SEC News Digest

ENFORCEMENT PROCEEDINGS

SEC Charged Wireless Company Executives in Stock Dumping Scheme, Instituted Administrative Proceedings Against Company for Failure to Make Required Filings, and Instituted Administrative Proceeding Against Auditors for Improper Professional Conduct

On May 27, the Securities and Exchange Commission announced the filing of securities fraud charges against Pegasus Wireless Corporation, former CEO Jasper Knabb, and CFO Stephen Durland alleging they defrauded investors by illegally selling millions of Pegasus shares they secretly controlled and lying about the transactions in company filings.

According to the SEC's complaint, Knabb and Durland created Pegasus from a dormant shell company and then touted several acquisitions in a series of press releases, causing Pegasus' stock price to soar and briefly giving it a market capitalization of over $1.4 billion. Unbeknown to investors, however, Knabb and Durland secretly controlled millions of Pegasus shares through nominees. The nominees unloaded the shares and funneled the proceeds to Knabb, Knabb's wife, and Durland. Knabb and Durland together reaped more than $30 million through their scheme. Pegasus, meanwhile, saw its share price steadily decline to under a penny and filed bankruptcy.

As alleged in the complaint, Knabb and Durland reported none of these nominee transactions in reports with the SEC and instead falsely told investors they owned only minimal amounts of stock. The SEC further alleges that Knabb and Durland falsely claimed in numerous SEC filings that much of the stock was issued to satisfy a business debt, when in reality this "debt" was entirely fabricated through phony documentation.

The SEC's complaint, filed in federal court in San Francisco, alleges Pegasus, Knabb, and Durland violated, or aided and abetted violations of, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13. It alleges that Knabb and Durland violated Section 13(b)(5) and 16(a) of the Exchange Act and Rules 13a-14, 13b2-1, and 16a-3 thereunder, and that Durland violated Rule 13b2-2. The complaint also names Jasper's wife Tammy Knabb and Aero-Marine, LLC as relief defendants.

In addition, the SEC announced the institution of administrative proceedings against Pegasus pursuant to Section 12(j) of the Exchange Act to determine whether the registration of Pegasus's securities should be revoked or suspended for a period not exceeding twelve months. The SEC's Division of Enforcement (Division) alleges that Pegasus failed to comply with Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder by not filing a periodic report since its report on Form 10-QSB for the quarter ended September 30, 2007. In this proceeding, a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and Pegasus to determine whether the allegations are true. The Commission ordered that the Administrative Law Judge issue an initial decision not later than 120 days from the date of service of the order instituting proceedings.

Finally, the SEC announced the institution of administrative proceedings against Pollard Kelley Auditing Services, Inc., a public accounting firm, and Terance Kelley, CPA to determine whether they engaged in improper professional conduct as defined in Rules 102(e)(1)(ii) and (iv) of the Commission's Rules of Practice. The Division and the Office of the Chief Accountant allege that Respondents tampered with workpapers to conceal multiple deficiencies in their audit of Pegasus' 2006 financial statements. During the 2006 audit, Respondents violated numerous professional standards by failing to obtain written representations from Pegasus' management and failing to exercise due care and professional skepticism. Respondents also are alleged to have created workpapers after the fact and added them to their audit documentation, without identifying the date they were added or the reason for adding them, in violation of professional standards.

The Order directs that a public administrative hearing be scheduled to determine whether the allegations in the Order are true, to afford Respondents an opportunity to establish any defenses, and to determine what, if any, remedial action is appropriate. The Order requires that an Administrative Law Judge issue an initial decision no later than 300 days from the date of service of the Order.

For further information see SEC v. Pegasus Wireless Corporation, et al., Case No. CV-09-2302 BZ. (In the Matter of Pegasus Wireless Corporation - Rel. 34-59985; File No. 3-13488); In the Matter of Pollard Kelley Auditing Services, Inc. and Terance Kelley, CPA - Rel. 34-59986; AAE Rel. 2978; File No. 3-13489)

In the Matter of Bradley E. Morgan

On May 27, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against Bradley E. Morgan. The Order finds that between January 2004 and August 2005, Morgan was the president, compliance officer and financial operations principal of Geo Securities, Inc. (GSI), a Commission-registered broker-dealer. During this period, Morgan failed reasonably to supervise James Patrick Reedy, a GSI registered representative, in connection with Reedy's material misrepresentations and omissions in the offer and sale of oil and gas joint venture interests. The Order also finds that Morgan caused GSI to violate the net capital, books and records and notice provisions when he failed to record properly a contingent liability.

