until 2004, to conduct surveillance for violations of its customer priority rule, an important investor protection that prohibited NSX dealers from trading securities for their own accounts ahead of marketable customer orders. As a result, NSX failed to detect hundreds of thousands of transactions in which NSX dealers traded ahead of customer orders. As part of the settlement, NSX, without admitting or denying the findings in the Commissions order, consented to a censure, to cease and desist from committing or causing any violations and any future violations of certain rule filing, recordkeeping, and other SRO rules, as required by the federal securities laws, and to an order to undertake substantial remedial measures to bolster its regulatory and governance functions. Colker consented, without admitting or denying the findings in the Commissions order and complaint, to the imposition of a censure and to the entry of a final judgment ordering him to pay a $100,000 civil penalty. Under the terms of the Commissions order, Colker and his successors will have no future role in NSXs regulatory functions.

In the Matter of New York Stock Exchange, Inc. Admin. Proc. File No. 3-11892 (Apr. 12, 2005) http://www.sec.gov/litigation/admin/34-51524.pdf On April 12, 2005, the Commission instituted a settled enforcement action against the New York Stock Exchange, Inc., finding that the NYSE, over the course of nearly four years, failed to police specialists, who engaged in widespread and unlawful proprietary trading on the floor of the NYSE. In separate proceedings, the Commission charged the specialists who engaged in the fraudulent and improper trading practices.

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The Commissions orders found that from 1999 through 2003, various NYSE specialists repeatedly engaged in unlawful proprietary trading, resulting in more than $158 million of customer harm. The improper trading took various forms, including interpositioning the firms dealer accounts between customer orders and trading ahead for their dealer accounts in front of executable agency orders on the same side of the market. From 1999 through almost all of 2002, the NYSE failed to adequately monitor and police specialist trading activity, allowing the vast majority of this unlawful conduct to continue. The illegal trading went largely undetected because the NYSEs regulatory program was deficient in surveilling, investigating and disciplining the specialists trading violations. According to the Commission, the NYSE violated federal securities laws by failing to enforce compliance with the federal securities laws and NYSE rules that prohibit unlawful proprietary trading by specialists. Without admitting or denying the Commissions findings, the NYSE has agreed to a censure, an order to cease and desist from further violations of those enforcement compliance provisions, and to implement certain remedial undertakings. Report of Investigation Regarding NASDAQ, as Overseen by Its Parent, NASD, Arising Out of Investigation of Suspicious Trading Activity and Net Capital Violations By MarketXT Press Release 2005-14 (Feb. 9, 2005) http://www.sec.gov/news/press/2005-14.htm In the Matter of MarketXT and Irfan Amanat Admin Proc. File No. 3-11813 (Feb. 9, 2005) http://www.sec.gov/litigation/admin/33-8533.htm The Commission issued a Report of Investigation concerning Nasdaq, as overseen by its parent, the NASD, in connection with an investigation and inspection of wash trades and net capital violations by MarketXT, a NASD member firm. The Report finds, among other things, that Nasdaq employees observed suspicious trading by MarketXT and did not communicate their observations to NASD Regulation, Inc. In response to the Commissions investigation and the inspection from which it stemmed, NASD and Nasdaq have implemented a number of remedial steps, all designed to strengthen the self-regulatory oversight of their market. NASD and Nasdaq have consented to the issuance of the report, but neither admit nor deny the findings or conclusions therein. The Commission also instituted administrative proceedings against MarketXT, Inc., an Electronic Communications Network registered as a broker-dealer, and administrative and ceaseand-desist proceedings against Irfan Amanat, MarketXTs de facto chief technology officer. In the order, the Commission alleges that Amanat executed thousands of wash trades and matched orders over a three-day period in March 2002 in order to improperly qualify MarketXT for a tape revenue rebate program offered by Nasdaq. MarketXT improperly received approximately $50,000 in rebates from Nasdaq. In the order, the Commission also alleges that for the year ended December 31, 2001, and quarter ended June 30, 2002, MarketXT was operating without adequate net capital and did not maintain and preserve accurate books and records. 67

The Commission alleged that the respondents willfully violated antifraud provisions of the federal securities laws. The Commission further alleged that MarketXT willfully violated reserve requirement and records and reports provisions of the federal securities laws by failing to maintain adequate net capital and by failing to maintain and preserve adequate books and records. The Commission sought disgorgement plus prejudgment interest and a civil penalty against MarketXT, and a cease-and-desist order and civil penalty against Amanat, in addition to any remedial sanctions appropriate in the public interest.

CASES INVOLVING MUNICIPAL BONDS

In the Matter of City of San Diego, California Admin. Proc. File No. 3-12478 (Nov. 14, 2006) http://www.sec.gov/litigation/admin/2006/33-8751.pdf On November 14, 2006, the Commission entered an order sanctioning the City of San Diego for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003. The SEC issued an Order finding that the city's disclosures about its pension and retiree health care obligations and its ability to pay those obligations were misleading. The Order finds that the city failed to disclose that the city's unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city's liability for retiree health care was another estimated $1.1 billion. According to the Order, the city also failed to disclose that it had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs, and that it would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. The Order further finds that the city knew or was reckless in not knowing that its disclosures were materially misleading. The Order finds that the city made these misleading statements through three different means. First, the city made misleading statements in the offering documents for five municipal offerings in 2002 and 2003 that raised over $260 million from investors. The offering documents containing the misleading statements included the "official statements," which were intended to disclose material information to investors, and the "preliminary official statements," which were used to gauge investors' interest in a bond issuance. Second, the city made misleading statements to the agencies that gave the city its credit rating for its municipal bonds. Finally, the city made misleading statements in its "continuing disclosure statements," which described the city's financial condition and were provided by the city to the municipal securities market with respect to prior city bond offerings. The city's enormous pension and retiree health liabilities and its failure to disclose those liabilities placed the city in serious financial straits, according to the Order. When the city eventually disclosed its pension and retiree health care issue in fiscal year 2004, the credit rating agencies lowered the city's credit rating.

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The Order requires the city to cease and desist from committing violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Order also requires the city to retain an independent consultant to review and assess its policies, procedures, and internal controls about its disclosures relating to municipal bond offerings; conduct annual reviews for a three-year period of the city's policies, procedures, and internal controls and to make recommendations with a view to assuring compliance with the city's disclosure obligations under the federal securities laws; and assess the city's compliance with its policies, procedures, and internal controls, and its adoption of the consultant's recommendations. The city agreed to adopt, implement, and employ the independent consultant's recommendations or alternatives designed to achieve the same objectives. In deciding to accept the city's offer to settle this matter, the Commission considered various remedial measures that the city has already taken to detect and prevent future securities law violations, as well as the city's agreement to retain an independent consultant. The city consented to the issuance of the Order without admitting or denying the findings in the Order.

CASES INVOLVING HEDGE FUNDS

SEC v. Viper Capital Management, LLC, et al. Litigation Release No. 19905 (Nov. 8, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19905.htm On November 8, 2006, the Commission filed fraud charges against the head of several San Francisco-based hedge funds, accusing him of misappropriating millions of dollars from investors nationwide, including senior citizens. According to the Commission, Edward Ehee, 43, of Oakland, defrauded investors in the Compass West Fund, LP, Viper Founders Fund, LP and Viper Investments, LP diverting much of the money towards mortgage and car payments, vacations, and personal bank accounts. Among other things, the Commission's complaint alleges that although the Viper Founders Fund essentially ceased operations by late 2002, Ehee was continuing to raise money as recently as May 2006, using bogus account statements and phony financial reports showing millions of dollars in non-existent fund assets to lure new investments. According to the Commission's complaint, Ehee told investors that their money would be placed into the funds managed by the two fund management companies he controlled, where it would be invested in accord with various securities trading strategies. In fact, according to the Commission, significant sums were obtained long after Ehee had closed the Viper Fund's brokerage accounts and ceased any investment activity. Instead, Ehee converted money invested in Viper and Compass to personal use. In addition, as in a classic Ponzi scheme, Ehee used money raised from new investors to pay off previous investors. In order to conceal his fraud and induce further investments, Ehee provided investors with account statements showing that their money was safe and continuing to generate positive returns. In addition, Ehee provided one investor in early 2006 with supposedly audited financial statements showing the Viper Founders Fund held over $18 million in assets and had 10% annual returns. Yet, according to the Commission, by that time the fund was essentially defunct. Ehee even fabricated an audit opinion letter from an accounting firm that had never actually audited the fund.

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The Commission's Complaint, filed in federal district court in San Francisco, seeks to enjoin Ehee, Compass Fund Management, and Viper Capital Management from future violations of the antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act). The Complaint also seeks to enjoin Ehee and Compass Fund Management from future violations of the federal securities laws governing reports filed with the Commission (Section 207 of the Advisers Act). The Commission requests that the district court order Ehee, Compass Fund Management and Viper Capital Management to disgorge their ill-gotten gains plus prejudgment interest and to impose a civil monetary penalty. In addition, the Commission asks the district court to order the relief defendants, including Ehee's wife, brother, and father, as well as the funds, to disgorge their ill-gotten gains plus prejudgment interest. In the Matter of Evan Misshula Admin. Proc. File No. 3-12338 (June 21, 2006) http://www.sec.gov/litigation/admin/2006/33-8714.pdf On June 21, 2006, the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-andDesist Order against Evan Misshula. The Order found that beginning in January 2001, Evan Misshula, the founder and manager of Sane Capital Partners, L.P., a hedge fund located in New York, New York and Greenwich, Connecticut, misappropriated Fund assets by transferring them into his personal bank account. From 2001 to 2004, Misshula materially misrepresented the performance of the Funds investments to investors. To hide his fraudulent conduct, Misshula sent investors fictitious quarterly reports showing investment gains, which bore no relation to the true condition of the Funds investments or assets under management. During the course of his fraudulent conduct, Misshula misappropriated approximately $529,000 in Fund assets. In July 2004, the Fund collapsed when Misshula was unable to meet an investors redemption demand. The Order found that as a result of this fraudulent conduct, Misshula willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. Based on the above, the Order required Misshula to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act, and barred him from association with any investment adviser. Misshula consented to the issuance of the Order without admitting or denying any of the findings in the Order. SEC v. CMG-Capital Management Group Holding Company, LLC and Keith G. Gilabert Litigation Release No. 19683 (May 1, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19680.htm

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On May 1, 2006, the Commission filed a complaint charging a hedge fund manager with misappropriating funds and misleading investors about the hedge funds returns. Named in the complaint are CMG-Capital Management Group Holding Company, LLC and its principal, Keith G. Gilabert. The Commissions complaint alleged that, from September 2001 to January 2005, the defendants offered and sold limited partnership interests in a purported hedge fund called The GLT Venture Fund, L.P., raising $14.1 million from at least 38 investors. CMG was GLTs investment adviser, and Gilabert was CMGs portfolio manager. The Commissions complaint alleges that CMG and Gilabert claimed that, under their direction, GLT would use investor funds to establish a portfolio of stocks and options, seeking returns through long-term appreciation, short-term trading, and hedging strategies. They also claimed that GLT had generated average annual returns of 19% to 36% and that they would only receive performance-based compensation if GLT was profitable. The complaint alleges that the defendants representations were false and misleading in that GLT actually lost $7.8 million rather than achieved the represented returns; CMG and Gilabert misappropriated nearly $1.7 million for their own personal purposes, because GLT was never profitable; the defendants misused $4.6 million in new investor funds to pay existing investors, operating a Ponzi-like scheme; and the defendants failed to disclose that CMGs investment adviser registration was revoked in 2003 by the California Department of Corporations. The complaint, which was filed in the United States District Court for the Central District of California, alleged that CMG and Gilabert violated the securities registration and antifraud provisions of the federal securities laws, Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. The complaint further charged that Gilabert violated the broker-dealer registration provision, Section 15(a) of the Exchange Act. The Commission sought permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each of the defendants. SEC v. Langley Partners, et al. Litigation Release No. 19607 (Mar. 14, 2006) http://www.sec.gov/litigation/litreleases/lr19607.htm On March 14, 2006, the Commission filed securities fraud and related charges against three hedge funds, Langley Partners, North Olmsted Partners and Quantico Partners (collectively, Langley Partners), and their portfolio manager, Jeffrey Thorp. Langley Partners and Thorp agreed to settle the Commissions charges that they perpetrated an illegal trading scheme to evade the registration requirements of the federal securities laws in connection with twenty-three unregistered securities offerings, that are commonly referred to as PIPEs (Private Investment in Public Equity), and engaged in insider trading. As part of the settlement, Langley Partners agreed to disgorge $8.8 million in ill-gotten gains and prejudgment interest, and Langley Partners and Thorp agreed to pay civil penalties totaling $7 million.

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The Commission alleged in its complaint that Langley Partners and Thorp, after agreeing to invest in a PIPE transaction, typically sold short the issuers stock, frequently through naked short sales in Canada, and used the PIPE shares to close out the short positions, a practice Thorp knew was prohibited by the registration provisions of the federal securities laws. The Commissions complaint also alleged that, in each of the transactions, Thorp made materially false representations to the PIPE Issuers to induce them to sell securities to Langley Partners. Finally, the Commissions complain alleged that on seven occasions, Thorp also engaged in insider trading by selling the securities of PIPE Issuers on the basis of material nonpublic information prior to the public announcement of the PIPEs. Without admitting or denying the allegations in the complaint, Langley Partners and Thorp consented to the entry of a final judgment permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 5 and 17(a) of the Securities Act of 1933. In addition, the final judgment ordered Langley Partners, North Olmsted Partners and Quantico Partners to pay, jointly and severally, disgorgement of $7,048,528, prejudgment interest of $1,769,400, and a civil penalty totaling $4,700,000. The final judgment also required Thorp to pay a $2,300,000 civil penalty. SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd. Litigation Release No. 19589 (Mar. 3, 2006) http://www.sec.gov/litigation/litreleases/lr19589.htm On March 3, 2006, the Commission announced the filing of a civil action charging Directors Financial Group, Ltd. (DFG), an Illinois investment adviser registered with the Commission, and Sharon E. Vaughn, DFGs owner and operator, with fraud and other securities violations. The Commissions complaint alleged that Vaughn and DFG defrauded their private hedge fund clients in Directors Performance Fund, L.L.C. (the Fund). According to the complaint, Vaughn and DFG invested $25 million of the Funds assets in a fraudulent Prime Bank trading scheme (the Trading Program) contrary to the Funds disclosed trading strategy, and did not properly investigate (a) whether the Trading Program was a suitable investment, (b) the backgrounds of the Trading Program promoters, and (c) whether programs like the Trading Program are legitimate investments. The complaint also alleged that Vaughn and DFG entered into an undisclosed profit sharing agreement with one of the Trading Program promoters and that they transferred the Funds $25 million to Akela Capital, Inc. (Akela), a separate entity that had no formal relationship to the Fund and was owned and controlled in part by the Trading Program promoters. In a Judgment dated March 2, 2006, Judge Charles P. Kocoras permanently enjoined DFG and Vaughn from violating antifraud provisions of the Securities Act, the Exchange Act, and the Investment Advisers Act of 1940. The Judgment also enjoined DFG from violating, and Vaughn from aiding and abetting violations of, record keeping provisions of the Investment Advisers Act of 1940. The Judgment required DFG and Vaughn to pay disgorgement and 72

prejudgment interest totaling $808,820.07. DFG and Vaughn consented to the Judgment without admitting or denying the allegations in the complaint. In a separate Order dated March 2, 2006, Judge Kocoras, among other things, froze the Funds remaining assets including the $21.6 million and authorized the distribution of over $20 million to Fund investors, which allowed for a return of their principal investment and profits prior to investment in the Trading Program. SEC v. Samuel Israel III, et al. Litigation Release No. 19406 (Sept. 29, 2005) http://www.sec.gov/litigation/litreleases/lr19406.htm On September 29, 2005, the Commission filed a civil injunctive action against Samuel Israel III, the founder of and investment adviser to the Funds, and Daniel E. Marino, the chief financial officer of Bayou Management, the managers of a group of hedge funds known as the Bayou Funds (Funds), based in Stamford, Connecticut. The Commissions complaint alleges that, beginning in 1996 and continuing through the present, Israel and Marino defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use. The Commission alleges that from 1996 through 2005, investors deposited over $450 million into the Bayou Funds and a predecessor fund. During this period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit. The Commission further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. They also stole investor funds by annually withdrawing from the Funds incentive fees that they were not entitled to receive because the Funds never returned a yearend profit. The Commission is seeking permanent injunctions for violations of the antifraud provisions of the federal securities laws against Israel, Bayou Management, the investment adviser to the funds, and Marino. Additionally, the Commission requested that the court order disgorgement of the defendants ill-gotten gains, prejudgment interest, and civil money penalties by freezing the defendants assets and appointing a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval. The United States Attorney for the Southern District of New York announced that it has filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct. SEC v. K.L. Group, LLC, et al.

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Litigation Release No. 19117 (Mar. 3, 2005) http://www.sec.gov/litigation/litreleases/lr19117.htm Litigation Release No. 19399 (September 29, 2005) http://www.sec.gov/litigation/litreleases/lr19399.htm In the Matter of Won Sok Lee and Yung Bae Kim Admin. Proc. File No. 3-12025 (Aug. 31, 2005) http://www.sec.gov/litigation/admin/34-52368.pdf On March 2, 2005, the Commission filed an emergency enforcement action to halt an ongoing hedge fund fraud concerning three related hedge fund investment advisers, multiple hedge funds, a registered broker-dealer and the principals that control these entities. The Commissions complaint names as defendants the hedge funds, KL Group Fund, LLC, KL Financial Group Florida, LLC, KL Financial Group DB Fund, LLC, KL Financial Group DC Fund, LLC, KL Financial Group IR Fund, LLC and KL Triangulum Group Fund, LLC (collectively, the Funds), the unregistered hedge fund investment advisers, K.L. Group, LLC, KL Florida, LLC and KL Triangulum Management, LLC (collectively, the Advisers), the principals of the investment advisers and hedge funds, Won Sok Lee, John Kim and Yung Bae Kim, and Shoreland Trading, LLC, an Irvine, California based broker-dealer that defendant Lee controlled and that conducted all of the trading for the various hedge funds. The Commissions complaint alleges that from approximately 1999 to March 2005, the defendants raised at least $81 million from investors nationwide by boasting annualized returns of 125 to 150 percent over the last several years and by sending false account statements to investors showing similar gains. According to the complaint, the hedge funds were suffering tremendous trading losses and only about $11 million remains of the more than $81 million that investors put into the hedge funds. The complaint charges all the defendants with violating antifraud provisions of the federal securities laws. Acting on the Commissions request for emergency relief, a federal district judge in southern Florida issued temporary restraining orders, asset freezes and other relief against the defendants. The court also appointed a receiver over all of the entities named in the Commissions action. The court entered an order of default judgment against Lee and Kim on August 15, 2005, enjoining them from violations of antifraud provisions of the federal securities laws, with disgorgement and penalties to be determined upon motion of the Commission. Based on the entry of the permanent injunctions, on August 31, 2005, the Commission instituted administrative proceedings to determine whether any remedial action is appropriate in the public interest against Lee and Kim pursuant to Section 15(b)(6) of the Exchange Act and 203(f) of the Advisers Act. SEC v. Northshore Asset Management et al. Litigation Release No. 19084 (Feb. 16, 2005) http://www.sec.gov/litigation/litreleases/lr19084.htm Litigation Release No. 19449 (Oct. 31, 2005) http://www.sec.gov/litigation/litreleases/lr19449.htm 74

On February 16, 2005, the Commission announced that it filed an emergency enforcement action in the Southern District of New York to halt fraudulent conduct concerning two hedge funds, Ardent Research Partners, L.P. and Ardent Research Partners, Ltd. (collectively, the Ardent Funds). Named as defendants are Northshore Asset Management, LLC (Northshore), the Ardent Funds, Saldutti Capital Management, L.P. (SCM), Kevin Kelley, Robert Wildeman, and Glenn Sherman. The complaint alleges that from April 2003 to February, 2005, Northshore and its principals diverted approximately $37 million of the Ardent Funds assets to their control and invested them in illiquid securities of, and made loans to, entities in which Northshore and its principals have an interest. The Commission alleges that the defendants did not disclose to the Ardent Funds investors that Northshore had purchased SCM and that Northshore was managing a significant portion of the Ardent Funds assets. Additionally, the defendants made numerous misrepresentations. The complaint charges all the defendants with violating antifraud provisions of the federal securities laws. In addition to emergency relief, the Commission seeks orders enjoining the defendants from committing future violations, and disgorgement and civil money penalties. On February 25, 2005 and March 10, 2005, the court granted the Commissions motion for a preliminary injunction enjoining Northshore, the Ardent Funds, SCM, Kelley, Wildeman, and Sherman from violating the federal securities laws, freezing certain assets, and appointing a receiver for Northshore, the Ardent Funds, and SCM. On October 31, 2005, the Commission filed its first amended complaint, adding defendants Francis J. Saldutti, the Ardent Funds found and investment adviser, and Douglas Ballew, Northshores former CFO. The first amended complaint alleges that Saldutti made material misrepresentations and omissions to Ardent Funds investors regarding both Northshores relationship to the Ardent Funds and Salduttis transfers of tens of millions of dollars of Ardent Funds cash to Northshore and Northshore-related entities. The First Amended Complaint further alleges that Northshore CFO Ballew participated in the fraudulent scheme concocted by the previously-named defendants. In addition, the First Amended Complaint alleges a new offering fraud claim against Sherman, one of the originally-named defendants.

CASES INVOLVING MUTUAL FUNDS AND INVESTMENT ADVISERS

A.G. Edwards & Sons, Inc. Admin. Proc. File No. 3-12624 (May 2, 2007) http://www.sec.gov/litigation/admin/2007/34-55692.pdf In the Matter of Thomas C. Bridge, James D. Edge, and Jeffrey K. Robles Admin. Proc. File No. 3-12626 (May 2, 2007) http://www.sec.gov/litigation/admin/2007/33-8798.pdf

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On May 2, 2007, the Commission announced settled enforcement proceedings against A.G. Edwards & Sons, Inc., alleging that A.G. Edwards failed reasonably to supervise some of its registered representatives who used deceptive means to place market timing trades on behalf of their customers. As part of its settlement with the SEC, A.G. Edwards, a registered brokerdealer headquartered in St. Louis, Mo., paid disgorgement and prejudgment interest of $2.36 million and civil penalties of $1.5 million for a total payment of $3.86 million. A.G. Edwards also agreed to certain undertakings, including hiring an independent consultant to review whether the changes A.G. Edwards has made to its policies and procedures are reasonably designed to prevent and detect future market timing activity. The SEC also announced the institution of settled enforcement proceedings against a former registered representative in A.G. Edwards' Boston Back Bay, Mass., branch office for engaging in a fraudulent market timing scheme and the institution of administrative and ceaseand-desist proceedings against a registered representative in A.G. Edwards' Boca Raton, Fla., branch office and two branch managers for their alleged involvement in the fraudulent market timing schemes. The SEC's Order relating to A.G. Edwards found that between January 2001 and September 2003, registered representatives in several of A.G. Edwards' branch offices engaged in illegal market timing schemes on behalf of their customers. These registered representatives engaged in deceptive practices designed to circumvent restrictions that mutual funds imposed on market timing. A.G. Edwards failed to develop or adopt reasonable policies, procedures or systems to monitor market timing in order to prevent and detect its registered representatives' misconduct. A.G. Edwards also failed to develop or adopt reasonable policies, procedures or systems for monitoring and responding to red flags about its registered representatives' deceptive market timing on behalf of customers. In addition to the $3.86 million payment, A.G. Edwards agreed to be censured and to hire an independent consultant to review its policies and procedures related to market timing. A.G. Edwards consented to the issuance of the SEC's Order without admitting or denying the findings contained therein. In the Matter of Fred Alger Administrative Proceeding No. 3-12540 http://www.sec.gov/litigation/admin/2007/34-55118.pdf On January 18, 2007, the Commission commenced administrative proceedings against Fred Alger Management, Inc. (FAMI), an investment adviser of Alger mutual funds, and Fred Alger & Co., Inc. (FACI), a registered broker-dealer involved in a fraudulent trading scheme involving mutual funds in the Alger Fund group. The Commission issued an Order that found Alger Management and Alger Inc. failed to disclose arrangements permitting market timing and late trading to the Board of Trustees of the Alger Fund. Without admitting or denying the Commission's charges, the companies agreed to pay $30 million in disgorgement of ill-gotten gains and a $10 million penalty, all of which will be used to compensate investors.

