Among recent enforcement actions taken by the SEC were charges against cosmetics company Revlon for misleading shareholders during a going-private transaction; a settlement with eight former directors of Morgan Keegan funds for failing to properly oversee asset valuations; charges against two executives at a medical insurance company for a Ponzi scheme; and charges against a penny stock promoter for illegally boosting the price of the stock to stimulate sales.
Eight Former Morgan Keegan Fund Directors Settle in Valuation Failure
Eight former directors of five Regions Morgan Keegan open- and closed-end funds that were heavily invested in securities backed by subprime mortgages have settled with the SEC on charges that they failed to properly oversee asset valuation in the funds. In some cases, portfolio managers were allowed to arbitrarily value the assets.
J. Kenneth Alderman of Birmingham, Ala.; Jack Blair of Germantown, Tenn.; Albert Johnson of Hoover, Ala.; James Stillman McFadden of Germantown; Allen Morgan Jr. of Memphis; W. Randall Pittman of Birmingham; Mary Stone of Birmingham; and Archie Willis III of Memphis were originally charged in December after the SEC found that they delegated their responsibility to ensure a fair valuation to a valuation committee, and provided inadequate guidance on how fair valuation determinations should be made.
The eight made no effort to determine how valuations were reached by the committee, despite the fact that the assets in question constituted substantial percentages of the funds, in most cases more than 60%. The funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.
The valuation committee, for its part, didn’t use reasonable procedures to value the assets, and often allowed the portfolio manager to arbitrarily determine values. That meant that the funds overstated the values of the assets just before the crash of the housing market in 2007. Morgan Keegan and other firms were previously charged by the SEC and other agencies, and the firms agreed to settle the charges for $200 million.
The directors neither admitted nor denied the charges, but agreed to the entry of the settled SEC order.
Penny Stock Promoter Busted in FBI Sting
Penny stock promoter David Bahr of Rancho Santa Fe, Calif., was charged by the SEC for fraudulently arranging the purchase of $2.5 million worth of shares in the penny stock company iTrackr Systems in an attempt to fake legitimate market interest and lure other investors to purchase the stock.
Bahr artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. The plan was to keep the price of the stock high enough for him to promote it later and drive it even higher. He also arranged for distribution of promotional material that overstated the likelihood of iTrackr’s success and future profits.
However, the supposed businessman Bahr was dealing with was actually an undercover FBI agent. In November, Bahr connected with the agent, who, he was told, represented a group of registered representatives who had trading discretion over certain client accounts.
In exchange for a 30% kickback, these brokers could arrange to purchase iTrackr stock through their customers’ accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr’s stock price.
Bahr agreed to pay the kickback, signing on for the purchase of 10 million iTrackr shares at an average of $0.25 per share for a total of $2.5 million, and also agreed not to disclose the kickback to any iTrackr investors. Then, during a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.
The SEC ordered a suspension of trading on iTrackr shares; its investigation is continuing. The U.S. Attorney’s Office for the Southern District of California has filed criminal charges against Bahr.
Revlon Charged with Misleading Shareholders on Going-Private Transaction