State and Canadian Liaison Roster and Reports · 2010-04-28 · AR Mr. John S. Selig N/R Mitchell,...

Committee on State Regulation of Securities Subcommittee on Liaisons to the States and Provinces

ABA Business Law Section Committee on State Regulation of Securities

Subcommittee of Liaisons to the States

State and Canadian Liaison Roster and Reports Covering: AL, AK, CA, CO, CT, FL, GA, IN, IA, LA, KY, ME, MD, MA, MI,

MN, MS, NC, MT, NH, NJ, NY, OH, OK, OR, SC, SD, TX, VT, VA, WA, WV, and WY Updated with Supplements through October 9, 2008

(No reports for: AZ, AR, DE, HI, ID, IL, KS, MO, NE, NV, NM, ND, PA, RI, TN, UT, PR, and USVI)

Co-Chair: Mr. Donald A. Rett Law Office of Donald Rett 1660 Metropolitan Circle Tallahassee, Florida 32308 E-Mail – [email protected] (850) 298-4454 (Work)

Co-Chair: Mr. Shane B. Hansen Warner Norcross & Judd LLP 111 Lyon Street, N.W., # 900 Grand Rapids, Michigan 49503 E-mail – [email protected] (616) 752-2145 (Work)

Report Report LIAISONS Page LIAISONS Page AL Ms. Carolyn L. Duncan 8 Cabaniss Johnston, et al. Ste. 700, 2100 Park Pl N Birmingham, AL 35203-2744 E-Mail – [email protected] (205) 716-5200 (Work) (205) 716-5389 (Fax) AK Mr. Julius J. Brecht 10 Wohlforth, Johnson, Brecht, Cartledge & Brooking 900 West 5th Avenue – Suite 600 Anchorage, AK 99501-2044 Direct E-Mail – [email protected] (907) 276-6401 (Work) (907) 276-5093 (Fax)

AZ Mr. Dee Riddell Harris N/R Alare Capital Partners, LLC 14861 North Scottsdale Road, Suite 105 Scottsdale, AZ 85254 E-Mail – [email protected] (480) 951-9200 x113 (Work) (480) 951-9215 (Fax) (602) 840-4078 (Home) (602) 840-6824 (Home Fax) AR Mr. John S. Selig N/R Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. 425 West Capitol Avenue, Suite 1800 Little Rock, AR 72201-3525 E-Mail – [email protected] (501) 688-8804 (Work) (501) 821-1540 (Home) (501) 688-8807 (Fax)

mailto:[email protected]






Report Report LIAISONS Page LIAISONS Page


CA Mr. Keith Paul Bishop 15 Allen Matkins Leck Gamble Mallory & Natsis LLP 1900 Main Street, 5th Floor Irvine, CA 92614-7321 E-Mail – [email protected] (949) 851-5428 (Work) (949) 553-8354 (Fax) CO/MT/WY Mr. Robert J. Ahrenholz 21 Kutak Rock LLP 1801 California Street, Suite 3100 Denver, CO 80202 E-Mail – [email protected] (303) 297-2400 (Work) (303) 292-7799 (Fax) CT Mr. Richard Slavin 39 Cohen and Wolf, P.C. 1115 Broad Street Bridgeport, CT 06604-4247 E-Mail – [email protected] (203) 337-4103 (Work) (203) 394-9901 (Fax) DE Mr. Andrew M. Johnston N/R Morris Nichols, et al. Wilmington, DE 19899-1347 E-Mail – [email protected] (302) 351-9202 (Work) (302) 658-3989 (Fax) FL Mr. Donald A. Rett 48 Law Office of Donald Rett 1660 Metropolitan Circle Tallahassee, FL 32308 E-Mail – [email protected] (850) 298-4454 (Work) (904) 894-0700 (Home) (850) 298-4494 (Fax)

GA J. Steven Parker 52 Page Perry, LLC 1040 Crown Pointe Parkway, Suite 1050 Atlanta, GA 30338 E-Mail – [email protected] (770) 673-0047 (Work) (770) 673-0120 (Fax) HI Mr. David J. Reber N/R Goodsill Anderson Quinn & Stifel 1099 Alakea Street, Suite 1800 Honolulu, HI 96813 E-Mail – [email protected] (808) 547-5611 (Work) (808) 395-7994 (Home) (808) 547-5880 (Fax) ID Mr. Jeffrey W. Pusch N/R Fisher Pusch & Alderman, LLP U.S. Bank Building 101 South Capitol Boulevard, Suite 500 Boise, ID 83702 E-Mail – [email protected] (208) 331-1000 (Work) (208) 331-2400 (Fax) IL [Vacancy] N/R IN Mr. Stephen W. Sutherlin 58 Stewart & Irwin 251 East Ohio Street, Suite 1100 Indianapolis, IN 46204 E-Mail – [email protected] (317) 639-5454 (Work) (317) 396-9541 (Direct Dial) (317) 733-8084 (Home) (317) 632-1319 (Fax) (317) 696-2254 (Cell)












IA Ms. Katherine G. Manghillis 68 Schottenstein Zox & Dunn Co., LPA Arena District 250 West Street Columbus, OH 43215-2538 E-Mail –[email protected] (614) 462-1087 (Work) (614) 462-5135 (Fax) KS/MO Mr. William M. Schutte N/R Polsinelli Law Firm 6201 College Blvd., Suite 500 Overland Park, KS 66211 E-Mail – [email protected] (913) 234-7414 (Work) (913) 451-6205 (Fax) (913) 345-0054 (Home) KY Mr. Edward D. McDevitt 77 Bowles Rice McDavid Graff & Love LLP 60 Quarrier Street Charleston, WV 25301 Post Office Box 1386 Charleston, WV 25325-1386 E-Mail – [email protected] (304) 347-1711 (Work) (304) 343-3058 (Fax) LA Mr. Carl C. Hanemann 79 Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. Place St. Charles 201 St. Charles Avenue, 51st Floor New Orleans, LA 70170-5100 E-Mail – [email protected] (504) 582-8156 (Work) (504) 861-3992 (Home) (504) 582-8012 (Fax)

ME Christine A. Bruenn 83 Bingham McCutchen LLP 85 Exchange Street, 3rd Floor Portland, Maine 04101-5045 E-Mail – [email protected] (207) 780-8288 (Work) (207) 780-8298 (Fax) MD Mr. Wm. David Chalk 87 DLA Piper US LLP 6225 Smith Avenue Baltimore, MD 21209-3600 E-Mail – [email protected] (410) 580-4120 (Work) (410) 580-3120 (Fax) MA Mr. Michael M. Jurasic 103 Ropes & Gray One International Place Boston, MA 02110-2624 E-mail – [email protected] (617) 951-7754 (Work) (617) 235-0698 (Fax) MI Mr. Shane B. Hansen 105 Warner Norcross & Judd LLP 111 Lyon Street, N.W., Suite 900 Grand Rapids, MI 49503-2487 E-mail – [email protected] (616) 752-2145 (Work) (616) 942-7063 (Home) (616) 752-2500 (Fax) MN (See IOWA) 112 MS Mr. Daniel G. Hise 118 Butler, Snow, O’Mara, Stevens & Cannada, PLLC P.O. Box 22567 Jackson, MS 39225-2567 E-Mail – [email protected] (601) 985-5711 (Work) (601) 355-1742 (Home) (601) 985-4500 (Fax)












MO (SEE KANSAS) N/R MT (SEE COLORADO) 123 NE Mr. David R. Tarvin, Jr. N/R [New Street Address] Omaha, NE 68102 E-Mail – [email protected] (402) 960-1332 (Cell) NV Mr. Ken Creighton N/R 9295 Prototype Drive Reno, NV 89511 E-Mail – [email protected] (775) 448-0119 (Work) (775) 825-1844 (Home) (775) 448-0120 (Fax) NH Mr. Richard A. Samuels 138 McLane, Graf, Raulerson & Middleton P.A. 900 Elm Street P.O. Box 326 Manchester, NH 03105-0326 E-Mail – [email protected] (603) 628-1470 (Work) (603) 228-8636 (Home) (603) 625-5650 (Fax) NJ Mr. Peter D. Hutcheon 140 Norris, McLaughlin & Marcus, P.A. 721 Route 202-206 Post Office Box 1018 Somerville, NJ 08876-1018 E-Mail – [email protected] (856) 881-6621 (Work) (908) 356-4766 (Home) (908) 722-0755 (Fax)

NM Mr. Robert G. Heyman N/R Sutin Thayer & Browne 100 North Guadalupe, Suite 202 Santa Fe, NM 87501 Mailing Address: P.O. Box 2187 Santa Fe, NM 87504 E-Mail – [email protected] (505) 986-5493 (Work) (505) 982-5297 (Fax) NY Mr. F. Lee Liebolt, Jr. 144 420 Lexington Avenue, Suite 2620 New York, NY 10170 E-Mail – [email protected] (212) 286-1384 (Work) (212) 369-8067 (Home) (212) 286-1389 (Fax) NC Mr. David N. Jonson 151 K&L Gates LLP 4350 Lassiter at North Hills Avenue Suite 300 (27609) Post Office Box 17047 Raleigh, NC 27619-7047 E-Mail – [email protected] (919) 743-7308 (Work) (919) 639-0598 (Home) (919) 516-2008 (Fax) ND Mr. Craig A. Boeckel N/R Pagel Weikum Law Form 1715 Burnt Boat Drive, Madison Suite Bismarck, ND 58503 E-Mail – [email protected] (701) 250-1369 (Work) (701) 250-1368 (Fax)