Based on the above, the Order directed Morgan to cease and desist from causing any violations and any future violations of the net capital, books and records and notice provisions. The Order also barred Morgan from association with any broker or dealer in a supervisory capacity with a right to reapply after three years. Morgan consented to the issuance of the Order without admitting or denying the findings in the Order. (Rel. 34-59988; File No. 3-13490)

In the Matter of Frank P. Sinopoli, CPA

On May 27, the Commission issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order as to Frank P. Sinopoli. The Order finds that, for the fiscal year ended July 31, 2005, Sinopoli audited the financial statements of Geo Securities, Inc. (GSI). GSI's financial statements were not prepared in conformity with generally accepted accounting principles (GAAP) because they failed to include a material liability, for GSI was jointly and severally liable. As a result, Sinopoli caused GSI's violations of the net capital, books and records and notice provisions. The Order also finds that Sinopoli engaged in improper professional conduct by failing to conduct the audit of GSI's financial statements in accordance with generally accepted auditing standards (GAAS).

Based on the above, the Order directed Sinopoli to cease and desist from causing any violations and any future violations of the net capital, books and records and notice provisions. The Order also denies Sinopoli the privilege of appearing or practicing before the Commission as an accountant. After one year Sinopoli may request reinstatement. Sinopoli consented to the issuance of the Order without admitting or denying the findings in the Order. (Rel. 34-59989; AAE Rel. 2979; File No. 3-13491)

SEC Charges Wireless Company Executives in $30 Million Stock Dumping Scheme

On May 27, the Commission announced the filing of securities fraud charges against Pegasus Wireless Corporation and two of its senior officers who defrauded investors by illegally selling hundreds of millions of Pegasus shares they secretly controlled and lying about the transactions in company filings.

The SEC alleges that former CEO Jasper Knabb of Anchorage, Alaska, and Little River, S.C., and former CFO Stephen Durland of West Palm Beach, Fla., together reaped more than $30 million through their securities law violations, using the funds to support their extravagant lifestyles including the purchase of homes, boats, and sports cars.

According to the SEC's complaint, Knabb and Durland created Pegasus from a dormant shell company around 2005. They then touted several acquisitions in a series of press releases, causing Pegasus' stock price to soar and briefly giving the company a market capitalization of more than $1.4 billion. Unbeknownst to investors, however, Knabb and Durland are alleged to have secretly controlled hundreds of millions of Pegasus shares through nominees, which they sold to individual investors and dumped on the open market through 2008. Pegasus saw its share price steadily decline to under a penny.

As alleged in the SEC's complaint, Knabb and Durland accomplished their scheme by issuing hundreds of millions of shares to individuals and entities they controlled, including Knabb's mother-in-law, his sister-in-law, his then-mistress, and an entity ostensibly managed by Knabb's personal pilot. The nominees unloaded the shares and funneled millions of dollars to Knabb, Knabb's wife, and Durland. Knabb and Durland reported none of these transactions in reports with the SEC, and instead falsely told investors they owned only minimal amounts of stock and received no compensation from Pegasus. The SEC further alleges that Knabb and Durland falsely claimed in numerous SEC filings that much of the stock was issued to satisfy a business debt, when in reality this "debt" was entirely fabricated through phony documentation. By February 2008, Pegasus had issued more than 75 percent of its total outstanding shares in this fraudulent manner. The forged documents and false SEC filings concealed the fact that Knabb and Durland were, in essence, printing shares and diluting the interests of innocent shareholders to enrich themselves.

The SEC's complaint, filed in federal court in San Francisco, charges Pegasus, Knabb, and Durland with violating the antifraud provisions of the federal securities laws, including 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. Pegasus is also charged with violating the books-and-records requirements of Section 13(a) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13, and Knabb and Durland are charged with aiding and abetting Pegasus' violations. All three defendants are charged with violations of the registration requirements embodied in Sections 5(a) and 5(c) of Securities Act. The SEC's complaint also charges Knabb and Durland with falsifying Pegasus' books and records in violation of Exchange Act Section 13(b)(5) and Rule 13b2-1, falsely certifying Pegasus' quarterly and annual reports in violation of Exchange Act Rule 13a-14, and with stock ownership reporting violations under Section 16(a) of the Exchange Act and Rule 16a-3 thereunder. Finally, Durland is charged with making false statements to an accountant in connection with an audit in violation of Exchange Act Rule 13b2-2.

