SEC NEWS DIGEST Issue 2006-232 December 4, 2006 COMMISSION ANNOUNCEMENTS SEC STAFF ANNOUNCES POSSIBLE TOPICS FOR 2007 CCOutreach REGIONAL SEMINARS Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, announced that the next series of CCOutreach regional seminars for mutual fund and investment adviser chief compliance officers will be held in April, May, and June of 2007 at various locations throughout the country. During the CCOutreach National Seminar on Nov. 14, 2006, in Washington D.C., Ms. Richards encouraged chief compliance officers (CCOs) to share their preferences with respect to possible discussion topics. Ms. Richards said, "We want the CCOutreach program to be as helpful as possible to CCOs by addressing the areas of interest or concern that CCOs feel are important. Therefore, we will set the agenda for our 2007 regional seminars based on CCO feedback. We feel this approach will strengthen our growing relationship with CCOs and will educate and inform CCOs on information, issues, and/or events most pertinent to them and their businesses." The 2007 CCOutreach regional seminars will include four or five compliance topics. Possible topics for the seminars include, but are not limited to * the examination process; * the risk assessment process; * portfolio management; * brokerage arrangements, best execution and trade allocation; * personal securities transactions; * pricing and valuation; * books and records; * disclosures and filings; * marketing, performance advertising and distribution; and * safety of client assets. With respect to each topic, the regional seminars will address the information and documents that are requested during exams, frequent examination findings, various analyses that may be performed, and factors to consider when establishing compliance controls. CCOs may provide suggestions with respect to the 2007 CCOutreach regional seminars, including topics to be addressed, via email to CCOutreach@sec.gov before the end of the calendar year. Further information about the CCOutreach program can be found on the Commission's website at http://www.sec.gov/info/ccoutreach.htm. (Press Rel. 2006-199) RULES AND RELATED MATTERS PROPOSED AMENDMENTS TO MUNICIPAL SECURITIES DISCLOSURE The Commission is publishing for comment proposed amendments to a rule under the Securities Exchange Act of 1934 relating to municipal securities disclosure which would delete references to the Municipal Securities Rulemaking Board as a recipient of material event notices filed by or on behalf of issuers of municipal securities or other obligated persons. Comments on the release are due within 30 days following publication in the Federal Register. (Rel. 34-54863; File No. S7-19-06) ENFORCEMENT PROCEEDINGS JEFFERIES SETTLES SEC CHARGES ARISING OUT OF THE ILLEGAL PROVISION OF $2 MILLION IN GIFTS AND EXCESSIVE ENTERTAINMENT TO MUTUAL FUND COMPANY TRADERS FOR BROKERAGE BUSINESS On December 1, the Commission today charged registered broker-dealer Jefferies & Co., Inc., and two executives in connection with approximately $2 million worth of lavish gifts, extravagant travel and entertainment and other illegal gratuities to win mutual fund trading business. Jefferies, its Director of Equities, Scott Jones, and Kevin Quinn, the firm's former Senior Vice President and equity sales trader, have agreed to the Commission's institution of settled enforcement proceedings. The Commission issued an Order that finds that, in May 2002, Jefferies hired Quinn to increase Jefferies' brokerage business with a family of mutual funds managed by an adviser with which Quinn had a pre-existing relationship. To retain Quinn as an expected rainmaker, the firm gave him a highly lucrative compensation package that included a $1.5 million annual travel and entertainment budget, which Quinn used to lavish travel, entertainment and gifts on a handful of the fund adviser's most successful equity traders and the adviser's head of equity trading. The Commission's Order finds Quinn aided and abetted the violations of the fund adviser's employees, and that Jefferies and Jones failed to supervise Quinn's misconduct. According to the Commission's Order, Quinn provided the traders with expensive golf trips, flew them on private jets, lodged them at fancy hotels, and showered them with golf merchandise and other presents. On certain occasions, he also made private jets available to them to take on personal trips without his attendance. Quinn also gave these same traders tickets to major sporting events, Broadway shows, and concerts, again without his attendance, and even helped pay for one trader's elaborate bachelor party in Miami. The Commission's Order further finds that Jones, Quinn's primary supervisor, approved numerous expense vouchers that reflected inappropriate expenditures on behalf of the traders. The illegal conduct occurred between May 2002 and October 2004. The Commission's Orders find that Quinn willfully aided and abetted and caused violations of Section 17(e)(1) of the Investment Company Act, Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder. Under the terms of the