SEC Charges Ritchie Capital Management, CEO and Other Employees for Illegal Late Trading Scheme

The Securities and Exchange Commission today announced a settled enforcement action against a hedge fund, its investment adviser, its founder and CEO, and two employees for their roles in an illegal late trading scheme.

The SEC charged hedge fund Ritchie Multi-Strategy Global Trading Ltd. and its Chicago-based adviser — Ritchie Capital Management LLC — as well as Ritchie Capital’s founder and CEO A.R. Thane Ritchie and employees Warren DeMaio and Michael Mauriello. They will pay a combined total of approximately $40 million to settle the SEC’s charges. These payments will be distributed to the affected mutual funds.

“This action demonstrates the Commission’s willingness to take strong action against hedge fund advisers and their employees when they violate the federal securities laws. Here, respondents did so by engaging in illegal late trading in mutual funds,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement.

Merri Jo Gillette, Director of the SEC’s Chicago Regional Office, said, “Ritchie Capital concealed its late trading by receiving pre-4 p.m. time-stamps on its order tickets. The respondents’ attempt to cover their tracks by using falsified order tickets merely underscores the egregiousness of the fraudulent scheme and commends the thorough and tenacious investigative work that uncovered it.”

The Commission’s Order finds that from January 2001 through September 2003, Ritchie Capital engaged in an illegal late trading scheme. Ritchie Capital placed thousands of late trades in mutual fund shares and used post-4 p.m. ET news and market information to make its mutual fund trading decisions while receiving the same day’s net asset value for the mutual funds traded. Thane Ritchie approved the use of late trading by Ritchie Capital’s mutual fund group and oversaw its performance. DeMaio supervised mutual fund trading at Ritchie Capital and was involved in the development of the late trading strategy. Mauriello was responsible for placing mutual fund late trades with brokers on behalf of Ritchie Capital. Ritchie Capital’s post-4 p.m. trading resulted in a profit of approximately $30 million to the Ritchie Multi-Strategy fund.

The Commission’s Order requires Ritchie Multi-Strategy Global Trading Ltd. and Ritchie Capital Management LLC to pay disgorgement, jointly and severally, of $30 million, and prejudgment interest thereon of approximately $7.4 million. Ritchie Capital and Ritchie will pay civil penalties, jointly and severally, totaling $2.5 million. DeMaio will pay $250,000 in civil penalties. These payments will be distributed to the affected mutual funds.

In addition to the disgorgement and civil penalties, the Commission’s Order requires that Ritchie Capital, the Ritchie Multi-Strategy fund, Thane Ritchie and Warren DeMaio cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Rule 22c-1 under the Investment Company Act, and that Ritchie Capital be censured and comply with certain undertakings. The Order also requires that Mauriello cease and desist from committing or causing violations of Rule 22c-1 under the Investment Company Act.

All respondents consented to the Commission’s Order without admitting or denying the findings. The Commission’s action was taken in coordination with the Office of the New York State Attorney General.

SEC Charges Former Dow Jones Board Member, Three Other Hong Kong Residents in $24 Million Insider Trading Settlement

The Securities and Exchange Commission today announced a $24 million settlement with a former Dow Jones & Company board member and three other Hong Kong residents accused of illegal tipping and insider trading ahead of news of an unsolicited buyout offer from News Corporation that sent Dow Jones shares soaring last spring.

The SEC's complaint filed in the U.S. District Court for the Southern District of New York alleges that David Li Kwok Po, a Dow Jones board member at the time who also is Chairman and CEO of the Bank of East Asia and a member of Hong Kong's Legislative Counsel and Executive Committee, learned of the then-secret News Corp. offer and illegally tipped his close friend Michael Leung Kai Hung.

The SEC complaint also alleges that Leung, with the help of his daughter Charlotte Ka On Wong Leung and son-in-law Kan King Wong purchased approximately $15 million worth of Dow Jones securities in their account at Merrill Lynch. They stood to make approximately $8 million in illicit profits had the SEC not won an emergency court order within days of the News Corp. offer, freezing the account and stopping the money from moving half a world away.

"Protecting the integrity of our markets in today's world of global trading and instant communications requires real-time enforcement across national borders," said SEC Chairman Christopher Cox. "This case makes clear that the SEC will move fast, and decisively, not only in the United States but around the world to protect investors from insider dealings and threats to fair and open markets. It also illustrates the value of the significant international partnerships we are developing with our regulatory partners in other nations."

"Insider trading on merger and acquisition information continues to be a top enforcement priority," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We hope this case sends a forceful reminder to corporate insiders that they need to exercise careful discretion when discussing important business matters outside the boardroom and executive suite."

Cheryl J. Scarboro, Associate Director in the Division of Enforcement, added, "Tipping and trading by corporate insiders corrupts our markets, and today's action demonstrates our ability to stop this type of misconduct in its tracks - no matter where it occurs and who is involved."