OH Mr. Edward D. McDevitt 153 Bowles Rice McDavid Graff & Love LLP 60 Quarrier Street Charleston, WV 25301 Post Office Box 1386 Charleston, WV 25325-1386 E-Mail – [email protected] (304) 347-1711 (Work) (304) 343-3058 (Fax) OK Mr. C. Raymond Patton, Jr. 155 Conner & Winters A Professional Corporation 3700 First Plaza Tower 15 East Fifth Street Tulsa, OK 74103 E-Mail – [email protected] (918) 586-8523 (Work) (918) 299-5838 (Home) (918) 586-8548 (Fax) OR Mr. Jacob (“Jake”) Heth 157 Davis Wright Tremaine LLP 1300 SW Fifth Avenue – Suite 2300 Portland, OR 97201 E-Mail – [email protected] (503) 778-5396 (Work) (503) 778-5299 (Fax) PA Mr. Michael Pollack N/R Reed, Smith, Shaw & McClay LLP One Liberty Place, Suite 2500 1650 Market Street Philadelphia, PA 19103-7301 E-Mail – [email protected] (215) 851-8182 (Work) (215) 628-9904 (Home) (215) 851-1420 (Fax)

RI Mr. John F. Corrigan N/R John F. Corrigan PC 90 Elm Street, Suite 2000 Providence, RI 02903-4647 E-Mail – [email protected] (401) 276-8350 (Work) (401) 885-1025 (Home) (401) 633-6145 (Fax) (401) 219-1400 (Cell) SC Mr. F. Daniel Bell III 164 K&L Gates LLP 4350 Lassiter at North Hills Avenue Raleigh, NC 27619-7047 E-Mail – [email protected] (919) 743-7335 (Work) (919) 872-7886 (Home) (919) 516-2035 (Fax) SD Mr. Charles D. Gullickson 167 Davenport, Evans, Hurwitz & Smith, L.L.P. 206 West 14th Street Post Office Box 1030 Sioux Falls, SD 57101-1030 E-Mail – [email protected] (605) 357-1270 (Work) (605) 331-3880 (Home) (605) 335-3639 (Fax) TN Ms. E. Marlee Mitchell N/R Waller Lansden Dortch & Davis, PLLC Nashville City Center Suite 2100, 511 Union Street Nashville, TN 37219-1760 E-Mail – [email protected] (615) 244-6380 (Work) (615) 298-2514 (Home) (615) 244-6804 (Fax)











TX Mr. Daniel R. Waller 173 Secore & Waller LLP 12221 Merit Drive, Suite 1100 Dallas, TX 75251-2227 E-Mail – [email protected] (972) 776-0200 (Work) (972) 392-2452 (Home) (972) 776-0240 (Fax) UT Vacancy N/R VT Mr. William (Chip) A. Mason 177 Gravel and Shea 76 St. Paul Street, 7th Floor Post Office Box 369 Burlington, VT 05402-0369 E-Mail – [email protected] (802) 658-0220 (Work) (802) 658-1456 (Fax) VI Mr. Leigh F. Goldman, Esq. N/R Goldman Law Offices, Inc. 3562 Honduras, Suite 9 P.O. Box 303250 St. Thomas, Virgin Islands 00803 E-Mail – [email protected] (340) 715-5162 (Work) (866) 715-5163 (Fax)

VA Mr. Thomas G. Voekler 181 Hirschler Fleischer The Edgeworth Building 2100 East Cary Street Richmond, VA 23223-7078 Post Office Box 500 Richmond, VA 23218-0500 E-mail – [email protected] (804) 771-9599 (Work) (804) 241-3529 (Cell) (804) 644-0957 (Fax) WA Mr. John L. Mericle 184 Harris, Mericle & Wakayama 999 Third Avenue, Suite 3210 Seattle, WA 98104 E-Mail – [email protected] (206) 621-1818 (Work) (206) 624-8560 (Fax) WV Mr. Edward D. McDevitt 196 Bowles Rice McDavid Graff & Love, PLLC 600 Quarrier Street Charleston, WV 25314 E-Mail – [email protected] (304) 347-1711 (Work) (304) 345-4188 (Home) (304) 343-3058 (Fax) WI Mr. Terry Nelson 197 Foley & Lardner 150 East Gilman Post Office Box 1497 Madison, WI 53701 E-Mail – [email protected] (608) 258-4232 (Work) (608) 836-8855 (Home) (608) 258-4258 (Fax) WY SEE COLORADO 201










DC Ms. Michele A. Kulerman 207 Hogan & Hartson L.L.P. Columbia Square 555 Thirteenth Street, N.W. Washington, DC 20004-1109 E-Mail – [email protected] (202) 637-5743 (Work) (301) 279-6772 (Home) (202) 637-5910 (Fax) PR [Vacant] N/R USVI Mr. Tom Bolt N/R Tom Bolt & Associates PC Corporate Place 5600 Royal Dane Mall St. Thomas, VI 00802-6410 E-Mail – [email protected] (340) 774-2944 (Work) (340) 776-1639 (Fax)

CAN Mr. Paul G. Findlay 214 Borden Ladner Gervais LLP Scotia Plaza, Suite 4400 40 King Street West Toronto, Ontario M5H 3Y4 Canada E-Mail – [email protected] (416) 367-6191 (Work) (416) 484-9862 (Home) (416) 361-7083 (Fax)




ALABAMA


ALABAMA STATE LIAISON REPORT

As of August 15, 2008

This reports on material developments affecting blue sky practitioners in Alabama since June 2007 to August 15, 2008. Liaison: Carolyn L. Duncan

Cabaniss Johnston Suite 700, Park Place Tower 2100 Park Place North Birmingham, Alabama 35203

Email: [email protected] Telephone: (205) 716-5200 Fax: (205) 716-5839 State Administrator: Joseph P. Borg, Director

Alabama Securities Commission 770 Washington Ave., Suite 570 Montgomery, Alabama 36130-4700

Main Telephone: (334) 242-2984 Main Fax: (334) 242-0240 Internet: http://www.asc.alabama.gov Short Title/Citation: Alabama Securities Act, Code of Alabama (1975), §§ 8-6-1 et seq. http://www.asc.state.al.us/statutes.htm Rules Name/Citation: Rules of the Alabama Securities Commission, Alabama

Administrative Code, Chapter 830 (Rules 830-X-1 et seq.) http://asc.state.al.us/statutes.htm Highlights of Material Developments Nothing to report. Securities Statutory Developments None. Applicable State Statutes of Limitations Periods Criminal Enforcement Proceedings: Five years after the alleged violation. Ala. Code § 8-6-18(a). Civil Actions: For registration violations, two years from the date of sale. For all other violations, the earlier of two years from discovery of the violation or when discovery should have been made in the exercise of reasonable care. Ala. Code § 8-6-19(f).


http://www.asc.alabama.gov

http://www.asc.state.al.us/statutes.htm

http://asc.state.al.us/statutes.htm

ALABAMA


Securities Rules Developments Use of Senior-Specific Certifications and Professional Designations. The Commission has proposed for adoption new Rule 830-X-3-.28, which will prohibit the use of senior-specific certification or professional designations by any person in connection with the offer, purchase or sale of securities or the provision of advice relating to securities, unless the professional designation or certification is actually earned and awarded according to accepted educational and training criteria. The Rule establishes a rebuttable presumption that a designating or certifying organization is qualified for purposes of the Rule if the organization has been accredited by any of several listed accrediting organizations or others later designated as such by the Director. The burden of proof in any proceeding under the Rule is upon the person claiming any such certification or designation. The full text of the proposed Rule is available on the Commission’s website at http://asc.state.al.us/statutes.htm. Comments may be submitted in writing (including email) to Jane Brannan, Associate Counsel, Alabama Securities Commission, 770 Washington Ave., Suite 570, Montgomery, AL 36130-4700, (334) 242-2984, [email protected]. The comment period ends September 4, 2008. Administrative Orders and Announcements None. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement). Securities-related Case Law Developments None. Other Statutory Developments None. Administrator’s Staffing Changes None. Other Noteworthy Practice Developments None.