settlement, Quinn has agreed, without admitting or denying the Commission's findings or allegations, to payment of $1 of disgorgement and a civil monetary penalty of $468,000 to a Fair Fund for the benefit of the fund adviser's clients; a cease-and-desist order against committing or causing any violations and any future violations of Section 17(e)(1) of the Investment Company Act and Section17(a)(1) of the Exchange Act and Rule 17a-3 thereunder; a bar from association with any broker or dealer; and a prohibition from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company. The Orders further find that Jefferies failed reasonably to supervise Quinn, with a view to preventing and detecting Quinn's aiding and abetting and causing violations of Section 17(e)(1) of the Investment Company Act. The Order also finds that Jefferies violated Section 17(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-3 thereunder. Without admitting or denying the Commission's findings or allegations, Jefferies has consented to the imposition of a cease-and-desist order against committing or causing any violations and any future violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder; a censure; and payment of $4.2 million in disgorgement, plus prejudgment interest. Jefferies has also agreed to retain an independent compliance consultant to conduct a comprehensive review of Jefferies' supervisory, compliance, and other policies and procedures relating to the provision of gifts, travel, and entertainment by the company and its employees. Jefferies also will pay a penalty of $5.5 million to NASD in connection with the settlement of a separate NASD proceeding based on the same underlying conduct. Finally, the Order finds that Jones failed reasonably to supervise Quinn, with a view to preventing and detecting Quinn's aiding and abetting and causing violations of Section 17(e)(1) of the Investment Company Act. Jones has consented, without admitting or denying the Commission's findings or allegations, to payment of a civil money penalty of $50,000 and a three month suspension from acting in a supervisory capacity for any broker or dealer. The Commission acknowledges the assistance and cooperation in this investigation of NASD, which first discovered the conduct at issue during a routine examination of Jefferies & Co., Inc. The Commission's investigation is ongoing. (Rel. 34-54861; File No. 3- 12495; Press Rel. 2006-198) COMMISSION FILES SUBPOENA ENFORCEMENT ACTION AGAINST CONCETTA DONOVAN AND DAVID DONOVAN, SR. The Commission announced today that it filed an application on Nov. 30, 2006, in the U.S. District Court for the District of Massachusetts for orders to enforce investigative subpoenas served on Concetta A. Donovan (Concetta) and David K. Donovan, Sr. (DKD Sr.) of Marblehead, Massachusetts. The Commission's application and supporting papers allege that, on March 22, 2005, the Commission issued a formal order of private investigation authorizing its staff to investigate, among other things, potential illegal insider trading in the securities of Covad Communications Group, Inc (Covad). On April 6, 2005, the Commission issued investigative subpoenas to Concetta and DKD Sr. The subpoenas required Concetta and DKD Sr. to produce documents relevant to the investigation and to appear before the Commission staff for testimony. The Commission alleges that, despite a number of accommodations offered to Concetta and DKD Sr., as of the date of its application, they have refused to produce the subpoenaed documents, and Concetta has refused to appear for testimony. According to the Commission's application, neither Concetta nor DKD Sr. have a valid justification for their failure to comply with the subpoenas, and court orders are necessary to compel them to produce the subpoenaed documents and to compel Concetta to appear for testimony. The Commission alleges that Concetta and DKD Sr.'s son, David K. Donovan, Jr. (DKD, Jr.), was an equity trader for FMR Co., Inc. (FMR Co.), a Boston, Massachusetts-based investment adviser to Fidelity Investments' family of mutual funds and other institutional clients. According to the Commission's application and supporting papers, during a period of approximately one month in July and August 2003, DKD Jr. accessed information in FMR Co.'s internal trade database about Covad stock on 44 occasions and thereby learned that FMR Co. was purchasing and intended to continue purchasing substantial amounts of Covad stock for its advisory clients. When DKD Jr. accessed FMR Co.'s internal trade database concerning Covad stock at 7:48 a.m. on Aug. 5, 2003, for example, he would have been able to determine that FMR Co. had pending orders to buy 1,966,400 shares of Covad stock and no pending orders to sell any Covad stock. The Commission alleges that on August 5 and 6, 2003, at least four telephone calls were placed from DKD Jr.'s work number at FMR Co. to his parents' home, and within fifteen minutes of two of those telephone calls, purchases of Covad stock were placed in a brokerage account in Concetta's name. According to the Commission's