SEC CHARGES BIG FLORIDA BANK AND TOP EXEC. WITH COOKING THE BOOKS

The following excerpt is from an SEC e-mail: 

"Washington, D.C., Jan. 18, 2012 — The Securities and Exchange Commission today charged the holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis.

The SEC alleges that BankAtlantic Bancorp and its CEO and chairman Alan Levan made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.

“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, BankAtlantic and Levan knew that a large portion of the loan portfolio — which consisted primarily of loans on large tracts of lands intended for development into single family housing and condominiums — was deteriorating in early 2007 because many of the loans had required extensions due to borrowers’ inability to meet their loan obligations. Some loans were kept current only by extending the loan terms or replenishing the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee that approved the extensions and principal increases. BankAtlantic and Levan also were aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about those loans.

“BankAtlantic and Levan publicly minimized the risks in the bank’s commercial residential loan portfolio when in reality, they had significant concerns about the borrowers’ ability to pay,” said Eric I. Bustillo, Miami Regional Office Director. “Investors had a right to know this key information.”

The SEC alleges that despite this knowledge, BankAtlantic’s public filings in the first two quarters of 2007 made only generic warnings of what may occur in the future if Florida’s real estate downturn continued. BankAtlantic failed to disclose the downward trend already occurring in its own portfolio. The steady deterioration of this portfolio constituted a known trend that should have been disclosed in the Management’s Discussion and Analysis (MD&A) section of BankAtlantic’s filings, which were signed by Levan. During earnings calls in the same time period, Levan made further misleading statements to investors about the portfolio. BankAtlantic finally acknowledged the problems in the third quarter of 2007 by announcing a large unexpected loss. The investing public did not expect a loss of that magnitude, and BankAtlantic’s share price immediately dropped 37 percent.

According to the SEC’s complaint, BankAtlantic and Levan attempted to sell some of the deteriorating loans after this announcement. However, they failed to account for them properly as being “held for sale,” which is required by Generally Accepted Accounting Principles (GAAP). BankAtlantic concealed the attempted sales from auditors and investors alike, because proper accounting would have required BankAtlantic to write them down and incur immediate additional losses. Instead, BankAtlantic schemed to understate its net loss by more than 10 percent in its 2007 annual report.

The SEC’s complaint seeks financial penalties and permanent injunctive relief against BankAtlantic and Levan to enjoin them from future violations of the federal securities laws. The complaint also seeks an officer and director bar against Levan.

The SEC’s investigation was conducted by Senior Counsel Brian P. Knight and Senior Accountant Fernando Torres under the supervision of Assistant Regional Director Thierry Olivier Desmet in the Miami Regional Office. C. Ian Anderson and Adam L. Schwartz will lead the SEC’s litigation efforts."

SEC CHARGES HEDGE FUNDS WITH INSIDER TRADING

The following excerpt is from an SEC e-mail:

“Washington, D.C., Jan. 18, 2012 – The Securities and Exchange Commission today charged two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia. Investment analyst Sandeep “Sandy” Goyal of Princeton, N.J., obtained Dell quarterly earnings information and other performance data from an insider at Dell in advance of earnings announcements in 2008. Goyal tipped Diamondback analyst Jesse Tortora of Pembroke Pines, Fla., with the inside information, and Tortora in turn tipped several others, leading to insider trades on behalf of Diamondback and Level Global hedge funds.

“These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
According to the SEC’s complaint filed in federal court in Manhattan, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.

The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City andDanny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.
The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcements, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

The SEC’s complaint charges each of the defendants with violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Goyal, Tortora, Newman, Adondakis, Chiasson, Horvath and Kuo with aiding and abetting others’ violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus and Stephen Larson – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.”

OWNERS OF U.S. CAVIAR EXPORTING COMPANIES CONVICTED FOR ILLEGAL HARVEST

The following excerpt is from the Department of Justice website:

Tuesday, January 17, 2012
"WASHINGTON – Two Kentuckians and their caviar companies pleaded guilty today in the U.S. District Court for the Southern District of Ohio to trafficking in and falsely labeling illegally harvested paddlefish (Polydon spathula). Steve Kinder, along with his wife, Cornelia Joyce Kinder, both of Owenton, Ky., owned and operated Kinder Caviar Inc. and Black Star Caviar Company. Those companies were in the business of exporting paddlefish eggs as caviar to customers in foreign countries.

