SEC News Digest

COMMISSION ANNOUNCEMENTS

Fee Rate Advisory #3 for Fiscal Year 2009

Effective on April 1, 2009, or 30 days after the date of enactment of the Commission's regular appropriation for FY 2009, whichever is later, the Section 31 fee rate applicable to securities transactions on the exchanges and over-the-counter markets will increase to $25.70 per million dollars. Until that date, the current rate of $5.60 per million dollars will remain in effect. The Section 31 assessment on security futures transactions will remain unchanged at $0.0042 per round turn transaction.

A copy of the Commission's Feb. 27, 2009, order regarding the mid-year fee adjustment for fiscal year 2009 is available at: http://www.sec.gov/rules/other/2009/34-59477.pdf. As explained more fully in the order, the Commission is required to adjust the Section 31 fee rate based on the estimated dollar volume of securities sales for FY 2009. The Commission consulted with the Congressional Budget Office and the Office of Management and Budget regarding the calculation of the mid-year adjustment, as required by Section 31(j)(2) of the Act. The Commission's calculation methodology is described in the order.

Section 31(k) of the Act requires the Commission to continue to collect transaction fees at the previous year's rate until 30 days after the date of enactment of the Commission's regular appropriation for FY 2009. The Commission will publish the effective date of the new rate announced today once the Commission's regular appropriation for FY 2009 is enacted.

The Office of Interpretation and Guidance in the Commission's Division of Trading and Markets is also available for questions on Section 31 fees at (202) 551-5777, or by e-mail at tradingandmarkets@sec.gov.

The Commission will announce the FY 2010 rates for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e), 14(g), and 31 of the Securities Exchange Act of 1934 no later than April 30, 2009. Those rates will become effective on Oct. 1, 2009, or after the date of enactment of the Commission's regular appropriation for FY 2010, whichever comes later. (Press Rel. 2009-41)

James Brigagliano Named Deputy Director in SEC Division of Trading and Markets

The Securities and Exchange Commission today announced that James Brigagliano has been named a Deputy Director in the agency's Division of Trading and Markets.

Mr. Brigagliano has been serving as Associate Director for the Office of Trading Practices and Processing and has more than 20 years of experience at the SEC. He replaces Robert Colby, who left the agency for the private sector at the end of February.

"I am pleased to have Jamie play an expanded role in the Division's management," said Erik Sirri, Director of the SEC's Division of Trading and Markets. "The Division will continue to benefit from Jamie's management in a wider variety of areas. His insights, energy, and pragmatism will be especially valuable as we confront today's challenging market environment."

Mr. Brigagliano said, "I look forward to continuing to work with my colleagues to pursue the Commission's statutory mandate to promote fair and efficient markets."

As an Associate Director, Mr. Brigagliano has been overseeing the Division's regulatory program in trading practices, including Regulation SHO and other rules related to short selling and market manipulation. He also oversees the clearance and settlement program within the Division, as well as the enforcement liaison function. In his new role as Deputy Director, Mr. Brigagliano's responsibilities will be expanded to include oversight of the Division's Office of Market Supervision, which has responsibility for matters related to oversight of stock and option exchanges.

Mr. Brigagliano, 51, joined the Division in 1998. He was previously Assistant General Counsel for Litigation and Administrative Practice in the SEC's Office of the General Counsel, representing the Commission in a wide range of matters in federal district and appellate courts. Mr. Brigagliano has received a number of awards for his work at the SEC, including the Capital Markets Award, the Jay Manning Award, and the Supervisory Excellence Award. He came to the SEC in 1986 after three years in private practice. Mr. Brigagliano received his law degree from Georgetown University and undergraduate degree from Amherst College. (Press Rel. 2009-43)

ENFORCEMENT PROCEEDINGS

In the Matter of Krispy Kreme Doughnuts, Inc.

SEC Charges Krispy Kreme Doughnuts, Inc.