application and supporting papers, from August 5 through Aug. 7, 2003, a total of 55,000 shares of Covad stock were purchased in Concetta's brokerage account, resulting in profits in the amount of approximately $89,775. A hearing on the Commission's application has not yet been scheduled. [SEC v. Concetta A. Donovan and David K. Donovan, Sr., USDC, District of Massachusetts, 06-MC-10454-RCL] (LR-19930) PERMANENT INJUNCTION ASSESSED AGAINST ANDREW ZAHN The Commission announced that on Nov. 27, 2006, the U.S. District Court for the Northern District of Illinois entered a Final Judgment as to Defendant Andrew J. Zahn based on his Consent. In SEC v. Andrew J. Zahn, Philip J. Sexauer, and Cynthia K. Berryman, each of the defendants is a former officer of DFG, L.L.C. (DFG), a Chicago-based company that was a subsidiary of a subsidiary of IBP, Inc. (IBP). The Commission alleged in the complaint that Zahn, among other defendants, engaged in an array of accounting improprieties to inflate DFG's earnings. These misstatements caused IBP to materially misstate its own financial results for the fourth quarter of 1999 and the first three quarters of 2000. Specifically, the Commission alleged that Zahn and others directed that DFG not charge certain expense items in the period they were incurred, but instead improperly included these amounts in inventory, prepaid expense, and accounts receivable asset accounts to overstate DFG's earnings. The Commission alleged that Zahn was motivated by personal compensation tied to DFG's financial performance. In its complaint, the Commission claims that, through these actions, each of the defendants violated Section 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 13b2-1 thereunder, and aided and abetted IBP's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. It further claims that Zahn violated Section 10(b) of the Exchange Act and Rules 10b-5 and 13a-13 thereunder. The Final Judgment enjoins Zahn from future violations of the federal securities laws and imposes a five year officer and director bar. Zahn was also ordered to pay a civil penalty of $50,000.00 and post judgment interest on any delinquent amounts pursuant to 28 USC § 1961. [SEC v. Andrew J. Zahn, Philip J. Sexauer and Cynthia K. Berryman, Case No. 04C4948 (N.D. Ill.)] (LR-19931; AAE Rel. 2519) SEC v. BART THIELBAR, DAVID MONAGHAN, KEITH BEACHLER, JANA QUAM AND CARY GRISWOLD The Commission today filed a complaint against five individuals for misstating the financial results of NorthWestern Communications Solutions (NCS), a former division of NorthWestern Corporation's utility subsidiary. The Commission's complaint, filed in the United States District Court for the District of South Dakota, alleges that these misstatements caused NorthWestern to report materially false financial results in Commission filings and press releases relating to the fourth quarter of 2001 and the first two quarters of 2002. In its complaint, the Commission named Bart A. Thielbar, the former head of NCS, Keith W. Beachler, a former vice president of NCS, and Cary B. Griswold, a former NCS accountant; as well as David A. Monaghan and Jana L. Quam, the former vice president of finance and controller, respectively, for NorthWestern's utility subsidiary. During the time period referenced in the Commission's complaint, NCS was headquartered in Sioux Falls, South Dakota, and sold and installed telecommunications equipment. The Commission's complaint alleges that, during the fourth quarter of 2001 and the first two quarters of 2002, NCS improperly recognized approximately $3.2 million of revenue by recording revenue on non-existent contracts and by recording revenue before work had been performed on existing contracts. The Commission's complaint also alleges that, for the fourth quarter of 2001, NCS improperly reclassified approximately $1 million in unsubstantiated assets to a goodwill account to avoid a year-end charge against income. The complaint further alleges that, during the third quarter of 2002, Thielbar and Monaghan attempted to cover up the improper accounting after it was exposed by internal auditors, mischaracterizing the nature and extent of the improprieties in reports to NorthWestern's audit committee and outside auditors. The Commission's complaint charges Thielbar, Monaghan and Beachler with violations of Section 10(b) of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint further charges all defendants with violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and with aiding and abetting NorthWestern's 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-11 thereunder. It further charges Thielbar, Beachler and Griswold with violating Exchange Act Rule 13a-13. The Commission's complaint seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties. The Commission also seeks an officer and director bar against Thielbar. Monaghan, Beachler, Quam and Griswold, without admitting or denying the allegations in the Commission's complaint, each consented to the entry of a final judgment permanently enjoining them from violating or aiding and abetting violations