Paddlefish, whose eggs are marketed as caviar, are protected by both federal and Ohio law. Ohio law prohibits commercial fishing for paddlefish. Ohio law also prohibits the possession or use of gill nets. The Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES), which is codified in United States law through the Endangered Species Act, regulates international trade in certain species listed on one of three Appendices. Paddlefish are listed on Appendix II of CITES. Appendix II species, or their parts, which were harvested in the United States, may be exported only if they are accompanied by a valid export permit issued by the U.S. Fish & Wildlife Service (USFWS).
Among other things, the Lacey Act makes it a crime to transport or sell fish, or their parts, knowing that the fish were harvested in violation of any state’s law. Among other things, the Lacey Act also makes it a crime to make or submit a false record, account or label for, or false identification of, fish or fish parts which were, or were intended to be, exported, transported or sold.

According to the  plea agreement filed in U.S. District Court in Cincinnati, Cornelia Joyce Kinder admitted to making false statements on behalf of Kinder Caviar in a CITES Export Registration Form for paddlefish eggs on or about March 15, 2007. Specifically, Cornelia Joyce Kinder misrepresented the amount of legally-harvested paddlefish eggs that she could provide documentation for, as well as misidentified the fishermen who harvested the paddlefish and the location of harvest.

As part of a plea agreement, Cornelia Joyce Kinder also admitted to making false statements on behalf of Black Star Caviar Company in a CITES Export Registration Form for paddlefish eggs on or about Dec. 18, 2010. Specifically, Cornelia Joyce Kinder completed the form using the name of a subordinate employee and forged that employee’s signature on the form in order to give the impression that she was not the applicant.

According to the plea agreement, both Steve Kinder and Cornelia Joyce Kinder admitted to aiding and abetting one another in harvesting paddlefish in Ohio waters, using gill nets attached to the Ohio shoreline, on or about May 5, 2007, and transporting the paddlefish to Kentucky with the intent to sell them when, in the exercise of due care, they should have known that the fish were harvested in violation of Ohio law.
As part of a plea agreement, both Kinder Caviar and Black Star Caviar Company have each agreed to pay a $5,000 fine and serve a three-year term of probation, during which time those companies will be prohibited from applying for or receiving a CITES Export Permit. In addition, both Steve Kinder and Cornelia Joyce Kinder have agreed to serve a three-year term of probation, during which time they will each perform 100 hours of community service, be prohibited from fishing anywhere in the Ohio River where that river forms the border between Ohio and Kentucky, and be prohibited from applying for or receiving a CITES Export Permit, either on behalf of themselves or anyone else. In accordance with Kentucky law, both Steve Kinder and Cornelia Joyce Kinder face possible suspension of their Kentucky commercial fishing licenses.

Also as part of the plea agreement, the boat and truck that were used in furtherance of the Lacey Act crimes have been forfeited."

INDIVIDUALS AND CORPORATIONS CHARGED WITH ONLINE PIRACY OF COPYRIGHTED MATERIAL

The following excerpt is from the Department of Justice website:

January 19, 2012
“WASHINGTON – Seven individuals and two corporations have been charged in the United States with running an international organized criminal enterprise allegedly responsible for massive worldwide online piracy of numerous types of copyrighted works, through Megaupload.com and other related sites, generating more than $175 million in criminal proceeds and causing more than half a billion dollars in harm to copyright owners, the U.S. Justice Department and FBI announced today.

This action is among the largest criminal copyright cases ever brought by the United States and directly targets the misuse of a public content storage and distribution site to commit and facilitate intellectual property crime.
         
The individuals and two corporations – Megaupload Limited and Vestor Limited – were indicted by a grand jury in the Eastern District of Virginia on Jan. 5, 2012, and charged with engaging in a racketeering conspiracy, conspiring to commit copyright infringement, conspiring to commit money laundering and two substantive counts of criminal copyright infringement. The individuals each face a maximum penalty of 20 years in prison on the charge of conspiracy to commit racketeering, five years in prison on the charge of conspiracy to commit copyright infringement, 20 years in prison on the charge of conspiracy to commit money laundering and five years in prison on each of the substantive charges of criminal copyright infringement.

The indictment alleges that the criminal enterprise is led by Kim Dotcom, aka Kim Schmitz and Kim Tim Jim Vestor, 37, a resident of both Hong Kong and New Zealand. Dotcom founded Megaupload Limited and is the director and sole shareholder of Vestor Limited, which has been used to hold his ownership interests in the Mega-affiliated sites.