On March 4, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Order) against Krispy Kreme Doughnuts, Inc. (Krispy Kreme), a North Carolina company. The Order finds that Krispy Kreme materially misstated its earnings in its financial statements filed with the Commission between the fourth quarter of fiscal 2003 and the fourth quarter of fiscal 2004. In each of these periods, Krispy Kreme falsely reported earnings per share (EPS) equal to its EPS guidance plus one cent in the fourth quarter of fiscal 2003 through the third quarter of fiscal 2004 or, in the case of the fourth quarter of fiscal 2004, earnings that met its EPS guidance.

Specifically, Krispy Kreme improperly accounted for its incentive compensation plan for senior executive officers (Incentive Plan) and for three round-trip transactions in connection with the acquisition of company franchises. Krispy Kreme's accounting for the Incentive Plan operated as a de facto reserve accounting mechanism which virtually guaranteed that reported quarterly EPS would equal Krispy Kreme's quarterly guidance plus $0.01. For example, in the second and third quarters of fiscal 2004, Krispy Kreme reversed previously accrued incentive compensation expenses, which increased after-tax earnings by $569,999 and $499,999 respectively. By effecting the reversals, Krispy Kreme increased its earnings for each quarter and reported EPS that equaled its previously announced EPS guidance plus $0.01.

In the second, third and fourth quarters of fiscal 2004, Krispy Kreme engaged in round-trip transactions in connection with the reacquisition of a franchise. In each transaction, Krispy Kreme paid money to the franchise, the franchise paid the money back to Krispy Kreme in a pre-arranged manner and Krispy Kreme recorded additional pre-tax net income in an amount roughly equal to the funds originally paid to the franchise. The first round-trip transaction occurred in June 2003, in connection with the reacquisition of a franchise in Texas. Krispy Kreme increased the price it paid for the franchise by $800,000 in return for the franchise purchasing from Krispy Kreme certain doughnut making equipment at the request of Krispy Kreme. At closing, Krispy Kreme paid the additional amount to the franchise and then debited the franchise's bank account for the equipment. This additional revenue boosted Krispy Kreme's net income for the second quarter by approximately $365,000 after taxes. The second round-trip transaction occurred in October 2003, in connection with the reacquisition of a franchise in Michigan. Krispy Kreme increased the price it paid for the franchise in an amount that represented the approximate total of two disputed amounts that Krispy Kreme claimed it was owed by the Michigan franchise. When the reacquisition closed, Krispy Kreme recorded the transaction as if it had been reimbursed for the two disputed amounts and overstated its net income in the third quarter by approximately $310,000 after taxes. The third round-trip transaction occurred in January 2004, in connection with Krispy Kreme's reacquisition of the ownership interest of the manager of a franchise in California. A few days before the closing, Krispy Kreme provided the former franchise manager with funds that he immediately transferred back to Krispy Kreme as payment of a management fee. Krispy Kreme booked this fee as income, thereby overstating Krispy Kreme's net income in the fourth quarter by approximately $361,000.

Based on the above, pursuant to Section 21C of the Exchange Act, Krispy Kreme was Ordered to cease and desist from committing or causing violations and 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, 13a-11, and 13a-13, promulgated thereunder. Krispy Kreme consented to the issuance of the Order without admitting or denying the findings in the Order.

The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, which conducted a separate, parallel investigation. (Rel. 34-59499; AAE Rel. 2941; File No. 3-13388)

In the Matter of Sherry J. Polonsky

Former Officer of Krispy Kreme Doughnuts, Inc. Sanctioned

On March 4, the Commission issued an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (Order) against Sherry J. Polonsky. The Order finds that Polonsky, the former Senior Vice President of Finance for Krispy Kreme Doughnuts, Inc., caused Krispy Kreme to record improperly two round-trip transactions in connection with the acquisition of Company franchises located in Michigan and California in the third and fourth quarters of Krispy Kreme's 2004 fiscal year. In both transactions, Krispy Kreme paid money to the franchisee with the understanding that the franchisee would pay the money back to Krispy Kreme. In each instance, Krispy Kreme recognized additional income in an amount roughly equal to the funds that were paid back to it. As a result, Krispy Kreme filed annual, quarterly, and current reports with the Commission that contained misstated financial results, failed to have books and records that accurately and fairly reflected its transactions and disposition of assets, and failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that its accounts were accurately stated in accordance with generally accepted accounting principles.