of the provisions they allegedly violated. Monaghan consented to pay a $25,000 civil penalty, and Griswold consented to pay a $10,000 civil penalty. The Commission waived the imposition of a civil penalty against Beachler based upon his sworn financial statements. Quam's consent does not include a penalty. [SEC v. BART A. THIELBAR, DAVID A. MONAGHAN, KEITH W. BEACHLER, JANA L. QUAM AND CARY B. GRISWOLD, USDC for the District of South Dakota, Civil Action No. 06-4253)] (LR-19932; AAE Rel. 2520) SEC FILES FRAUD CHARGES AGAINST CHINA ENERGY SAVINGS TECHNOLOGY, INC. AND OTHERS; COURT ORDERS ASSET FREEZE The Commission today filed an emergency action against China Energy Savings Technology, Inc., several of its former officers, its controlling shareholder, and others, alleging that they orchestrated an elaborate stock manipulation scheme. In its complaint, the Commission alleges that China Energy and the company's undisclosed control person, Chiu Wing Chiu, with the assistance of the company's Corporate Secretary, Lai Fun (Stella) Sim, devised a wide-ranging stock manipulation scheme to fraudulently obtain Nasdaq National Market System (NMS) listing, artificially inflate China Energy's stock price, and sell millions of China Energy shares into the U.S. capital markets. According to the Commission's complaint, other participants in the scheme included the company's former purported Chairman and CEO, Sun Li; a former company employee, Zhao Jun Tang (J. Zhao); and New Solomon Consultants, which was China Energy's majority shareholder. All the defendants reside or have operations abroad. Among other things, the Commission's complaint alleges that Chiu and Sim formed China Energy through a transaction with a Nevada shell corporation called Rim Holdings, Inc. and the subsequent acquisition of a British Virgin Islands holding company called Starway Management Limited. According to the Commission's complaint, in furtherance of the scheme, the Defendants: (i) caused China Energy to purchase Starway at an excessive price to facilitate the issuance of large quantities of China Energy shares to entities controlled by Chiu; (ii) caused China Energy to obtain a NMS listing by artificially creating a shareholder base and falsely representing to Nasdaq that the company had met its minimum shareholder requirement; (iii) issued false press releases concerning China Energy's NMS listing; (iv) created artificial demand for China Energy stock by engaging in manipulative trading and entering into secret deals to give free China Energy stock to shareholders willing to purchase China Energy in the open market; and (v) concealed the fact that Chiu controlled both the company and the company's public float. In addition, according to the Commission's complaint, China Energy, Chiu, and others engaged in illegal unregistered sales by gifting shares to more than 400 persons as part of the fraudulent Nasdaq listing scheme and by improperly issuing S-8 stock to promoters engaged in capital raising activities and consultants who performed no services. The Commission's complaint charges China Energy, Chiu, Sim, J. Zhao, Li, and New Solomon with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, charges China Energy, Chiu, Sim, and J. Zhao with violating Sections 5(a) and (c) of the Securities Act of 1933, and seeks permanent injunctions prohibiting future violations of the securities laws, disgorgement, and civil penalties. With respect to Chiu, Sim, J. Zhao, and Li, the Commission also seeks officer and director bars and penny stock bars. On Dec. 4, 2006, the federal district court for the Eastern District of New York issued an order freezing assets of $3.9 million held in four brokerage accounts in the names of relief defendants Precise Power Holdings Limited, Essence City Limited, Amicorp Development Limited, and Yan Hong Zhao. The Commission alleges that these accounts realized millions in proceeds from the fraudulent scheme by receiving and selling thousands of shares of China Energy stock. For prior Commission actions related to this matter, see Release Nos. 34-53839 (May 19, 2006) (suspending trading in China Energy's securities); 34-54503A (Sept. 26, 2006) (suspending trading in China Energy's securities), and 34-54502 (Sept. 26, 2006) (instituting administrative proceedings against China Energy pursuant to Section 12(j) of the Exchange Act to determine whether to revoke or suspend China Energy's securities due to its failure to make periodic filings). The Commission would like to acknowledge the assistance afforded by the Hong Kong Securities and Futures Commission in this matter. The Commission's investigation is continuing. [SEC v. China Energy Savings Technology, Inc., et al., Civil Action No. 06-6402 (ADS) EDNY] (LR- 19933) SELF-REGULATORY ORGANIZATIONS PROPOSED RULE CHANGES The New York Stock Exchange filed a proposed rule change (SR-NYSE- 2006-57) that will amend its Rule 180 to mandate that member organizations utilize the automated liability notification system of a clearing agency registered under Section 17A of the Exchange Act when issuing liability notifications in connection with certain securities transactions. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54818) The Boston Stock Exchange filed a proposed rule change (SR-BSE-2006- 46) that would amend its rules to mandate that all listed companies become eligible to participate in a Direct Registration System administered by a clearing agency registered under Section 17A of the Act. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54832) The Chicago Stock Exchange filed a proposed rule change (SR-CHX-2006- 33) that would amend its listing standards to mandate that all listed companies become eligible to participate in a Direct Registration System administered by a clearing agency registered under Section 17A of the Act. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54833) The Philadelphia Stock Exchange filed a proposed rule change (SR-Phlx- 2006-69) that will amend its listing standards to mandate that all listed companies become eligible to participate in a Direct Registration System administered by a securities depository registered as a clearing agency under Section 17A of the Act. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54834) The Fixed Income Clearing Corporation filed a proposed rule change (SR-FICC-2006-17) to adjust the deadline for satisfying a clearing fund deficiency call from 10:30 a.m. to 9:30 a.m. in the Schedule of Timeframes in FICC's Government Securities Division rulebook. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54819) The National Securities Clearing Corporation filed a proposed rule change (SR-NSCC-2006-11) to amend its Rules and Procedures with respect to Clearing Fund collateral. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54822) The Chicago Board Options Exchange filed a proposed rule change (SR- CBOE-2005-111) and Amendment No. 1 thereto relating to multiple representation exception procedures. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54823) A proposed rule change (SR-NYSE-2006-97) relating to amendments to NYSE Rule 342.30 has been filed by the New York Stock Exchange. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54847) APPROVAL OF PROPOSED RULE CHANGES The Commission approved a proposed rule change and Amendment Nos. 1, 2, and 3 thereto filed by the New York Stock Exchange (SR-NYSE-2006- 65) and accelerated approval of Amendment No. 5 thereto relating to exchange rules governing certain definitions, systemic processing of certain orders, and the implementation schedule of the NYSE Hybrid Market. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54820) The Commission granted approval of a proposed rule change (SR-FICC- 2006-13) filed by Fixed Income Clearing Corporation to amend the rules of FICC's Mortgage-Backed Securities Division to require that clearing participants satisfy their cash settlement amounts through the Federal Reserve's National Settlement Service. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54821) The Commission approved a proposed rule change (SR-Amex-2006-88) submitted by the American Stock Exchange to amend its generic listing standards to extend the term of index-linked securities. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54844) IMMEDIATE EFFECTIVENESS OF PROPOSED RULE CHANGES A proposed rule change filed by the New York Stock Exchange relating to the inclusion of an additional security in the pilot to put into operation certain rule changes pending before the Securities and Exchange Commission to coincide with the Exchange's implementation of Phase 3 of the NYSE Hybrid Market and the substitution of the name and trading symbol of a security operating in the pilot has become effective under Section 19(b)(3)(A)(ii) of the Securities Exchange Act of 1934 (SR-NYSE-2006-102). Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54837) The Commission issued notice of immediate effectiveness of a proposed rule change (SR-ISE-2006-69) filed by the International Securities Exchange relating to fee changes. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54841) A proposed rule change (SR-CHX-2006-35) filed by the Chicago Stock Exchange relating to participant fees and credits has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54842) A proposed rule change (SR-CHX-2006-34) filed by the Chicago Stock Exchange regarding the implementation of a communications or routing service has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54846) ACCELERATED APPROVAL OF PROPOSED RULE CHANGES The Commission has granted accelerated approval to a proposed rule change and Amendment No. 1 thereto (SR-Amex-2006-82) and granted accelerated approval of Amendment No. 2 thereto submitted by the American Stock Exchange relating to MACRO Tradeable Shares. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54839) The Commission granted accelerated approval to a proposed rule change (SR-NYSE-2006-73) and Amendment Nos. 1, 2, and 3 submitted by the New York Stock Exchange relating to block crosses outside the prevailing NYSE quotation. Publication is expected in the Federal Register during the week of December 4. (Rel. 34-54843)