Without admitting or denying the Commission's allegations, David Li, Michael Leung, K.K. Wong and Charlotte Wong consented to the entry of court orders enjoining them from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. David Li is ordered to pay an $8.1 million civil penalty. Michael Leung is ordered to pay $8.1 million in disgorgement plus prejudgment interest and an $8.1 million penalty. K.K. Wong is ordered to pay $40,000 in disgorgement plus prejudgment interest and a $40,000 civil penalty.

The SEC previously filed an emergency action against the Wongs on May 8, 2007, in U.S. District Court for the Southern District of New York for alleged trading on inside information. The court entered a Temporary Restraining Order freezing assets and imposing other relief (see LR-20106). In its amended complaint filed today, the Commission also alleges that K.K. Wong bought 2,000 Dow Jones shares in his TD-Ameritrade account and made approximately $40,000 in profits.

The Commission acknowledges the assistance of Merrill Lynch & Co. and the Hong Kong Securities and Futures Commission in this matter.

SEC Charges San Diego's Independent Auditor for Fraud in Connection With City Municipal Securities Offerings

The Securities and Exchange Commission filed a settled civil fraud action yesterday against San Diego's independent auditor in connection with the city's false and misleading financial statements in five 2002 and 2003 bond offerings.

According to the Commission's complaint, the independent auditor issued unqualified audit reports on the bond offerings that raised $260 million from investors but contained materially false and misleading information about San Diego's pension and retiree health care obligations.

The Commission charges against certified public accountant Thomas J. Saiz and his firm, Calderon, Jaham & Osborn (CJO), allege that they failed to comply with generally accepted accounting standards, were not knowledgeable about San Diego, and failed to obtain sufficient competent evidential matter.

"Auditors play an important role in providing investors with material information in municipal securities offerings," said Linda Chatman Thomsen, Director of the SEC's Enforcement Division. "It is therefore critical that auditors of municipalities conduct their audits with a high degree of rigor, competence and independence, and that cities hire auditors who have the technical skills, experience and resources to conduct proper audits and not hire auditors based primarily on the lowest bid or other factors unrelated to the auditor's skills, resources and abilities."

Rosalind Tyson, Acting Regional Director of the SEC's Los Angeles Regional Office, added, "Saiz, like many independent auditors of municipalities, participated in drafting the footnote disclosures to the city's financial statements. Saiz failed to exercise proper professional care and skepticism to see that San Diego disclosed both the positive and negative information regarding its pension and retiree health care obligations."

According to the Commission's complaint, San Diego was the seventh largest city in the United States in 2001 and 2002, with revenues exceeding $1 billion per year and assets in excess of $10 billion. San Diego's pension plan had net assets of $2.5 billion and total additions to the plan of more than $85 million. CJO was the independent auditor for San Diego and its pension plan in 2001 and 2002, and Saiz was sole shareholder of CJO, which had approximately 30 employees.

The Commission's complaint alleges that Saiz and CJO drafted, subject to San Diego's review and approval, the disclosures in footnotes to the city's financial statements. The footnotes disclosed that San Diego was under-funding its annual pension contribution but also included positive statements about the city's method for funding its pension obligations. These statements included that the city's funding method contained a provision to ensure that the pension's funded level would not drop below a certain level to protect the pension plan's financial integrity; that the pension plan's actuary believed that the city's pension funding method was an excellent method for the city; and that the total amount that the city had under-funded its annual pension contribution, or net pension obligation, was funded in a reserve.

The SEC's complaint alleges that these statements were false and misleading because the city's net pension obligation was not funded in a reserve and, in 2002, the pension plan had fallen below a funded level that the actuary deemed appropriate and the actuary no longer supported the city's funding method. The complaint further alleges that Saiz and CJO knew or were reckless in not knowing that the disclosure was false and misleading as a result of information Saiz received from his audits of the city and its pension plan and his review of the city's bond offering documents.

CJO and Saiz also drafted footnotes that disclosed that the city provided health benefits to retirees at a cost of $7.2 million in 2001 and $8.9 million in 2002 and that the expenses for such benefits were recognized as they were paid. The complaint alleges that Saiz and CJO knew or were reckless in not knowing that this disclosure was misleading because it failed to disclose, as Saiz and CJO knew from auditing the city and its pension plan, that the retiree health care expense was being paid with earnings from the pension plan and that the city would soon have to begin paying this substantial expense out of its own budget.

According to the SEC's complaint, Saiz and CJO also audited San Diego's financial statements and issued reports falsely stating that the financial statements were fairly presented in conformity with generally accepted accounting principles (GAAP) and the audits were performed in accordance with generally accepted auditing standards (GAAS). Saiz and CJO also consented to San Diego's including CJO's audit report in its 2002 and 2003 municipal securities offerings. As alleged in the complaint, the false and misleading statements regarding the city's pension obligations were not presented in conformity with GAAP.

The Commission's complaint also alleges that at the time they consented to San Diego's including the audit report in the 2003 offering documents, Saiz and CJO also failed, as required by GAAS, to inquire into the recent substantial increase in the city's obligations to its pension to determine whether the financial statements or the audit report required revision.