http://asc.state.al.us/statutes.htm


ALASKA


ALASKA STATE LIAISON REPORT

(Updated through July 31, 2008) This reports on material developments affecting blue sky practitioners in this state/province since February 29, 2008, to July 31, 2008. Liaison: Name: Julius J. Brecht Address: Wohlforth, Johnson, Brecht, Cartledge and Brooking 900 West 5th Avenue, Suite 600 Anchorage, Alaska 99501 Email: [email protected] Telephone: 907.276.6401 Cell Phone: Fax: 907.276.5093 State Administrator: Administrator's Name: Lorie L. Hovanec, Director Agency's Name: Division of Banking and Securities Agency's Official Address: 150 Third Street, Room 217 Agency's Mailing Address: Post Office Box 110807 Juneau, Alaska 99811-0807 Overnight Deliveries Address – if different: Main Telephone: 907.465.2521 Main Fax: Internet: http://www.commerce.state.ak.us/bsc/secur.htm Short Title/Citation: Alaska Securities Act, AS 45.55 http://www.dced.state.ak.us/bsc/pub/securitiesact.pdf Rules Name/Citation: 3AAC 08.005-08.950. Highlights of Material Developments The division has commenced a review of the Alaska Securities Act with the Alaska Department of Law as a first step in a renewed effort in considering replacement of the act with USA 2002. Securities Statutory Developments In 2007, a bill was submitted to the Alaska legislature based upon USA 2002 with certain revisions to fit the regulatory scheme in this state. The Alaska legislature operates with two consecutive one-year sessions. A bill that is not enacted within that time period fails and if to be addressed in the succeeding legislature must be reintroduced and start a new legislative


http://www.commerce.state.ak.us/bsc/secur.htm

http://www.dced.state.ak.us/bsc/pub/securitiesact.pdf

ALASKA


process. The director has expressed interest in having a bill introduced in the 2009 session of the legislature to replace the Alaska Securities Act with USA 2002. The present Alaska Securities Act is based upon USA 1956. Applicable State Statute of Limitations Periods The Alaska Securities Act addresses the statute of limitation provisions at AS 45.55.930(f). It provides that a person may not sue under the section more than three years after the contract of sale of securities, except as otherwise provided in that subsection. For a violation based in AS 45.55.930(a)(2) (by means of an untrue statement of a material fact or omission of a of a material fact the omission of which makes the statement misleading) or a violation of AS 45.55.010 (in connection with an offer, sale or purchase of a security, directly or indirectly, employing a device, scheme or artifice to defraud, make an untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made in light of the circumstances under which it is made not misleading, or engage in an act, practice or course of business that operates or would operate as a fraud or deceit on a person), an action under Section 930 may be brought within three years after the sale or two years after the person bringing the action discovered or should have discovered the facts on which the action is based, whichever is later. Failure to bring an action on a timely basis is an affirmative defense. A person may not sue under Section 930 if the buyer received a written offer before suit to refund the consideration paid together with interest at 8% per year or the stated rate from the date of payment, less the amount of income received on the security and the buyer failed to accept the offer within 30 days of its receipt, or the offer before suit and at the time when the buyer did not own the security unless the buyer rejected the offer in writing within 30 days of its receipt. Securities Rules Developments The division is considering issuing notice of intent to adopt proposed regulations to revise the current regulations pertaining to filing proxy solicitation materials and annual reports by Alaska Native corporations subject to the Alaska Native Claims Settlement Act of 1971, as amended (ANCSA). Such corporations were formed under Alaska corporate law and subject to ANCSA and are under limited conditions exempt from the Securities Act o f 1933 and the Securities Exchange Act of 1934 but are subject to the Alaska Securities Act in the context of proxy solicitations and filing of annual reports with the state. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings Several in progress, none final at this point.

ALASKA


Securities-related Case Law Developments The Superior Court for the State of Alaska decided in the division's favor as having the right to elect what a hearing officer may review in an administrative hearing involving filings of proxy materials and annual reports under the Alaska Securities Act. See Calista Corporation v. State of Alaska, Department of Commerce, Community and Economic Development (April 2008). Other Statutory Developments None to report. Administrator’s Staffing Changes The division has recently hired one bank examiner and one securities examiner. The division uses its examiners on cross discipline matters as regulatory needs require. The division continues to recruit to fill one bank examiner position (applicant must be a resident of the state) and one securities examiner (applicant need not be a resident of the state to apply for the position). Both positions are for locations in the state. Inquiries should be directed to the director. Other Noteworthy Practice Developments The division has a new director-- Lori L. Hovanec. She is an attorney and former trust officer for a national bank association having offices in Anchorage, Alaska.

ARIZONA


ARIZONA STATE LIAISON REPORT

No report.

ARKANSAS


ARKANSAS STATE LIAISON REPORT

No report.

CALIFORNIA


CALIFORNIA STATE LIAISON REPORT

(As of February 24, 2008; supplemented to August 21, 2008) Liaison: Keith Paul Bishop Allen Matkins Leck Gamble & Mallory LLP 1900 Main Street, 5th Floor Irvine, CA 92614 Email: [email protected] Telephone: (949) 851-5428 Cell phone: Fax: (949) 553-8354 State Administrator: Preston DuFauchard

Department of Corporations 1515 K Street, Suite 200 Sacramento, CA 95814-4052

Main Telephone: (916) 445-7205 Main Fax: Internet: http://www.corp.ca.gov Short Title/Citation: Corporate Securities Law of 1968, Cal. Corp. Code § 25000 et seq. http://www.leginfo.ca.gov/calaw.html Rules Name/Citation: Title 10, Chapter 3, California Code of Regulations http://ccr.oal.ca.gov/linkedslice/default.asp?SP=CCR-

1000&Action=Welcome Highlights of Material Developments None to report. Securities Statutory Developments 1. S.B. 998 (Cox), 2007 Stats. Chapter 101, among other things, this law: (a) Authorizes a court to prohibit, conditionally or unconditionally, and permanently or for a prescribed period a person who has violated Corp. Code Section 25401 from acting as an officer or director of any issuer that has securities that are qualified or exempt. (Added Corp. Code § 25530.1)

(b) Makes it unlawful for any person to knowingly make an untrue statement to the commissioner during the course of licensing, investigation, or examination, with specified intent. (Amended Corp. Code § 25404).


http://www.corp.ca.gov

http://www.leginfo.ca.gov/calaw.html

http://ccr.oal.ca.gov/linkedslice/default.asp?SP=CCR

CALIFORNIA


2. AB 918 (Torrico), Chapter 239, Statutes of 2007 Exempts securities transactions of certain telephone utilities from review by the Public Utilities Commission (PUC). AB 918 is intended to provide a statutory exemption from the PUC’s review and approval process for the sale of securities by telephone companies, thereby superseding the PUC’s current authority and practice to grant exemptions by rule or order (on a case-by-case basis).

3. AB 1528 (Assembly Banking & Finance Committee), Chapter 363, Statutes

of 2007 Amends existing law to prohibit persons from marketing financial products in a misleading or deceptive manner that suggests military affiliation, as specified. AB 1528 is intended to help curb deceptive sales of financial products by unscrupulous operators who represent that the products are sponsored by or otherwise affiliated with the branch of armed forces.

4. SB 1037 (Senate Banking, Finance & Insurance Committee), Chapter 99, Statutes of 2007

Streamlines the securities approval process for state-chartered banks in the case of an acquisition of bank control or a merger, and makes other technical changes regarding trust activities and fiduciary activities of state-chartered trust companies; Securities Rules Developments The California Corporations Commissioner extended the time period for the public to comment on proposed regulations amending the licensing exemption for certain investment advisers. The written comments will be accepted until close of business on March 31, 2008. http://www.corp.ca.gov/OLP/pdf/rm/4106extension.pdf On November 30, 2007, the California Corporations Commissioner issued a Notice of recent California law changes designed to protect military members and their families from fraudulent and other deceptive practices in connection with certain loans and financial services provided by persons licensed under laws administered by the Department of Corporations. http://www.corp.ca.gov/Education_Outreach/pdf/taps/16-07MiltaryPotectionNotice.pdf Administrative Orders and Announcements On September 9, 2007, the California Corporations Commissioner issues Order to confirm an exemption from securities qualification for securities listed on the NASDAQ Global Market.

http://www.corp.ca.gov/OLP/pdf/rm/4106extension.pdf

http://www.corp.ca.gov/Education_Outreach/pdf/taps/16-07MiltaryPotectionNotice.pdf

CALIFORNIA


In 2005, Congress enacted the Class Action Fairness Act (CAFA) (28 U.S.C. Sections 1332(d), 1453, and 1711 – 1715). One of the requirements of the CAFA is that within 10 days of filing a proposed class action in court, each defendant must serve appropriate federal and state officials in any state where one class member resides. On November 6, 2007, the California Department of Corporation issued a release that specifies that it is the "appropriate state official" for service with respect to the following laws:

• Bucket Shop Law (Corporations Code Section 29000 et seq.) • California Commodity Law of 1990 (Corporations Code Section 29500 et seq.) • California Deferred Deposit Transaction Law (Financial Code Section 23000 et seq.) • California Finance Lenders Law (Financial Code Section 22000 et seq.) • California Financial Information Privacy Act (Financial Code Section 4050 et seq.) • California Residential Mortgage Lending Act (Financial Code Section 50000 et seq.) • Capital Access Company Law (Corporations Code Section 28000 et seq.) • Check Sellers, Bill Payers and Proraters Law (Financial Code Section 12000 et seq.) • Corporate Securities Law of 1968 (Corporations Code Section 25000 et seq.) • Covered Loan Law (Financial Code Section 4970 et seq.) • Escrow Law (Financial Code Section 17000 et seq.) • Franchise Investment Law (Corporations Code Section 31000 et seq.) • Securities Depository Law (Financial Code Section 30000 et seq.) • Insurance Code Section 1280.7 relating to physician indemnity arrangements