Based on the above, Polonsky was ordered to cease and desist from causing any violations of 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. Polonsky consented to the issuance of the Order without admitting or denying the findings in the Order.

The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, which conducted a separate, parallel investigation. (Rel. 34-59500; AAE Rel. 2942; File No. 3-13389)

In the Matter of Botta Capital Management, L.L.C., Equitec Proprietary Markets, LLC, Group One Trading, L.P., Knight Financial Products, LLC, Goldman Sachs Execution & Clearing, L.P., SLK-Hull Derivatives LLC, Susquehanna Investment Group, and TD Options LLC

On March 4, the Commission announced the institution of settled proceedings against eight Specialist firms that engaged in unlawful proprietary trading on three regional and options exchanges. As part of the settlements, the firms agreed to pay an aggregate of more than $27 million in disgorgement and civil penalties.

The Commission issued Orders Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 (Orders) against the following respondents: Botta Capital Management, L.L.C. (Botta); Equitec Proprietary Markets, LLC (Equitec); Group One Trading, L.P. (Group One); Knight Financial Products, LLC (Knight); Goldman Sachs Execution & Clearing, L.P. (GSEC); SLK-Hull Derivatives LLC (SLK-Hull); Susquehanna Investment Group (Susquehanna); and TD Options LLC (TD Options) (collectively, the Respondents).

The Orders find that the Respondents violated their basic obligation as specialists to serve public customer orders over their own proprietary interests. As a specialist member firm on one or more of three regional and options exchanges — the American Stock Exchange, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange — each of the Respondents had a duty to match executable public customer or "agency" buy and sell orders and not to fill customer orders through trades from the firm's own accounts when those customer orders could be matched with other customer orders. However, from 1999 through 2005, each Respondent violated this obligation by filling orders through proprietary trades rather than through other customer orders, thereby causing upwards of $22 million in customer harm. In the Orders, the Commission finds that the Respondents each violated Section 11(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 11b-1 thereunder. Through this conduct, the Respondents also violated various Exchange rules. The Respondents consented to the entry of the Orders without admitting or denying the findings contained therein.

The violative conduct engaged in by the Respondents took three basic forms:

• Trading Ahead. In certain instances, specialists filled one agency order through a proprietary trade for their firm's account while a matchable agency order was present on the opposite side of the market, thereby improperly "trading ahead" of such opposite-side executable agency order. The customer order that was traded ahead of was then disadvantaged when it was subsequently executed at a price that was inferior to the price received by the firm's proprietary account. For example, if a specialist has present on his book, at the same time, a marketable customer order to buy five contracts of an options series and a marketable customer order to sell five contracts of the same options series, the specialist would be obligated to pair off those matchable orders. Trading ahead would occur if the specialist filled the sell order from the firm's proprietary account at $5.00 per share per contract, and then subsequently executed the buy order at the inferior price of $5.05 per share per contract. In this example, the buy order received a price inferior to that to which it was entitled ($5.00) and the customer was disadvantaged by $25.00 (5 contracts x $0.05 per share per contract x 100 shares per contract).

• Interpositioning. In certain instances, after trading ahead, specialists also traded proprietarily with the matchable opposite-side agency order that had been traded ahead of, thereby "interpositioning" themselves between the two agency orders that should have been paired off in the first instance. By participating on both sides of trades, the specialist captured the spread between the purchase and sale prices, thereby disadvantaging the other parties to the transactions. Interpositioning occurred in a relatively small number of instances.

• Trading Ahead of Unexecuted Open or Cancelled Orders. In certain instances, specialists traded ahead of opposite-side executable agency orders, as described above, but the unexecuted orders were left open until the end of the trading day, or were cancelled by the customer prior to the close of the trading day before receiving an execution. Because these orders were never executed, the calculation of customer harm for this type of misconduct was based on a formula that incorporated certain economic assumptions. A substantial amount of the customer harm relates to these unexecuted or cancelled orders.