In addition, the following alleged members of the Mega conspiracy were charged in the indictment:
Finn Batato, 38, a citizen and resident of Germany, who is the chief marketing officer;
Julius Bencko, 35, a citizen and resident of Slovakia, who is the graphic designer;
Sven Echternach, 39, a citizen and resident of Germany, who is the head of business development;
Mathias Ortmann, 40, a citizen of Germany and resident of both Germany and Hong Kong, who is the chief technical officer, co-founder and director;
Andrus Nomm, 32, a citizen of Estonia and resident of both Turkey and Estonia, who is a software programmer and head of the development software division;
Bram van der Kolk, aka Bramos, 29, a Dutch citizen and resident of both the Netherlands and New Zealand, who oversees programming and the underlying network structure for the Mega conspiracy websites.
Dotcom, Batato, Ortmann and van der Kolk were arrested today in Auckland, New Zealand, by New Zealand authorities, who executed provisional arrest warrants requested by the United States. Bencko, Echternach and Nomm remain at large. Today, law enforcement also executed more than 20 search warrants in the United States and eight countries, seized approximately $50 million in assets and targeted sites where Megaupload has servers in Ashburn, Va., Washington, D.C., the Netherlands and Canada. In addition, the U.S. District Court in Alexandria, Va., ordered the seizure of 18 domain names associated with the alleged Mega conspiracy.

According to the indictment, for more than five years the conspiracy has operated websites that unlawfully reproduce and distribute infringing copies of copyrighted works, including movies – often before their theatrical release – music, television programs, electronic books, and business and entertainment software on a massive scale. The conspirators’ content hosting site, Megaupload.com, is advertised as having more than one billion visits to the site, more than 150 million registered users, 50 million daily visitors and accounting for four percent of the total traffic on the Internet. The estimated harm caused by the conspiracy’s criminal conduct to copyright holders is well in excess of $500 million. The conspirators allegedly earned more than $175 million in illegal profits through advertising revenue and selling premium memberships.

The indictment states that the conspirators conducted their illegal operation using a business model expressly designed to promote uploading of the most popular copyrighted works for many millions of users to download. The indictment alleges that the site was structured to discourage the vast majority of its users from using Megaupload for long-term or personal storage by automatically deleting content that was not regularly downloaded. The conspirators further allegedly offered a rewards program that would provide users with financial incentives to upload popular content and drive web traffic to the site, often through user-generated websites known as linking sites. The conspirators allegedly paid users whom they specifically knew uploaded infringing content and publicized their links to users throughout the world.

In addition, by actively supporting the use of third-party linking sites to publicize infringing content, the conspirators did not need to publicize such content on the Megaupload site. Instead, the indictment alleges that the conspirators manipulated the perception of content available on their servers by not providing a public search function on the Megaupload site and by not including popular infringing content on the publicly available lists of top content downloaded by its users.

As alleged in the indictment, the conspirators failed to terminate accounts of users with known copyright infringement, selectively complied with their obligations to remove copyrighted materials from their servers and deliberately misrepresented to copyright holders that they had removed infringing content. For example, when notified by a rights holder that a file contained infringing content, the indictment alleges that the conspirators would disable only a single link to the file, deliberately and deceptively leaving the infringing content in place to make it seamlessly available to millions of users to access through any one of the many duplicate links available for that file.

The indictment charges the defendants with conspiring to launder money by paying users through the sites’ uploader reward program and paying companies to host the infringing content.

The case is being prosecuted by the U.S. Attorney’s Office for the Eastern District of Virginia and the Computer Crime & Intellectual Property Section in the Justice Department’s Criminal Division. The Criminal Division’s Office of International Affairs, Organized Crime and Gang Section, and Asset Forfeiture and Money Laundering Section also assisted with this case.

The investigation was initiated and led by the FBI at the National Intellectual Property Rights Coordination Center (IPR Center), with assistance from U.S. Immigration and Customs Enforcement’s Homeland Security Investigations. Substantial and critical assistance was provided by the New Zealand Police, the Organised and Financial Crime Agency of New Zealand (OFCANZ), the Crown Law Office of New Zealand and the Office of the Solicitor General for New Zealand; Hong Kong Customs and the Hong Kong Department of Justice; the Netherlands Police Agency and the Public Prosecutor’s Office for Serious Fraud and Environmental Crime in Rotterdam; London’s Metropolitan Police Service; Germany’s Bundeskriminalamt and the German Public Prosecutors; and the Royal Canadian Mounted Police – Greater Toronto Area (GTA) Federal Enforcement Section and the Integrated Technological Crime Unit and the Canadian Department of Justice’s International Assistance Group. Authorities in the United Kingdom, Australia and the Philippines also provided assistance.”