Here's a link to the Commissioner's notice with information on how to effect the required notice: http://www.corp.ca.gov/commiss/18G.pdf Administrative Enforcement Proceedings The Department has an active enforcement division. Civil and administrative actions are listed on the Department’s website, www.corp.ca.gov. Securities-related Case Law Developments People v. Edward D. Jones,, 154 Cal. App. 4th 627 (2007) (Action by State of California against brokerage firm for failure to disclose certain “shelf space” arrangements was not preempted by either the National Securities Markets Improvement Act or SEC Rule 10b-10). People v. Cole, 156 Cal. App. 4th 452 (2007) (Evidence of failure to have broker-dealer license constitutes probable cause for arrest and search of vehicle).

http://www.corp.ca.gov/commiss/18G.pdf


CALIFORNIA


OCM Principal Opportunities Fund v. CIBC World Markets, 157 Cal. App. 4th 835 (2007) (Prejudgment interest under Section 25500). Apollo Capital Fund v. Roth Capital, 158 Cal. App. 4th 226 (2007) (No private right of action exists under a statutory provision making it unlawful to knowingly provide substantial assistance to another person in violation of any provision of the corporate securities law). Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments In February, 2008, the California Attorney General entered into an “agreement of discontinuance” with American Funds Distributors, Inc. and Capital Research and Management. The Attorney General had previously filed suit alleging that AFD and CRMC violated two of the antifraud provisions of California Corporate Securities Law by failing to accurately disclose in the prospectuses of the American Funds their directed brokerage and revenue-sharing arrangements with retail broker dealer.

CALIFORNIA


Supplemented to August 21, 2008 Highlights of Material Developments None at this time. Securities Statutory Developments None at this time. Securities Rules Developments On May 1, 2008, the Commissioner issued a notice that he has decided not to proceed with the proposed amendment of 10 CCR § 260.204.9 which establishes an exemption from California's investment adviser registration requirement for certain investment advisers with fewer than 15 clients. The comment period on the Commissioner's proposed investment adviser omnibus rulemaking expired on July 8, 2008. The Commissioner has repealed and amended various rules related to the preservation of books and records by broker-dealers. 10 CCR §§ 260.218.5 and 260.241.1 have been repealed and 10 CCR §§ 260.241 and 260.241.2 have been amended. These changes took effect on April 6, 2008. Administrative Orders and Announcements None at this time. Administrative Enforcement Proceedings The Department has an active enforcement division. Civil and administrative actions are listed on the Department’s website, www.corp.ca.gov. Securities-related Case Law Developments Flaxel v. Johnson, 541 F. Supp. 2d 1127 (S.D. CA 2008) - The Court found that although Congress has prohibited the states from requiring the registration of certain types of securities, states may continue to regulate the sale of securities through statutory and common-law causes of action for securities fraud. Usana Health Sciences, Inc. v. Minkow, 2008 U.S. Dist. LEXIS 16613 (Case No. 2:07-cv-159 TC, D. UT March 4, 2008) - A company sued Barry Minkow and the Fraud Discovery Institute alleging that they engaged in a scheme of illegal market manipulation involving a lengthy and uncomplimentary report about the company. The court dismissed the


CALIFORNIA


state claims under California's anti SLAPP (Strategic Lawsuit Against Public Participation) statute. Other Statutory Developments None at this time. Administrator’s Staffing Changes Colleen Monahan has been appointed as the new Deputy Commissioner of the Office of Legislation and Policy. She replaces Tim LeBas who moved to the California Department of Managed Health Care. Robert Van der Volgen is the new Deputy Commissioner for the Securities Regulation Division. Other Noteworthy Practice Developments None at this time.

COLORADO


COLORADO STATE LIAISON REPORT

(February 18, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since August 2007 and supplemented to August 15, 2008. Liaison: Robert J. Ahrenholz, Esq.

Kutak Rock LLP 1801 California Street, Suite 3100 Denver, CO 80202

Email: [email protected] Telephone: 303-297-2400 Cell phone: Fax: 303-292-7799 State Administrator: Fred J. Joseph, Colorado Securities Commissioner

Department of Regulatory Agencies, Division of Securities 1560 Broadway, Suite 900 Denver, CO 80202

Main Telephone: 303-894-2320 Main Fax: 303-861-2126 Internet: http://www.dora.state.co.us/securities

Short Title/Citation: Colorado Securities Act, COLO. REV. STAT. § 11-51-101 through 908 http://www.dora.state.co.us/securities/pdf_forms/forms/statute2007.pdf Rules Name/Citation: Colorado Division of Securities Rules, 3 COLO. CODE REGS. § 704-1,

Rules 51-1 through 51.9.2 http://www.dora.state.co.us/securities/pdf_forms/Forms/Rules%202007.pdf Highlights of Material Developments

The Colorado Division of Securities is a unit of the Colorado Department of Regulatory Agencies. Its mission is to protect investors and maintain public confidence in the securities markets while avoiding unreasonable burdens on participants in the capital markets. In this capacity, the Colorado Division of Securities is responsible for the administration and enforcement of the Colorado Securities Act (the “CSA”), the Colorado Commodity Code, the Colorado Municipal Bond Supervision Act, the Local Government Investment Pool Trust Fund Administration and Enforcement Act and the rules and regulations promulgated thereunder. The Colorado Division of Securities licenses and regulates stockbrokers and investment advisers and the securities they offer, sell and advise about in the State of Colorado. For additional information, visit the Colorado Division of Securities’ Web site at: www.dora.state.co.us.1 1 The information contained in the foregoing paragraph was obtained on 02/05/08 at http://www.dora.state.co.us/Securities/ (last updated 02/05/08).


http://www.dora.state.co.us/securities

http://www.dora.state.co.us/securities/pdf_forms/forms/statute2007.pdf

http://www.dora.state.co.us/securities/pdf_forms/Forms/Rules%202007.pdf

http://www.dora.state.co.us

http://www.dora.state.co.us/Securities/

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On April 30, 1998, Governor Romer signed into law House Bill 98-1244, a bill for the regulation of investment advisory activities. Under the law, the Colorado Securities Commissioner and Securities Division license and regulate state-based investment advisers and investment adviser representatives who work in Colorado, effective January 1, 1999.

The “Colorado Investment Adviser” law was enacted in the context of NSMIA, under which Congress split regulatory responsibility for investment advisers between the Securities and Exchange Commission and state securities regulators. Investment Advisor firms with more than $25 million in assets under management are regulated exclusively by the SEC. Colorado regulates Investment Adviser firms located in Colorado with assets under that threshold. Investment adviser representatives, individuals with a place of business in Colorado who work for Federal Covered Advisors or state Investment Adviser Firms in providing investment advice to customers, need a Colorado Investment Adviser Representative license.

To be licensed in Colorado, the filing of Investment Adviser and Investment Adviser Representative license applications and fees is required. Colorado Investment Adviser Representative license applicants are required to take and pass a minimum competency examination or provide proof of alternate qualifications. Annual fees will be required each year. Licensees are subject to inspection, dishonest and unethical business practice rules, customer disclosure requirements and anti-fraud provisions.

A Federal Covered Advisor with a place of business in Colorado, or who employs or otherwise engages an individual with a place of business in this state to act as an Investment Adviser Representative, is required to make a notice filing.

Securities Statutory Developments

The First Regular Session of the Sixty-Sixth General Assembly convened on January 10, 2007 and adjourned on May 9, 2007. There were no laws enacted relating to securities regulation. The Second Regular Session of the Sixty-Sixth General Assembly convened on January 9, 2008. There are no bill currently pending relating to securities regulation.

Securities Rules Developments

Since the August 2007 Update, there have not been any material developments in securities rules.

Administrative Orders and Announcements

Since the August 2007 Update, there have not been any material administrative orders and announcements.

Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement)

Since the August 2007 Update, there have been 5 press releases dealing with the Division’s enforcement activities:

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a. Press Release: Computer Software Company Sanctioned By Securities Commissioner. In a press release dated August 31, 2007, Colorado Securities Commissioner, Fred J. Joseph, announced that he has entered a final cease and desist order against a Las Vegas, Nevada computer software company for allegedly violating the securities registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are CK Systemz, LLC, Executive Solutions Online, LLC, and the co-owners and operators of CK Systemz, Diane M. Dutton and Michael D. Dutton, all of Las Vegas, Nevada.

The Staff of the Division of Securities (the “Staff”) has alleged that in May of 2007, Respondents were advertising for investors on the internet website raisecapital.com for a 15% ownership of CK Systemz. Respondents represented that the CK Systemz was attempting to raise $1 million for the marketing and production of computer software programs that targeted the cosmetology industry. They were offering limited liability company memberships at $85 per unit, in the hopes of selling 11,000 units. The Staff alleged that the Respondents offered its securities in Colorado that were not registered, or exempt from registration, in violation of the registration provisions of the Act.