Based on the above, the Commission found that Botta, Equitec, Group One, Knight, GSEC, SLK-Hull, Susquehanna, and TD Options each effected proprietary transactions that were not part of a course of dealings reasonably necessary to maintain a fair and orderly market, and thereby violated Section 11(b) of the Exchange Act and Rule 11b-1 thereunder. The Respondents were ordered (i) to disgorge ill-gotten gains totaling in the aggregate over $22.7 million and pay civil penalties totaling over $4.3 million, and (ii) to cease-and-desist from future violations of Section 11(b) of the Exchange Act and Rule 11b-1. The Respondents were also censured for their violations pursuant to Section 15(b) of the Exchange Act. (Rel. 34-59501; File No. 3-13390; 34-59502, File No. 3-13391; 34-59503, File No. 3-13392; 34-59504, File No. 3-13393; 34-59505, File No. 3-13394; 34-59506, File No. 3-13395; 34-59507, File No. 3-13396)

SEC v. Automated Trading Desk Specialists
SEC v. E*Trade Capital Markets LLC
SEC v. Melvin Securities, LLC and Melvin & Company, LLC
SEC v. Sydan, LP
SEC v. TradeLink, LLC

On March 4, the Commission filed civil injunctive actions in the United States District Court for the Southern District of New York charging 6 Specialist firms for engaging in unlawful proprietary trading on the Chicago Stock Exchange (CHX). The defendants are Automated Trading Desk Specialists, LLC (ATD); E*Trade Capital Markets LLC (E*Trade); Melvin Securities, L.L.C. (Melvin); Melvin & Company LLC (Melvin Co); Sydan, LP (Sydan); and TradeLink, LLC (TradeLink) (collectively, the Defendants).

In its complaints, the Commission alleges that the Defendants failed to meet their basic obligation as specialists to serve public customer orders over their own proprietary interests while executing trades on the CHX. As specialists operating on the CHX, each of the Defendants had a general duty to match executable public customer or "agency" buy and sell orders and not to fill customer orders through trades from the specialist firm's own accounts when those customer orders could be matched with other customer orders. However, from 1999 through 2005, each Defendant violated this obligation by filling orders through proprietary trades rather than through other customer orders, thereby causing upwards of $35 million in customer harm.

The Commission's complaints allege that the violative conduct engaged in by the Defendants took three basic forms:

• Trading Ahead. In certain instances, specialists filled one agency order through a proprietary trade for their firm's account while a matchable agency order was present on the opposite side of the market, thereby improperly "trading ahead" of such opposite-side executable agency order. The customer order that was traded ahead of was then disadvantaged when it was subsequently executed at a price that was inferior to the price received by the firm's proprietary account. For example, if a specialist has present on his book, at the same time, a marketable customer order to buy 1,000 shares of a security and a marketable customer order to sell 1,000 shares of the same security, the specialist would be obligated to pair off those matchable orders. Trading ahead would occur if the specialist filled the sell order from the firm's proprietary account at $25.00 per share, and then subsequently executed the buy order at the inferior price of $25.05 per share. In this example, the buy order received a price inferior to that which it was entitled ($25.00) and the customer was disadvantaged by $50.00 (1,000 shares x $0.05 per share).

• Interpositioning. In certain instances, after trading ahead, specialists also traded proprietarily with the matchable opposite-side agency order that had been traded ahead of, thereby "interpositioning" themselves between the two agency orders that should have been paired off in the first instance. By participating on both sides of trades, the specialist captured the spread between the purchase and sale prices, thereby disadvantaging the other parties to the transactions. Alternatively, specialists sometimes sold shares of a security into a customer buy order, and then filled the customer sell order by buying for the firm's proprietary account at a lower price. In either case, the specialists participated on both sides of trades, capturing the spread between the purchase and sale prices, and disadvantaging the other parties to the transaction.

• Trading Ahead of Unexecuted Open or Cancelled Orders. In certain instances, specialists traded ahead of opposite-side executable agency orders, as described above, but in these instances, the unexecuted orders were left open until the end of the trading day, or were cancelled by the customer prior to the close of the trading day before receiving an execution.