MARUBENI CORP. WILL PAY OVER $54 MILLION TO RESOLVE FOREIGN CORRUPT PRACTICES CHARGE

The following excerpt is from the Department of Justice website:

Tuesday, January 17, 2012
“Marubeni Corporation Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay a $54.6 Million Criminal Penalty$1.7 Billion in Total Penalties and Forfeiture Orders Obtained for Scheme to Bribe Nigerian Government Officials to Obtain Contracts

WASHINGTON – Marubeni Corporation has agreed to pay a $54.6 million criminal penalty to resolve charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction (EPC) contracts, the Justice Department’s Criminal Division announced today.  

The department filed a deferred prosecution agreement and a criminal information today against Marubeni in U.S. District Court for the Southern District of Texas. The two-count information charges Marubeni with one count of conspiracy and one count of aiding and abetting violations of the FCPA. Marubeni is a Japanese trading company headquartered in Tokyo.
                     
According to court documents, Marubeni was hired as an agent by the four-company TSKJ joint venture to help TSKJ obtain and retain EPC contracts to build liquefied natural gas (LNG) facilities on Bonny Island, Nigeria, by offering to pay and paying bribes to Nigerian government officials, among other means. TSKJ was comprised of Technip S.A., Snamprogetti Netherlands B.V., Kellogg Brown & Root Inc. (KBR) and JGC Corporation. Between 1995 and 2004, TSKJ was awarded four EPC contracts, valued at more than $6 billion, by Nigeria LNG Ltd. to build the LNG facilities on Bonny Island. The government-owned Nigerian National Petroleum Corporation was the largest shareholder of NLNG, owning 49 percent of the company.

According to court documents, to assist in obtaining and retaining the EPC contracts, the joint venture hired two agents – Marubeni and Jeffrey Tesler, a U.K. solicitor – to pay bribes to a wide range of Nigerian government officials. The joint venture hired Tesler as a consultant to pay bribes to high-level Nigerian government officials, including top-level executive branch officials, and hired Marubeni to pay bribes to lower-level Nigerian government officials. At crucial junctures preceding the award of EPC contracts, a number of co-conspirators, including on two occasions an employee of Marubeni, met with successive holders of a top-level office in the executive branch of the Nigerian government to ask the office holders to designate a representative with whom TSKJ should negotiate bribes to Nigerian government officials. TSKJ paid approximately $132 million to a Gibraltar corporation controlled by Tesler and $51 million to Marubeni during the course of the bribery scheme and intended for these payments to be used, in part, for bribes to Nigerian government officials.

Under the terms of the deferred prosecution agreement, the department agreed to defer prosecution of Marubeni for two years. Marubeni agreed to retain a corporate compliance consultant for a term of two years to review the design and implementation of its compliance program, to enhance its compliance program to ensure that it satisfies certain standards and to cooperate with the department in ongoing investigations. If Marubeni abides by the terms of the deferred prosecution agreement, the department will dismiss the criminal information when the term of the agreement expires.
“With today’s resolution, the department has held accountable all five of the corporations that participated in the massive, decade-long scheme to bribe Nigerian government officials in connection with the so-called Bonny Island project,” said Mythili Raman, Principal Deputy Assistant Attorney General of the Justice Department’s Criminal Division. “As a result of this extensive investigation, the department and our partners have obtained more than $1.7 billion in penalties and forfeiture orders from the joint venture partners, their agents and individuals who sought illegally to obtain the Bonny Island contracts. Several individuals also have pleaded guilty for their roles in the scheme. Our FCPA enforcement efforts are an essential part of our comprehensive approach to rooting out corruption across the globe.”
In a related criminal case, KBR’s successor company, Kellogg Brown & Root LLC, pleaded guilty in February 2009 to FCPA-related charges for its participation in the scheme to bribe Nigerian government officials. Kellogg Brown & Root LLC was ordered to pay a $402 million fine and to retain an independent compliance monitor for a three-year period to review the design and implementation of its compliance program. In another related criminal case, the department filed a deferred prosecution agreement and criminal information against Technip in June 2010. According to that agreement, Technip agreed to pay a $240 million criminal penalty and to retain an independent compliance monitor for two years.   In July 2010, the department filed a deferred prosecution agreement and criminal information against Snamprogetti, which also agreed to pay a $240 million criminal penalty. In April 2011, the department filed a deferred prosecution agreement and criminal information against JGC, in which JGC agreed to pay a $218.8 million criminal penalty and to retain an independent compliance consultant for two years.