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The Commission's Order finds that from at least 2000 through October 2003, Alger Inc. permitted select investors to market time the Alger Fund, and in 2002, Alger Inc. began to demand that market timers make a 20% sticky asset investment in exchange for timing capacity. Alger Inc. also permitted at least one investor to late trade the Alger Fund. Alger Inc. also permitted one hedge fund customer, Veras Investment Partners, to engage in late trading of Alger Fund portfolios. Specifically, despite the 4:00 p.m. close of the stock market, Veras' principals requested the ability to enter trades until 4:30 p.m. because their trading model was based on a "signal" from the close of the futures market at 4:15 p.m. Alger's Vice Chairman James P. Connelly, Jr., approved the arrangement, which allowed Veras to trade shares of Alger Fund portfolios after both the stock and futures markets closed but still receive that day's NAV as if the orders had been timely entered before the 4:00 p.m. market close. The Commission previously brought a settled enforcement action against Connelly in October 2003. Neither Alger Management nor Alger Inc. disclosed these market timing and late trading arrangements to the Alger Fund's Board of Trustees. The market timing in the Alger Fund diluted the value of long-term shareholders' investments. At the same time, Alger Management and Alger Inc. benefited through advisory fees paid to Alger Management and distribution and servicing fees paid to Alger Inc. As a result of these activities, Alger Management and Alger Inc. violated the antifraud and various other provisions of the Investment Advisers Act, the Investment Company Act, and the Securities Exchange Act of 1934. The Order censures Alger Management and Alger Inc., and directs Alger Management and Alger Inc. to cease and desist from committing or causing any future violations of the provisions referred to above. Further, the Order directs Alger Management and Alger Inc., jointly and severally to pay disgorgement of $30 million plus a civil money penalty of $10 million. The $40 million will be paid into a Fair Fund to be distributed according to a plan to be developed by an independent distribution consultant. Alger also agreed to retain an independent compliance consultant to review various policies and procedures. Alger Management and Alger Inc. consented to the issuance of the Order without admitting or denying any of the findings in the Order In the Matter of Deutsche Bank Securities, Inc. Administrative Proceeding No. 34-54993 http://www.sec.gov/litigation/admin/2006/34-54993.pdf On December 21, 2006, the Commission instituted administrative and cease-and-desist proceedings against Deutsche Bank Securities, Inc. (DSBI), a registered broker-dealer and subsidiary of Deutsche Bank AG. The Commission alleges that between March and September of 2003, a registered representative of DSBI defrauded mutual funds and fund shareholders by engaging in a scheme to conceal the identity of the representatives trading customers. The representative executed trades on behalf of customers whose trades were rejected by the mutual funds. The funds were thus deceived into believing that the funds were initiated by DSBI customers rather than the rejected customers. The Commission charged the representative with violated section 17(a) of the Securities Act and sections 10b and 10b-5 of the Securities Exchange Act. Likewise, DSBI was charged 77

with failure to protect its funds and fund shareholders through procedures reasonably designed to prevent fraud and misuse of funds thereby violating Securities Exchange Act section 15(b)(4)(E). DSBI was ordered to cease and desist current violations and to pay $202,835 in disgorgement, $37,284 in prejudgment interest and a civil monetary penalty of $202,835. In the Matter of Deutsche Asset Management, Inc. and Deutsche Investment Management Americas, Inc. Administrative Proceeding No. IA-2575 http://www.sec.gov/litigation/admin/2006/ia-2575.pdf On December 21, 2006, the Commission initiated administrative proceedings against Deutsche Asset Management (DAMI) and Deutsche Investment Management Americas, Inc. (DIMA), registered advisory investment subsidiaries of Deutsche Bank AG, a German bank and financial holdings company. The Commission alleges that DAMI and DIMA violated sections 206(1) and 206(2) of the Advisers Act and section 34(b) of the Investment Company Act when it knowingly allowed hedge fund managers and representatives of broker-dealers to engage in market timing to the detriment of DIMA and DAMI shareholders. The Commission alleged that contrary to notions of fair play and to DAMI and DIMAs own policies, the corporations were aware of and consented to at least three separate instances of market timing involving large companies. While generating substantial fees for the corporations, the fraudulent transactions resulted in significant shareholder losses through diversion of shareholder gains and dilution of shareholder funds. DAMI and DIMA were ordered to cease and desist from fraudulent transactions and to employ independent consultants to advise the companies on internal management systems for prevention of future fraud, instigate a more appropriate compliance and ethics oversight system, and submit to periodic procedural reviews. Further, the corporations were required to jointly pay $17,200,000 in disgorgement. In the Matter of Hartford Financial Services, LLC, HL Investment Advisors, LLC and Hartford Securities Distribution Company, Inc. Admin. Proc. File No. 3-12476 (Nov. 8, 2006) http://www.sec.gov/litigation/admin/2006/33-8750.pdf On November 8, 2006, the Commission announced that three subsidiaries of Hartford Financial Services Group, Inc. will pay $55 million to settle charges that they misrepresented and failed to disclose to fund shareholders and the funds' Boards of Directors their use of fund assets to pay for the marketing and distribution of Hartford mutual funds and annuities. The three subsidiaries, Hartford Investment Financial Services, LLC (Hartford Investment), HL Investment Advisors, LLC (HL Advisors) and Hartford Securities Distribution Company, Inc. (Hartford Distribution) (collectively, Hartford), agreed to relinquish $40 million in ill-gotten gains and pay a $15 million penalty. The entire $55 million will be distributed to the affected Hartford funds. According to an Order issued by the Commission, between 2000 and 2003, Hartford entered into arrangements with 61 broker-dealers pursuant to which it agreed to pay for special 78

marketing and distribution benefits, known as "shelf space." Hartford represented to shareholders in the funds' prospectuses that it used its own assets to pay for shelf space and that shareholders did not pay for shelf space. Hartford failed to disclose that instead of using only its own assets, Hartford directed approximately $51 million of the Hartford funds' assets, in the form of brokerage commissions, to certain broker-dealers in order to satisfy some of Hartford's shelf space obligations. Hartford also failed to disclose to the funds' Boards its practice of directing the funds' brokerage commissions to broker-dealers in exchange for shelf space. By failing to disclose this practice to the Boards, Hartford Investment and HL Advisors breached their fiduciary duties to the funds' Boards and deprived the funds' Boards of the opportunity to determine the best use of fund assets. Hartford Distribution, the distributor and principal underwriter for some of the funds, aided and abetted Hartford Investment and HL Advisors violations. Despite its duty to do so, Hartford Distribution also failed to disclose these arrangements to the funds' Boards. In addition to the $55 million payment, Hartford Investment and HL Advisors were censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 206(2) of the Investment Advisers Act, and Section 34(b) of the Investment Company Act. Hartford Distribution was also censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and from causing violations of Section 206(2) of the Investment Advisers Act. The Commission's Order further requires Hartford Investment, HL Advisors and Hartford Distribution to undertake certain compliance reforms. Hartford Investment, HL Advisors and Hartford Distribution have consented to the issuance to the Commission's Order, without admitting or denying the findings contained therein. In the Matter of BISYS Fund Services, Inc. Admin. Proc. File No. 3-12432 (Sept. 26, 2006) http://www.sec.gov/litigation/admin/2006/ia-2554.pdf On September 26, 2006, the Commission announced the institution of a settled enforcement action against BISYS Fund Services, Inc. (BISYS), a mutual fund administrator, finding that BISYS aided and abetted over two dozen mutual fund advisers in defrauding fund investors. BISYS entered into undisclosed side agreements with the advisers, which enabled the advisers improperly to use investors' mutual fund assets to pay for marketing expenses rather than paying for those expenses out of their own assets. BISYS provides numerous administration services to mutual fund families for a fee. The Commission's Order against BISYS finds that from July 1999 to June 2004, BISYS entered into side agreements with the investment advisers to 27 mutual fund families. These side agreements obligated BISYS to rebate a portion of its fund administration fee to (or on behalf of) the investment advisers to the funds so that the advisers would continue to recommend that BISYS be retained as the fund administrator. The side agreements enabled the advisers to use mutual fund assets to pay for marketing expenses that were incurred by the advisers to promote the funds. On occasion, the investment advisers also used the money dedicated by BISYS under these arrangements to pay expenses that were entirely unrelated to marketing, such as for check 79

fraud losses, seed capital for new mutual funds, and settlement of disputes with third parties. If the investment advisers had not improperly used mutual fund assets to subsidize these expenses, the advisers would have had to pay the marketing and other expenses using their own assets. BISYS provided over $230 million from its administration fees for the benefit of the funds' advisers or third parties pursuant to these side agreements. The Order further finds that these side arrangements were not disclosed to the mutual funds' boards of trustees or shareholders. Without admitting or denying the findings in the Order, BISYS agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Investment Advisers Act, and Sections 12(b) and 34(b) of the Investment Company Act and Rule 12b-1(d) thereunder. As part of its settlement, BISYS, a wholly-owned subsidiary of The BISYS Group, Inc., agreed to pay a total of $21.4 million, consisting of disgorgement of $9.7 million in ill-gotten gains, prejudgment interest of $1.7 million, and a $10 million civil penalty. These monies will be placed in a distribution fund to be administered by the Commission for the benefit of the harmed mutual funds. BISYS further agreed to retain the services of an independent consultant to conduct a comprehensive review of its current policies and procedures governing the receipt of revenue and payment of expenses associated with its administrative, fund accounting, and distribution services to determine if the policies and procedures provide reasonable assurance that the revenue is properly received and expenses are properly paid. The independent consultant will also review the accuracy of the disclosures to mutual fund boards concerning agreements between BISYS and the funds, advisers, banks and any related entities for administrative, fund accounting, and distribution services to determine if the policies and procedures provide reasonable assurance that such disclosures comply with applicable securities laws. In the Matter of Prudential Equity Griup, LLC Admin. Proc. File No. 3-12400 (August 28, 2006) http://www.sec.gov/litigation/admin/2006/34-54371.pdf SEC v. Frederick J. O'Meally, et al. Litigation Release No. 19813 (Aug. 28, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19813.htm On August 28, 2006, the Commission announced the institution of settled enforcement proceedings against Prudential Equity Group, LLC (PEG), formerly known as Prudential Securities Inc. (PSI), alleging that former PSI registered representatives defrauded mutual funds by concealing their identities, and those of their customers, to evade mutual funds' prospectus limitations on market timing. PEG has been ordered to pay a total of $600 million pursuant to a global civil and criminal settlement with the United States Attorney's Office for the District of Massachusetts, the Commission, the Massachusetts Securities Division, NASD, the New Jersey Bureau of Securities, the New York Attorney General's Office and the New York Stock Exchange. Under the terms of the settlement, $270 million will be paid to a distribution fund administered by the Commission for the benefit of those harmed by the fraud, $325 million will be paid as a criminal penalty to the U.S. Department of Justice, and $5 million will be paid as a

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civil penalty to the Massachusetts Securities Division. PEG is a registered broker-dealer and investment adviser subsidiary of Prudential Financial, Inc., headquartered in New York, N.Y. The Commission's Order against PEG finds that from at least September 1999 through June 2003, former PSI registered representatives deceived mutual funds in order to engage in market timing in the mutual funds' shares. The Order finds that on numerous occasions when mutual funds tried to prevent or block the registered representatives from market timing under certain broker identifying numbers, known as Financial Advisor, or FA numbers, at PSI, or in certain customer accounts, the registered representatives used deceptive market timing practices to evade the mutual funds' restrictions and continue to trade. These deceptive practices included the use of multiple FA numbers and multiple customer accounts, many of which bore fictitious names that had no relation to the actual customer's name; the use of accounts coded as "confidential" in PSI's systems; and the use of "under the radar" trading to avoid notice by mutual funds. When the mutual funds succeeded in blocking certain FA numbers or customer accounts from further trading, the registered representatives used other FA numbers and customer accounts that had not yet been blocked to evade the mutual funds' restrictions and continue to trade. As early as 2000, PSI identified the registered representatives and monitored their revenues and ranks within the firm. Although the firm received hundreds of notices from mutual fund companies that complained about the registered representatives' conduct, PSI failed to curtail their deceptive market timing practices. In settling the Commission's charges, PEG has also agreed to be censured and to retain the services of an independent distribution consultant for the distribution of the $270 million disgorgement. PEG has consented to the issuance of the SEC's Order without admitting or denying the findings contained therein. As part of the global civil and criminal resolution, simultaneous with the SEC's announcement of this action, the United States Attorney's Office for the District of Massachusetts announced that it had entered into an agreement with PEG concerning substantially the same conduct as identified in the SEC's Order. The SEC's Order also was filed contemporaneously with related, settled orders against PEG by the Massachusetts Securities Division, which brought civil charges against PSI in November 2003, the NASD, the New Jersey Bureau of Securities, the New York Attorney General's Office, and the New York Stock Exchange. In a related matter, on August 28, 2006, the Commission filed an unsettled civil injunctive action in the United States District Court for the Southern District of New York against former PSI registered representatives Frederick J. O'Meally, Jason N. Ginder, Michael L. Silver, and Brian P. Corbett. The Commission previously sued five former PSI registered representatives and the former branch manager of PSI's Boston, Mass., branch office for similar conduct. In the Matter of Warwick Capital Management, Inc. & Carl Lawrence Admin. Proc. File No. 3-12357 (July 6, 2006) http://www.sec.gov/litigation/admin/2006/ia-2530.pdf

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On July 6, 2006, the Commission issued an Order Instituting Administrative and Ceaseand-Desist Proceedings Pursuant to against Warwick Capital Management, Inc., a Bronx, New York based investment adviser and its owner Carl Lawrence. In the Order, the Division of Enforcement alleged that the Respondents distributed through third-party subscription services false and misleading information about Warwick that: (i) overstated Warwicks assets under management; (ii) overstated the number of Warwicks clients; (iii) falsely represented performance returns that Warwick and Lawrence knew were false and misleading; (iv) falsely represented that Warwick was in compliance with the Association for Investment Management and Research Performance Presentation Standards; (v) falsely claimed that Warwick was registered with the Commission; and (vi) overstated the length of time Warwick had been in the investment advisory business. In its Form ADV filings from 1998 through 2000, Warwick and Lawrence also overstated the number of clients Warwick had and its assets under management. The Division of Enforcement alleged that Warwick willfully violated Sections 203A, 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-2(a)(11), 204-2(a)(16) and 206(4)-1(a)(5) thereunder; and that Lawrence willfully violated, or willfully aided and abetted and caused Warwicks violations of, Sections 206(1), 206(2), and 207 of the Advisers Act and that Lawrence willfully aided and abetted and caused Warwicks violations. 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 sanctions, if any, are appropriate and in the public interest.

In the Matter of Weiss Research, Inc., Martin Weiss and Lawrence Edelson Admin. Proc. File No. 3-12341 (June 22, 2006) http://www.sec.gov/litigation/admin/2006/ia-2525.pdf On June 22, 2006, the Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 against Weiss Research, Inc., a financial newsletter publisher; its owner, Martin Weiss; and one of its principal editors, Lawrence Edelson (Respondents). The Order finds that Weiss Research, Inc. unlawfully operated as an unregistered investment adviser and that the Respondents made materially false and misleading statements about the past performance and profit potential of the trading recommendations contained in their publications. The Order finds that Weiss Research published several newsletters containing specific trading instructions for the purchase and sale of securities and charged between $1,000 and $5,000 for annual subscriptions to these newsletters. From September 2001 through March 2005, Weiss Research facilitated an auto-trading arrangement between its subscribers and their broker-dealers, wherein Weiss Research sent its trading instructions directly to its subscribers broker-dealers for immediate and automatic execution in the subscribers brokerage accounts. Additionally, Weiss Research promised its subscribers personalized service through direct 82

contact with Martin Weiss and Lawrence Edelson regarding their investment advice and provided certain assistance with selecting the appropriate type of newsletter for a particular subscriber. During this period, Weiss Research was not registered as an investment adviser with the Commission or any state securities regulator. The Order also found that the Respondents made numerous materially false and misleading statements regarding the past performance and profit potential of their recommended trades in Weiss Researchs promotional materials. The Order required the Respondents to cease and desist from committing or causing any violations and any future violations of the applicable provisions of the Investment Advisers Act, and required the Respondents to pay approximately $2 million in disgorgement, prejudgment interest, and civil penalties. The Respondents consented to the issuance of the Order without admitting or denying any of the findings in the Order. SEC v. Terrys Tips and Terry F. Allen Litigation Release No. 19725 (June 13, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19725.htm On June 13, the United States District Court for the District of Vermont entered final judgments against Terry F. Allen and Terrys Tips, Inc. in the Commissions pending civil action. Terrys Tips and Allen were permanently enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Allen was also permanently enjoined from aiding and abetting violations of Sections 206(1) and 206(2) of the Investment Advisers Act and ordered to pay disgorgement of $100,000 and a civil penalty of $120,000. The disgorged funds will be returned to investors. The Complaint alleged that since mid 2003, Terrys Tips and Allen used false and misleading performance projections to encourage hundreds of subscribers to enroll in an autotrading program that allowed subscribers to designate Terrys Tips to automatically direct trades in the subscribers personal brokerage account. In the Matter of CapitalWorks Investment Partners, LLC and Mark J. Correnti Admin. Proc. File No. 3-12324 (June 6, 2006) http://www.sec.gov/litigation/admin/2006/ia-2520.pdf On June 6, the Commission sanctioned CapitalWorks Investment Partners, LLC, a registered investment adviser, and Mark J. Correnti, its part-owner and director of client service and marketing, for making false and misleading representations to clients and potential clients about the results of a 2002 Commission inspection. CapitalWorks and Correnti agreed to settle the charges, without admitting or denying the Commissions findings, by agreeing to the issuance of a censure, a cease-and-desist order, and payment of civil penalties of $40,000 and $25,000, respectively. In mid-2002, the Commissions investment adviser inspection staff conducted an inspection of CapitalWorks and issued a deficiency letter to the firm which identified various 83

problems related to the firms advertising, marketing and performance, custody of client assets, assignment of advisory contracts, and internal controls. The Commissions order found that from August 2002 through December 2004, CapitalWorks and Correnti misrepresented facts to current and prospective clients in twelve responses to requests for information and requests for proposals (RFPs). Correnti, as CapitalWorks director of client service and marketing and head of compliance, had ultimate responsibility for the accuracy of the responses. He was fully aware of the deficiencies that had been identified in the Commissions inspection but failed to ensure their disclosure. CapitalWorks and Correnti consented to the issuance of an order that censures them and orders them to cease and desist from future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and to pay civil penalties of $40,000 and $25,000, respectively. CapitalWorks will also undertake compliance measures designed to prevent future violations. These measures include retaining an independent consultant to review CapitalWorks written procedures for responding to requests for proposals. CapitalWorks will also provide a copy of the Commissions order to all existing clients and prospective clients for one year.

In the Matter of Bear, Stearns & Co., Inc., and Bear, Stearns Securities Corp. Admin. Proc. File No. 3-12238 (Mar. 16, 2006) http://www.sec.gov/litigation/admin/33-8668.pdf On March 16, 2006, the Commission settled enforcement action against Bear, Stearns & Co., Inc. (BS&Co.) and Bear, Stearns Securities Corp. (BSSC) (collectively, Bear Stearns), charging Bear Stearns with securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and the customers of its introducing brokers. The Commission issued an Order finding that from 1999 through September 2003, Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds. Pursuant to the Order, Bear Stearns will pay $250 million, consisting of $160 million in disgorgement and a $90 million penalty. The money will be paid into a Fair Fund to be distributed to the harmed mutual funds and mutual fund shareholders. Bear Stearns will also undertake significant reforms to improve its compliance structure. Simultaneously, NYSE Regulation, Inc. censured and fined Bear Stearns. The fine imposed by the NYSE will be deemed satisfied by the payment of the $250 million pursuant to the Commissions Order. In determining to accept the settlement, the Commission considered the remedial acts undertaken by Bear Stearns and the cooperation afforded the Commission staff. The Commissions investigation is continuing. SEC v. BMA Ventures, Inc. and William Robert Kepler 84

Litigation Release No. 19606 (Mar. 10, 2006) http://www.sec.gov/litigation/litreleases/lr19606.htm On March 9, 2006, the Commission filed a lawsuit against registered investment adviser BMA Ventures, Inc. and its president, William Robert Kepler, alleging that they illegally obtained approximately $1.9 million in a fraudulent scalping scheme from January 2004 through March 2005. Scalping is the illegal practice of recommending that others purchase a security and secretly selling the same security contrary to the recommendation. According to the Commissions complaint, Kepler acted through BMA Ventures to inundate fax machines across the country with newsletters touting the stock of 26 small companies whose stock traded on the OTC Bulletin Board or the PinkSheets. Each newsletter described a featured company and its earnings prospects in glowing terms while urging readers to buy the companys stock. In every case, however, BMA Ventures sold its stock in the featured company contemporaneously with the fax campaign or shortly afterward. Although the newsletters disclosed that BMA Ventures owned stock in the featured companies, they did not disclose BMA Ventures intent to sell its stock holdings or its past stock sales in connection with its recommendations. The complaint further alleged that BMA Ventures violated the investment adviser registration provisions of the federal securities laws by registering with the SEC when it did not meet the minimum registration requirements. These requirements prohibit registration unless the adviser has at least $25 million in assets under management or is an adviser to a registered investment company. The Commission also alleged that Kepler aided and abetted BMA Ventures violations of these provisions. The SECs action sought permanent injunctions for violations of the anti-fraud and investment adviser registration provisions of the federal securities laws, penny stock bars, disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties against BMA Ventures and Kepler. SEC v. Daniel Calugar and Security Brokerage, Inc. Litigation Release No. 19526 (Jan. 10, 2006) http://www.sec.gov/litigation/litreleases/lr19526.htm On January 10, 2006, the Commission announced that Daniel Calugar and his former registered broker-dealer, Security Brokerage, Inc. (SBI), agreed to settle the Commissions charges alleging that they defrauded mutual fund investors through improper late trading and market timing. As part of the settlement, Calugar will disgorge $103 million in ill-gotten gains and pay a civil penalty of $50 million. Calugar also consented to the issuance of a Commission order, based on the entry of the injunction in the federal court action that will permanently bar him from association with any broker or dealer. SBI ceased to be a registered broker-dealer in November 2003. Calugar and SBI consented to the final judgment and Commission order without admitting or denying the allegations.

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In December 2003, the Commission filed an emergency action in federal court seeking an asset freeze, preliminary injunction, and other relief against Calugar and Security Brokerage. The Commissions complaint alleges that from at least 2001 to 2003, Calugar reaped profits of approximately $175 million through improper late trading and market timing, principally through mutual funds managed by Alliance Capital Management and Massachusetts Financial Services (MFS). The complaint alleges that Calugar routinely transmitted trading decisions for his own account through Security Brokerage one to two hours after 4:00 p.m. EST (the close of the market) without any legitimate reason, and that Security Brokerage created false internal records in which the order time for all trades was entered as 3:59 p.m. EST. The Commissions complaint further alleges that from at least March 2001 to September 2003, the defendants engaged in extensive market timing of Alliance and MFS funds despite knowing that the prospectuses for those funds either prohibited or discouraged timing and that timing was not available to most investors. In the case of Alliance, Calugar agreed to make longterm investments (referred to as sticky assets) in Alliance hedge funds in exchange for Alliance permitting him to engage in market timing in its mutual funds. Calugar was the single largest timer at Alliance during the relevant period, according to the complaint. The complaint alleges that Calugar and SBI violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 under the Exchange Act. SEC v. Karnig H. Durgarian, Jr., et al. Litigation Release No. 19517 (Jan. 3, 2006) http://www.sec.gov/litigation/litreleases/lr19517.htm On December 30, 2005, the Commission filed a civil fraud action against six former officers of Putnam Fiduciary Trust Company (PFTC), a Boston-based registered transfer agent, for engaging in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million. The six defendants are Karnig Durgarian, a former senior managing director and chief of operations for PFTC, as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004; Donald McCracken, a former managing director and head of global operations services for PFTC; Virginia Papa, a former managing director and director of defined contribution servicing; Sandra Childs, a former managing director who had overall responsibility for PFTCs compliance department; Kevin Crain, a managing director who had responsibility for PFTCs plan administration unit; and Ronald Hogan, a former vice-president who had responsibility for new business implementation at PFTC. The Commission alleges that the defendants misconduct arose out of PFTCs one-day delay in investing certain assets of a defined contribution client, Cardinal Health, Inc., in January 2001. The markets rose steeply on the missed day, causing Cardinal Healths defined contribution plan to miss out on nearly $4 million of market gains. The Commission alleges that instead of informing Cardinal Health of the one-day delay and the missed trading gain, the defendants decided to improperly shift approximately $3 million of the costs of the delay to shareholders of certain Putnam mutual funds through deception, illegal trade reversals, and accounting machinations. The Commission also alleges that the defendants improperly allowed 86

Cardinal Healths defined contribution plan to bear approximately $1 million of the loss without disclosing their actions. The Commission is seeking injunctive relief and civil monetary penalties. The Commission announced that it would not bring any enforcement action against PFTC because of its swift, extensive and extraordinary cooperation in the Commissions investigation of the transactions that are the subject of the Commissions complaint. PFTCs cooperation consisted of prompt self-reporting, an independent internal investigation, sharing the results of that investigation with the government (including not asserting any applicable privileges and protections with respect to written materials furnished to the Commission staff), terminating and otherwise disciplining responsible wrongdoers, providing full restitution to its defrauded clients, paying for the attorneys and consultants fees of its defrauded clients, and implementing new controls designed to prevent the recurrence of fraudulent conduct.