The cease and desist order, which CK Systemz, Executive Online Solutions, LLC, Diane Dutton and Michael Dutton all agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the registration provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on August 31, 2007.

b. Press Release: Investment Adviser’s License Revoked By Colorado Securities Commissioner. In a press release dated September 4, 2007, Colorado Securities Commissioner Fred J. Joseph announced that the Colorado investment adviser licenses of Secured Financial Companies, Inc., doing business as Secure Financial Group, and its owner, Brian J. Peterson, have been revoked. These sanctions were imposed as a result of an action initiated by the Division of Securities’ staff. In a stipulated settlement, the firm and Peterson agreed to the revocation, effectively ending their privilege to do business in Colorado as investment advisers.

The Commissioner’s order, issued on September 4th, resolved a licensing enforcement action originally set to go to hearing on September 10th. The hearing was to be held on charges that Secured Financial and Peterson violated an earlier consent order issued by the Securities Commissioner against them in 2006 resolving charges of receiving illegal referral fees in another case involving Alan Bird and XL Capital Partners, Inc. The staff also alleged in the licensing action that Peterson engaged in self-dealing by loaning funds from his hedge funds to a business in which Peterson holds an ownership interest. In entering the stipulation, Secured Financial and Peterson neither admitted nor denied any of the allegations were true.

Still pending against Secured Financial and Peterson is a Denver District Court action filed by the Commissioner alleging that they have violated the anti-fraud provisions of the Colorado Securities Act in connection with the operation of two hedge funds by Mr. Peterson. On August 23, 2007, a Denver District Court Judge entered an Order appointing a Receiver over two hedge funds operated by Secured Financial and Peterson. See Press Release dated August

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24, 2007 at: http://www.dora.state.co.us/securities/pdf_forms/pressreleases/brianpetersonpress.pdf. The revocation of the investment adviser licenses does not resolve the District Court claims.

c. Press Release: Texas Oil And Gas Company Sanctioned By Securities Commissioner. In a press release dated September 13, 2007, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Texas oil and gas company for allegedly violating the securities registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado.

Named in the Order are Wortham Oil and Gas Enterprises, LLC, and the owners and operators of Wortham Oil, Paul A. Burns and Wayne K. West, all of Conroe, Texas.

The Staff of the Division of Securities (the “Staff”) has alleged that in January and February of 2006, Wortham Oil and Gas advertised investments in oil and gas properties on a Denver area radio station.

Respondents represented that Wortham Oil and Gas was attempting to raise $1.25 million in an oil and gas drilling project located in Leon County, Texas. Investors could purchase a so-called unit for $59,000 with the potential return of $72,000 per year for 15 years. The Staff alleged that the Respondents made a public offering of its securities in Colorado by means of the radio ad, that the securities were not registered, or exempt from registration, all in violation of the registration provisions of the Act.

“Investors need to be wary of oil and gas promoters who use the high price of oil as an inducement to invest,” said Commissioner Joseph. “Investors still need to do their homework.”

Following a hearing in front of the Colorado Securities Board, a final cease and desist order was entered by the Commissioner, ordering the Respondents to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado or otherwise engaging in conduct in violation of any provision of the Act.

d. Press Release: Texas Oil And Gas Company Sanctioned By Securities Commissioner. In a press release dated October 9, 2007, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Texas oil and gas company for allegedly violating the securities registration, licensing, and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado.

Named in the Order are Pathfinder Resources, LLC, and its managing member, Anthony L. Martin, both of Dallas, Texas.

The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (DORA), has alleged that in May and June of 2007, the Respondents attempted to sell investments in oil and gas related ventures in wells to be drilled in Michigan and Nebraska. The Staff alleged that the Respondents engaged in a scheme to defraud potential oil and gas investors by failing to disclose to investors that Martin’s former company, Oxbow Energy, LLC, had been the subject of two civil judgments in March of 2006

http://www.dora.state.co.us/securities/pdf_forms/pressreleases/brianpetersonpress.pdf

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and May of 2007 for failure to pay for drilling activities and other land services work. Despite opening a new company under a different name,

Martin operations maintained the same address and phone number he used for Oxbow. The Staff further alleged that Martin offered a sales agent in Colorado $50,000 if the sales agent could find investors for the $250,000 Michigan offering. With the Nebraska program, Martin proclaimed a potential return of $180,000 on a $50,000 investment. The offers of units in the Michigan and Nebraska oil and gas drilling programs were not registered, or exempt from registration, and were attempted to be sold without the proper license, in violation of the registration and licensing provisions of the Act.

The cease and desist order, which Pathfinder and Martin agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud, registration and licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on October 9, 2007.

DORA is dedicated to preserving the integrity of the marketplace and is committed to promoting a fair and competitive business environment in Colorado. Consumer protection is our mission.

e. Press Release: In a press release dated January 29, 2008 Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Wyoming oil and gas company for allegedly violating the securities registration, licensing, and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado.

Named in the Order are Painted Horse, LLC, a Wyoming limited liability company, and its managing member and chief executive officer, James Anthony McCoy, of Columbus, Ohio

Securities-related Case Law Developments

Since the August 2007 Update, there have not been any material court decisions addressing novel questions of law.

Other Statutory Developments

Since the August 2007 Update, there have not been any other material statutory developments.

Administrator’s Staffing Changes

Since the August 2007 Update, there have not been any material changes in the Administrator’s staffing.

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Other Noteworthy Practice Developments

The First Regular Session of the Sixty-Sixth General Assembly convened on January 10, 2007 and adjourned on May 9, 2007. Since the August 2007 Update, there were no bills relating to Colorado general corporate law that were passed by the Colorado General Assembly.

The Second Regular Session of the Sixty-Sixth General Assembly convened on January 9, 2008. There are no bills currently pending relating to Colorado general corporate law.

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Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in this state since February 2008. Highlights of Material Developments

The Colorado Division of Securities is a unit of the Colorado Department of Regulatory Agencies. Its mission is to protect investors and maintain public confidence in the securities markets while avoiding unreasonable burdens on participants in the capital markets. In this capacity, the Colorado Division of Securities is responsible for the administration and enforcement of the Colorado Securities Act (the “CSA”), the Colorado Commodity Code, the Colorado Municipal Bond Supervision Act, the Local Government Investment Pool Trust Fund Administration and Enforcement Act and the rules and regulations promulgated there under. The Colorado Division of Securities licenses and regulates stockbrokers and investment advisers and the securities they offer, sell and advise about in the State of Colorado. For additional information, visit the Colorado Division of Securities’ Web site at: www.dora.state.co.us.2 On April 30, 1998, Governor Romer signed into law House Bill 98-1244, a bill for the regulation of investment advisory activities. Under the law, the Colorado Securities Commissioner and Securities Division license and regulate state-based investment advisers and investment adviser representatives who work in Colorado, effective January 1, 1999. The “Colorado Investment Adviser” law was enacted in the context of NSMIA, under which Congress split regulatory responsibility for investment advisers between the Securities and Exchange Commission and state securities regulators. Investment Advisor firms with more than $25 million in assets under management are regulated exclusively by the SEC. Colorado regulates Investment Adviser firms located in Colorado with assets under that threshold. Investment adviser representatives, individuals with a place of business in Colorado who work for Federal Covered Advisors or state Investment Adviser Firms in providing investment advice to customers, need a Colorado Investment Adviser Representative license. To be licensed in Colorado, the filing of Investment Adviser and Investment Adviser Representative License applications and fees is required. Colorado Investment Adviser Representative License applicants are required to take and pass a minimum competency examination or provide proof of alternate qualifications. Annual fees will be required each year. Licensees are subject to inspection, dishonest and unethical business practice rules, customer disclosure requirements and anti-fraud provisions. A Federal Covered Advisor with a place of business in Colorado, or who employs or otherwise engages an individual with a place of business in this state to act as an Investment Adviser Representative, is required to make a notice filing.3

2 The information contained in the foregoing paragraph was obtained at http://www.dora.state.co.us/securities/ (last visited Aug. 12, 2008). 3 The information from the foregoing paragraphs dealing with investment advisors was obtained at http://www.dora.state.co.us/securities/ialaw.htm (last visited Aug. 12, 2008).

http://www.dora.state.co.us

http://www.dora.state.co.us/securities/

http://www.dora.state.co.us/securities/ialaw.htm

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The Second Regular Session of the Sixty-Sixth General Assembly convened on January 9, 2008 and adjourned on May 6, 2008. House Bill 1055 amended language to the exchange exemption provision in § 11-51-307(f): 4

Effective before August 6, 2008:

(f) Any security listed or approved for listing upon notice of issuance on the New

York stock exchange, American stock exchange, Pacific stock exchange, Midwest stock exchange, PBW stock exchange, Boston stock exchange, or Chicago board of options exchange; any security designated or approved for designation upon notice of issuance for inclusion in the national association of securities dealers automated quotation national market system; any other security of the same issuer which is of a senior or substantially equal rank; any security called for by subscription rights or warrants so listed, designated, or approved; or any warrant or right to purchase or subscribe to any of them;

Effective after August 6, 2008:

(f) Any security listed or approved for listing upon notice of issuance on any

national securities exchange registered under the federal "Securities Exchange Act of 1934," 15 U.S.C. Sec. 78f, as amended, or any other security of the same issuer that is of a senior or substantially equal rank; any security called for by subscription rights or warrants so listed, designated, or approved; or any warrant or right to purchase or subscribe to any of them.