In other related criminal cases, KBR’s former CEO, Albert “Jack” Stanley, pleaded guilty in September 2008 to conspiring to violate the FCPA for his participation in the bribery scheme. Tesler and Wojciech J. Chodan, a former salesperson and consultant of a United Kingdom subsidiary of KBR, were indicted in February 2009 on FCPA-related charges for their participation in the bribery scheme. In March 2011, Tesler was extradited from the United Kingdom and subsequently pleaded guilty to conspiring to violate and violating the FCPA and agreed to forfeit $148,964,568. In December 2010, Chodan was extradited from the United Kingdom and subsequently pleaded guilty to conspiring to violate the FCPA and agreed to forfeit $726,885.  
                     
The criminal case is being prosecuted by Assistant Chief William J. Stuckwisch and Deputy Chief Patrick F. Stokes of the Criminal Division’s Fraud Section, with investigative assistance from the FBI-Houston Division. The Criminal Division’s Office of International Affairs and the SEC’s Division of Enforcement provided substantial assistance. Significant assistance was provided by authorities in France, Italy, Switzerland and the United Kingdom.”

SEC ALLEGES UBS ADVISORY BUSINESS MISLED INVESTORS

The following excerpt is from the SEC website:

“Washington, D.C., Jan. 17, 2012 – The Securities and Exchange Commission today charged an investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed, resulting in a misstatement to investors of the net asset values (NAVs) of those funds. The misconduct was revealed during the course of an SEC examination, minimizing investor harm.

The SEC’s Enforcement Division began investigating UBS Global Asset Management (UBSGAM) following a referral from SEC examiners who conducted a routine exam of the firm, which is an SEC-registered investment adviser. The SEC’s investigation further determined that during a two-week period, UBSGAM did not follow the mutual funds’ fair valuation procedures in pricing certain illiquid fixed-income securities in the portfolios of the mutual funds.

UBSGAM agreed to pay $300,000 to settle the SEC’s charges.
“UBS Global Asset Management failed to fulfill one of its core delegated responsibilities on behalf of mutual funds it advises – to price securities in the mutual funds accurately,” said Merri Jo Gillette, Regional Director of the SEC’s Chicago Regional Office.

“Fortunately this misconduct was brought to light quickly, so the duration was short and the harm to investors minimal.”

According to the SEC’s order instituting administrative proceedings against UBSGAM, the firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of approximately $22 million. Most of the securities were part of subordinated tranches of nonagency mortgage-backed securities whose underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac. The securities purchased also included asset-backed securities and collateralized debt obligations.
The SEC’s order finds that following the purchases, all but six of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100 percent higher. The valuations used by UBSGAM were provided by pricing sources (broker-dealers or a third-party pricing service) that did not appear to take into account the prices at which the mutual funds had purchased the securities. Some of the broker-dealer quotations were based on the previous month-end pricing; other quotes were stale and not priced daily. UBSGAM did not price the securities at fair value until it held a meeting of the firm’s Global Valuation Committee more than two weeks after UBSGAM began receiving “price tolerance reports” identifying the discrepancies between the purchase prices and the valuation of the securities based on the pricing sources. By using the valuations provided by broker-dealers or a third-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures. These procedures required the securities to be valued at the transaction price until UBSGAM received a response to a price challenge based on the discrepancy identified in the price tolerance report, or UBSGAM made a fair value determination. The procedures provided that the transaction price could be used for up to five business days until a decision needed to be made to determine the fair value. By failing to implement these procedures, UBSGAM aided and abetted and caused the funds to violate Rule 38a-1 under the Investment Company Act.

The SEC’s order further finds that because the securities were not properly or timely priced at fair value, the NAVs of the funds were misstated between one cent and 10 cents per share for several days in June 2008. Consequently, the mutual funds sold, purchased, and redeemed their shares based on inaccurately high NAVs on those days. UBSGAM thus aided and abetted and caused the funds to violate Rule 22c-1 adopted pursuant to Section 22(c) of the Investment Company Act.

In settling the charges without admitting or denying the SEC’s findings, UBSGAM agreed to be censured and to pay a $300,000 penalty, and also consented to a cease-and- desist order from committing or causing violations of Rules 22c-1 and 38a-1 under the Investment Company Act. The SEC acknowledges the assistance and cooperation of UBSGAM during the examination and investigation.

The SEC’s investigation was conducted by Jamie Davidson, Marlene Key, Steven Levine, and Eric Phillips of the Chicago Regional Office. The SEC examination team that referred the matter to enforcement officials included Maureen Dempsey, Matthew Harris, Leora Hughes, Stanton Nelson, and Susan Weis of the Chicago Regional Office.”