In the Matter of Veras Master Capital Fund, et al. Admin. Proc. File No. 3-12133 (Dec. 22, 2005) http://www.sec.gov/litigation/admin/33-8646.pdf On December 22, 2005, the Commission instituted a settled enforcement action against Veras Capital Master Fund (VCM), VEY Partners Master Fund (VEY), their investment adviser, Veras investment Partners, LLC (VIP), and its managing members, Kevin D. Larson and James R. McBride. The Commission found that the respondents engaged in a fraudulent scheme to market time and late trade mutual fund shares. The Commission found that from January 2002 through September 2003, respondents used deceptive techniques to evade market timing restrictions, including creating legal entities with names unrelated to respondents to hide its true identity from mutual funds and then using those entities to open multiple accounts at multiple broker-dealers. Respondents used the multiple accounts to divide trades into smaller dollar amounts that would evade detection by the mutual funds. Respondents also traded mutual fund shares after 4:00 p.m. Eastern Time and received the same days price. Without admitting or denying the Commissions findings, the respondents consented to entry of an order that requires the respondents to cease and desist from future violations of the federal securities laws and bars Larson and McBride from association with any investment adviser, with the right to reapply for association after 18 months. The respondents were also ordered to pay, on a joint and several basis, $35,554,903 in disgorgement and $645,585 in prejudgment interest. Larson and McBride will additionally pay a $750,000 penalty.

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On March 21, 2007, the Commission announced the distribution of approximately $38 million in Fair Funds to approximately 810 mutual funds that were victims of fraudulent market timing and late trading by the Veras hedge funds. The funds distributed reflect the entirety of the disgorgement and civil penalties paid by the Veras hedge funds and their principals to settle charges of unlawful market timing and late trading brought by the SEC. The Sarbanes-Oxley Act of 2002 gave the SEC authority to increase the amount of money returned to harmed investors by allowing civil penalties to be included in Fair Fund distributions. Prior to SOX, only disgorgement could be returned to harmed investors. As of March 21, 2007, the SEC had distributed over $1 billion in Fair Funds. In the Matter of Millenium Partners, L.P., et al. Admin. Proc. File No. 3-12116 (Dec. 1, 2005) http://www.sec.gov/litigation/admin/33-8639.pdf On December 1, 2005, the Commission instituted a settled administrative and cease-anddesist proceeding against Millennium Partners, L.P., Millennium Management, L.L.C., Millennium International Management, L.L.C., Israel Englander, Terence Feeney, Fred Stone, and Kovan Pillai, finding that they participated in a fraudulent scheme to market time mutual funds. The Commission found that from at least 1999 to 2003, Englander, Feeney, Stone and Pillai generated tens of millions of dollars in profits for Millennium by devising and carrying out various fraudulent means to conceal Millenniums identity and thereby avoid detection and circumvent restrictions that the mutual funds imposed on market timing. Millenniums deceptive market timing practices included the creation of approximately 100 new legal entities, with unrelated names, to hide its identity thereby executing market timing trades in mutual fund shares without detection. The entities opened over 1,000 accounts at various brokerage firms in order to further conceal Millenniums market timing. Millennium also engaged in market timing trading through variable annuity contracts and used brokers with multiple registered representative numbers in order to evade certain mutual funds market timing restrictions. Additionally, structured trading and omnibus account trading strategies were implemented to hide Millenniums market timing activities. With Englander and Feeneys knowledge and approval, Millennium also deployed sticky assets, through broker-dealers, to obtain timing capacity that the brokers had negotiated with the mutual funds. Without admitting or denying the Commissions findings, the respondents consented to an order that requires them to pay a total of over $180 million in disgorgement and penalties, and Millennium agreed to undertake various compliance reforms to prevent recurrence of similar conduct. The order also (1) requires the respondents to cease and desist from future violations of the fraud provisions of the federal securities laws; (2) prohibits Englander, Feeney, and Stone from association with any investment adviser for three years; (3) denies Stone the privilege of appearing or practicing before the Commission as an attorney for six months; and (4) suspends Pillai from association with any investment adviser for a period of 12 months.

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In the Matter of Federated Investment Management Company, et al. Admin. Proc. File No. 3-12111 (Nov. 28, 2005) http://www.sec.gov/litigation/admin/34-52839.pdf On November 28, 2005, the Commission instituted a settled administrative and ceaseand-desist proceeding, finding that Federated Investment Management Company (FIMC), a registered investment adviser, Federated Securities Corp. (FSC), a registered broker-dealer, and Federated Shareholder Services Company (FSSC), formerly a registered transfer agent, harmed long-term mutual fund shareholders by allowing undisclosed market timing and late trading by favored clients and an employee. The firms are affiliated with Federated Investors, Inc., headquartered in Pittsburgh, and perform services for the Federated mutual fund complex. The Commission found, among other things, that FIMC, the investment adviser to the Federated funds, and FSC, distributor for the Federated funds, committed securities fraud by approvingbut not disclosing to Federated funds shareholders or the funds Boards of Trusteesthree market timing arrangements, or the associated conflict of interest between FIMC and the funds involved in the arrangements. From January 2003 through July 2003, FIMC and FSC entered into market timing arrangements with Canary Capital Partners LLC, a hedge fund managed by Edward J. Stern, and two existing Federated investors to market time high yield bond funds. Canary Capital used almost $125 million in timing capacity in six Federated domestic equity funds and invested $10 million in an off-shore Federated fund. The two Federated clients used over $18 million and $11 million, respectively, producing advisory and other fees for FIMC, FSC and FSSC. In addition, between July 1998 and March 2003, FSSC allowed a customer and a Federated employee to late trade. Without admitting or denying the Commissions findings, FIMC, FSC, and FSSC agreed to disgorge $27 million in ill-gotten gains and pay a $45 million civil penalty, in addition to $8 million they previously paid to the Federated funds that were harmed by the wrongful conduct. The companies also agreed to censures, cease-and-desist orders, and to undertake mutual fund governance and compliance reforms. In the Matter of Theodore Charles Sihpol III Admin. Proc. File No. 3-11261 (Oct. 12, 2005) http://www.sec.gov/litigation/admin/33-8624.pdf SEC v. Theodore Charles Sihpol III Litigation Release No. 19422 (Oct. 12, 2005) http://www.sec.gov/litigation/litreleases/lr19422.htm On October 12, 2005, the Commission settled an administrative and cease-and desist proceeding against Theodore Charles Sihpol III, formerly a broker at Banc of America Securities LLC (BAS). The proceedings had been instituted on September 16, 2003. The Commission found that Sihpol played a key role in enabling Canary Partners LLP, a hedge fund customer of BAS, to engage in late trading in shares of mutual funds sold by BAS 89

and others. The Commission also found that Sihpol enabled Canary to place orders to buy or redeem mutual fund shares that were received by and cleared through BAS after 4:00 p.m., but received the price previously determined as of 4:00 p.m. that same day, rather than the price determined as of 4:00 p.m. the next day. In the process, Sihpol falsified, altered, destroyed, or evaded the creation of, books and records that BAS was required accurately to create, maintain and preserve. Without admitting or denying the allegations, Sihpol consented to an order to cease-anddesist from committing or causing any violations and any future violations of the antifraud, books and records and other provisions of the federal securities laws. The order also barred him for five years from association with any broker, dealer, or investment adviser. He also consented to the entry of a judgment in federal court, in the Southern District of New York, imposing a $200,000 penalty. The judgment resolves similar allegations contained in an SEC complaint filed in federal court, which charged Sihpol with violating the antifraud provisions and with aiding and abetting BASs violations of the broker-dealer record-keeping provisions of the federal securities laws. In the Matter of Legg Mason Wood Walker, Inc. Admin. Proc. Filing No. 3-12048 (Sept. 21, 2005) http://www.sec.gov/litigation/admin/34-52478.pdf On September 21, the Commission instituted a settled administrative and cease-anddesist proceeding against Legg Mason Wood Walker, Inc., a registered broker-dealer. The Commission found that from at least Sept. 1, 2002, through Oct. 19, 2003, Legg Masons flawed mutual fund order processing system enabled Legg Mason registered representatives to process more than 18,000 mutual fund orders after 4:00 p.m., ET, and receive the current days net asset value (NAV) without regard for the time the orders were placed. Hundreds of these orders were either received by Legg Mason after 4:00 p.m. or were the result of discretionary investment decisions made by Legg Mason registered representatives after 4:00 p.m. The Commission further found that Legg Mason had minimal written procedures governing the timing and pricing of mutual fund orders and, instead, relied almost exclusively on its mutual fund order entry system to block any orders from being processed after 4:00 p.m., regardless of their time of receipt. However, since 1997, Legg Masons system had been failing to block certain trades processed by Legg Mason registered representatives after 4:00 p.m. Although the violative trading was not the result of any improper agreements between Legg Mason personnel and their customers, this practice had the potential to affect shareholders in the mutual funds sold by Legg Mason. Shareholders in the mutual funds could have been harmed through dilution of their share values if Legg Mason personnel attempted to capitalize on postmarket information by processing mutual fund orders after hours based on stale prices. The Commission also found that Legg Mason failed to comply with the Exchange Acts recordkeeping requirements relating to the original time of order entry for mutual fund transactions and the time it received the orders from customers. Without admitting or denying the Commissions findings, Legg Mason consented to the entry of the order, which censures Legg Mason, and

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orders Legg Mason to cease and desist from violations of the charged provisions, comply with certain undertakings, and pay a $1,000,000 civil penalty. SEC v. Thomas W. Jones and Lewis E. Daidone Litigation Release No. 19330 (Aug. 8, 2005) http://www.sec.gov/litigation/litreleases/lr19330.htm On August 8, 2005, the Commission filed a civil injunctive action alleging that former Citigroup executives Thomas W. Jones and Lewis Daidone aided and abetted Citigroups fraud in the creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. Rather than passing the substantial fee discount on to the mutual funds, Citigroup took most of the benefit of the discount for itself, reaping tens of millions of dollars in profit at the expense of mutual fund shareholders. The actions against the individuals follow the Commissions settlement in May, in which Citigroup agreed to pay $208 million. In its complaint, the Commission alleges that Jones and Daidone were two of the officers principally responsible for the fraud. The complaint alleges that Jones, the former chief executive officer of the asset management division: (1) directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds third party transfer agent had been making; (2) approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work; (3) intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds independent directors were fully informed of the details of the proposal; and (4) approved the presentation delivered to the funds boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading. The complaint also alleges that Daidone, a senior vice president of the Adviser and the funds treasurer and chief financial officer, participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds best interests, which was not true. The complaint seeks permanent injunctions against future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and disgorgement of any ill-gotten gains and civil penalties. In the Matter of Canadian Imperial Holdings Inc. and CIBC World Markets Corp. Admin. Proc. File No. 3-11987 (July 20, 2005) http://www.sec.gov/litigation/admin/33-8592.pdf On July 25, 2005, the Commission instituted administrative proceedings against Canadian Imperial Holdings Inc. (CIHI) and CIBC World Markets Corp. According to the Commissions order, CIHI and World Markets, which are subsidiaries of Canadian Imperial Bank of Commerce, Inc. (CIBC), participated in a scheme to defraud numerous mutual funds and their shareholders through late trading and deceptive market timing. The Commission alleged that CIHI financed hedge fund customers while knowing the hedge funds would use the leverage to late trade and deceptively market time mutual funds; that CIHI provided, and World Markets arranged, improper financing for market timing hedge fund customers in violation of the 91

margin and extension of credit requirements; and that a team of World Markets registered representatives enabled numerous customers to late trade and market time mutual funds. The Commission found that CIHI violated antifraud provisions, margin requirements, and net asset value pricing requirements of the federal securities laws, and violated rules promulgated by the Municipal Securities Rulemaking Board regarding the extension of margin credit. The Commission found that World Markets violated net asset value pricing requirements and antifraud, records and reports, and margin and credit provisions of the federal securities laws. The Commission also found that World Markets violated regulations promulgated by the Federal Reserve Board regarding the extension of margin credit. Without admitting or denying the Commissions findings, the respondents agreed to pay, on a joint and several basis, disgorgement and prejudgment interest in the amount of $100 million, and a civil money penalty in the amount of $25 million, for a total payment of $125 million. The respondents also agreed to cease and desist from committing or causing any violations and any future violations and to comply with certain undertakings. SEC v. Amerindo Investment Advisors Inc., et al. Litigation Release No. 19245 (June 2, 2005) http://www.sec.gov/litigation/litreleases/lr19245.htm On June 1, 2005, the Commission filed a civil injunctive action alleging securities fraud charges against Amerindo Investment Advisors, Inc., a registered investment adviser, and Alberto William Vilar and Gary Alan Tanaka, Amerindos co-founders and principals, for misappropriating at least $5 million from an Amerindo client. The Commissions complaint alleges that in approximately June 2002, Vilar solicited an Amerindo client and close personal friend to invest $5 million in the Amerindo Venture Fund LP, a limited partnership that was purportedly being organized to qualify and be operated as a Small Business Investment Company. Tanaka then transferred the investors funds to accounts held by Vilar and Amerindo. When the investor inquired about the status of her investment, Vilar said the license was still pending, when in fact, the Small Business Administration had never approved a license for any Amerindo affiliated fund or received any deposits for that purpose. Vilar used the funds he received for various personal expenses, including making a donation to his alma mater. The Commission seeks disgorgement of the defendants ill-gotten gains, civil penalties, and permanent injunctions from future violations of the antifraud provisions of the federal securities laws. In addition, upon emergency motion by the Commission, the court granted a preliminary injunction against Amerindo prohibiting it from future violations of the federal securities laws and appointed a temporary monitor over Amerindo. In the Matter of Smith Barney Fund Management LLC and Citigroup Global Markets, Inc. Admin. Proc. File No. 3-11935 (May 31, 2005) http://www.sec.gov/litigation/admin/34-51761.pdf

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On May 31, 2005, the Commission settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. The two subsidiaries named as respondents in the action are Citigroup Global Markets, Inc. (CGM) and Smith Barney Fund Management LLC (Smith Barney), the investment adviser to the mutual funds. The Commission found that the respondents recommended that the mutual funds contract with an affiliate of Smith Barney to serve as transfer agent without fully disclosing to the mutual funds boards that most of the actual work was to be done under a subcontract arrangement that respondents had negotiated with the mutual funds existing third party transfer agent at steeply discounted rates. The Commission found that rather than passing the substantial fee discount on to the mutual funds, the respondents, through the affiliated transfer agent, took most of the benefit of the discount for themselves, reaping nearly $100 million in profit at the funds expense over a five-year period. The Commission found that the respondents violated antifraud provisions of the federal securities laws. In settling this action, the respondents consented, without admitting or denying the findings, to the Commissions order, which requires payment of $128 million in disgorgement and interest, $80 million in penalties, and compliance with substantial remedial measures. The remedial measures include a requirement that respondents put out for competitive bidding certain contracts for transfer agency services for the mutual funds. The Commissions investigation regarding individuals is continuing. SEC v. Thomas J. Gerbasio, et al. Litigation Release No. 19197 (April 21, 2005) http://www.sec.gov/litigation/litreleases/lr19197.htm In the Matter of Charles J. Addeo Admin. Proc. File No. 3-11908 (April 21, 2005) http://www.sec.gov/litigation/admin/34-51589.pdf In the Matter of Raymond L. Braun, Jr. Admin. Proc. File No. 3-11961 (June 23, 2005) http://www.sec.gov/litigation/admin/34-51914.pdf In the Matter of Fiserv Securities, Inc. and Dennis J. Donnelly Admin. Proc. File No. 3-11907 (Apr. 21, 2005) http://www.sec.gov/litigation/admin/34-51588.pdf On April 21, 2005, the Commission filed a civil action in federal district court in Pennsylvania against Thomas J. Gerbasio, and Raymond L. Braun, Jr., two former employees of Fiserv Securities, Inc., a broker-dealer headquartered in Philadelphia. The Commission also instituted settled administrative proceedings against Fiserv, Dennis J. Donnelly, Fiservs former COO, and Charles J. Addeo, a vice president for mutual funds at Fiserv. This matter involved

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illegal market timing schemes engaged in by Gerbasio, Braun, and Addeo. This matter further involves Fiservs and Donnellys failure to supervise those who engaged in the illegal conduct. The Commission alleged that in response to hundreds of notifications from mutual funds monitoring and restricting excessive trading, including kick-out letters rejecting market timing trades, Gerbasio, Braun, and Addeo employed a variety of deceptions and evasions on behalf of the hedge fund customers, including misrepresenting the nature of their trades to the funds and opening dozens of accounts under different names to conceal the customers identities from the funds. Between August 2002 and October 2003, the two hedge fund customers placed 37,965 market timing trades. As a result of their conduct, Gerbasio and Braun received at least $454,797 and $125,318, respectively, in ill-gotten gains. The Commission alleged that Gerbasio, Braun, and Addeo violated antifraud provisions of the federal securities laws. The Commission seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties against Gerbasio and Braun. Without admitting or denying any wrongdoing, Braun has consented to a permanent injunction as well as payment of disgorgement and prejudgment interest for a total of $133,576. The final judgment as to Braun waives payment of all but $20,000, and does not impose a civil penalty, based on Brauns sworn financial statements submitted to the Commission. Braun also agreed to a three-year bar from associating with any broker or dealer based on the entry of the injunction. Addeo agreed to a permanent injunction, a $30,000 penalty, and a 12-month suspension from associating with any broker or dealer. The Commissions enforcement proceedings against Fiserv and Donnelly found that Fiserv and Donnelly failed reasonably to supervise Gerbasio and Braun, with a view to preventing their violations of the federal securities laws. Without admitting or denying the Commissions findings, Fiserv has agreed to a censure, to pay $5 million in disgorgement and a $10 million civil penalty, and to undertake measures to prevent future misconduct. Donnelly agreed to pay a $50,000 civil penalty, as well as a to nine-month suspension from association in a supervisory capacity with any broker or dealer. SEC v. Pension Fund of America, LC, et al. Litigation Release No. 19161 (Mar. 30, 2005) http://www.sec.gov/litigation/litreleases/lr19161.htm On March 28, 2005, the Commission filed an emergency civil action to halt an ongoing offering fraud that targeted Latin American investors. On the same day, a federal district court issued temporary restraining orders, asset freezes, and other relief against the defendants Pension Fund of America, LC and PFA Assurance Group, Ltd. (collectively, PFA), unregistered investment advisers operating in Coral Gables, Florida, affiliated entities PFA International, Inc. and Claren, TPA, and their principals Luis Cornide and Robert de la Riva. The court also appointed a receiver over all of the entities named in the Commissions complaint. According to the Commissions complaint, from October 1999 to the present, PFA and its principals raised approximately $127 million from over 3,400 investors, through the sale of 94

retirement trust plans that purportedly combine life insurance and investments in mutual funds. Cornide and de la Riva have misappropriated at least $15 million of investors funds for themselves. The defendants failed to disclose to investors that their money was used to pay exorbitant commissions, an administrative fee, and other costs. Additionally, the Complaint alleges that defendants have misrepresented their relationship with financial institutions and broker-dealers, and perpetuated those misrepresentations by creating false certificates bearing unauthorized seals. The Commissions complaint alleges that defendants violated antifraud provisions of the federal securities laws and that Cornide and de la Riva further violated registration provisions. In addition to the emergency relief obtained, the Commissions civil action is seeking, among other things, preliminary and permanent injunctions, an order that the defendants disgorge all illgotten gains, with pre-judgment interest, and an order imposing civil money penalties.

CASES INVOLVING INSIDER TRADING

SEC v. Christopher M. Balkenhol Litigation Release No. 20115 (May 14, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20115.htm On May 14, 2007, the Commission filed settled insider trading charges against a former Oracle Corporation vice president who allegedly traded on confidential information about Oracle acquisition targets gleaned from his spouse, who was also employed by Oracle. The Commission alleged that Christopher Balkenhol learned about secret merger negotiations from his wife, who worked at Oracle as the lead executive assistant to Oracle's CEO and two co-Presidents. The complaint alleged that Balkenhol breached a duty not to misuse confidences gleaned from his wife for his own gain. The complaint alleged that Balkenhol engaged in pattern of insider trading by purchasing stock in Oracle acquisition targets before any public announcement of Oracle's interest. Balkenhol's first profitable trade came on March 1, 2005, when he invested $85,000 in Minneapolis-based Retek Inc. the day after Oracle executives began considering a tender offer for Retek. When Oracle announced the tender offer the following week, Retek's stock price jumped and Balkenhol sold the shares for approximately $15,000 in alleged unlawful profits. Balkenhol allegedly continued his pattern of insider trading with a series of stock purchases in another acquisition target, Siebel Systems, Inc., during Oracle's negotiations to acquire the company in 2005. On June 9, 2005, the day after Oracle's two co-Presidents secretly met with Siebel's CEO to initiate merger discussions, Balkenhol bought over $270,000 worth of Siebel's stock. Over the next three months, Balkenhol made three additional purchases of Siebel stock, each following a critical advance in the confidential negotiations. Again, Balkenhol's wife had access to detailed inside information relating to each such advance. From June to September, Balkenhol ultimately purchased over 50,000 shares of Siebel stock for a total of approximately $448,000. Immediately after Oracle's September 12, 2005 announcement of its acquisition of Siebel, Balkenhol sold his entire position for approximately $82,000 in unlawful profits. 95

Without admitting or denying the Commission's allegations, Balkenhol agreed to pay in settlement of the Commission's action $97,282 in disgorgement, $4,115 in prejudgment interest and a $97,282 civil penalty. Balkenhol also agreed to a permanent injunction from further violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934, and Rules 10b-5 and 14e-3 thereunder.

SEC v. Jennifer Xujia Wang, et al. Litigation Release No. 20112 (May 10, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20112.htm On May 10, 2007, the Commission charged Jennifer Xujia Wang, an employee of Morgan Stanley & Co., Inc., and her husband, Ruben Chen a.k.a. Ruopian Chen, a former employee of ING Investment Management Services, LLC, with insider trading. The Commission charged Chen and Wang with using online brokerage accounts in Wang's mother's name, Zhiling Feng, to purchase securities of three companies on the verge of announcing they would be acquired. Wang and Chen allegedly used material non-public information from Wang's employer, which was contacted to provide services in connection with the acquisitions. Acting on the Commission's request, the Court issued a temporary restraining order which, among other things, froze the defendants' assets and ordered repatriation of funds taken out of the United States. The Commission's complaint alleged that Wang and Chen obtained illegal profits of more than $600,000 by trading on the basis of material nonpublic information before the public announcements of three acquisitions. The complaint further alleged that Wang was privy to material nonpublic information concerning each of these pending acquisitions. Since Aug. 29, 2005, Wang has been employed as a Vice President of Morgan Stanley in a group that supported the Principal Transaction Group, which provides financing for MSRE and other entities' potential acquisitions. In this position, Wang received documents via e-mail and had access to documents on a shared network drive which demonstrated that the firm was providing financing on certain acquisitions before they were publicly announced. The Commission's complaint alleged that Chen and Wang funded and exercised control over Feng's online brokerage accounts. When Feng's first brokerage account was opened, it is alleged that it was funded with money from a checking account in Wang and Chen's name. In addition, Feng, who lives in Beijing, China, did not access the two online brokerage accounts that were opened in her name on the days of the relevant trading. Rather, it is alleged that most of the logins to the brokerage accounts were from Internet Protocol addresses at ING and from Chen and Wang's home in New Jersey. As a result of the conduct described in the complaint, the Commission alleged that Chen and Wang violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 96

thereunder and, as permanent relief, sought permanent injunctions against future violations, disgorgement of all ill-gotten gains, prejudgment interest, and civil penalties. The complaint named Feng as a relief defendant and sought disgorgement of Chen and Wang's ill-gotten gains, plus prejudgment interest from her.

SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp, Sunil Sehgal, Seema Sehga. Hafiz Naseem and Francisco Javier Garcia Litigation Release No. 20105 (May 4, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20105.htm On May 2, 2007, the Commission charged Hafiz Naseem, an investment banker with Credit Suisse (USA) LLC, with illegally divulging non-public information to a person believed to be a banker in Pakistan concerning the leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Naseem allegedly misappropriated the information from his employer, Credit Suisse, which served as a financial advisor to TXU in connection with the buyout. The Commission originally filed a complaint in the U.S. District Court for the Northern District of Illinois on March 2, 2007, alleging insider trading ahead of the TXU buyout against Certain Unknown Purchasers of TXU Call Options. The Commission amended its complaint to name Naseem as a defendant. The Commission's Second Amended Complaint alleged that Naseem, in breach of his duty to Credit Suisse and its client TXU, telephoned the Pakistani banker on several occasions in February 2007 and disclosed non-public, material information about the proposed but unannounced TXU buyout. The Pakistani banker allegedly traded on the inside information provided by Naseem and reaped millions of dollars in profits when the buyout was publicly announced. In addition to tipping at least one of the traders in the TXU case, the SEC alleged that Naseem tipped the Pakistani banker and possibly others concerning eight additional mergers or business deals since joining Credit Suisse's New York office in March 2006. According to the SEC's complaint, after receiving the insider information from Naseem, the Pakistani banker purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and made profits of approximately $5 million following public announcement of the buyout. The SEC's complaint further alleged that Naseem also divulged pending, but unannounced, business combinations and deals involving eight other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The complaint noted that Credit Suisse served as an investment banker or financial advisor in all of these deals, and Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. The complaint alleged that the

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Pakistani banker also purchased securities in those companies in advance of public merger announcements, obtaining additional profits of more than $2.4 million. According to the SEC's complaint, Naseem opened a brokerage account in Pakistan in May 2006 and granted the Pakistani banker trading authority over that account to conceal his personal financial benefit from his misappropriations. The Commission sought injunctive relief, disgorgement, and money penalties against Naseem. In its complaint, the SEC also identified another previously unidentified trader who purchased in advance of the public announcement regarding TXU. The SEC alleged that Francisco Javier Garcia, believed to be a resident of Switzerland, purchased TXU securities through an omnibus account at Fimat Frankfurt and is believed to have done so on inside information. SEC v. Martha Stewart and Peter Bacanovic Litigation Release No. 19794 (Aug. 7, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19794.htm On August 7, 2006, the Commission filed a settled insider trading action against Martha Stewart and Peter Bacanovic relating to Stewart's sale of ImClone Systems stock in December 2001. The Commission's complaint, filed in June 2003, charges Stewart and Bacanovic with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint alleges that on December 27, 2001, Bacanovic, then a broker, illegally tipped his client, Stewart, with the nonpublic information that the then CEO of ImClone Systems, Samuel D. Waksal, and his daughter were selling their ImClone stock. Based on this information, Stewart sold all of her ImClone stock. The next day, ImClone announced that the FDA had refused to file ImClone's license application for a new cancer drug, Erbitux, and ImClone's stock price dropped 16%. Stewart and Bacanovic have agreed to settle the Commission's enforcement action by consenting to final judgments that impose permanent injunctions prohibiting them from violating the antifraud provisions of the federal securities laws and imposing the following relief against each defendant. Stewart will pay disgorgement of $45,673, representing the losses avoided from her insider trading, plus prejudgment interest of $12,389, for a total of $58,062, and a civil penalty of $137,019, representing three times the amount of the losses avoided. Stewart has also agreed to a five year bar from serving as a director of a public company, and a five year limitation on her service as an officer or employee of a public company by prohibiting her from participating in certain activities, including financial reporting, financial disclosure, monitoring compliance with the federal securities laws, internal controls, audits or Commission filings. Bacanovic will pay disgorgement of $510, representing the commissions he earned as a result of the Stewart's ImClone stock sale, plus prejudgment interest of $135, for a total of $645, and a civil penalty of $75,000. In August 2004, the Commission barred Bacanovic from associating with a broker, dealer or investment adviser. Stewart and Bacanovic have agreed to consent to the judgments without admitting or denying the allegations in the complaint.

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The proposed judgments provide that, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, the disgorgement and penalties will be deposited with the Court and added to the disgorgement fund for the benefit of the victims of this case. The defendants consent to the judgments without admitting or denying the allegations in the complaint.

SEC v. Deephaven Capital Management, LLC and Bruce Lieberman Litigation Release No. 19683 (May 2, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19735.htm On May 2, 2006, the Commission filed a civil injunctive action against hedge fund adviser Deephaven Capital Management, LLC and its former portfolio manager Bruce Lieberman, charging them with insider trading from August 2001 to March 2004 on the information that 19 private investment in public equity (PIPE) stock offerings were about to be publicly announced. In each case, the companys stock price fell on the announcement of its PIPE offering. The defendants learned confidential nonpublic details about the upcoming PIPE offerings from placement agents for the companies and sold short the company shares on behalf of the Deephaven Small Cap Growth Fund, LLC, profiting from the price decline when the PIPE offerings were publicly announced. Deephaven and Lieberman each consented, without admitting or denying the allegations in the complaint, to final judgments permanently enjoining them from violating Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5. Deephaven also agreed to disgorge $2,683,270 in unlawful profits, plus $343,418 prejudgment interest, and to pay a $2,683,270 civil penalty. Lieberman agreed to pay a $110,000 civil penalty and to a Commission order barring him from associating with any investment adviser, with the right to reapply after three years, in an administrative proceeding to be instituted based on entry of the anticipated final judgment. SEC v. Nelson J. Obus, et al. Litigation Release No. 19667 (Apr. 25, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19667.htm On April 25, 2006, the Commission filed a contested insider trading action against Nelson J. Obus, Peter F. Black, and Thomas Bradley Strickland in connection with trading for three hedge funds in advance of the June 19, 2001, public announcement of a merger agreement between SunSource, Inc. and Allied Capital Corporation. In a complaint filed in the S.D.N.Y., the Commission alleged that Obus directed the purchase of 287,200 shares of SunSource stock in accounts of three hedge funds he managed after being tipped by Black, who had been tipped by Strickland. As a result of the trading, the three funds Wynnefield Partners Small Cap Value L.P. (Wynn), Wynnefield Partners Small Cap Value L.P. I (Wynn I), Wynnefield Partners Small Cap Value Offshore Fund, Ltd. (Wynn II) had illicit gains of $1,335,700. The Commission sought injunctions, disgorgement, and other sanctions. The three funds are named as relief defendants. 99

The Commission alleged that Strickland, an employee of GE Capital Corporation, learned material, nonpublic information about the proposed acquisition of SunSource by Allied in mid-May 2001, after being assigned to work on the deal and attending a meeting with members of SunSources management. According to the complaint, shortly thereafter, Strickland called his close friend Black, who was an analyst for Wynnefield Capital, Inc., and tipped him about the upcoming merger. Black then tipped his boss, Obus, who was a founder and principal of Wynnefield Capital. The Commission also alleged that on June 8, 2001, Obus directed the purchase of a block of 287,200 shares of SunSource stock at $4.75 per share. This was the largest purchase of SunSource stock that Obus had ever made and comprised more than 99% of SunSource stock that was traded that day. The shares were deposited into accounts of relief defendants Wynn, Wynn I, and Wynn II. On June 19, 2001, SunSource and Allied jointly announced that they had signed a definitive merger agreement. SunSources stock closed that day at $9.50 per share, an increase of 91.5% over the prior days closing price, and based on this, the relief defendants had profits of $1,335,700. According to the complaint, Obus and Black each had an interest in two of the relief defendant funds. In its complaint, the Commission sought a final judgment enjoining Obus, Black, and Strickland from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, ordering disgorgement of $1,335,700 in illicit gains jointly and severally from the individual defendants and relief defendants, imposing a civil money penalty on the individual defendants, and prohibiting Obus and Black from serving as an officer or director of a public company. SEC v. Sonja Anticevic, et al. Litigation Release No. 19650 (Apr. 11, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19650.htm On April 11, 2006 the Commission announced new charges against individuals involved in international schemes of serial insider trading that yielded at least $6.7 million of illicit gains. The schemes were orchestrated by two individuals: Eugene Plotkin, a research analyst at Goldman Sachs, and David Pajcin, a former employee of Goldman Sachs. The charges were made in a Second Amended Complaint, which the Commission submitted to the Court in a pending action charging insider trading in advance of the August 2005 Reebok-adidas-Salomon AG (adidas) merger announcement. In total, Plotkin and Pajcin traded in at least 25 stocks within one year based on inside information obtained through these schemes. The Commissions complaint charged 13 individuals in the United States and Europe for their roles in the scheme. This complaint follows two prior complaints filed by the Commission in August 2005 charging insider trading in Reebok securities and successfully freezing over $6 million in trading proceeds. The complaint alleged that Plotkin and Pajcin infiltrated the investment banking unit of Merrill Lynch, repeatedly learning of mergers and acquisitions transactions before they became public. In exchange for a share of the illegal profits, Stanislav Shpigelman, an analyst at Merrill 100

Lynch, leaked confidential information to defendants Plotkin and Pajcin concerning at least six mergers or acquisitions that Merrill Lynch was working on, prior to the time the deals became public. Plotkin and Pajcin traded on the insider information and passed the insider information on to individuals in the United States and Europe (Traders) who traded on it. Plotkin and Pajcin had an agreement with the Traders, pursuant to which they were to receive a percentage of the illicit profits made by the Traders. The complaint further alleged that Plotkin and Pajcin also infiltrated one of the printing plants utilized by BusinessWeek, repeatedly obtaining advance copies of the market-moving Inside Wall Street (IWS) column in BusinessWeek. Plotkin and Pajcin recruited two individuals first, Nickolaus Shuster, and later Juan C. Renteria, Jr. to obtain employment at Quad/Graphics, Inc., one of four printing plants that print BusinessWeek magazine, for the sole purpose of stealing copies of upcoming editions of the magazine, and calling Plotkin or Pajcin to read them key portions of IWS before the column became available to the public. The complaint alleged that Shuster and Renteria provided Plotkin or Pajcin with insider information concerning at least twenty companies that were featured in the IWS column. Plotkin and Pajcin then either traded on the IWS insider information or passed the information to some or all of the traders, who traded on the insider information. The BusinessWeek Scheme yielded over $345,000 in illicit trading profits. On Aug. 5, 2005, within 48 hours after the announcement of the Reebok-adidas merger, the Commission obtained a court order from the United States District Court for the Southern District of New York freezing a securities account in the name of Sonja Anticevic, Pajcins aunt. The Commission sought additional emergency relief on Aug. 18, 2005, related to the Reebok trading against 8 additional defendants. As a result, the Court ultimately entered preliminary injunction against all of the defendants, and the Commission obtained Court orders freezing over $6 million in illegal profits stemming from insider trading in Reebok securities. The Commission alleged that the defendants engaged in illegal insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the Commission alleges that defendants Plotkin, Pajcin, and Shpigelman violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder by trading in the stock of a company while in possession of material, non-public information related to a cash tender offer for such companys stock. Among other things, the complaint sought permanent injunctive relief, the disgorgement of all illegal profits plus prejudgment interest, the imposition of civil monetary penalties, and orders requiring the defendants to repatriate to the United States proceeds of the fraud in accounts outside the United States. SEC v. Gary Herwitz and Tracey A. Stanyer Litigation Release No. 19499 (Dec. 19, 2005) http://www.sec.gov/litigation/litreleases/lr19499.htm On December 19, 2005, the Commission announced that it filed a settled insider trading action against Gary D. Herwitz, a certified public accountant and former president of the accounting firm Mahoney Cohen & Company, and Tracey A. Stanyer, former executive vice 101

president of Sirius Satellite Radio Inc. The complaint, filed in the Southern District of New York, alleges that the defendants engaged in illegal insider trading when they purchased Sirius stock in advance of the October 6, 2004 announcement that radio broadcaster Howard Stern had signed a $500 million agreement with Sirius. In the complaint, the Commission alleges that Herwitz purchased Sirius stock on September 30, 2004, after learning in confidence from his Mahoney Cohen colleague, who is Sterns longtime accountant, that Stern had received an offer from Sirius and that the parties were negotiating. The Commission alleges that Stanyer purchased Sirius stock on October 5, 2004, after learning in confidence from a senior Sirius executive that Sirius had signed an agreement with Stern. Finally, the Commission alleges that, based on this conduct, Herwitz and Stanyer violated Section 10(b) of the Securities Exchange Act and Rule 10b-5. Both Herwitz and Stanyer have consented to full disgorgement plus prejudgment interest, penalties, and antifraud injunctions. The judgment against Herwitz orders him to pay $18,163 to disgorge fully his profits plus prejudgment interest and to pay civil penalties in the amount of $34,000. Similarly, the judgment against Stanyer orders him to pay $17,897 to disgorge fully his profits plus prejudgment interest and to pay civil penalties in the amount of $17,357. Stanyer has also consented to a bar from serving as an officer or director of a public company. SEC v. Lohmus Haavel & Viisemann, et al. Litigation Release No. 19450 (Nov.1, 2005) http://www.sec.gov/litigation/litreleases/lr19450.htm On November 1, 2005, the Commission filed an emergency federal court action, charging Lohmus Haavel & Viisemann (Lohmus), an Estonian financial services firm, and two of its employees, Oliver Peek and Kristjan Lepik, with conducting a fraudulent scheme involving the electronic theft and trading in advance of more than 360 confidential press releases issued by more than 200 U.S. public companies. The Commission obtained a temporary restraining order which, among other things, freezes the defendants assets and orders the repatriation of funds taken out of the United States. The Commission alleges that, in June 2004, Lohmus became a client of Business Wire, a leading commercial disseminator of news releases and regulatory filings for companies and groups throughout the world, for the sole purpose of gaining access to Business Wires secure client website. Once defendants had access, they surreptitiously utilized a software program, a so-called spider program, which provided unauthorized access to confidential information contained in impending nonpublic press releases of other Business Wire clients, including the expected time of issuance. Since January 2005, Lohmus made at least $7.8 million in illegal profits. The complaint further alleges that the information fraudulently stolen by the defendants allowed them to strategically time their trades around the public release of news involving, among other things, mergers, earnings, and regulatory actions. Using several U.S. brokerage accounts, the defendants bought long or sold short the stocks of the companies from which they stole confidential press release information, and purchased options to increase their profits. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, together with prejudgment interest, and the imposition of civil monetary penalties.

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SEC v. Sonja Anticevic et al. Litigation Release No. 19340 (Aug. 18, 2005) http://www.sec.gov/litigation/litreleases/lr19340.htm Litigation Release No. 19327 (Aug. 5, 2005) http://www.sec.gov/litigation/litreleases/lr19327.htm On August 5, the Commission obtained a court order freezing a securities account in the name of Sonja Anticevic, a Croatian national and resident, in which a series of highly profitable and timely trades of out of the money Reebok International Ltd. (Reebok) call options occurred in the two days prior to an August 3 announcement that Reebok had agreed to be acquired by adidas-Salomon AG. On August 18, 2005, the Court entered a Preliminary Injunction against Anticevic which, among other relief, continues the asset freeze. Also on August 18, 2005, in a second emergency action alleging insider trading in the securities of Reebok, the Commission also charged eight additional individuals who reaped illegal profits from the trades: Ilija Borac, Perica Lopandic, David Pajcin, Elvis Santana, Henry Siegel, Zoran Sormaz, Monika Vujovic, and certain unknown persons trading in an account at an Austrian broker, Direktanlage.at AG. The amended complaint alleges that Pajcin, a former broker and Anticevics nephew, placed or directed some of the Reebok trades, and tipped other defendants who placed Reebok trades. The Commission also alleges that the defendants acted in concert or under a common direction, collectively netting a profit of over $6 million by placing the Reebok trades of out of money Reebok call options - $4 million through domestic trading, $2 million from foreign trading. The illegal trading took place in domestic and offshore brokerage accounts held by residents of the U.S., Croatia and Germany, the Commission alleged. In addition to the Reebok trading, overlapping trades were placed at the same time in both the domestic and foreign accounts in the securities of other companies. The Commission obtained temporary restraining orders that freeze the proceeds of trading in Reebok securities in the domestic accounts and require the repatriation and freezing of the proceeds in the foreign accounts. Among other things, the complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil monetary penalties. SEC v. Philip Evans and Paul Evans Litigation Release No. 19312 (July 26, 2005) http://www.sec.gov/litigation/litreleases/lr19312.htm On July 26, 2005, the Commission charged a financial analyst for Merix Corporation, an Oregon circuit board manufacturer, with trading on inside information and tipping his brother, 103

allowing the pair to net over $400,000 in illegal profits. The Commission alleges that Philip E. Evans sold Merix stock in May 2004 after learning from his boss that the company was preparing to report disappointing financial news. The Commission alleges that Philip Evans avoided losses and made profits of over $30,000. According to the Commission, Philip Evans also passed the information to his brother Paul Evans who bought Merix put options. When the public announcement drove down Merixs stock price, Paul Evans made profits in excess of $400,000. The Commission also alleges that Philip Evans shared the nonpublic information with his mother, who avoided losses of over $3,000, and that Paul Evans shared the nonpublic information with a friend who profited approximately $14,000 by trading Merix securities. The Commissions complaint alleges that through their fraudulent trading and tipping, Philip and Paul Evans violated antifraud provisions of the federal securities laws. The Commission seeks injunctive relief, disgorgement of all ill-gotten gains as well as the gains of the people they tipped plus pre-judgment interest and civil monetary penalties. SEC v. Gary D. Force Litigation Release No. 19252 (June 8, 2005) http://www.sec.gov/litigation/litreleases/lr19252.htm On June 8, 2005, the Commission filed an insider trading action against Gary D. Force, the owner of automobile dealerships in Kentucky and Tennessee. The Commissions complaint alleged that from June 1998 through December 1999, Force traded based on inside information he received from his broker about seven upcoming mergers or acquisitions. Force made more than $1.5 million in profits from his trading. Force also shared some of the recommendations with his daughter, who purchased stock in advance of four deals and reaped more than $220,000 in profits. The Commissions complaint alleged that Forces trading was part of a broader insider trading scheme that was launched on the Internet and ultimately involved more than twenty individuals located in and around New York City and Bowling Green, Kentucky. Eighteen individuals have been convicted criminally for their roles in the scheme and the Commission has also obtained civil judgments against those eighteen individuals. Force has agreed to settle the charges against him by consenting, without admitting or denying the findings in the Commissions complaint, to the entry of a final judgment ordering him to pay a total of $4,152,197. This amount includes disgorgement of Forces profits in the amount of $1,515,213 and disgorgement of his daughters profits in the amount of $221,062; prejudgment interest in the amount of $900,709; and a civil penalty of $1,515,213. The final judgment also enjoins Force from future violations of antifraud provisions of the federal securities law.

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SEC v. Hilary L Shane Litigation Release No. 19227 (May 18, 2005) http://www.sec.gov/litigation/litreleases/lr19227.htm In the Matter of Hilary L. Shane Admin. Proc. File No. 3-11951 (June 14, 2005) http://www.sec.gov/litigation/admin/34-51839.pdf On May 18, 2005, the Commission announced that it filed a complaint in the Southern District of New York against Hilary L. Shane alleging that Shane committed insider trading and registration violations by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering and prior to the effective date of the resale registration statement for the PIPE shares. This case represents the first settlement of insider trading charges against a hedge fund manager in connection with a PIPE offering. The Commissions complaint alleged that, in September of 2001, Shane was asked to participate in a PIPE offering by CompuDyne. The Commissions complaint also alleged that Shane agreed to purchase shares in the PIPE offering for her personal account and for one of the hedge fund accounts she managed. Shane agreed to keep information about the PIPE offering confidential. Before the public announcement of the PIPE offering, Shane began short selling CompuDyne securities in both her personal account and the hedge funds account. Shane continued short selling CompuDyne shares until she had sold the same number of shares she had been allocated in the PIPE offering. After the PIPE was announced and caused CompuDynes share price to drop, Shane covered all of her short sales with the shares she obtained in the PIPE offering making substantial profits for both accounts. The Commissions complaint alleged that Shanes short selling violated antifraud provisions of the federal securities laws. The complaint also alleged that Shanes short selling of CompuDyne shares prior to the effective date of the resale registration statement for the PIPE shares and covering those short sales with the shares she obtained in the PIPE offering violated registration provisions. Without admitting or denying the allegations in the Commissions complaint, Shane consented to the entry of a final judgment in which she is permanently enjoined from further violations of the antifraud and registration provisions of the federal securities laws and agreed to pay disgorgement of the trading profits, plus prejudgment interest and a civil penalty totaling $1,075,015. In separate administrative proceedings, Shane also consented to be barred from the broker-dealer industry and suspended for twelve months from the investment advisory industry.

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SEC v. Ernesto Sibal, et al. Litigation Release No. 19210 (April 28, 2005) http://www.sec.gov/litigation/litreleases/lr19210.htm On April 28, 2005, the Commission filed settled enforcement proceedings against five individuals, Ernesto V. Sibal, Doseph J. Shin, Chae Hyon Chin, Benjamin Y. Chiu, and Pejman Sabet and an unsettled action against a sixth individual, Robert Y. Joo, for their participation in fraudulent insider trading schemes that yielded collective profits in excess of $970,000. In its complaint, the Commission alleged that, during 2002 and 2003, Shin and Joo misappropriated material nonpublic information from the investment banks where they worked and tipped Sibal, Chin, Chiu, and Sabet in advance of one or more of four separate merger transactions. The complaint alleges that during the course of these insider trading schemes, the individuals who executed the trades shared their illegal profits with Shin and/or Joo. Without admitting or denying the Commissions allegations, Sibal, Shin, Chin, Chiu and Sabet have consented to the entry of a permanent injunction prohibiting them from further violations of antifraud provisions of the federal securities laws. These settling defendants have agreed to pay a total of $1,111,515.23 in disgorgement, prejudgment interest, and penalties. Joo has not settled with the Commission. The complaint against Joo seeks a permanent injunction against future violations, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties. In addition, based upon the courts anticipated entry of the final judgment, Sibal, Shin, and Chiu each have agreed, without admitting or denying the Commissions findings, to the issuance of a settled administrative order finding that each has violated antifraud provisions of the federal securities laws. The Commissions order will bar Sibal and Shin from associating with any broker or dealer, and will bar Chiu from associating with any broker, dealer or investment adviser. Related criminal actions are pending against all six defendants. SEC v. Guillaume Pollet Litigation Release No. 19199 (Apr. 21, 2005) http://www.sec.gov/litigation/litreleases/lr19199.htm On April 21, 2005, the Commission announced that it has charged Guillaume Pollet, a former managing director of SG Cowen & Co., with insider trading and fraud for short selling the stock of companies prior to the companies closing on a private offering of stock, including offerings in which SG Cowen invested. The private offerings are often referred to as PIPEs for private investment in public equity, and, because they dilute the pool of shares, they typically drive a shares price down. At the time of the misconduct, Pollet was in charge of investing SG Cowen proprietary funds in PIPE transactions.

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The Commissions complaint alleges that during 2001 Pollet, after receiving confidential non-public information about the upcoming PIPE transaction, traded in the shares of ten public companies that either engaged in, or were contemplating engaging in, PIPE financings. As a result of Pollets illicit trading, SG Cowen locked in over $4 million in trading profits, in addition to other gains SG Cowen made on the transactions. In several instances, SG Cowen also acted as the PIPE issuers investment banker. The Commissions complaint also alleges that, in several instances, Pollets short selling was directly contrary to representations that SG Cowen made to PIPE issuers in connection with the PIPE transactions. The Complaint alleges that through his fraudulent trading Pollet violated antifraud provisions of the federal securities laws. The Commission is seeking injunctive relief, disgorgement of all ill-gotten gains plus prejudgment interest, and civil penalties.