Since the February 2008 update, there have not been any material developments in securities rules. Administrative Orders and Announcements

Since the February 2008 update, there have not been any material administrative orders and announcements. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement)

Since the February 2008 Update, there have been 12 press releases dealing with the Division’s enforcement activities:5

4 HB 1055 can be found at: http://www.leg.state.co.us/CLICS/CLICS2008A/csl.nsf/fsbillcont3/EE8449D02004658C872573A80067EB5B?Open&file=1055_enr.pdf (last visited Aug. 13, 2008). 5 The following press releases are found at http://www.dora.state.co.us/securities/press.htm (last visited on Aug. 13, 2008).

http://www.leg.state.co.us/CLICS/CLICS2008A/csl.nsf/fsbillcont3/EE8449D02004658C872573A80067EB5B?Open&file=1055

http://www.dora.state.co.us/securities/press.htm

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a. Press Release: Real estate developer ordered by Securities Commissioner to stop offering securities in Colorado. In a press release dated June 25, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against an Erie, Colorado real estate developer. It orders him to stop offering or selling securities in Colorado for violating the securities anti-fraud and registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in Colorado. Named in the Order are Morganti Properties, LLC, and Ricardo Morganti. Morganti Properties operates out of Erie, Colorado, and Mr. Morganti resides in Longmont, Colorado. The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Morganti sought investors for his real estate projects by advertising in a local newspaper. Morganti sought investors to invest in single family homes in the Denver metro and surrounding areas. Investors could either invest in specific single family homes, or invest in Morganti Properties where the funds would be generally used by Morganti. Morganti promised investors a 12% return on their investment. The Staff alleged that the Respondents engaged in a scheme to defraud investors by failing to disclose to potential investors the risks associated with and the speculative nature of the investment. The Staff also alleged that the offer of these securities were not registered, or exempt from registration, in violation of the registration provisions of the Act. The cease and desist order, which Morganti Properties and Mr. Morganti agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud and registration provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. b. Press Release: Real estate promoter settles Colorado securities law violations. In a press release dated June 24, 2008, Colorado Securities Commissioner Fred Joseph announced that he has settled his enforcement action against Jason J. Sharkey, of Denver, Colorado, arising from the offer and sale of securities in Klytie’s Developments, Inc., and Klytie’s Developments, LLC, to Colorado investors. There were at least 50 investors who have invested over $2.25 million with Klytie’s Developments. Under the terms of the settlement, Mr. Sharkey has consented to a permanent injunction entered by Judge Gloria A. Rivera of the Denver District Court barring him from the securities industry in Colorado and permanently enjoining him from further violation of the registration, licensing and anti-fraud provisions of the Colorado Securities Act. In addition, Mr. Sharkey has agreed to the entry of a monetary judgment against him in the amount of $944,391.00. On October 23, 2006, Commissioner Joseph filed a complaint in Denver District Court against Mr. Sharkey, and others, alleging they violated the registration and anti-fraud provisions of the Colorado Securities Act. Specifically, that since at least March of 2005, Mr. Sharkey offered and sold investments in the so-called “Global Real Estate Fund.” Sharkey

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represented to investors that they would pool investor monies to finance the purchase of real estate developments and holdings throughout the world. In turn, those real estate developments would form the assets of the Global Real Estate Fund and the investors would share in the profits and capital gains derived from the assets of the Fund. Sharkey guaranteed a minimum annual return of 10% to investors. In the complaint, the Commissioner has alleged that in connection with the offer and sale of interests in the Global Real Estate Fund, Mr. Sharkey made misrepresentations to prospective investors which are materially false and misleading, including, but not limited to the following:

a. Mr. Sharkey represented to investors that Klytie’s Developments owned certain properties listed in the Klytie’s Prospectus. In truth, some of the properties identified in the Prospectus do not even exist.

b. Mr. Sharkey represented to investors that investor’s funds would be pooled to purchase real estate. But investor funds were used for purposes other than the purchase of real estate, including the personal use by Mr. Sharkey.

c. Mr. Sharkey represented that the properties were held in trust by TD Canada Trust. But TD Canada Trust has no record of any trust documents filed with them by the Defendants.

Other Defendants named in the civil action, Klytie’s Developments, Hidai Friedman, and Efrat Friedman, have not settled the civil charges. Hidai Freidman is currently awaiting trial on related criminal charges in Jefferson County District Court. The criminal trial is set to commence on July 8, 2008. The civil case has been stayed pending the outcome of the criminal case. c. Press Release: Golden oil and gas company sanctioned by Securities Commissioner. In a press release dated June 5, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Golden, Colorado oil and gas company and its principals for allegedly violating the securities registration and antifraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are Peak Oil, LLC, and its managing members or principals, Jerry Goedert, and Elizabeth Goedert, all of Golden, Colorado. The Staff of the Division of Securities (the “Staff”), which a division of the Colorado Department of Regulatory Agencies (“DORA”), has alleged that in April of this year, advertisements were placed in local newspapers soliciting investors for so-called "low risk drilling prospects in the D.J. Basin." The Staff alleges that the Respondents attempted to sell investments in oil and gas related ventures where Respondents would re-enter existing wells that had been previously capped. These wells were located in Morgan County, Colorado. The Staff alleged that the Respondents engaged in a scheme to defraud potential oil and gas investors by

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promising investors "low risk and high return" on their investment, failing to disclose to potential investors operating and financial history of Peak Oil, and the speculative nature and actual risks of the investment. The Staff also alleged that the offer of interests in Peak Oil were not registered, or exempt from registration, in violation of the registration provisions of the Act. The cease and desist order, which Peak Oil and the Goedert's agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud and registration provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on June 5, 2008. d. Press Release: Oklahoma real estate developer ordered by Securities Commissioner to stop offering securities in Colorado. In a press release dated May 22, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against an Oklahoma real estate developer to stop offering or selling securities in Colorado for violating the securities anti-fraud and registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in Colorado. Named in the Order is Troy B. Labani of Oklahoma City, Oklahoma. The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Labani sought investors for his real estate projects by advertising in a local newspaper. Labani was seeking investors to invest in two remodeling projects, a laundry facility in Tupelo, Mississippi, and an apartment complex in Ponca City, Oklahoma. Labani promised investors a return on their investment of 12-18% interest. Labani failed to disclose to investors that he was being currently sued in numerous lawsuits filed in Mississippi and Oklahoma. Labani was found to have violated both the anti-fraud and registration provisions of the Colorado Securities Act. "When we become aware of unregistered securities offerings, we will take quick action," said Commissioner Joseph. "But investors always need to be wary of promoters promising returns that appear too good to be true." In the cease and desist order, Mr. Labani is ordered to stop offering or selling securities in Colorado. e. Press Release: Real estate investment firm sanctioned by Securities Commissioner. In a press release dated May 13, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Colorado real estate residential development company and its manager for allegedly violating the securities registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are Peak Financial Group, LLC, and its principal officer and manager, John Scott Buckley, with an address of 7887 E. Belleview Avenue, Suite 1100, Englewood, Colorado 80111.

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The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Buckley sought investors for his "infill" real estate development projects by advertising for investors in a local newspaper. According to Buckley, he was seeking passive investors to invest in the building of custom residential homes in the Greenwood Village/Cherry Hills neighborhoods. These proposed residential homes would average approximately 6500 square feet on 1/2 acre lots, and list for approximately $2,000,000. Buckley promised investors an 18% annual return. The Staff alleged that the offering of these investment opportunities is a securities offering, and Respondents failed to register its securities offering in violation of the Colorado Securities Act. The Staff also alleged that Buckley failed to disclose to investors the risk of investing with Peak Financial and the speculative nature of the investment. The cease and desist order, which all of the Respondents agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud and registration provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. f. Press Release: Longmont man sanctioned by Securities Commissioner. In a press release dated April 28, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Colorado company and its owner for allegedly violating the securities registration and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are DH Products, LLC, and its owner and manager, Carl "Dusty" Hill, both of Longmont, Colorado. The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Hill sought venture capital from investors for his "invention" by placing ads in local newspapers. In his promotional material, Hill touted his invention of a flat tire alert system for the trucking industry. Hill's "Flat Alert System" purportedly would alert truck drivers when any of their tires are under-inflated, flat, or blown out. For $10,000, Hill offered investors a "1% ownership" of the gross revenue of DH Products from the sale or licensing of his Flat Alert System. The Staff alleged that the Respondents failed to register its security offering. In addition, the Staff alleged that Hill offered these investments in a fraudulent manner by failing to disclose to investors the risks inherent in investing in his Flat Alert System. Commissioner Joseph cautioned investors about investing in the latest fad or the newest technology. "More often than not, these type of products with exaggerated marketing, but questionable or unverifiable quality, turn out to be nothing more than a modern day version of snake oil," said Commissioner Joseph. The cease and desist order, which all Respondents agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the