The SEC seeks injunctive relief and disgorgement from the defendants, as well as civil penalties and officer-and-director bars against Knabb and Durland. The SEC also seeks to recover assets from two relief defendants -- Jasper's wife Tammy Knabb, 41, also of Anchorage, Alaska, and Little River, S.C., and Aero-Marine, LLC, a Nevada entity secretly controlled by Knabb -- who received money through the misconduct. [SEC v. Pegasus Wireless Corporation, Jasper Knabb, and Stephen Durland, Case No. 09-2302 (BZ) (ND Cal.)] (LR-21060)

SEC Charges Ten Brokers With Fraud Related To Mortgage Backed Securities

The Securities and Exchange Commission today charged ten brokers with fraud related to mortgage backed securities known as Collateralized Mortgage Obligations (CMOs). The ten brokers had all worked for Irvine, California-based Brookstreet Securities Corp., a now defunct broker-dealer. The Brookstreet brokers allegedly represented to their customers that the securities were safe and suitable for retirees and conservative investors, when in fact they were not.

In its complaint, filed in federal district court in West Palm Beach, Florida, the Commission alleges that William Betta, Jr., James J. Caprio, Troy L. Gagliardi, Barry M. Kornfeld, Clifford A. Popper, Alfred B. Rubin, and Steven I. Shrago, all of Central or South Florida, Travis A. Branch of Kailua, Hawaii, Russell M. Kautz of Medford, Oregon, and Shane A. McCann of Florence, Montana, defrauded over 750 customers by selling them risky types of CMOs between 2004 and 2007.

According to the Commission's complaint, the defendants told their customers that the CMOs in which they would invest were safe, secure, liquid investments that were suitable for retirees and investors with conservative investment goals. The complaint alleges that contrary to these representations, the defendants invested in risky types of CMOs that: (1) were not all guaranteed by the United States government; (2) jeopardized customers' yield and principal; (3) were largely illiquid; and (4) were only suitable for sophisticated investors with a high-risk investment profile. The complaint alleges that the defendants received $18 million in commissions and salaries related to CMO investments.

The complaint also alleges that some defendants told customers that they would use margin, or the ability to borrow money to purchase CMOs, only sparingly, when in fact they heavily margined customers' accounts, resulting in losses of over $36 million.

The Commission's complaint specifically alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and civil monetary penalties.

The Commission wishes to acknowledge the assistance of the Financial Industry Regulatory Authority.

The Commission's investigation is ongoing. [SEC v. William Betta, Jr., et al., Civil Action No. 09-80803-Civ-Marra/Johnson (S.D. Fla.)] (LR-21061)

INVESTMENT COMPANY ACT RELEASES

Citibank, N.A.

An order has been issued on an application filed by Citibank, N.A. The order permits an issuer of asset-backed securities that is not registered as an investment company under the Investment Company Act (Act) in reliance on Rule 3a-7 under the Act to appoint the applicant as a trustee to the issuer when the applicant is affiliated with an underwriter for the issuer's securities. (Rel. IC-28746 - May 26)

SELF-REGULATORY ORGANIZATIONS

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by the National Stock Exchange (SR-NSX-2009-03) to amend the Fee and Rebate Schedule issued pursuant to Exchange Rule 16.1(c) in order to include securities priced at less than one dollar in the calculation of volume thresholds used to determine rebates payable for displayed order liquidity adding Tape A and C securities executed at one dollar or above 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 May 25. (Rel. 34-59974)

A proposed rule change (SR-NYSEArca-2009-41) submitted pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder by the NYSE Arca to amend rules related to doing a public business in options 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 May 25. (Rel. 34-59978)

A proposed rule change filed by the New York Stock Exchange (SR-NYSE-2009-52) amending the fees charged for the Floor Member Continuing Education Program for Qualified Floor Members Pursuant to NYSE Rule 103A 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 May 25. (Rel. 34-59979)

A proposed rule change filed by NASDAQ OMX BX (SR-BX-2009-027) extending the effective date of the rule governing Exchange's directed order process on the Boston Options Exchange has become effective under Section 19(b)(3)(A) under the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59983)

Proposed Rule Change

The Commission issued notice of an amendment and granted accelerated approval to a proposed rule change submitted by NYSE Alternext US (SR-NYSEALTR-2009-26), as modified by Amendment Nos. 1 and 2, pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, changing certain NYSE Amex Equities Rules to conform them with changes to corresponding rules submitted in a companion filing by the New York Stock Exchange LLC (SR-NYSE-2009-25). Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59975)

Approval of Proposed Rule Change

The Commission approved a proposed rule change (SR-CBOE-2009-024) submitted by the Chicago Board Options Exchange pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to amend CBOE Rules 6.25 and 24.16 (the "Obvious Error Rules") pertaining to the nullification and adjustment of options transactions. Publication is expected in the Federal Register during the week of May 25. (Rel. 34-59981)

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http://www.sec.gov/news/digest/2009/dig052809.htm