CASES INVOLVING MARKET MANIPULATION

In the Matter of Park Financial Group, Inc. and Gordon C. Cantley Admin. Proc. File No. 3-12614 (April 11, 2007) http://www.sec.gov/litigation/admin/2007/34-55614.pdf On April 11, 2007, the Commission announced the institution of administrative and cease-and-desist proceedings against Winter Park, Fla.-based broker-dealer Park Financial Group, Inc. and its principal, Gordon Cantley. In the Order Instituting Proceedings, the Division of Enforcement alleged that Park and Cantley aided and abetted and caused a pump-and-dump scheme involving the securities of Spear & Jackson, Inc. and failed to file Suspicious Activity Reports (SARs) reporting suspicious transactions, in violation of the firm's record-keeping obligations. The Commission, in a settled proceeding, had already obtained injunctive relief against Dennis P. Crowley, the former chief executive officer of Spear & Jackson, for alleged violations of the antifraud, registration and reporting provisions of the federal securities laws in connection with his role in the pump-and-dump scheme. See Litigation Release No. 19072, Feb. 10, 2005 (http://www.sec.gov/litigation/litreleases/lr19072.htm). The Complaint alleged that between February 2002 and July 2003, Park, a registered broker-dealer with a disciplinary history, and Cantley executed numerous trades in Spear & Jackson stock, despite obvious red flags, for three companies located in the British Virgin Islands (BVI Companies), which Crowley secretly controlled. Specifically, it is alleged that on several occasions, Crowley gave Park and Cantley sell orders for the BVI Companies' accounts. Park and Cantley filled these orders even though each of these foreign-based accounts, which were rare for Park, required the written approval of at least two authorized individuals before any transaction could occur, and Crowley was not an authorized signatory. It is further alleged that Park and Cantley executed Crowley's trades knowing that he was the chief executive officer of Spear & Jackson and that the BVI Companies' accounts traded exclusively in Spear & Jackson stock, often buying and selling shares on a daily basis. Park and Cantley also knew that the BVI Companies were transferring large amounts of Spear & Jackson stock to a stock promoter, which 107

was actively promoting Spear & Jackson, and Spear & Jackson's stock price was sharply increasing. During the relevant time period, Park and Cantley allegedly executed more than 200 trades in Spear & Jackson stock for the BVI Companies' accounts, which generated approximately $2.5 million in proceeds. The Commission's Complaint also alleged that Park failed to report suspicious transactions in Spear & Jackson stock by filing SARs with the Financial Crimes Enforcement Network as required by regulations implementing the Bank Secrecy Act, which was amended by the USA Patriot Act and became effective Dec. 31, 2002. This was the first Commission enforcement action alleging violations due to a broker-dealer's failure to file a SAR. The proceedings instituted will determine whether Park and Cantley should be ordered to cease and desist from committing or causing violations of and any future violations of Sections 10(b) and 17(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 17a-8 thereunder. Additionally, the proceedings will determine what, if any, remedial action is appropriate in the public interest against Park pursuant to Section 15(b)(4) of the Exchange Act and against Cantley pursuant to Section 15(b)(6) of the Exchange Act including, but not limited to, disgorgement and civil penalties. SEC v. Jaisankar Marimuthu, Chockalingam Ramanathan and Thirugnanam Ramanathan Litigation Release No. 20037 (March 12, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20037.htm On March 12, 2007, the Commission filed a complaint in the United States District Court for the District of Nebraska charging three Indian nationals with participating in a fraudulent scheme to manipulate the prices of at least fourteen securities through the unauthorized use of other people's online brokerage accounts. The Commission's complaint alleged that, between July and November 2006, Jaisankar Marimuthu, Chockalingam Ramanathan and Thirugnanam Ramanathan hijacked the online brokerage accounts of unwitting investors using stolen usernames and passwords. Prior to intruding into these accounts, the Defendants acquired positions in the securities of at least thirteen issuers and options on shares of another issuer. Then, without the account holders' knowledge, and using the victims' own accounts and funds, the Defendants placed scores of unauthorized buy orders at above-market prices. After these unauthorized buy orders were placed, the Defendants sold the positions held in their own accounts at the artificially inflated prices. These transactions created the appearance of legitimate trading activity and pumped up the share price of the fourteen securities. The complaint further alleged that on several occasions, the Defendants opened new online brokerage accounts using stolen personal information, and then funded these accounts using funds taken from the unknowing account holders' own bank accounts. In total, the Defendants realized unlawful trading profits of at least $121,500. Online broker-dealers whose customers' accounts were compromised suffered losses of least of $875,000 as a result of the Defendants' fraudulent conduct. The Commission's action charged the Defendants with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the 108

Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and sought permanent injunctive relief, disgorgement and civil money penalties. In a related criminal action, a federal court in Nebraska unsealed a twenty-three count indictment charging both Marimuthu and Chockalingam Ramanathan with one count of conspiracy, eight counts of computer fraud, six counts of wire fraud, two counts of securities fraud, and six counts of aggravated identity theft. The indictment also charged Thirugnanam Ramanathan with one count of conspiracy, two counts of computer fraud, and two counts of aggravated identity theft. The conspiracy and computer fraud charges each carry a maximum sentence of five years in prison. Wire fraud and securities fraud carry maximum sentences of twenty and twenty-five years, respectively. Each count of aggravated identity theft adds two years in prison, with at least one of those terms running consecutively with the sentences for the other charges. Operation Spamalot Securities Exchange Act of 1934 Release No. 55420 (Mar. 8, 2007) http://www.sec.gov/news/press/2007/2007-34.htm http://www.sec.gov/litigation/suspensions/2007/34-55420.pdf On March 8, 2007, the Commission suspended trading in the securities of 35 companies that have been the subject of recent and repeated spam email campaigns. The trading suspensions are part of a stepped-up SEC effort, code named "Operation Spamalot" - to protect investors from potentially fraudulent spam email hyping small company stocks with phrases like, "Ready to Explode," "Ride the Bull," and "Fast Money." It's estimated that 100 million of these spam messages are sent every week, triggering dramatic spikes in share price and trading volume before the spamming stops and investors lose their money. The trading suspensions will last for ten business days. The trading suspensions commenced on March 8, 2007, at 9:30 a.m., EDT, and terminate at 11:59 p.m., EDT, on March 21, 2007. The 35 suspensions involve companies that are not subject to the reporting requirements of the Securities Exchange Act of 1934. The companies' securities have been quoted on the Pink Sheets quotation service on an unsolicited basis, meaning that the brokers posting quotations for the purchase and sale of the securities are not required to conduct due diligence regarding the issuers. SEC v. Aleksey Kamardin Litigation Release No. 19981 (Jan. 25, 2007) http://www.sec.gov/litigation/litreleases/2007/lr19981.htm On January 25, 2007, the Commission filed a complaint in the Middle District of Florida charging twenty-one year old Aleksey Kamardin with participating in a fraudulent scheme to manipulate the prices of numerous stocks through the unauthorized use of online brokerage accounts.

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The Commission alleges that between July 13 and August 25, 2006, Kamardin commandeered the online trading accounts of unwitting investors at various broker-dealers, liquidated existing equity positions and, using the resulting proceeds, purchased thinly traded stocks in order to create the appearance of trading activity and pump up the price of the stocks. The Commission further alleges that in seventeen instances, Kamardin bought shares in the thinly traded issuer in his own account just prior to or at the same time that compromised accounts were made to buy shares, creating the false appearance of market activity. Shortly after the intrusions, Kamardin sold all of his shares at the inflated prices. In all but three of these instances, Kamardin realized a profit from his trading, netting a total profit of $82,960. The Commission's action charges Kamardin with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks permanent injunctive relief, disgorgement and civil money penalties. Securities and Exchange Commission v. Mervin George Fiessel and Robert Michael Doherty Litigation Release No. 19902 (Nov. 8, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19902.htm On November 8, 2006, the Commission and the British Columbia Securities Commission (BCSC) simultaneously announced settled cases against British Columbia residents Mervin Fiessel, 61, and Robert Doherty, 42, in a market manipulation scheme involving a Nevada company, Greyfield Capital, Inc., and a British Columbia car dealership called the Autorama. Greyfield traded under the symbol GRYF on the U.S. over-the-counter market and was quoted on the pink sheets. The Complaint alleges that Fiessel, Doherty and others (either collectively or individually the "Greyfield Promoters") misappropriated Greyfield Nevada and its trading symbol GRYF through a series of unauthorized corporate actions, reincorporated the company in Oregon ("Greyfield Oregon"), and claimed that Greyfield Oregon had acquired the Autorama. As a result, the original shareholders of Greyfield complained that the identity of their company had been stolen. The Greyfield Promoters then improperly issued hundreds of millions of new shares of Greyfield Oregon and conditioned the market with false and misleading publicity about Greyfield Oregon, its management and the Autorama. Almost immediately thereafter, Fiessel and others began selling tens of millions of Greyfield Oregon shares. Without admitting or denying the allegations in the complaint, Fiessel and Doherty consented to: (1) injunctions against future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933; (2) officer and director bars; and (3) penny stock bars. Fiessel also consented to liability for disgorgement of $147,486.60 plus prejudgment interest of $7,634. Doherty consented to liability for disgorgement of $26,125.40. Doherty's obligation to pay prejudgment interest of $1,626.32 was waived and no penalty was imposed based on his sworn Statement of Financial Condition. The BCSC simultaneously announced settlements with Fiessel and Doherty pursuant to which Fiessel also agreed to pay an additional monetary 110

sanction of Cdn.$144,445 to the BCSC. The BCSC did not impose a monetary sanction on Doherty based on his sworn Statement of Financial Condition. The BCSC imposed additional non-monetary sanctions on the two British Columbia residents. SEC v. Faisal Zafar and Sameer Thawani Litigation Release No. 19642 (Apr. 6, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19642.htm On April 6, 2006 the Commission filed an emergency enforcement action charging Faisal Zafar and Sameer Thawani with perpetrating an ongoing securities fraud over the Internet. The complaint alleges that since late 2004 and as recently as March 2006, Zafar and Thawani have engaged in a pump and dump scheme to manipulate the market for at least 24 thinly traded microcap or smallcap stocks. The defendants made over $873,000 by purchasing the stocks, anonymously disseminating false information about the companies on popular Internet message boards, and then selling the stocks at artificially inflated prices. Acting on the Commissions application for emergency relief, the United States District Court for the Eastern District of New York issued a temporary restraining order that, among other things, froze the defendants assets and set a date for a hearing on the Commissions motion for entry of a preliminary injunction against further violations and other relief while the action is pending. The Commissions complaint further alleged as follows: after buying shares at prevailing market prices, Zafar and Thawani used online aliases to post messages touting the stock and containing phony press release excerpts or other fake news about the issuer to deceive investors. In addition to capitalizing on actual events in the news, the phony headlines concocted by the defendants have also included false claims of huge business contracts, mergers and strategic alliances between these little-known issuers and an array of major corporations -such as Google, Kmart and Sun Microsystems -- and other dramatic developments designed to make the targeted stocks appear to be surefire investment opportunities. The complaint charged Zafar and Thawani with violations of the antifraud provisions of the federal securities laws. In addition to permanent and preliminary injunctive relief, the complaint sought disgorgement of all illegal profits and the imposition of civil monetary penalties. SEC v. Compania Internacional Financiera S.A. and Yomi Rodrig Litigation Release No. 19501 (Dec. 20, 2005) http://www.sec.gov/litigation/litreleases/lr19501.htm On December 19, 2005, the Commission filed a settled civil action against Compania Internacional Financiera S.A., a European investment vehicle, and its sole owner Yomi Rodrig, charging them with violating Rule 105 of Regulation M and Section 10(a) of the Securities Exchange Act of 1934, which prohibits covering a short sale with securities obtained in a public offering when the short sale occurs during a specific restricted period (usually five business days) before the pricing of the offering and effecting a short sale of a security registered on a national securities exchange in contravention of the Commissions rules and regulations. 111

According to the Commissions complaint, beginning as early as January 2002 through at least March 2005, Compania, under the control and at the direction of Rodrig, used securities purchased from underwriters participating in at least eighty-five (85) public offerings to cover shares Compania had sold short during the restricted period set by Rule 105. Compania typically conducted its short selling on the day of the pricing of the public offering or one or two days earlier. In each offering, the offering price was set on the pricing day, and was usually set at a discount to the last reported sale price of the stock on the pricing day. Accordingly, by short selling just before pricing, Compania often sold shares short at prices higher than the price it would later pay for the shares in the offering. The Commission alleges that Compania made profits of more than $4.7 million from these short sales. The Commission further alleges that in connection with at least forty-nine of the eighty-five offerings, Companias illegal trading involved exchange traded securities and violated Section 10(a) of the Exchange Act. If the settlement is approved by the Court, the disgorgement and penalty would be the largest ever recovered in a SEC enforcement action involving violations of Rule 105. Compania and Rodrig agreed to settle the lawsuit by consenting, without admitting or denying the allegations in the Commissions complaint, to the entry of an order permanently enjoining them from future violations of federal securities laws, ordering them to disgorge more than $4.8 million in trading profits plus prejudgment interest, and imposing a civil money penalty of $1.4 million. SEC v. PacketPort.com, Inc., et al. Litigation Release No. 19465 (Nov. 16, 2005) http://www.sec.gov/litigation/litreleases/lr19465.htm On November 15, 2005, the Commission filed an enforcement action charging six individuals and four companies with securities fraud and other violations in connection with a scheme to pump and dump the stock of PacketPort.com, a company based in Norwalk, Connecticut. The Commission alleges that three PacketPort.com officials and two stock touters, aided and abetted by a registered representative, executed the pump and dump, which obtained more than $9 million in illicit proceeds. The Complaint alleges that Ronald Durando privately acquired a majority stake in an insolvent public company, then called Linkon. His stake in Linkon consisted of restricted shares. With the help of his colleagues, Gustave Dotoli and attorney Robert H. Jaffe, Durando took control of Linkon and changed its name to PacketPort.com. Durando became president and CEO, while Jaffe and Dotoli became directors. Durando, Jaffe, and Dotoli laundered restrictive legends from Durandos share certificates so that the restricted shares could be passed off to the public as free trading. Durando then paid IP Equity, Inc., a private California corporation that operated an Internet-based stock newsletter, and its principals, M. Christopher Agarwal and Theodore Kunzog, to publish false publicity and bogus recommendations about PacketPort.com in order to pump up the stock price. The share price more than quadrupled following the false publicity, rising from about $4.75 to a high of about $19.50. The Complaint alleges that Durando, Dotoli, Jaffe, and IP Equity dumped PacketPort.com shares into the pumped-up market in an unregistered distribution, obtaining 112

more than $9 million in illicit proceeds. Registered representative William Coons III was Durandos and IP Equitys broker and was the principal outlet for the fraudulent sales. The Complaint further alleges that Durando, Dotoli, and Jaffe concealed the fraud and their short swing profits by: 1) failing to make required disclosures and selling through nominees; 2) failing to file required forms reflecting changes in ownership, including forms that would have revealed their short-swing profits; and 3) causing PacketPort.com to file quarterly and annual reports that contained false financial information and that failed to report the insiders beneficial ownership or past failures to report beneficial ownership. The Complaint also names as defendants two corporations that Durando controlled and used in executing the fraud. Durando used his wholly-owned company, PacketPort, Inc. to acquire stock and transfer shares to other defendants. Durando used Microphase, Inc., of which he is COO, as his nominee in the illegal sales. By selling through Microphase, Durando concealed the fact that he, PacketPorts CEO and majority shareholder, was dumping stock. SEC v. Joshua Yafa, Michael O. Pickens, et al. Litigation Release No. 19305 (July 18, 2005) http://www.sec.gov/litigation/litreleases/lr19305.htm On July 18, 2005, the Commission filed charges against two stock promoters, Joshua Yafa and Michael O. Pickens, in a scam designed to mislead investors into believing they had inadvertently received a confidential stock tip faxed from a stockbroker to his client. The handwritten fax had the appearance of an urgent message from a financial planner intended only for his client, Dr. Mitchel, urging the purchase of a stock that was about to triple in price. In fact, neither the financial planner nor Dr. Mitchel exists. The fax was sent to more than one million recipients across the country by stock promoters who made over half a million dollars unloading their shares on duped investors. The Commissions complaint, filed in the Southern District of New York, alleges that Yafa drafted the fax that urged Dr. Mitchel to buy shares of AVL Global, Inc., a company which had hired Yafa and paid him in stock. Yafa sent the supposedly misdirected fax to more than 150,000 fax machines causing AVLs stock price to soar by 25% the next day, after which Yafa sold his shares of AVL, reaping more than $300,000. The Commission also charged Pickens with hatching a copycat scheme. According to the Commissions complaint, Pickens replaced AVLs ticker symbol with the symbols of three different microcap companies Pickens had been promoting. The Commission alleges that Pickens sent out nearly a million of the modified Dr. Mitchel faxes causing the share price of the three stocks to climb by as much as 100% on significantly increased volume, and netting Pickens over $300,000. The Commission also brought fraud charges against Serafin Sierra, a salesman at Miamibased Vision Lab Telecommunications, Inc., the fax blasting company that transmitted both sets of Dr. Mitchel faxes. According to the Commissions complaint, Sierra learned of Yafas scam, and forwarded a copy of the original AVLL Dr. Mitchel fax to his customer Pickens, facilitating Pickens copycat scheme.

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The Commissions complaint charges Yafa, Pickens, and their affiliated companies, Global Media Marking, Inc., M3, Inc., and M3 Research LLC, with violating antifraud provisions of the federal securities laws. The complaint also charges Sierra with aiding and abetting Pickenss violations of antifraud provisions. In addition to the Commissions civil action, the United States Attorneys Office for the Southern District of New York has announced the initiation of a related criminal action. SEC v. Michael OGrady, et al. SEC v. David E. Whittemore Litigation Release No. 19213 (May 3, 2005) http://www.sec.gov/litigation/litreleases/lr19213.htm On May 3, 2005, the Commission filed two complaints in federal district court against two voicemail broadcasters and their associates for broadcasting hundreds of thousands of fraudulent wrong number stock tip messages. The messages, which were left on telephone voicemail recording machines throughout the country, were designed to make each recipient believe the caller had dialed the number by mistake. Many of the messages were left by a woman calling herself Debbie, and sounded as if she had misdialed when calling a friend to pass along a hot stock tip. In one action, the Commission charged Michael OGrady and two affiliated Georgiabased telemarketing companies, Telephone Broadcasting Company, LLC and Telephony Leasing Corporation, LLC, with broadcasting wrong number stock tips touting the stocks of six small, thinly traded companies. OGrady used his knowledge of the wrong number tips to trade in three of the touted companies, realizing a profit of $9,415. Without admitting or denying the allegations made in the Commissions complaint, OGrady consented to a final judgment ordering him to pay $50,786 in disgorgement and prejudgment interest and a $25,000 penalty, and all three defendants consented to being permanently enjoined from violating antifraud provisions of the federal securities laws. In a related criminal proceeding, OGrady has pled guilty to obstruction of justice charges stemming from the message scheme. In the second action, the Commission charged David E. Whittemore of Dallas and his privately held corporation Whittemore Management, Inc., with broadcasting hundreds of thousands of similar fraudulent wrong number voicemail messages. Also charged in that complaint were Peter S. Cahill and Clearlake Venture Group. The Commission alleges that Whittemore Management received cash and stock payments for broadcasting the messages, and Cahill sold approximately 680,000 shares of one of the touted stocks while the messages were being broadcast, generating proceeds of $508,000. The Commission charged all four defendants with violating antifraud provisions of the federal securities laws and charged Whittemore and WMI with aiding and abetting Cahill and Clearlakes violations. The Commission seeks civil penalties, disgorgement of all ill-gotten

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gains plus prejudgment interest, and permanent injunctions barring future violations against all four defendants.

CASES INVOLVING SECURITIES OFFERINGS

In the Matter of Amaranth Advisors L.C.C. Admin. Proc. File No. 3-12632 (May 9, 2007) http://www.sec.gov/litigation/admin/2007/34-55728.pdf On May 9, 2007, in a settled proceeding, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940 (Order) against Amaranth Advisors L.L.C. (Amaranth). The Order finds that Amaranth participated in five follow-on offerings between November 2004 and February 2005, in which it sold securities short during the restricted period before the pricing of those offerings and then covered the short positions with securities purchased in those offerings. These transactions violated Rule 105 of Regulation M and allowed Amaranth to make profits of $507,627 for certain funds it advised. Based on the above, the Commission ordered Amaranth to cease-and-desist from committing or causing any violations of Rule 105 of Regulation M, pay disgorgement of $507,627 plus prejudgment interest of $59,192, pay a civil money penalty of $150,000, and censured Amaranth. Amaranth consented to the issuance of the Order without admitting or denying any of the Commission's findings. SEC v. Renaissance Asset Fund, Inc., Ronald J. Nadel, and Joseph M. Malone Litigation Release No. 19764 (July 17, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19764.htm On July 17, 2006, the Commission filed civil fraud charges against Renaissance Asset Fund, Inc., Ronald J. Nadel, and Joseph M. Malone. The Commissions complaint alleged that Renaissance and its principals raised over $16 million from more than 190 investors nationwide. Many of the victims were elderly and were solicited through Jehovahs Witnesses congregations. According to the complaint, from at least March 1999 through April 2004, the defendants raised funds for multiple purported projects, including a general fund, an outlet mall, an international currency exchange, and a Swiss bank. Some of the purported projects did not exist, and others were unsuccessful. The defendants misrepresented to investors that their investments would earn returns ranging from 10% to 25% in as little as four months. The defendants also sent quarterly account statements to investors setting forth the fictitious profits their investments had purportedly earned. Based on the representations in these account statements, many investors reinvested their principal and purported profits in other Renaissance projects. The defendants operated Renaissances programs as a Ponzi scheme, paying earlier investors with funds raised from later investors. Nadel also used investor funds to pay for lavish expenses, including country club memberships, car leases, and retail purchases. The majority of investors 115

in Renaissance never received the interest or return of their principal the defendants had promised. Based on this conduct, the complaint alleged that Defendants Renaissance, Nadel and Malone violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also alleged that Nadel and Malone violated Section 15(a) of the Exchange Act. The complaint sought final judgments permanently enjoining the defendants from violating or aiding and abetting violations of the antifraud and registration provisions of the federal securities laws. The Commission also sought disgorgement of ill-gotten gains with prejudgment interest, an accounting, and civil penalties. SEC v. Pittsford Capital Income Partners, L.L.C., et al. Litigation Release No. 19761 (July 14, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19761.htm On July 14, 2006, the Commission announced that it filed an emergency enforcement action to halt fraudulent conduct against Edward Ted Tackaberry, Mark Palazzo, Pittsford Capital, L.L.C., Pittsford Capital Mortgage Partners, L.L.C., Pittsford Capital Group, Inc., Pittsford Capital Income Partners, L.L.C., Pittsford Income Partners II, L.L.C., Pittsford Income Partners III, L.L.C., Pittsford Income Partners IV, L.L.C., Pittsford Income Partners V, L.L.C., Jefferson Income Partners (collectively, the Defendants) and Michael Latini, Communicate Wireless, L.L.C., and Monroe Wireless, L.L.C. (the Relief Defendants). The Complaint alleged that from approximately 1996 to 2004, Tackaberry and Palazzo raised, in unregistered transactions, at least $15 million from at least 275 investors, including many senior citizens, by issuing promissory notes in various real estate investment companies owned and managed by Tackaberry and Palazzo. The Complaint further alleged that the Defendants engaged in a fraudulent scheme, in which they made numerous misrepresentations and omissions to investors, including: (i) making undisclosed transfers of money, including a $2.4 million payment to an entity that Tackaberry and Palazzo had significant personal interests in; (ii) making undisclosed transfers of money to Palazzo; (iii) failing to disclose that they commingled the real estate investment companies assets in one bank account to fund operations; and (iv) falsely claiming that certain of the real estate companies would retain an independent third-party agent to represent investors interests. The Defendants targeted senior citizens and retirees when soliciting investments in these real estate investment companies, and then misappropriated their funds. The Complaint charged the Defendants with violating Section 17 (a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In its emergency enforcement action, the Commission sought a temporary restraining order (i) freezing the Defendants and Relief Defendants assets; and (ii) appointing a temporary receiver over the real estate investment companies and affiliated entities. In addition to this emergency relief, the Commission also sought orders enjoining the Defendants, preliminarily and permanently, from

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committing future violations of the foregoing federal securities laws, and a final judgment ordering the Defendants to disgorge ill-gotten gains and assessing civil penalties. SEC v. Timothy M. Roberts Litigation Release No. 19701 (May 16, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19701.htm On May 16, 2006 the Commission charged the former CEO of video game developer Infinium Labs, Inc., for his role in a fraudulent junk fax scheme to promote the companys stock. The Commission alleged that Timothy M. Roberts authorized the fax promotion and reaped more than $400,000 by unloading his Infinium Labs shares in the ensuing run-up in trading volume. According to the Commissions complaint, Roberts hired a stock promoter to send faxes to tens of thousands of potential investors. The faxes made it appear as if Infinium Labs was on the verge of launching its flagship product, a home videogame system. However, at the time of the fax campaign, Infinium Labs lacked the financial resources to overcome the significant technological and manufacturing hurdles preventing it from marketing the game system to consumers. The faxes also included baseless stock price targets, predicting that Infinium Labs stock price would rise as much as 3,000% in the coming weeks. The Commission alleged that, over the four months of the fax campaign, Roberts took advantage of the increased trading volume in Infinium Labs stock to sell approximately $422,500 of his personal stock holdings. The Commissions complaint also alleged that Roberts paid the promoter with four million shares of his own Infinium Labs stock in violation of the registration provisions of the federal securities laws. The Commission sought to enjoin Roberts from future violations of the antifraud, stock registration, and ownership disclosure provisions of the federal securities laws. In its complaint, the Commission requested that the District Court order Roberts to disgorge his ill-gotten gains plus prejudgment interest, impose a civil money penalty, and bar him from participating in penny stock offerings and from serving as an officer or director of a publicly-traded company.