The complaints further allege that, during the relevant period, each of the Defendants failed to make or keep current a blotter containing an itemized daily record of all purchases and sales of securities effected by it for its proprietary accounts. Specifically, the complaints allege that the Defendants sometimes received orders to buy or sell securities that are dually listed on the CHX and on a different exchange, such as the New York Stock Exchange (NYSE). In order to fill these orders, the specialist would sometimes place a corresponding order (lay-off trade) on the NYSE for the firm's proprietary account. With respect to lay-off trades, the Defendants failed to make or keep current records showing the account for which each such transaction was effected, the name and amount of the securities, the unit and aggregate purchase or sale price, and the trade date.

The Commission's complaints allege that by engaging in the conduct described above, the Defendants violated CHX Article 9, Rule 17, and Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(1) thereunder.

Without admitting or denying the allegations set forth in the complaints, the Defendants have consented to the entry of orders permanently enjoining them from engaging in the violations set forth above, and have agreed to disgorge ill-gotten gains totaling in the aggregate over $35.7 million and pay civil penalties totaling more than $6.7 million. The orders are subject to the approval of the Court. [SEC v. Automated Trading Desk Specialists, LLC, Civil Action No. 09-1977 (SDNY); SEC v. E*Trade Capital Markets LLC, Civil Action No. 09-1976 (SDNY); SEC v. Melvin Securities, LLC and Melvin & Company, LLC, Civil Action No. 09-1978 (SDNY); SEC v. Sydan, LP, Civil Action No. 09-1975 (SDNY); SEC v. TradeLink, LLC, Civil Action No. 09-1973 (SDNY)] (LR-20922)

INVESTMENT COMPANY ACT RELEASES

Notices of Deregistration under the Investment Company Act

For the month of February, 2009, a notice has been issued giving interested persons until March 24, 2009, to request a hearing on any of the following applications for an order under Section 8(f) of the Investment Company Act declaring that the applicant has ceased to be an investment company:

• Short-Term Investments Trust II [File No. 811-22259]
• Putnam New York Investment Grade Municipal Trust [File No. 811-7274]
• Dollar Strategy Global Trust [File No. 811-22122]
• Fortress Brookdale Investment Fund LLC [File No. 811-10127]
• Diamond Portfolio Investment Trust [File No. 811-22129]
• Salomon Brothers Unit Investment Trust Insured Tax Exempt Series [File No. 811-4203]
• Shearson Lehman Bros Unit Trusts High Yield Taxable Series 1 [File No. 811-5070]
• Tax Exempt Trust Medium Term Series 1 [File No. 811-3863]
• Harris Upham Tax Exempt Bond Fund First Series [File No. 811-2403]
• Shearson Lehman Brothers Unit Trust Ret Portfolios Series 1 [File No. 811-5129]
• F&M Tax Exempt Bond Fund First Series [File No. 811-2343]
• Oppenheimer Tremont Market Neutral Fund, LLC [File No. 811-10537]
• Keystone Capital Preservation & Income Fund [File No. 811-6278]
• Evergreen Tax Free Trust [File No. 811-4507]
• Hutton E F Corporate Income Fund First Series [File No. 811-2588]
• Hutton E F Trust For Government Guaranteed Securities [File No. 811-2820]
• Pennsylvania Fund Tax Exempt Municipal Investment Trust [File No. 811-2326]
• Northwest Tax Exempt Bond Fund Second & Subsequent Series [File No. 811-2442]
• Michigan Fund Tax Exempt Municipal Investment Trust [File No. 811-2304]
• Domini Advisor Trust [File No. 811-21653]
• Domini Institutional Trust [File No. 811-7599]
• TH Lee, Putnam Investment Trust [File No. 811-10373]
• Old Mutual Insurance Series Fund [File No. 811-8009]

(Rel. IC-28639 — February 27)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Change

A proposed rule change (SR-NYSEALTR-2009-19) filed by NYSE Alternext US amending its schedule of fees and charges for exchange services 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 March 2. (Rel. 34-59478)

SECURITIES ACT REGISTRATIONS

• Latest Securities Act registrations (TXT)

RECENT 8K FILINGS

• Latest 8-K filings (TXT)

http://www.sec.gov/news/digest/2009/dig030409.htm