Without admitting or denying the allegations in the complaint filed in federal district court in San Diego, Saiz and CJO have consented to the entry of final judgments permanently enjoining them from violating the antifraud provisions of the federal securities laws. Additionally, Saiz has agreed to pay a $15,000 civil penalty.

The Commission previously 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. To settle the action, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws.

The Commission's investigation is ongoing as to other individuals and entities that may have violated federal securities laws.

SEC Takes Another Bite Out of E-Mail Spam With Three More Trading Suspensions

The Securities and Exchange Commission this morning continued its assault on stock market e-mail spam by suspending trading in the securities of three companies that haven't provided adequate and accurate information about themselves to the investing public.

The trading suspensions are part of the Commission's Anti-Spam Initiative announced earlier this year that cuts the profit potential for stock-touting spam and is credited for a significant worldwide reduction of financial spam. A recent private-sector Internet security report stated that a 30 percent decrease in stock market spam "was triggered by actions taken by the U.S. Securities and Exchange Commission, which limited the profitability of this type of spam."

In addition, spam-related complaints to the SEC's Online Complaint Center have been cut in half.



"The SEC is moving aggressively against stock market spam that has been clogging our e-mail inboxes for too long," said SEC Chairman Christopher Cox. "Because of our aggressive enforcement efforts, there has been a reported 30 percent drop in financial spam, and that means fewer investors are getting ripped off."

Since the March 8, 2007 launch of its Anti-Spam Initiative to combat spam-driven stock market manipulations, the Commission has suspended trading in the securities of 39 companies and has brought several spam-related enforcement actions.

Mark K. Schonfeld, Director of the Commission's New York Regional Office, said, "Today's trading suspensions exemplify our firm commitment to protecting investors from stock fraud and spam e-mail. Investors are entitled to accurate and adequate information about public companies, and we will take strong action promptly when companies fail to fulfill this obligation."

Today's trading suspensions pertain to the securities of Alliance Transcription Services, Inc. (ATSS), Prime Petroleum Group, Inc. (PPGU), and T.W. Christian, Inc. (TWCI). The companies are recent successors to Strategy X, Inc., Pinnacle Development, Inc. and Xraymedia, Inc., respectively. Each of the companies changed its name on Aug. 14, 2007, is currently quoted under a new ticker symbol, and purports to have a new business. The companies, all of which trade on the Pink Sheets, are susceptible to spam stock promotions because they have inadequately disclosed their assets, business operations and/or management, their current financial condition, and/or financing arrangements involving the issuance of the companies' shares.

The trading suspensions will last for 10 business days, commencing today at 9:30 a.m. EDT and terminating at 11:59 p.m. EDT on Oct. 17, 2007.

The success of the SEC's Anti-Spam initiative is described in the Symantec Internet Security Threat Report, a semi-annual analysis and discussion of online threat activity during the previous six-month period. The most recent report was released Sept. 17, 2007: http://www.symantec.com/threatreport. The SEC's efforts are cited on page 107 of the report

"Spam related to financial services made up 21 percent of all spam in the first six months of 2007, making it the second most common type of spam during this period. The previous edition of the Internet Security Threat Report reported that Symantec had detected an increase in spam related to the financial services sector over the last six months of 2006. This was primarily due to an abundance of stock market "pump and dump" spam. However, in the current period, there has been a 30 percent decline in this type of spam from the previous period. This is due to a decline in spam touting penny stocks that was triggered by actions taken by the United States Securities and Exchange Commission, which limited the profitability of this type of spam by suspending trading of the stocks that are touted."

The SEC Division of Enforcement's Online Complaint Center similarly indicates a 30 percent decrease in spam-related complaints during the same 12-month period, with complaints dropping from more than one million complaints during the final six months of 2006 to 727,313 during the first 6 months of 2007. Moreover, while the Online Complaint Center received 166,741 complaints in February 2007 before the SEC unveiled its anti-spam initiative in March, the number of complaints about financial spam dropped to 67,785 last month - a nearly 60 percent decrease.

The Online Complaint Center can be reached at enforcement@sec.gov. The SEC's Office of Investor Education and Assistance has information for investors and members of the general public on topics directly related to this action by the SEC. See http://www.sec.gov/investor/35tradingsuspensions.htm for a compilation of helpful links.

Any broker, dealer or other person with information relating to this matter is invited to e-mail the Securities and Exchange Commission at 35suspensions@sec.gov.

SEC Online Complaint Center Data:

Month Complaints
June 2006 118,741
July 2006 121,531
Aug. 2006 165,434
Sept. 2006 128,811
Oct. 2006 178,657
Nov. 2006 220,486
Dec. 2006 221,036
Jan. 2007 163,522
Feb. 2007 166,741
March 2007 127,465
April 2007 111,382
May 2007 88,236
June 2007 69,967
July 2007 86,759
Aug. 2007 84,222
Sept. 2007 67,785