SEC v. John P. Utsick, et al. Litigation Release No. 19659 (Apr. 17, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19659.htm On April 17, 2006, the Commission announced that it filed a civil injunctive action charging Worldwide Entertainment, Inc. and Entertainment Group Fund, Inc. and their principal John (Jack) P. Utsick, and American Enterprises, Inc. and Entertainment Funds, Inc. and their 117

principals Robert Yeager and Donna Yeager, in connection with a fraudulent offering that raised over $300 million from over 3,300 investors nationwide. The Commission also requested the appointment of a receiver over all four corporate defendants. Simultaneously with the complaint, the Commission filed consents executed by all the defendants, with proposed judgments. Defendants, without admitting or denying the allegations of the complaint, consented to the entry of a permanent injunction, an asset freeze, repatriation order, repayment of amounts they received, and penalties. The Commissions complaint alleged that from at least 1998 through late 2005, the defendants sold unregistered securities in the form of loan agreements or units in special purpose LLCs to raise funds for a variety of entertainment ventures produced and/or promoted by Jack Utsick, the third-largest independent entertainment promoter in the world according to Billboard Magazine. Defendants told prospective investors that their investments would earn annual returns ranging from 15% to 25% and, in some in instances, an additional 3% of the profits generated by Jack Utsick and his companies. In truth, most of the entertainment projects lost money and, as a result, Utsick and his companies paid earlier investors with funds raised from new investors. The defendants also made material misrepresentations and omissions to investors about, among other things, the profitability of their investments, the use of proceeds, the payment of commissions, and the existence of state disciplinary actions. The complaint charged the defendants with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and, as to Robert and Donna Yeager, American Enterprises and the Entertainment Funds, with violations of Section 15(a) of the Exchange Act. The complaint seeks permanent injunctions prohibiting future violations of the securities laws, an accounting and disgorgement of ill-gotten gains, with prejudgment interest, imposition of civil penalties, and an asset freeze through the conclusion of the litigation. SEC v. Kirk S. Wright, International Management Associates, et al. Litigation Release No. 19581 (Feb. 28, 2006) http://www.sec.gov/litigation/litreleases/lr19581.htm On February 27, 2006, the Commission filed complaint and an emergency application for a temporary restraining order and other relief in the Northern District of Georgia to halt an ongoing offering fraud involving the sale of investments in seven hedge funds by an Atlantabased promoter and investment advisers controlled by him. The defendants are Kirk S. Wright (Wright); International Management Associates, LLC (IMA) and International Management Associates Advisory Group, LLC (IMA Advisory) and seven hedge funds; International Management Associates Platinum Group, LLC (Platinum I), International Management Associates Emerald Fund, LLC (Emerald Fund), International Management Associates Taurus Fund, LLC, International Management Associates Growth & Income Fund, LLC, International Management Associates Sunset Fund, LLC; Platinum II Fund, LP (Platinum II), and Emerald II Fund, LP. IMA and IMA Advisory are investment advisers in Atlanta, Georgia, owned and operated by Wright and others. 118

The Complaint alleges that from February 1997 to the present, approximately $115 million, and as much as $185 million, was raised from up to 500 investors through the fraudulent investment scheme. IMA and IMA Advisory, through Wright, have been providing investors with quarterly statements that misrepresented both the amount of assets in the respective funds and the rates of return obtained by them. In fact, by 2005, the assets of the funds had been largely dissipated, and this fact was not disclosed to the investors of the funds. The Complaint further alleges that Wright produced for certain investors account statements purportedly from a securities broker-dealer, showing over $155 million in securities in four accounts for August 2005, when in fact the first three accounts did not exist, and the fourth account number pertained to an account unrelated to the defendants. The Complaint also alleges that account statements and summaries which Wright displayed to an investors representative reflecting the balances of Platinum I, Platinum II and Emerald Funds as of December 30, 2005 were fabricated and reflected assets which the funds did not possess at that time. The district court entered an order temporarily restraining and enjoining the defendants from future violations of Sections 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and enjoining Wright, IMA, and IMA Advisory from future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The order also appointed a receiver for all of the entity defendants. SEC v. Charis Johnson, Lifeclicks, LLC, and 12daily Pro Litigation Release No. 19579 (Feb. 27, 2006) http://www.sec.gov/litigation/litreleases/lr19579.htm On February 27, 2006, the Commission announced the filing of securities fraud charges against the operators of www.12dailypro.com, a paid autosurf program that in fact was a massive Ponzi scheme which raised more than $50 million from over 300,000 investors worldwide. As a result of the Commissions charges, the defendants, Charis Johnson, age 33, of Charlotte, N.C., and her companies, 12daily Pro and LifeClicks, LLC (LifeClicks), ceased their solicitation of investors and agreed to a freeze of all their assets and the appointment of a receiver to take control of the companies operations. According to the Commission, www.12dailypro.com claimed to be a paid autosurf program - a form of online advertising program that purportedly generates advertising revenue by automatically rotating advertised websites into a viewers Internet browser. Advertisers purportedly pay hosts, which in turn pay their members to view the rotated websites. The Commission alleges that 12daily Pros sale of membership units constituted the fraudulent and unregistered sale of securities under the federal securities laws. The website, recently ranked as the 352nd most heavily trafficked website, allegedly solicited investors to become upgraded members by buying units for a fee of $6 per unit, with a maximum of 1,000 units. 12daily Pro promised to pay each upgraded member 12% of his or her membership fee per day for 12 days, at the end of which, the member purportedly would have earned a total of 144% of his or her original membership fee, 44% of which would be profit on the membership fee. To receive the promised payment, a member purportedly must view at least 12 web pages per day during the

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12 day period. The amount of returns that 12daily Pro would pay its members, however, was in fact dependent solely on the amount of the members investment, not on the amount of websiteviewing or any other services rendered. The Commission alleges that the defendants defrauded investors by operating 12daily Pro as almost a pure Ponzi scheme - using new investor monies to pay the promised returns to existing investors - violating federal securities laws. The defendants falsely represented that upgraded members earnings are financed not only [by] incoming member fees, but also with multiple income streams including advertising, and off-site investments. In fact, at least 95% of 12daily Pros revenues came from new investments in the form of membership fees from new or existing members. The other multiple income streams from advertising revenues or off-site investments touted by the defendants were either negligible or non-existent. In addition, undisclosed to investors, Johnson transferred more than $1.9 million in investor funds to her personal bank account since mid-2005. Johnson and her companies have consented to the entry of a court order that permanently enjoins them from future violations federal securities laws, imposes a freeze on their assets, prohibits the destruction of documents, and appoints Thomas F. Lennon as permanent receiver over the assets of 12daily Pro and LifeClicks, LLC. The order is subject to approval by the district court. Johnson and her companies consented to the order without admitting or denying the allegations in the complaint. The Commissions complaint also seeks repayment of ill-gotten gains and civil money penalties; the amounts to be sought will be determined at a later date. SEC v. Allied Capital Management, Inc. and Shea Silva Litigation Release No. 19513 (Dec. 22, 2005) http://www.sec.gov/litigation/litreleases/lr19513.htm On December 22, 2005, the Commission announced that it filed a civil action against Shea Silva of Costa Mesa, California, and Allied Capital Management, Inc., a California corporation under his control, for violations of the antifraud and registration provisions of the federal securities laws. On the Commissions application, the Court issued a Temporary Restraining Order; Order Freezing Assets, and Prohibiting the Destruction of Documents; and Order to Show Cause why a Preliminary Injunction Should Not Issue (Order). In its Complaint, the Commission alleges that from approximately November 2001 through the present, Silva, Allied, and two defunct entities known as Sunrise Energy, Inc. and Blue Marlin Energy, Inc., defrauded investors of over $5 million through the sale of unregistered securities. The securities were purportedly sold to invest in oil and gas operations. According to the Complaint, Silva, Allied, and others acting at their direction engaged in high pressure cold call campaigns and solicited investments from hundreds of individuals nationwide. However, the defendants misrepresented the nature of the investments, the risks involved in the investments, and the potential return on the investments. The Commission also alleges that Silva misappropriated a large portion of investor funds and acted as an unregistered broker-dealer. The Complaint claims that, through these activities, Silva and Allied violated federal securities laws. Among other things, the Courts Order prohibits the defendants, pending a hearing, from disposing of any assets and prohibits financial institutions holding the defendants 120

assets from allowing any withdrawals. The Order also requires that the defendants notify the Court of each account they hold with a financial or brokerage institution. SEC v. Lance Poulsen, Rebecca Parrett, Donald Ayers and Randolph Speer Litigation Release No. 19509 (Dec. 21, 2005) http://www.sec.gov/litigation/litreleases/lr19509.htm On December 21, 2005, the Commission filed a civil injunctive action against Lance Poulsen, principal and former Chief Executive Officer of National Century Financial Enterprises, Inc. (NCFE), Donald S. Ayers, principal and former Chief Operating Officer of NCFE, Rebecca S. Parrett, principal and former Director of NCFEs Accounts Receivable Service Department, and Randolph H. Speer, former Chief Financial Officer of NCFE, for scheming to defraud investors in securities issued by subsidiaries of NCFE, NPF VI and NPF XII (the Programs). The Commission alleged that, from at least February 1999 to October 2002, NCFE, a private corporation located in Dublin, Ohio, used wholly owned subsidiaries to purchase medical accounts receivable from health-care providers and issued notes that securitized those receivables. The subsidiaries offered and sold at least $3.25 billion in total notes through fifteen private placements to institutional investors. In October 2002, NCFE suddenly collapsed when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors, causing investors to lose over $2.6 billion and approximately 275 healthcare providers to file for bankruptcy protection. The Commission further alleged that pursuant to the representations in the offering documents and the Program agreements, the Programs were required to maintain certain reserve-account balances and medical accounts receivable as collateral to secure the notes. Nevertheless, Poulsen, Parrett, Ayers and Speer depleted the Programs reserve accounts and collateral base by advancing at least $1.2 billion from the Programs funds to health-care providers without receiving eligible receivables in return. The advances were essentially unsecured loans by the Programs to distressed or defunct health-care providers - many of which were wholly or partly owned by NCFE, Poulsen, Parrett and/or Ayers. According to the complaint, the defendants concealed their fraud from investors and others by: (1) repeatedly transferring funds between the subsidiaries bank accounts to mask cash shortfalls of as much as $350 million; (2) recording $1 billion or more in non-existent or ineligible medical accounts receivable on the subsidiaries books; (3) creating and distributing false offering documents, false monthly investor reports, and false accounting records to trustees, investors, potential investors, and auditors; and (4) misrepresenting the status of the Programs cash accounts and collateral base to investors and others. The Commission seeks to: (1) permanently enjoin each Defendant from violating federal securities laws; (2) permanently bar each Defendant from serving as an officer or director of a public company; and (3) order each Defendant to pay disgorgement, prejudgment interest, and a civil monetary penalty, in amounts to be determined. The Commission already obtained judgments against three other former NCFE executives: Sherry Gibson, former Executive Vice President of Compliance of NCFE; John Snoble, former Vice President and Controller; and Brian Stucke, former Associate Vice-President for Business Services. Each of these individuals consented to a permanent injunction prohibiting them from violating federal securities laws; an 121

order barring him or her from serving as an officer or director of a public company; and disgorgement, prejudgment interest, and a civil penalty, in amounts to be determined. Moreover, each of these three former NCFE executives has pled guilty in federal district court to criminal charges arising from the scheme. The Commission continues to investigate this matter. SEC v. Church Extension of the Church of God, Inc., et al. Litigation Release No. 19500 (Dec. 19, 2005) http://www.sec.gov/litigation/litreleases/lr19500.htm On December 19, 2005, the Commission announced that in two separate rulings entered on December 14 and 15, U.S. District Court Judge David F. Hamilton affirmed a jury verdict reached in July 2004 finding James Perry Grubbs and Shearon Louis Jackson liable for violating the antifraud provisions of the federal securities laws, and imposed monetary and injunctive remedies against each of them. The Court also entered separate final judgments against Grubbs and Jackson, permanently enjoining both from future violations of federal securities laws and from service as officers or directors of issuers of federally registered securities and federally regulated broker-dealers, ordering disgorgement of $44,500 plus interest by Mr. Grubbs and $37,000 plus interest by Mr. Jackson, and imposing third tier civil penalties of $120,000 on Mr. Grubbs and $90,000 on Mr. Jackson. The Commission commenced this action on July 22, 2002, charging Church Extension of the Church Of God, Inc. and United Management Services, Inc. (UMS) and the former presidents of those entities, Grubbs and Jackson, with engaging in a fraudulent scheme from approximately 1996 to the time of the lawsuit, through which Church Extension raised $85 million from the sale of investment notes to thousands of individuals throughout the country, most of whom were members of the Church of God, a Christian denomination headquartered in Anderson, Indiana. Church Extension was a not-for-profit corporation set up by the Church of God to help finance the construction and expansion of local churches. The Commission alleged that in connection with the offer and sale of investment notes, defendants repeatedly made material misrepresentations and omitted to state material facts in Church Extensions solicitation and offering circulars, concerning, among other things, the primary use of investment note proceeds and the financial conditions of Church Extension and UMS. The complaint alleged that during the period from 1996 to 2002, instead of using investment note proceeds primarily to fund church loans as stated in the offering circulars, Church Extension departed from its original focus and instead used the note proceeds to fund speculative non-church real estate transactions and to make interest and principal payments to prior noteholders. The Commission also alleged that Grubbs and Jackson caused Church Extension and UMS to overstate dramatically the companys financial condition in its offering circulars through the overvaluation of properties it received in connection with these real estate transactions that were used to give Church Extension a misleading appearance of solvency. By the spring of 2001, Church Extension owed noteholders more than $80 million, but was actually insolvent. After an eight-day trial in 2004, the jury found in favor of the Commission on all of its claims, and determined that Grubbs and Jackson violated federal securities laws. The disgorgement amounts ordered by the Court represent one-half of each defendants base salaries 122

for 2001, based on the Courts reasoning that, but for the securities violations, Church Extension would have collapsed earlier, so the violations enabled defendants Grubbs and Jackson to continue their employment. Church Extension and UMS previously settled the Commissions charges against them on July 31, 2002, consenting to the entry of permanent injunctions prohibiting future violations of federal securities laws. Church Extension and UMS also agreed to pay disgorgement of approximately $81 million. In consenting to the entry of the civil injunctions and disgorgement, Church Extension and UMS neither admitted nor denied the allegations of the Commissions Complaint. In connection with this settlement, on July 31, 2002, the Court appointed Jeff J. Marwil, a partner at the law firm of Jenner & Block in Chicago, Illinois, as an independent Conservator in this case. The Conservators mandate is to protect the interest of investors who invested or reinvested in the note program. Since his appointment, Mr. Marwil has liquidated and distributed to investors assets totaling in excess of $25 million, and has also commenced independent lawsuits against various officers, directors and third parties who were involved in the transactions giving rise to the SECs lawsuit. At the trial, the Conservator estimated that investor losses will exceed between $20 million and $40 million.

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SEC Speech: Remarks Before the Stanford Law School Directors' College 2007; Stanford, California: June 26, 2007

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Speech by SEC Staff: Remarks Before the Stanford Law School Directors' College 2007
by Linda Chatman Thomsen
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Director, Division of Enforcement U.S. Securities and Exchange Commission Stanford, California June 26, 2007

From time to time, I am honored by being asked to speak to a group such as this one. I have three simple objectives when I agree to do so: first, to talk about something I know something about; second, to say something that is relevant to the audience; and third, to say something that is fresh. It turns out that I am too ambitious, especially as to the last point. I have found that everything worth saying has already been said, usually said better than I can manage and often, it turns out, said by William Shakespeare. Indeed, many of my favorite expressions are ones I have stolen from Shakespeare. For example, ever see a method in some madness? Hamlet. Or declare that something was too much of a good thing? As You Like It. The Merchant of Venice brings us love is blind. The world is your, his, my, someones oyster has its roots in The Merry Wives of Windsor. Ever give the devil his due? Henry IV. Or declare, as I often do, that discretion is the better part of valor? Also, Henry IV. When clueless, we often say its Greek to me. You can thank the play Julius Caesar for that expression. Ever not sleep one wink? Neither did Pisanio in Cymbeline. Remember wearing your heart on your sleeve? I was going to say you were in good company until I discovered it was the not so wonderful Iago who declared that he had in Othello. I know that some of you in the private sector have gotten worked up into a lathernot Shakespearean, by the way, as far as I can tellbecause some government bureaucrat wouldnt budge an inch. Eventually, I suspect, he or she did budge some, just as Kate did in The Taming of the Shrew. For the record, from the perspective of this particular shrew, Kate budged way too much and I wouldnt put her on any enforcement negotiating team. And speaking of perspective, my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. Anyway, the fact that there really is nothing new to say is downright

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SEC Speech: Remarks Before the Stanford Law School Directors' College 2007; Stanford, California: June 26, 2007

depressing to all of us who are called upon from time to time to say something to groups such as this one. I take some comfort that this very idea was also recognized by Shakespeare. In Sonnet 59 he wrote: there be nothing new, but that which . . . [h]ath been before. And the very best thing about that phrase is that Shakespeare stole it from Ecclesiastes. So that is a long, roundabout way of getting to my point: not that Shakespeare plagiarized the Bible or that we all plagiarize Shakespeare but that, in the words of Ecclesiastes, there is nothing new under the sun. There is a corollary to this point which, to a certain extent, takes some of the sting out: its okay that we are constantly repeating what someone else has done or said, or repeating ourselves, because collectively we have really lousy longterm memories. My favorite example of our leaky memories comes from a 2005 episode of Jeopardy. This would probably be a good time to confess that I have seen many more episodes of Jeopardy than plays by Shakespeare. Anyway, it was a Tournament of Champions and the final Jeopardy answer was: CEOs must personally certify their corporate books following a July 2002 law named for these two men. Two out of the three contestants in this, let me remind you, Tournament of Champions, answered McCain and Feingold. Only one guy got it right and he was Canadian.
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Why, you patient souls are quietly asking yourselves, is she carrying on about all this? Simply this: as directors, one of the very valuable things you do is remember and retell the stories of your experience. Whether that experience is deep or different or both, the perspectives you bring are some of the most valuable assets you contribute in your board service. Id like to talk for a moment or two about some of the recent stories in our experience in enforcement. If we consider these challenges in light of history, it turns out there is nothing new here either. Broadly viewed, these challenges are new variations on old themes. Or, as Mark Twain said, undoubtedly stealing from Shakespeare, and the Bible and whatever else was handy: History may not repeat itself, but it sure does rhyme a lot.
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One current example of the rhyming of history is insider trading by Wall Street professionals. In the late 1990s, my penultimate predecessor, Dick Walker, was concerned about insider trading making a comeback from Main Street to Wall Street. After bringing many cases against Wall Street professionals in the massive insider trading scandals of the 1980s, the SEC had no such cases in the first half of the 1990s. Walkers concern arose from the fact that in the last half of the 1990s, the SEC charged a total of ten Wall Street professionals with insider trading. Roll forward to today: in the past four months, we have sued about twice that number of professionals for insider trading.
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In March of this year, we filed the largest insider trading case against Wall Street professionals since the days of Ivan Boesky, Dennis Levine, and Michael Milken in the 1980s. Our complaint alleged two overlapping insider trading schemes: One involved trading ahead of upcoming UBS analyst
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SEC Speech: Remarks Before the Stanford Law School Directors' College 2007; Stanford, California: June 26, 2007

upgrades and downgrades. At the center of this scheme was a senior UBS professional who served on a powerful internal committee dedicated to reviewing and approving proposed analyst recommendations. He tipped traders outside the firm regarding upgrades and downgrades before they were publicly announced. The other scheme involved trading ahead of corporate acquisition announcements on information stolen from Morgan Stanley. At the center of that scheme was a lawyer in Morgan Stanleys global compliance department whose duties included safeguarding confidential information. Far from safeguarding the companys confidential information, she stole it and passed it on to others. The conduct alleged in these two schemes included carefully planned efforts to conceal the behavior: use of disposable cell phones, discreet meeting places, coded messages, and cash payoffs. Some of these attempts were more creative than others--you may have seen press reports that cash was passed in empty snack bags. Now I ask you: What kind of a genius do you have to be to know that being paid in cash in an empty Cheetos bag is probably a bad thing? Discouragingly, when other Wall Street professionals happened upon the scheme, their instincts were not to stop it but instead to find ways to personally profit from it. All told, the SECs complaint alleged unlawful conduct by 14 defendants, including numerous Wall Street professionals. We alleged conduct occurring over five years and involving hundreds of tips, thousands of trades and millions of dollars in illegal profits. Also in March, we filed a case alleging insider trading related to the TXU buyout; in that case two professionals were chargedan analyst in New York and an investment banker in Pakistan. In the TXU case, the complaint alleged that the New York analyst misappropriated confidential information about the TXU buyout and eight other upcoming transactions from his employer, Credit Suisse. We further alleged that the analyst passed the information along to the Pakistani investment banker, who traded on it for total profits of over $7 million. Just a month before, in February, we brought an insider trading action against a pharmaceutical company executive and his three sons, all of whom were Wall Street accountants or lawyers. According to our complaint, their scheme was a family business in which the father regularly tipped his sons with confidential information misappropriated from his employer, the pharmaceutical company. The sons then traded on the information and tipped others as well. We alleged that, in the course of the scheme, the family created a hedge fund to conduct the trading and further obscure their identities.
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We also brought insider trading cases against other corporate professionals not technically employed on Wall Street. In April, we sued a corporate executive who served as both general counsel and chief insider trading compliance officer of a public company. We alleged that he traded in his companys stock in advance of five corporate announcements. Fifty trades. And, according to our complaint, almost all of them were made during blackout periods he was supposed to be administering. To round out this ugly picture, May was professional couples month. We obtained a TRO and asset freeze in connection with our allegations that a
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SEC Speech: Remarks Before the Stanford Law School Directors' College 2007; Stanford, California: June 26, 2007

Hong Kong couple engaged in insider trading in advance of the announcement that News Corp. made an acquisition bid for Dow Jones. In the two weeks immediately before the News Corp. bid, this couple allegedly bought $15 million worth of Dow Jones stock and sold it all a few days after the announcement for a profit of about $8 million. Another couple, both Wall Street professionals, was sued for allegedly trading in advance of corporate acquisitions the wife learned about through her employment. According to our complaint, this couple conducted their trading in an account in the name of the wifes mother, who was a resident of Beijing. This new wave of insider trading cases gives me a weird sense of dj vu. I am reminded, as I said, of Ivan Boesky, Dennis Levine and Michael Milken infamous Wall Street professionals who were at the center of similar insider trading scandals in the 1980s. Many of you probably remember them too. I remember Michael Douglass portrayal of Gordon Gekko in the movie Wall Street (a character said to be based on Boesky), and his signature line: Greed is good. Thieves.
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I remember reading the aptly-titled best seller Den of

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And I also remember the barely fictional masters of the

universe in Tom Wolfes Bonfire of the Vanities. Apparently, Im not alone in this sense of dj vu. Im told that Hollywood is now planning a sequel to the movie Wall Street titled Money Never Sleeps, and Tom Wolfe is once again writing about barely fictional Wall Street traders, described by his publisher as the new masters of the universe.
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But Im not sure everyone remembers. Many of the new defendants are young enough that they werent around for the headlines or the movies or books that chronicled them. They werent on trading floors from which colleagues were removed, courtesy of the U.S. Marshals. They have seen Enron collapse, but they dont remember the demise of Drexel. They dont remember that some of the insider traders of the 1980s not only paid record penalties to the SEC, but were also criminally charged and went to prison. As a result, many of these new insider traders are literally too young to have learned the lessons of Boesky, Levine and Milken. We, in the enforcement business, will remind them. Speaking of corporate collapses, I recently read a post-mortem sort of law review article describing one such case. Listed among the contributing factors was questionable business activity by the corporations officers, such as [u] nique and delusive accounting practices [that] painted a rosy picture of success while the company was in fact losing millions of dollars a year. There was also questionable conduct involving an investment venture set up by company officers for their own personal benefit that, while legally separate from the company, was inextricably involved in its affairs (and privy to non-public information). At this point, you may be thinking about the collapse of Enron, the private investment partnerships set up by Enron insiders for their personal profit, and the creatively-named transactions between those partnerships and the company through which the insiders realized that profit. But the law review article wasnt about Enron. It was about a big corporate collapse 37 years ago that I would bet few of you
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SEC Speech: Remarks Before the Stanford Law School Directors' College 2007; Stanford, California: June 26, 2007

remember: the bankruptcy of Penn Central Railroad in the summer of 1970. The companys stock price plummeted from $86 in July 1968 to $8 a share a few days after the bankruptcy. 120,000 shareholders bore the brunt of those losses, including the University of Pennsylvania and the Philadelphia Museum of Art. The victims also included the 94,000 employees of Penn Central, who experienced mass layoffs, worthless payroll checks, and the loss of their pensions, which were heavily invested in the stock of Penn Central and companies tied to its board members. In 1972, the SEC detailed the causes of Penn Centrals demise in a report to the Senate subcommittee investigating the collapse. Those causes included its stretch[ing] of accounting principles to cover novel situations, emphasizing form over substance on a number of major transactions . . ., as well as its use of subsidiaries to engage in what were essentially paper transactions which should not have been recorded as profit.
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Sounds just like Enron, doesnt it?