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State of Colorado in violation of the anti-fraud, registration and licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. g. Press Release: Boulder investment firm and its two owners charged with securities law violations. Denver District Court enjoins securities law violations and appoints receiver over assets. In a press release dated April 11, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has filed a complaint in Denver District Court and obtained a preliminary injunction against Dharma Investment Group, LLC, and its two owners, Bela A. Geczy and Michael B. Kass, alleging that they are violating the registration provisions of the Colorado Securities Act (“Act”). On April 10, 2008, Denver District Court Judge Stephen Phillips entered a preliminary injunction, which prohibits the Defendants from offering or selling securities in Colorado and violating the registration, licensing and anti-fraud provisions of the Colorado Securities Act. Judge Phillips also appointed John C. Smiley of the Denver law firm of Lindquist and Vennum to act as receiver over the assets of Dharma Investment Group and all related entities. Dharma, Geczy, and Kass all use the business address of 737 29th Street, Suite 300, Boulder, Colorado 80303. In the complaint, the Commissioner has alleged that as early as March 2006 and continuing until at least October 2007, Kass and Geczy raised more than $17 million from investors. Kass and Geczy represented to investors that they would form separate limited liability companies for the purpose of raising capital for a particular business enterprise. Once the entity was formed and capital raised, the funds would be invested in investment opportunities identified by Kass and Geczy. For example, the Defendants formed Dharma Coffee, LLC. Money raised from investors for Dharma Coffee was then invested in a coffee company. Investors usually received short term, high interest promissory notes for their investments. According to the Commissioner’s complaint, Defendants failed to register any of the securities in Colorado. The Defendants have cooperated and agreed to the entry of the injunction and appointment of the receiver by the court. Commissioner Joseph said "It was important to get a receiver in place here to preserve as much of the remaining assets as possible for investors. But our investigation of this matter will continue." A copy of the complaint and preliminary injunction can be found at http://www.dora.state.co.us/securities/enforcement.htm#Injunctions. h. Press Release: Real estate investment firm sanctioned by Securities Commissioner. In a press release dated April 8, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Colorado real estate investment firm and its manager for allegedly violating the securities registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado.

http://www.dora.state.co.us/securities/enforcement.htm#Injunctions

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Named in the Order are A&M Properties, LLLP, and its principal officer and manager, Gerald E. Kessel, of Newport Realty Investments, Ltd., all of Englewood, Colorado. The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Kessel sought investors for his real estate project by advertising on the internet website www.propertyline.com. According to Kessel, he was seeking passive investors to invest in a "light rail" opportunity by assisting him in purchasing the former Landmark Lincoln/Mercury car lot located at 9200 West Colfax Avenue in Lakewood, Colorado. Kessel promoted the investment stating that the property would be turned into an RV/Boat/Auto storage facility, with long term plans of selling the property after it is rezoned as a "Transit Orientated Development." Kessel was seeking $50,000 from each investor for the proposed $1.7 million project. The Staff alleged that the Respondents failed to register its security offering and, by offering the investment opportunity to the public at large through the use of internet advertising, Respondents were unable to take advantage of any private offering exemption under the Act. "The registration of securities provides important safeguards to the public," said Commissioner Joseph. "It requires promoters to make full and fair disclosure of information about securities offerings available to potential investors and it enables our office to review investment offerings, before they are circulated, for evidence of fraud and other possible violations." The cease and desist order, which all of the Respondents agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud, registration and licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. i. Press Release: Florida hedge fund sanctioned by Securities Commissioner. In a press release dated March 14, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Florida hedge fund for allegedly violating the securities registration, licensing, and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are The Black Diamond Fund, LLLP, a Minnesota limited liability partnership operating out of Florida, its general manager, Wealth Strategy Partners, and Harvey Altholtz, both of Sarasota, Florida. Mr. Altholtz directs and controls both The Black Diamond Fund and Wealth Strategy Partners from offices in Sarasota, Florida. The Commissioner issued a Final Cease and Desist Order against The Black Diamond Fund for registration, licensing, and anti-fraud violations of the Colorado Securities Act, and against Wealth Strategy Partners and Mr. Altholtz for registration and antifraud violations. The matter was heard before the Colorado Securities Board (the “Board”) at a show cause hearing. The Board, in its initial decision, recommended that the cease and desist order be issued.

http://www.propertyline.com

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The Board found that Black Diamond was attempting to conduct an offering of up to $10 million by offering partnership interests in Black Diamond. The interests were offered through persons described as "finders" who were paid commissions for their sales of these interests. Mr. Altholtz, who is a former dentist, used at least five finders in Colorado, including William Alan Gay. The Board found that Mr. Gay, who is currently subject to a court order prohibiting him from engaging in any securities activities in Colorado, conducted "free lunch" or "free dinner" seminars where the invitees were provided investment opportunities, including investing in the Black Diamond Fund. Mr. Altholtz attended some of these seminars. Mr. Gay is currently subject to a Contempt of Court proceeding in Denver District Court for allegedly violating the terms of the court injunction for offering and selling these securities in Colorado. Also, the Board found that The Black Diamond Fund, Wealth Strategy Partners, and Mr. Altholtz offered and sold securities in Colorado without registering the securities or seeking an exemption from registration. In addition, the Board found that Black Diamond hired a sales agent, Mr. Gay, who was not properly licensed to sell securities. The Board also found that The Black Diamond Fund, Wealth Strategy Partners and Mr. Altholtz violated the anti-fraud provisions by failing to disclose to investors Mr. Gay's current licensure status. The Final Cease and Desist Order orders all three Respondents to immediately cease and desist offering or selling any security in or from the State of Colorado in violation of the anti-fraud, registration and licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. j. Press Release: Pro Football Team sanctioned by Securities Commissioner. In a press release dated February 29, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a New Mexico pro football team for violating the securities registration provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are The New Mexico Wildcats, LLC, and its general manager, Steven J. Mascarenas. The Wildcats are a new professional arena football team associated with the American Indoor Football Association (AIFA). It is a Colorado limited liability company with a Westminster, Colorado address. Mr. Mascarenas is a Colorado lawyer who resides in Thornton, Colorado. The Staff of the Division of Securities (the “Staff”) alleged that in December 2007, ads were placed in a Denver newspaper seeking "qualified investors" for a "new pro football team." The Respondents offered to a prospective investor a 4% ownership interest in the team for an investment of $100,000. The Staff alleged that the interests offered by Respondents are securities and that the Respondents failed to register its security offering. By engaging in such conduct, the Respondents are offering and selling securities in violation of §11-51-301 of the Colorado Securities Act.

COLORADO


The Securities Commissioner entered the final cease and desist order, which orders Respondents to immediately cease and desist offering or selling any “security” in or from the State of Colorado, and from otherwise violating the Colorado Securities Act. A copy of the Final Order can be found at: http://www.dora.state.co.us/securities/enforcement.htm#CeaseDesist. k. Press Release: Jay Leboeuf and Sterling Partners Group, Ltd., enjoined on charges of securities law violations in connection with the sale of investments in oil and gas wells. In a press release dated February 21, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has filed a complaint in Denver District Court and obtained a temporary restraining order against Sterling Partners Group, Ltd., and its sole owner, Jay LeBoeuf, alleging that they are violating the registration, licensing and anti-fraud provisions of the Colorado Securities Act (“Act”). On February 13, 2008, Denver District Court Judge Norman Haglund entered a temporary restraining order, which prohibits the Defendants, LeBoeuf and Sterling, from offering or selling securities in Colorado and violating the anti-fraud provisions of the Colorado Securities Act. LeBoeuf is a Colorado resident who currently resides in Castle Rock, Colorado. Sterling is a Colorado corporation with its registered principal place of business at 9800 Mr. Pyramid Court, Suite 400, Englewood, Colorado. In the complaint, the Commissioner has alleged that from September 2005, and continuing to the present, the Defendants raised over $200,000 from at least 7 investors through a fraudulent, unregistered offering of securities in the form of fractionalized interests in oil and gas rights. It is alleged that the Defendants marketed these securities by contacting potential investors using cold-call telemarketing tactics. LeBoeuf would obtain so-called "lead sheets" from marketing groups, and cold call the names on the lead sheets. LeBoeuf contacted at least 4,000 potential investors from these lead sheets. The Commissioner also alleges that a substantial amount of the investors’ funds have been spent on personal items, such as LeBoeuf's rent, child support, and living expenses. According to the Commissioner’s complaint, LeBoeuf failed to register the securities in Colorado, and was not licensed to sell the securities. It is also alleged that the Defendants failed to disclose to investors that the Defendants would take 40% of all investment money received; that LeBoeuf would take draws against investor money for personal use; that a similar company owned by LeBoeuf, Sterling Petroleum, also selling oil and gas well investment opportunities, recently filed bankruptcy; that LeBoeuf had recently filed for bankruptcy; and that Leboeuf was currently being sued for more than $1 million for fraud in connection with various Sterling operations. The Commissioner’s complaint charges the defendants with violating the antifraud, licensing, and registration provisions of the Colorado Securities Act. In addition to the emergency relief described above, the complaint seeks permanent injunctions prohibiting future violations of the securities laws, damages, and restitution on behalf of investors.