In a Harvard Law Review article, the Commissions Chairman decried the types of conduct that characterized some of the recent corporate scandals: secret loans to officers and directors, undisclosed profit-sharing plans, timely contracts unduly favorable to affiliated interests, dividend policies based on false estimates, manipulations of credit resources and capital structures to the detriment of minority interests . . . and trading in securities of the company by virtue of insider information, to mention only a few. I think we would all agree that the Chairmans statements provide a fairly accurate depiction of the corporate scandals that rocked our financial markets a few years ago Enron, WorldCom, Adelphia, Tyco, and the like. But these statements were not made by our present Chairman, Chris Cox they were made in 1934 by a highly respected professor at Yale Law School, William O. Douglas, who later became the Commissions third Chairman (and, incidentally, also went on to become the longest-serving Justice on the U.S. Supreme Court). In his 1934 law review article, Douglas was talking about the corporate scandals of the late 1920s that led to the enactment of the 1933 and 1934 Acts some 70-odd years ago. Perhaps short memories have also been contributing to some of the gloomy views about the Sarbanes-Oxley Act with respect to the U.S. markets global competitiveness. Three reports authored by various business interests have recently predicted that the requirements of Sarbanes-Oxley and excessive securities litigation will cause U.S. markets to lose their competitive advantage over other major market centers like London and Hong Kong. Along with these reports, I recently read an article from Fortune magazine that reached the same conclusions. The Fortune article railed against newly enacted securities legislation that, in the author's view, would increase the cost of capital, make independent directors reluctant to sit on corporate boards, push companies offshore and away from U.S. regulatory requirements, and increase the number of shareholder strike suits brought as a form of legal blackmail. But the Fortune article was not about SarbanesOxley. The author was discussing the Securities Act of 1933 -- the key law governing our securities offering process -- just a few months after its passage. The historians among you will recall that the 1933 Act, like Sarbanes-Oxley, was passed with resounding support in the wake of a
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financial crisis and subsequent Congressional findings of corruption and wrongdoing in the securities markets. The predictions of disaster made in the Fortune article nearly 75 years ago are eerily similar to the recent reports dire predictions about the effects of Sarbanes-Oxley and the purported doom of the U.S. capital markets. But the sky was not falling in 1933, and it is not falling now. It will be interesting to see how history judges Sarbanes-Oxley 75 years out. It is worth noting that even now, numerous academic studies conducted after the passage of Sarbanes-Oxley have concluded that the U.S. system of securities regulation creates significant advantages for the U.S. securities markets over their international competitors. The academic evidence shows that U.S. financial markets are robustly competitive not in spite of U.S. regulatory standards, but because of our high standards. Just last month, yet another academic study concluded that the U.S. system of securities regulation creates a substantial and permanent corporate governance premium for initial public offerings listed on U.S. markets that cannot be found in similar public offerings listed on foreign exchanges. The existence of the corporate governance premium is directly related to our strong system of securities regulation.
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On a related topic, I would be remiss if I didnt mention a recent Wall Street Journal editorial by one of our hosts, Joseph Grundfest, which discusses data showing a dramatic decrease in the number of securities class action suits. After discussing and dismissing some explanations for the recent drop in class action filings, Professor Grundfest writes: The remaining explanation is more interesting and profound: Perhaps fewer companies are being sued for fraud because there is less fraud. Under this theory, the government's aggressive criminal and civil enforcement strategy following the Enron and WorldCom frauds has caused corporate boards and management to "get religion" when it comes to complying with the securities laws. Executives are acutely aware that a major accounting or disclosure fraud is more likely than ever to leave them fired or indicted. They respond to this new regime like rational economic actors: If you increase the penalties for engaging in fraud then you reduce the incentives to commit fraud. Nothing complicated here at all.
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This brings me to yet another enforcement story of the dayinternal investigations. Given all the talk about them of late, you would think they were newly invented by todays defense counsel. But theyre not at all new and I think its fair to give most of the credit for them to directors. Directors created the corporate internal investigation as we know it today. The investigation of corporate wrongdoing by an independent third party originated as a sanction that was occasionally imposed by the SEC in settling enforcement actions. And we have one of todays speakers, Stan Sporkin, to thank for that. In these settlements, an independent receiver was formally

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appointed to investigate the wrongdoing at issue and to ensure that sufficient remedial steps were taken by the corporation. However, the institution of receivership proceedings was extremely disruptive and costly. In the 1970s, the Commission adopted a voluntary disclosure program in response to the questionable payments scandal in which some of Americas best-known corporations were found to have used slush funds to make illegal campaign contributions in the United States and to bribe foreign officials for business. During the voluntary disclosure program, outside directors who were not involved in the payment practices came to have a central role in overseeing companies internal investigations and the resulting reports.
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To their credit, directors came to realize that an internal investigation could be made more efficient and less disruptive if it was conducted by the board, rather than by a third-party receiver. They also realized that an investigation would be more productive and might result in lesser sanctions if it was conducted before -- rather than after -- an SEC enforcement action. Of course, the directors realized that their investigative work would be reviewed and tested by the SEC, and that the independence of the investigation was crucial to its credibility. Thus, the special committee was born. Outside directors who had no role in the questionable payments were appointed to a committee that would conduct a thorough and independent investigation of the practices at issue, institute remedial measures and report their findings to the SEC. In reporting to Congress on the questionable payments scandal, the SEC acknowledged outside directors initiative in taking responsibility for internal investigations. The SEC found that outside directors increase[d] their involvement and knowledge of corporate affairs . . . and that [i]n many cases, these outside directors reportedly [were] instrumental in initiating internal investigations and requiring more stringent auditing controls.
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From my perspective, the evolution of the internal investigation has been an overwhelmingly positive development for shareholders and for our enforcement program. More than 30 years after the initiation of the Commissions voluntary disclosure program, the internal investigation continues to play a key role in our enforcement efforts. We continue to encourage and reward cooperation from the business community for very important reasons. As our Chairman has said: The danger is not that we will interfere too often but that we may act too late. That is why I appeal so frankly to you [in the business community] . . .You can help us. . . .[O]ur job will be better done and your interest will be better protected if, by alert and vigilant cooperation, you [in the business community] . . . share our task. . . . Have no fear that Government supervision will destroy honest enterprise. . . . This Commission will destroy nothing in our business life that is worth preserving. You are warranted in having confidence in our plans and purposes -confidence . . . that if business does the right thing it will be
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protected and given a chance to live, make profits, and grow, helping itself, and helping the country. Honest business needs nothing more; the Commission promises nothing less.
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I expect by now you have figured out my gimmick. I said these were the remarks of our Chairman, but they were the words not of our current Chairman, but our first Chairman, Joseph Kennedy, on November 15, 1934 in one of his first speeches, at a meeting of the Boston Chamber of Commerce. I should note that I found this speech because our current Chairman, Chris Cox, quoted it in one of his recent speeches. Before I end, lets look to the past one last time this afternoon this time to the four allegorical sculptures that frame the entrances to the National Archives building in Washington. According to Herbert Hoover, the grand edifice that houses the National Archives was built to serve as a temple of our history. Coincidentally, the cornerstone of the building was laid in 1933, the year of enactment of the first federal securities law. One sculpture, The Past, is inscribed Study the Past. Another, Guardianship, is inscribed with one of my favorite quotations: Eternal Vigilance is the Price of Liberty. While I often borrow this line in talking about securities enforcement, it seems the author may have borrowed it himself. The quote is attributed to the 19th century abolitionist Wendell Phillips, who is believed to have borrowed the quote from Thomas Jefferson or Patrick Henry (or possibly from an 18th century Irish statesman who may have gotten the idea from an ancient Greek orator). The remaining two sculptures speak to the future and its relationship to the past. One, Heritage, instructs us that The Heritage of the Past is the Seed that Brings Forth the Harvest of the Future. And finally, the last one is The Future, which brings us back to the beginning of my remarks today. It is inscribed with a line from Shakespeares The Tempest: What is Past is Prologue. What that leaves off is the next, very important line, what to come [i]n yours and my discharge. So, with apologies and thanks to William Shakespeare, Wendell Phillips, Mark Twain, and their many predecessors, lets discharge our duties to shareholders with vigilance, and not forget the rhyming of the past. Thank you.
Endnotes

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. See http://boards.sonypictures.com/boards/showthread.php?t=14978.

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See, e.g., http://www.brainyquote.com/quotes/quotes/j/jdhaywor374057. html; http://www.insidevandy.com/drupal/node/3833.

4

Bob Drummond, Insider Trading Makes Comeback in Options 20 Years After Boesky, Bloomberg, June 20, 2007. SEC v. Guttenberg et al., Lit. Rel. No. 20022 (Mar. 1, 2007).

SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp. et al., Lit. Rel. No. 20105 (May 4, 2007); Lit. Rel. No. 20113 (May 11, 2007) (adding Pakistani investment banker Ajaz Rahim to third amended complaint). SEC v. Aragon Capital Management LLC et al., Lit. Rel. No. 19995A (Feb. 13, 2007). SEC v. Heron, Lit. Rel. No. 20079 (Apr. 18, 2007). SEC v. Wong et al., Lit. Rel. No. 20106 (May 8, 2007). SEC v. Wang et al., Lit. Rel. No. 20112 (May 10, 2007). See http://www.imdb.com/title/tt0094291/quotes. James B. Stewart, Den of Thieves (1991).

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Tom Wolfe, Bonfire of the Vanities (1987); http://www.brainyquote.com/ quotes/t/tomwolfe166712.html.

14

Dave McNary, Fox Heads Back to Street, Variety (May 6, 2007), available at http://variety.com/article/VR1117964380.html?categoryid=13&cs=1.

15

Tom Wolfe, The Pirate Pose (Apr. 16, 2007), available at http://www. portfolio.com/executives/features/2007/04/16/The-Pirate-Pose.
16

Daniel J. Schwartz, Penn Central: A Case Study of Outside Director Responsibility Under the Federal Securities Laws, 45 UMKC L. Rev. 394, 398 (1976-77). The Financial Collapse of the Penn Central Company, Staff Report of the Securities and Exchange Commission to the Senate Special Subcommittee on Investigations 4, 6 (Aug. 1972).

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William O. Douglas, Directors Who Do Not Direct, 47 Harvard L. Rev. 1305, 1306 (June 1934).

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Committee on Capital Markets Regulation, Interim Report of the Committee on Capital Markets Regulation (Nov. 30, 2006) (Scott Report); McKinsey & Company, Sustaining New York's and the US' Global Financial Services Leadership (Jan. 22, 2007) (Schumer-Bloomberg Report); United States Chamber of Commerce, Commission on the Regulation of U.S. Capital Markets in the 21st CenturyReport and Recommendations (Mar. 2007) (U. S. Chamber of Commerce Report). Arthur H. Dean, The Federal Securities Act: I, 2 Fortune 50, 104 (Aug. 1933). In general, transnational studies have found a strong correlation between the maturity and size of financial markets and the aggressiveness of the enforcement efforts on behalf of investors. Robert A. Prentice, The Inevitability of a Strong SEC, 91 Cornell L. Rev. 775, 836 (2005-2006) (citing Gerard Hertig et al., Issuers and Investor Protection in The Anatomy of Corporate Law: A Comparative and Functional Approach 193, 213 (R. Kraakman et al. eds., 2004)). Further evidence of the positive economic effects of a strong regulatory and enforcement environment has been found by numerous empirical studies concluding that in countries with stricter enforcement of securities laws there is a lower cost of equity and more liquid capital markets. See, e.g., Utpal Bhattacharya, Enforcement and Its Impact on Cost of Equity and Liquidity of the Market (Indiana University, Working Paper, May 2006); Luzi Hail and Christian Leuz, International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? (The Wharton Financial Institutions Center, Working Paper, Nov. 2003); Rafael La Porta, Andrei Shleifer, Robert W. Vishny, and Florencio Lopez de Silanes, Law and Finance, 106 J. of Political Economy 1113 (Dec. 1998). Craig Doidge, G. Andrew Karolyi, and Rene M. Stulz, Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listings Over Time, National Bureau of Economic Research Working Paper No. 13079 (May 2007), available at http://nber.org/papers/w13079?sfgdata=4. Joseph A. Grundfest, The Class Action Market, Wall St. J., Feb. 7, 2007 at A15. Id.

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The SEC brought 62 enforcement actions in connection with the questionable payments scandal, while about 400 more firms self-reported under the Commissions voluntary disclosure program, in exchange for more lenient treatment. See Joel Seligman, The Transformation of Wall Street 540-

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44 (1995); Arthur F. Mathews, Internal Corporate Investigations, 45 Ohio St. L.J. 662-70 (1984).
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Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices, Report to the Senate Committee on Banking, Housing and Urban Affairs 44 (May 1976).

27

Remarks of Joseph P. Kennedy, Chairman, U.S. Securities and Exchange Commission, Before the Boston Chamber of Commerce (Nov. 15, 1934), available at http://www.sechistorical.org/collection/ papers/1930/1934_11_15_Kennedy_Boston_Sp.pdf.

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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

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Speech by SEC Chairman: Address to the Mutual Fund Directors Forum Seventh Annual Policy Conference
by Chairman Christopher Cox U.S. Securities and Exchange Commission Washington, D.C. April 13, 2007

Thank you, Susan [Wyderko, Executive Director of the Mutual Fund Directors Forum] for that kind introduction. If my kids could hear you talk about their Dad, they'd wonder if it's the same person. The incongruity would probably be too much for them. Sort of like the way we feel when we watch someone order a double cheeseburger, large fries, and a Diet Coke. So let me take a minute to sing Susan's praises. The Forum is truly fortunate to have such an outstanding Executive Director. It was my privilege to work with Susan at the Commission, where she was a dedicated advocate for the protection of investors, as she is today. Whether it was through investor education or leadership of the Commission's regulatory program, Susan was tenacious in advancing the Commission's mission. And the mantel over her fireplace bears the honors she won in the process: the Distinguished Service Award, the Stanley Sporkin Award, the Federal Bar Association's Manuel F. Cohen Younger Lawyer Award, and - on three separate occasions - the Commission's Law and Policy Award. I also know that David Ruder very much wanted to be here today, and so I'd like to say how honored I am to be here at his invitation, nearly 20 years after President Reagan named him to be Chairman of the Securities and Exchange Commission. As a counsel to President Reagan at the time, I had the privilege of knowing first hand how the President came to make such an outstanding choice. It's really astonishing to consider how much David Ruder must know now, given that when he was nominated, he'd already written more than 40 articles and led more than 150 educational programs for corporate and securities practitioners - not to mention having served as dean of Northwestern University's School of Law for eight years. By the time of his appointment, he'd spent more than eight years working on the ALI project to codify the six statutes then administered by the SEC. And if that weren't

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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

enough, during his tenure as Chairman, he dealt with Black Monday on October 19, 1987; led the Commission through the Milken/Drexel Burnham era; and showed great foresight in expanding the international reach of the Commission. And as Susan well knows, David's campaign against penny stock fraud is alive and well at the SEC in the Internet era. So the Forum - and more importantly, the investors you serve - are very fortunate to have both Susan Wyderko and David Ruder applying their extraordinary talents and energies to your critical agenda. Eight years into your mission, good governance of the mutual fund industry has never been more important. With more than $10 trillion in assets, mutual funds have replaced the savings accounts of old as the primary long-term savings vehicle for almost half of all American households. As a result, insuring that investors can have confidence in the way their mutual funds are managed is key to maintaining confidence in our financial system. As independent directors, you play a critical part in the stewardship of this industry. I greatly appreciate and thank you for your commitment to the important work of protecting mutual fund investors. You have helped us in so many different areas that are critical to investor protection - not least of all with respect to 12b-1 fees, which, as you know, the Commission is closely examining this year. When the Commission adopted Rule 12b-1 more than a quarter century ago, our premise was that 12b-1 plans would be relatively short lived. The idea was that 12b-1 fees would be used to solve specific distribution problems, as they arose. And indeed, in the early going, that was our experience. No-load funds used 12b-1 fees of 25 basis points or less to offset the costs of advertising, of printing and mailing prospectuses, and of printing and mailing sales literature. All of this was consistent with the Commission's purposes in adopting the rule, at a time when nurturing mutual fund growth was an SEC priority. Specifically, the Commission's action came at a time of net redemptions. There was a very real concern that if funds were not permitted to use at least a small portion of their assets to facilitate distribution, many of them might not survive. Very quickly, however, 12b-1 plans came to be used for other reasons. Most notably, instead of paying for distribution, they became a substitute for frontend loads. In this way, more substantial sales loads could be collected while the fund could still advertise itself to investors as "no load." The transformation of the 12b-1 fee from a distribution subsidy to a sales load in drag is now so nearly complete that the primary purpose to which the $11 billion in 12b-1 fees last year were put was to compensate brokers. Another way that 12b-1 fees have veered away from their conceptual basis as distribution subsidies has been using them to pay for administrative expenses in connection with existing fund shareholders. Even some funds
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which are closed to new investors continue to collect 12b-1 fees. So it is that today, by far the lion's share of mutual funds' 12b-1 fees are used for these two purposes. Back in 1980, the Commission noted in our adopting release that we and our staff would monitor the rule's operation closely. And if experience suggested that the rule's restrictions on the use of fund assets were insufficiently strict, we made it clear we would be prepared to act to remedy the situation. Now, with nearly three decades of experience under our belts - and with today's uses of 12b-1 fees barely recognizable in the light of the rule's original purpose - it is high time for a thorough re-evaluation. The considerable distance that 12b-1 fees have strayed from the rule's paradigm isn't just occasion for the Commission to take a hard look at current practices. It's also a reason for independent directors to take a fresh look at the way this use of investors' funds has evolved. That's because Rule 12b-1 places considerable burdens on independent directors, without whose approval no payment may be made by a fund in connection with the distribution of its shares. Specifically, not just the fund's board, but a majority of the independent directors have to agree to the 12b1 plan. And the rule imposes additional oversight duties on fund directors, including that each year, without fail, you're required to approve your fund's 12b-1 plan. One element of the plan you cannot leave out, or change, is that it may be terminated at any time by vote of a majority of the independent directors. Rather obviously, the Commission had you in mind when the rule was devised. And if that weren't enough to make you feel intimately involved with the decision to collect 12b-1 fees, you are also required to periodically review all of the amounts that are spent in the name of the plan for which you are so personally responsible - and to satisfy yourself as to the reasons for those expenses. In doing all of this, fund directors are held to the fiduciary standards set out in both Section 36 of the Investment Company Act, and in applicable state law. Given that the Commission has so thoroughly bound the decision to charge 12b-1 fees to the independent judgment of the fund's disinterested directors, both we and you together have to tackle head-on the problem of brokers' sales commissions masquerading as fund marketing costs. It is worth revisiting, therefore, the original intent of Rule 12b-1, and considering its meaning in light of today's market realities and current practice. What the SEC had in mind in 1980 is that requiring current investors to subsidize the sale of fund shares to new investors could be a good thing even from the standpoint of the current investors - because increasing overall fund size could help better diversify their holdings, and also proportionally reduce the burden of administrative costs that might now be
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spread over a wider pool of investors. After all, higher expense ratios reduce investors' returns percentage point for percentage point. But whether, in fact, a fund's current investors are getting a break depends upon how the investment advisory contract is written. If increasing the size of the fund simply enlarges the fees earned by the investment adviser, the supposed benefits from economies of scale are undone. So one of the things that independent directors must concern themselves with in reviewing the propriety of any 12b-1 fees used for distribution is whether the fees paid to the management company and other vendors, as a percentage of total fund assets, has risen or fallen as the fund has grown. If the size of the fund is increasing, but the expense ratio isn't falling, then using a 12b-1 fee for marketing and distribution expenses is very likely harming, not helping, the current investors. There are other reasons to question the continued vitality of Rule 12b-1. Today the mutual fund industry is no longer at risk of suffering crib death, as was the case years ago when rule 12b-1 was adopted. At more than $10 trillion and counting, the survival of the mutual fund industry is plainly no longer at issue. Indeed, we have learned by this point in the 21st century that it can be just as big a problem for investors when a fund grows too large as when it is too small. The assumption can't always be made that growth in total assets inevitably assists existing investors. When funds grow too big, they can lose flexibility, with the result that investors get lower returns. For all of these reasons, the original premises of Rule 12b-1 seem highly suspect in today's world. If ever it was justified to indulge an irrebuttable presumption in favor of using fund assets to compensate brokers for sales of fund shares, that time surely has passed. Collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers. In meeting the fiduciary standards of the Investment Company Act and state law, of course, independent directors have to focus on the investors whose interests they represent. And so the independent directors' decision whether to approve a 12b-1 plan, and payments out of fund assets made pursuant to the plan, has to be no unless existing shareholders will benefit. Ironically, the strongest case for saying yes might well be when the 12b-1 fee is used to pay not for distribution, but for administrative services that are far afield from the kinds of costs that the original rule had in mind. After all, there is no question that processing shareholder transactions, maintaining shareholder records, and mailing account statements, fund communications, and reports to shareholders are services delivered to current investors - not potential new ones. That is at least a tangible something, as opposed to paying a commission to a broker. And it has a basis in some of the exemptive orders that have been issued over the years. But to the main point, it is a very different something than the rule itself contemplated when it was first adopted.

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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

That is why Rule 12b-1 is an issue the Commission will address this year. And as we do so, we will have the interests and concerns of independent directors, whose responsibilities and sensitivities to the fund's investors are thought to be particularly acute, uppermost in our minds. Nor is that all that the Commission will be doing this year that will be of direct interest to you. We intend to re-propose and then finalize our mutual fund governance rule. As you know, the comment period recently ended on the economic studies that were done in connection with the rule as it was first proposed - before its invalidation in the court of appeals. We are reviewing these comments carefully, analyzing them in the context of a comment file that now spans almost four years and includes more than 14,000 letters -including the thoughtful comments submitted by the Forum. We will punctiliously observe the procedural requirements to which the court directed us, and we will complete that important business with due regard for the comments already submitted, and those yet to be received. We are also in the midst of a broad initiative to examine the adequacy of investor disclosures by mutual funds and other investment vehicles in a typical 401(k) plan. With an emphasis on both the disclosures by the constituent investments in the 401(k), and the aggregate disclosures by the plan, we aim to make it far easier for busy Americans to understand the expenses they're being charged in connection with their investments, and the after-tax, after-inflation returns they're actually getting compared to an appropriate index. Even though this will require collaboration with the Department of Labor and other investment regulators, we're confident we can achieve a great deal in the coming months - and that the effort is supremely worthwhile, given what's at stake. The historic shift from company-guaranteed pension plans to investordirected vehicles such as 401(k) plans and other defined contribution retirement plans has put this issue at the center of our radar. Americans no longer can count on conventional pensions for support during their increasingly long retirement years. Defined benefit plans are going the way of the 8-track tape. So applying yourself diligently all of your working life won't mean retirement. It will mean a new career as a do-it-yourself money manager. Every American worker and every American family potentially are affected. And, as a nation, we've got to get this right, because an America burdened by large numbers of elderly living in straitened circumstances will not be a happy place, and the resulting problems will manifest themselves in countless dysfunctional ways. Our current arrangements, however, fall tragically short. To far too great a degree, and in substantial part because of a regulatory cumbersomeness that obscures the real numbers, our financial services industries are able to skim off much more of the assets they handle than would be the case in a well-functioning market. The difference materially
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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

burdens an investor's annual expected returns. And compounded over the retirement time horizon of even someone in his or her 50s, this can result in truly astronomical shortfalls. This is happening even now on a nationwide basis. That's why you can be sure that the "investors advocate" will be tackling this issue for the benefit of not only our senior citizens, but today's young savers as well. Americans already invest well over $3 trillion through these defined contribution retirement plans. And as I'm sure you know, nearly half of that is in mutual funds. And with the number of elderly Americans expected to grow 80% within the next 25 years, these already eye-popping numbers will grow further still. We want to be sure that today's retirees, and tomorrow's, have the information they'll need to successfully manage their savings through a retirement that, actuarially speaking, is guaranteed to be far longer than their parents'. So to insure we get the job done sooner rather than later, in the coming months we'll hold roundtable discussions with the nation's leading experts, and publish a concept paper outlining the issues we're addressing and the solutions that have been suggested. That, in turn, will pave the way for a formal rule proposal later this year. In this process, we'll be building on a substantial record that has already been compiled, including at our SEC Roundtable last June. From the input of investor advocates, third-party users of fund disclosure, fund directors such as yourselves, and others, a strong consensus emerged for the creation of more succinct, easy-to-understand disclosure documents for investors that highlight the key information about mutual funds that is most important to investors. The Commission's staff is already working on proposals to create this streamlined disclosure document for investors. Along with the improved presentation, those proposals may also call for better and more detailed information about investment objectives, strategies, risks, and costs, which could be made available online or in writing, as the investor prefers. And while we're doing this we'll continue to work to purge all of the legalese from these disclosures, and convert them into plain English. Getting rid of gobbledygook is no easy task, of course. After all, it isn't just legalese that has problems - even ordinary English often needs improvement. Just ask yourself: why is "abbreviated" such a long word? So we'll stay at it. And at the same time, we'll be examining the different types of disclosure that 401(k) participants receive, which today vary from full prospectuses and shareholder reports to one-page charts that contain extremely limited information. Our goal, working with our fellow regulators, is to develop an approach to 401(k) disclosures that permits each investor to obtain the information necessary to inform a sound investment decision. Nor will we stop there. Your organization has consistently focused on the significant conflicts of interest that fund directors face in connection with soft dollars, and the
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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

Commission plans more work here, as well. Soft dollars can serve as an incentive for fund managers to disregard their best execution obligations, and also to trade portfolio securities inappropriately in order to earn credits for research and brokerage. Soft dollars also represent a lot of investors' hard cash, even though it isn't reported that way. The total of soft dollars runs into the billions each year for all investment funds in the United States. An agency focused on ensuring full disclosure to investors has to be very concerned about this, because soft dollars make it more difficult for investors to understand what's going on with their money. Hard dollars eventually end up being reported as part of the management fee the fund charges its investors. But soft dollars provide a way for funds to lower their apparent fees - even though, in the end, investors pay for the expense anyway. The very concept of soft dollars may be at odds with clarity in describing fees and costs to investors. The 30-year old statutory safe harbor, in Section 28 (e) of the Exchange Act, was probably thought to be a useful legislative compromise when it was packaged with the abolition of fixed commissions. But surely in enacting Section 28(e) Congress meant to promote competition in research, not to create conflicts of interest by permitting commission dollars to be spent in ways that benefit investment managers instead of their investor clients. That is why the Commission is continuing to examine the potentially distortive effects that soft dollars can have on what should be the normal market incentive to seek best execution. And we're looking to ensure that when soft dollars are used to pay for research, it doesn't interfere with the full disclosure of actual management costs. In particular, the Commission will consider whether fund boards could better assess soft dollar arrangements if the Commission were to mandate better disclosure of the research and brokerage services that the adviser gets in return for a bundled commission. If directors are able to compare the broker's execution-only commission rate with its bundled rate, they could make more meaningful inquiries into the value of the additional services that the fund shareholders are getting. Our recent interpretive guidance was a step forward in this area, but it may not be enough to wipe out the abuses that the Commission has discovered, such as soft dollars used to pay for membership dues; carpeting; entertainment and travel expenses; and lavish expenditures for interior decorators and beachfront villas. So while the Commission's soft dollar release was important, you can rest assured it won't be our last word on this subject. Again, I want to commend each of you, and this organization, for your leadership in this area. I look forward to our continued work together. As you almost certainly know by now, no speech of mine, whether short or long, would be complete without a mention of interactive data. And because
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SEC Speech: Address to the Mutual Fund Directors Forum, Seventh Annual Policy Conference; Washington, D.C.; April 13, 2007 (Christopher Cox)

of the leadership that the mutual fund industry has shown, my mentioning it in this context is a very pleasant opportunity. Earlier this year, the Commission issued a proposing release requesting comment on whether mutual funds should now begin to use interactive data to report the information in the risk/return summaries. Since these summaries include a fund's investment objectives as well as its strategies, costs, risks, and historical performance, letting investors and analysts easily use and compare this data has the potential to vastly improve the quality of information that's provided to mutual fund investors. Your industry's participation in the Commission's interactive data initiatives has been truly exemplary. The truth is, as independent directors, you share more than just our goals at the Commission. An article in today's paper reminded me that not only are we partners in our mission of investor protection, but also the way the law expects us to execute our roles gives us similarly weighty responsibilities. Like you, each of the five Commissioners of the SEC shares the duty of overseeing and monitoring the operations and activities of our organization. Under procedures established long before I became Chairman, no formal investigation is initiated, no case is filed, no settlement is agreed to without Commission approval. Each of us has been appointed by the President and confirmed by the Senate with the express understanding that, like you, we will be independent in our actions and our judgments, with only the welfare of the nation's investors and markets as our special interest. Nowhere is this more important than in the area of enforcement, where - as we saw in the mutual fund scandals of 2003 and 2004 - vigorous Commission action is necessary to ensure that a culture of ethics and compliance operates throughout a fund complex for the benefit and protection of the funds' investors. At the same time, Commission review of enforcement actions shouldn't slow down the process. As both the Commission's caseload and its staff have grown in recent years, that has posed a genuine tradeoff for Commissioners seeking to fulfill their fiduciary duty. What full Commission review should provide is a guarantee of fairness and of horizontal equity in a nationwide program. And it should be the wind at the backs of our staff across the country as they seek to obtain the best possible results for America's investors. When enforcement lawyers in settlement discussions sit eye-to-eye across the table from counsel for the defense, we want them to know they have the full backing of the Commission. Our staff will have the strongest negotiating position, of course, if the Commission has reviewed the proposed range of outcomes before the offers in settlement are made. So in a handful of cases where the need for national consistency is greatest, we're reviving what had been a long standing policy of the SEC for all cases for many years - that Commission approval be obtained before settlement discussions are commenced. But we'll do so with a difference: When cases are settled within the range of guidance provided by the Commission, they will be eligible for summary approval through the

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Commission's seriatim procedure. And I and each of the Commissioners are committed to seeing to it that this procedure works to speed up, not slow down, our cases. The category of cases we've selected consists of those in which a monetary penalty against a company might be involved. As you know, very recently the Commission adopted new guidelines for cases of this kind, and we are anxious to ensure that in the early days of its implementation, the precedents we establish are clear, consistent, and in accordance with the instructions of Congress in the Remedies Act. Already, there's been speculation whether this procedural change portends a shift to higher or lower penalties. It is, of course, designed to do neither, but rather to ensure that the laws are vigorously enforced with the benefit of full Commission review. But if I had to hazard a guess, it would be that if anything, the penalties you will see imposed in future cases will be stiffer - because the staff lawyers negotiating them won't have to hedge their bets, wondering whether the Commission will later on back them up, or rather cut them off at the knees. We should never put our staff in such a position. They are America's finest, and every Commissioner is extremely proud of the work they do. We're confident that this new approach will give them more flexibility and better tools to do their jobs more effectively and more quickly. It will also give each of the Commissioners a better opportunity to do our jobs, which require of us the same oversight responsibilities that each of you must constantly exercise as independent directors. We have much to learn from working with you. And because the key to any good partnership is communication, I and each of the Commissioners have been actively reaching out to fund directors to engage in a dialogue. I plan to continue to meet personally with members of mutual fund boards, because you know from first-hand experience what SEC regulators can do that would make a positive impact in your work. You best understand the funds you oversee and your shareholders' expectations; you are the ones who are called upon to make determinations about fund fees and operations; you routinely interact with fund management and have intimate knowledge of not only the funds, but also their service providers and personnel. That is why we need you to partner with us to make sure the mutual fund industry meets the highest possible standards for investors. We need you to help us in constantly enhancing oversight. Ultimately, investors are depending on you to get the answers, to require accountability, and to ensure fairness and integrity in the conduct of the funds' business. Their investments are in your hands. You have a truly important responsibility, to our nation and its citizens, and we at the SEC have every confidence that you are up to the challenge. Thank you for inviting me, and more importantly, thank you for what you do every day. We at the SEC are proud to be your partners.

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SEC Speech: Remarks Before the 27th Annual Ray Garrett, Jr. Corporate an...w Institute 2007; Chicago, Illinois; May 4, 2007 (Linda Chatman Thomsen)

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Speech by SEC Staff: Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007
by Linda Chatman Thomsen1 Director, Division of Enforcement U.S. Securities and Exchange Commission Chicago, Illinois May 4, 2007

'Not often in the story of mankind does a man arrive on earth who is both steel and velvetwho holds in his heart and mind the paradox of terrible storms and peace unspeakable and perfect.' What Carl Sandburg, the prairie poet, said of Abraham Lincoln, the prairie lawyer and politician might just as well apply to the rabbi's son from Chicago who has been called, justifiably, the greatest lawyer of his time. The law is a paradoxical discipline, both absolute and flexible, fixed and evolving. Conservative as precedent, and liberal as compassion, it demands respect for institutions. Yet it relies upon imperfect individuals to give them life.2 So said Gerald Ford in the opening paragraph of his eulogy to Edward Levi, legendary lawyer who, in 1975, left the presidency of his beloved University of Chicago to serve as the 71st Attorney General of the United States. I couldn't resist sharing President Ford's words with you because they reflect so well on two Illinois lawyers and I thought as a guest in your wonderful city it was the polite thing to do. Also, while I know few will ever declare the eloquence of our 38th president to rival that of our 16th president, on this one, I think President Ford did pretty darn well. More to the point of gathering here today it speaks of our profession in a way that should cause all of us to walk a little taller. It is that profession I'd like to talk about today. Before I go any further I should remind you that my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. My views are also affected by my view, and while these days I see the world through glasses, I guarantee you they are not rose-colored. Consistent with that, I'll start with the bad news about our profession and talk briefly about behaviors that, rather than causing us to walk taller should have all of us slinking around looking at our shoes.

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A few too many recent examples come to mind. The conduct of several inside lawyers in the recent options backdating scandals should make us all pause. In recent months, the Commission has sued the former General Counsels of four publicly traded companies: Apple, McAfee, Monster Worldwide and Comverse Technology for allegedly backdating undisclosed in-the-money options to themselves and to others.3 Sadly, in each of the four cases we alleged that to further the respective scheme, the company's inside counsel altered or fabricated company records to advance or conceal the fraud. According to our allegations, the former General Counsels collectively made millions by exercising their own options and then selling shares. The Comverse and Monster lawyers have settled, each agreeing to monetary sanctions, permanent officer and director bars and suspensions from practicing as attorneys before the Commission.4 In another arena, the Commission has charged inside counsel with insider trading. Ironically, each had substantial compliance responsibilities. In the first case, we charged Randi Collotta, a Morgan Stanley compliance officer who was also a lawyer along with 13 others, for her role in one of the largest insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. In the complaint, we allege that Collotta and her husband, Christopher Collotta, also an attorney by the way, provided material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients to a registered representative at a Florida broker-dealer. The broker-dealer then traded on the information and shared his illicit profits with the Collottas.5 Just two weeks ago, the Commission sued Kevin Heron, the former General Counsel and chief insider trading compliance officer of Amkor Technology. The Commission's complaint alleges that over a two-year period, Heron illegally traded in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions. Heron executed more than fifty illegal trades in Amkor stock and options based on information Heron had learned as a result of his position as general counsel. Heron executed nearly all of these illegal trades while he and other company employees were subject to company blackout periods that prohibited them from trading in Amkor stock.6 Lest we forget one of the events that has had such a profound impact on the securities world, this spring, the Commission sued two former high-ranking Enron in-house lawyers for fraud.7 But all this depressing news about our profession is not what I want to focus on this morning. Instead, I'd like to spend time on the tremendous power of lawyers to do good. Especially in their roles in helping clients work through a crisis or better still working to help clients avoid a crisis all together. And happily, the cases I noted earlier really are not the norm. Society has long recognized the very effective role lawyers play in preventing terrible conduct and in ensuring fair process. It was, after all, the plotting

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tyrant Dick the Butcher who said "The first thing we do, let's kill all the lawyers" in Shakespeare's Henry VI (Part 2, Act IV, scene 2). Not, as is so often suggested because lawyers were bad guys but rather because they were effective at fighting tyranny. And if you want a positively chilling acknowledgement of the power of good lawyers to advance the greater good, think about what Adolph Hitler said during his rise to power: "I shall not rest until every German sees that it is a shameful thing to be a lawyer."8 It is not surprising that the law itself recognizes and protects the attorney role, especially in the context of privilege, a concept which dates back to Cicero.9 We've heard a lot lately about the attorney-client privilege, and I'd like to discuss it in more detail in a minute. But first, one of the important roles for corporate lawyers is helping companies unscramble the various messes they find themselves in. I'm talking about the internal investigation that companies often undertake when they become aware of potential bad conduct. As one former commissioner said about internal investigations: "There is a broad common-law basis for the proposition that if a corporation senses there has been wrong-doing, management has an obligation to ascertain the extent of it and to pursue a remedy Wherever management finds a problem it wants to eradicate effectively and in an objective fashion, it may resort to this new technique of internal investigation."10 The former commissioner? Al Sommer who served on the Commission over thirty years ago from 1973 to 1976 and who made these remarks over two decades ago in 1983. Commissioner Sommer's words are reported in a 1984 law review article by former SEC official and private practitioner Art Mathews, titled "Internal Corporate Investigations." In that article, Mathews details a very interesting history, a history that he noted went back to the 1960s, by the way, of what he described then as the "ever-increasing frequency" of internal investigations.11 Perhaps the most interesting thing about Mathews' research was the unmistakable conclusion that increasingly defense counsel were counseling their clients that conducting a thorough, independent, internal investigation would be in their best interest. First, because such an internal investigation gives the company a valuable opportunity to stay ahead of regulators and to propose realistic remedies that the company can live with in a case of securities law violations. In one example, Mathews noted that by conducting an internal investigation and proactively proposing to pay full restitution, the company likely avoided a receivership that would have placed the company in bankruptcy. A second reason defense counsel may advise internal investigations is that providing such information to the staff can result in significant resource savings for the company by limiting the number of executives and other employees whose testimony must be taken by the staff and reducing the length of the investigation. Most companies are anxious to eliminate the uncertainty of a pending Commission investigation. A third reason Mathews argues that conducting internal investigations is good counsel is that it has the power to restore confidence in the investing public that a company is back on track. And finally, for our part, at the SEC, we credit cooperation and the provision of useful information, which of course can benefit companies significantly. Many times that cooperation and
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information comes to us via an internal investigation. The principal of crediting cooperation has been part of our process for years. It was explicitly expressed by the Commission in October 2001 in a report commonly referred to as the Seaboard Report. That report was issued by the Commission in connection with an enforcement matter where the Commission decided not to sue a company, even though it had the law and evidence to do so, because of the steps the company had taken in response to the illegal behavior that had occurred.12 Among the steps was its cooperation. The decision to reward cooperation in the Seaboard matter was consistent with historical precedent, and that precedent continues to today. To cite just two examples, earlier I mentioned our recent action against two former Apple executives. In connection with that matter, the Commission said it would not bring any enforcement action against Apple based in part on its swift, extensive, and extraordinary cooperation in the Commission's investigation. Apple's cooperation consisted of, among other things, prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.13 Another explicit example can be found in the January 2006 action charging six former officers of Putnam Fiduciary Trust Company (PFTC) with defrauding clients of $4 million. The Commission simultaneously announced that even though the alleged conduct was "egregious" the company would not be charged because its cooperation and the remedial steps taken were "extraordinary." PFTC's cooperation consisted of prompt self-reporting, an independent internal investigation, sharing the results of that investigation with the Commission (notwithstanding applicable privileges and protections), terminating and otherwise disciplining responsible wrongdoers, providing full restitution, paying the related attorney and consultant fees incurred by its defrauded clients, and implementing new controls designed to prevent future fraudulent conduct.14 The PFTC action was announced the day before the Commission announced broader penalty guidance, which again reconfirms cooperation, among others, is a factor the Commission considers in determining the propriety of sanctions.15 On the topic of waiver of attorney client privilege and work product protection, a little history is in order. For years, long before Enron or WorldCom or the Thompson memo and certainly before the McNulty memo, we have affirmatively taken steps to protect the attorney client relationship by filing amicus briefs supporting selective waiver. We have consistently advocated legislation that would permit provision of information to us without otherwise waiving the privilege. We have supported rule amendments that would similarly protect information provided to us. Those who practice before us know we work with counsel to find ways to provide information to us that protects the privilege. Do we discuss waiver issues with counsel? Of course. Do we raise the topic? Sometimes, but more often than not it is the company or individual or their counsel who raise the issue. Why is that? A variety of reasons. First, advice of counsel is often used as a defense. Second, especially for companies with

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serious issues, they want to do whatever they can to distinguish the company from its employees who have engaged in serious law breaking. I have heard one defense counsel say that, when confronted with a big problem, he, his colleagues and his client, stay up nights trying to think of ways to cooperate. So what do we do when we initiate these conversations? We have a process, which I will describe, but first two important notes. First, we do not indeed we cannot require waiver of the attorney/client privilege. Second, waiver of a privilege or protection is not a pre-requisite to obtaining credit in a Commission investigation. The credit given is based on, among other things, the factual information given, the timeliness of the provision of information and the usefulness of the information. Waivers may be, and often are, a means to that end but are not an end in and of themselves. On to our process. It is, to coin a phrase from another current discussion in the securities world, principles based. First and foremost, we respect the legitimate assertions of the attorney client privilege and the attorney work product protection. Second, we think about alternatives for obtaining the information we seek. Third, we distinguish between facts and core attorneyclient communications and opinion work product. It is the former we are interested in. We also recognize the difference between work associated with an internal investigation and work done at the time of the events at issue. It is the factual information from the former we are most interested in. As to the latter, we often get it but not at our request but rather as a result of someone advancing an advice of counsel defense or argument. Fourth, recognizing the importance of this issue, if we initiate these conversations, we do so at the Assistant Director level or higher. Finally, we are candid about the existing state of the law and let people know that while we will do our best to protect the confidentiality of information provided to us, the state of the law may not support maintaining confidentiality after information has been shared with us. Our approach is based on the fact that we respect the role of good lawyers. We want to encourage parties to consult counsel both regarding potential violations of the securities laws and regarding how best to rectify bad behavior, and therefore, we must be and we are judicious in requesting waivers. We are ever mindful that the request alone may have a chilling effect. But, and this is an important but, we can not talk about the attorney-client privilege without talking about and embracing the reason for that protection. Underlying the privilege is the assumption that attorneys will advise and advance compliance with the law. Society expects lawyers to be more than hired guns, to do more than keep people happy. We expect that they can and will make uncomfortable decisions and that they can and will deliver unwanted advice and bad news. Underlying all evidentiary privileges which let me remind you, are disfavored at law, for the simple reason that they interfere with fact-finding is the idea that there is an offsetting benefit that justifies the cost to the truth-seeking process. That somehow by protecting these relationships with priests, or doctors, or lawyers we, as a society, end up encouraging better conduct, not worse.
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On this point, in November of 2006 the New York City Bar Association issued its Report of the Task Force on the Lawyer's Role in Corporate Governance. While I don't necessarily agree with everything in the report, I do find it an extremely thoughtful analysis. In March of 2005, the then-president of the New York City Bar appointed a task force to "examine the role of counsel, both in-house and outside, with respect to counseling about corporate conduct."16 The task force, which included four current or former public company general counsel, sixteen law firm lawyers, including litigators and transactional lawyers, two plaintiffs class action attorneys, two law professors, three government lawyers, one federal judge, one general counsel to an auditing firm, and one non-attorney who has served on audit committees, was charged with examining "all aspects of the role of individual lawyers and law firms by examining recent failures to perform that role effectively as alleged by government agencies, Congress and the courts."17 In the introduction to the report, the task force said it had "addressed itself generally to the question of how lawyers, whether in-house or outside counsel, can be more effective in helping the public companies they advise avoid problematic conduct that, as Enron, WorldCom and other recent scandals have dramatically emphasized, can injure many thousands of investors and employees. Lawyers are often in a position to influence or facilitate the conduct of their corporate clients. Thus, the question of what role lawyers can and should play to minimize wrongdoing by their public company clients is an important one."18 The report reasks the question Judge Sporkin asked in connection with the savings and loans crisis: Where were the lawyers? (I should note that is not the precise way the opinion reads but it is a fair, and perhaps understated, paraphrase.) Within this report there is one truly remarkable section. Roman numeral section II, subsection capital E., page 95 is the shortest lettered subsection in the report. It runs barely one page. But to my mind it may be the most important, and the title says it all: Professional courage: the indispensable element. The report finds that when lawyers are faced with unlawful corporate conduct "[f]irm advice to clients, including directly to the Board if necessary, should be sufficient to address and redress nearly every instance of actual or potential wrongdoing." And therein lies the need for professional courage. The task force found that "[t]he essential need is for lawyers to give that advice clearly and not waver when the advice is unwelcome, no matter how important the client or how powerful the officer or director resisting the advice."19 Given the economic and financial pressures to maintain relationships with major corporate clients and powerful officers and directors, and the fact that the answers to legal questions are rarely beyond dispute, the report acknowledged that "it may take genuine professional courage to provide unwelcome advice and stick to it."20

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These acts of courage can be dramaticresigning for example. But more often, there will be less dramatic, but just as important, opportunities for lawyers to effect good. Encouraging a client to step back from a line rather than help the client squeeze as close to it as possible. Once you've figured out whether a particular course of conduct can be taken, encouraging everyone to think about whether it should be taken. When going through the process of looking back over events, whether in an internal investigation or otherwise, not only figuring out whether the conduct is legally defensible but also asking, the quieter questions, is it in the business's long term interest? Is it behavior we want to encourage? Is it something we should be proud of? As I'm sure you can tell, I love the fact that the New York City Bar's report talks about courage. There it is, right there, a discussion of a virtue. I was reminded of what Aristotle said about courageit is the first virtue, because it makes all other virtue possible. So, here's to the courage in all of us.
Endnotes

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
1

Gerald Ford, In Memoriam: Edward H. Levi (1912-2000), 67 U. Chi. L. Rev. 975 (2000).
2

See SEC v. Nancy R. Heinen and Fred D. Anderson, Litigation Release No. 20086 (April 24, 2007); SEC v. Kent H. Roberts, Litigation Release No. 20020 (February 28, 2007); SEC v. Myron F. Olesnyckyj, Litigation Release No. 20004 (February 15, 2007); and SEC v. Jacob ("Kobi") Alexander, David Kreinberg, and William F. Sorin, Litigation Release No. 19796 (August 9, 2006).
3

See SEC v. Jacob ("Kobi") Alexander, David Kreinberg, and William F. Sorin, Litigation Release No. 19964 (January 10, 2007) and SEC v. Myron F. Olesnyckyj, Litigation Release No. 20056 (March 27, 2007).
4

See SEC v. Mitchel S. Guttenberg, Erik R. Franklin, David M. Tavdy, Mark E. Lenowitz, Robert D. Babcock, Andrew A. Srebnik, Ken Okada, David A. Glass, Marc R. Jurman, Randi E. Collotta, Christopher K. Collotta, Q Capital Investment Partners, LP, DSJ International Resources Ltd. (d/b/a Chelsey Capital), and Jasper Capital LLC, C.A., Litigation Release No. 20022 (March 1, 2007).
5 6

SEC v. Kevin J. Heron, Litigation Release No. 20079 (April 18, 2007).

See SEC v. Jordan H. Mintz and Rex R. Rogers, Litigation Release No. 20058 (March 28, 2007).
7

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Charles I. Lugosi, Reflections From Embassy Lakes, Florida: The Effective Teaching Of Criminal Law, 48 St. Louis U. L.J. 1350 (2000).
8

Max Radin, The Privilege of Confidential Communication Between Lawyer and Client, 16 Cal. L. Rev. 487 (1927).
9 10

Arthur F. Mathews, Internal Corporate Investigations, Ohio St. L.J. 655 (1984). Id.

11

12

See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Release No. 44969 (October 23, 2001). See SEC Charges Former Apple General Counsel for Illegal Stock Option Backdating, Press Release 2007-70 (April 24, 2007). See SEC Charges Six Former Officers of Putnam Fiduciary Trust Company with Defrauding Clients of $4 Million, Press Release 2006-2 (January 3, 2006). See Statement of the Securities and Exchange Commission Concerning Financial Penalties, Press Release 2006-4 (January 4, 2006). The Association of the Bar of the City of New York, Report of the Task Force on the Lawyer's Role in Corporate Governance at 1 (November 2006). Id. Id. at 3. Id. at 95. Id.

13

14

15

16

17

18

19

20

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