http://www.dora.state.co.us/securities/enforcement.htm#CeaseDesist

COLORADO


The Commissioner is represented in the action by attorneys from the office of State Attorney General John Suthers. A copy of the complaint and temporary restraining order can be found at: http://www.dora.state.co.us/securities/enforcement.htm#Injunctions. l. Press Release: Minnesota land investment companies sanctioned by Securities Commissioner. In a press release dated February 13, 2008, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against two Minnesota land investment companies for allegedly violating the securities registration and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer of securities in and from Colorado. Named in the Order are Loring Freshwater Fund LP USA and Loring Blue Water Views, and their principal officer, director and control person, Patrick J. O'Neil, all of Minneapolis, Minnesota. Loring and O'Neil promoted in Colorado so-called waterfront land investments located in Costa Rica. Also named in a corresponding order are Robert W. Priest, and his companies, Bob Priest Financial, Inc., and Real IRA, Inc., all of Silverthorne, Colorado. Priest acted as a sales agent in Colorado for Loring and O'Neil. The Staff of the Division of Securities (the “Staff”), which is a division of the Colorado Department of Regulatory Agencies (“DORA”), alleged that Priest advertised on his website investments in the waterfront land in Costa Rica marketed by O'Neil. The website claimed that investors could purchase a 50% interest in a specific lot in Costa Rica and become a co-owner with O'Neil or his companies. The real property interest purchased by investors is supposed to be part of a larger real estate development project allegedly owned, marketed, and developed by O'Neil, or one of his companies. Investors were required to execute two documents: 1) a "Real Property TIC (Tenant in Common) Purchase Agreement" and 2) a "Management Agreement." Under the Management Agreement, management of the property is vested solely in one of O'Neil's companies. Upon sale of the property, the investor will purportedly receive a pro-rata share of the proceeds of any sale. The Staff alleged that the Respondents failed to register its security offering and engaged in a scheme to defraud potential investors by failing to disclose to investors the numerous risks inherent in investing in real estate developments, especially in projects in a foreign country. The Staff also alleged that Respondents also failed to disclose to investors that nothing in the agreements signed by investors "guaranteed the protection of principal" as promised by the Respondents. They also failed to disclose that the so-called "Emergency Out" can only be exercised prior to the closing of the transaction. The cease and desist order, which all Respondents agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado in violation of the anti-fraud, registration and licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act.

http://www.dora.state.co.us/securities/enforcement.htm#Injunctions

COLORADO



Since the February 2008 update, there have not been any material court decisions addressing novel questions of law. Other Statutory Developments

Since the February 2008 update, there have not been any other material statutory developments.


Since the February 2008 update, there have not been any material changes in the Administrator’s staffing.


The Second Regular Session of the Sixty-Sixth General Assembly convened on January 9, 2008 and adjourned on May 6, 2008. Since the February 2008 update, there were no bills relating to Colorado general corporate law that were passed by the Colorado General Assembly.

CONNECTICUT


CONNECTICUT STATE LIAISON REPORT

As of February 19, 2008; supplemented to August 28, 2008 This report encompasses material development of interest to state securities lawyers since the June 22, 2007 Connecticut report. Liaison: Richard Slavin, Liaison

Cohen and Wolf, P.C. 320 Post Rd. West Westport, Connecticut 06880

Email: [email protected] Telephone: 203-341-5310 Cell phone: 203-556-8959 Fax: 203-341-5311 State Administrator: Howard Pitkin Banking Commissioner Ralph Lambiase, Director Securities and Business Investments Division Connecticut Banking Department 260 Constitution Plaza Hartford, CT 06103 Main Telephone: 860-240-8299 Main Fax: Internet: http://www.ct.gov/dob Short Title/Citation: Connecticut Uniform Securities Act, Sections 36b-3 to 36b-33 of

the Connecticut General Statutes Rules Name/Citation: Regulations of Connecticut State Agencies, Section 36b-31-2 to

36b-31-31f Highlights of Material Developments None to report. Securities Statutory Developments In most years the Connecticut Banking Department proposes securities legislation. I am not aware of this year’s proposals, if any. When they become available I shall update this form Also, there have been hedge fund registration bills proposed in each of the last two legislative sessions. They have never emerged from committee. I am not aware of any yet this year, but the session is young.


http://www.ct.gov/dob

CONNECTICUT


The only amendment to the Connecticut Uniform Securities Act (“CUSA”) in 2007 was a short provision amending Section 36b-14(a) of CUSA to establish the form of required recordkeeping fir broker-dealers to make it conform with the ways set out in Section 17(a) of the Securities Exchange Act of 1934 and to also articulate the form of recordkeeping for registered investment advisers. (3) Broker-dealer records required to be maintained under subdivision (2) of this subsection may be maintained in any form of data storage acceptable under Section 17(a) of the Securities [and] Exchange Act of 1934 if they are readily accessible to the commissioner. Investment adviser records required to be maintained under this section may be stored on microfilm, microfiche or on an electronic data processing system or similar system utilizing an internal memory device provided that a printed copy of any such record is immediately accessible. Securities Rules Developments None to report. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments For those interested in Ralph Lambiase’s philosophy of securities regulation the press release describing his long career in state service and his recent accomplishments tell the story: Ralph A. Lambiase, of Marlborough, Director of the Securities and Business Investments Division for the Department of Banking, received the Distinguished Managerial Service Award for his exemplary leadership in state service. The award was presented last Friday at State Manager’s Day, which is held annual each Fall. Mr. Lambiase is one of only three state

CONNECTICUT


employees selected by the state’s Management Advisory Council to receive the Distinguished Managerial Service Award for 2007. Mr. Lambiase was recognized for his long career in state service and his tireless commitment to protect Connecticut investors. He joined the Department of Banking in 1977 as Director of Securities Enforcement and Registration, and was named Division Director in 1987. He believes the job of his division is straightforward – to protect the citizens of our state who invest. For the past 30 years he has done just that, and has made a name for himself locally and nationally as “the Regulator Broker-Dealers Love to Hate.” He enforces state securities laws by fining, penalizing and prosecuting those who violate the law, and takes pride in providing restitution to investors who have suffered losses because of unscrupulous violators. Most notably, Mr. Lambiase has been a strong advocate of protecting the public through investor education, and believes the firms that violate the laws and harm investors should contribute to this cause. For example, Mr. Lambiase recently negotiated and structured settlements with Merrill Lynch and UBS for alleged violations of state securities laws that will have Merrill Lynch pay $500,000 to the National White Collar Crime Center by July 2009 for training of Connecticut regulators, prosecutors, investigators and police officers in the investigation and prosecution of financial crimes, and UBS pay $250,000 by July 2008 for training tailored to preventing these types of crimes against seniors. These two settlements additionally call for the companies to provide funding of over $4 million to the Departments of Education, Higher Education and Social Services for financial literacy programs in schools and state agencies. In September 2003, Mr. Lambiase was elected President of the North American Securities Administrators Association in 2003 for a one year-term, where he served as a national advocate for state securities regulation. Governor M. Jodi Rell said, “Ralph Lambiase has spent his entire career devoted to protecting Connecticut’s investors, and for that I am deeply grateful. This award recognizes the exceptional accomplishments he has achieved over the course of that career. I want to congratulate Mr. Lambiase on this very deserving award.”

CONNECTICUT


Supplemented to August 28, 2008 This report supplements my earlier Connecticut report. There have been two recent decisions which impact state securities law practitioners. The first, Southridge Capital Management, LLC v. Howard Pitkin, Commissioner of Banking, decided on August 18, 2008 in the Superior Court of the Judicial District of Hartford, decided a motion to quash a Banking Department subpoena and appears to be the result of many failed attempts to negotiate a reasonable production of documents between the agency and the parties it was investigating.. The second, Arnold Chase Family, LLC, et al. v. UBSAG; UBS Securities, LLC, and UBS Financial Services, LLC, decided on August 4, 2008, Docket No. 3:08cv00581, denied the UBS motion to dismiss an action for prejudgment remedies under Connecticut law.

Southridge Capital Management, LLC (“SCM”) v. Howard Pitkin, Banking Commissioner

SCM is a private investment firm that advises and manages investment funds and provides investment capital to growing businesses. SCM manages five hedge funds. SCM is not registered as an investment adviser with Connecticut or with the SEC. Southridge Investment Group (“SIG”), an affiliate of SCM, is a broker dealer registered with Connecticut. The subpoena which was the subject of the proceeding was issued by the Banking Commissioner on November 5, 2007. In August 2005 the Department performed a routine audit on SIG and request documents and a list of investors in the funds for which it sold securities. SIG provided the list of investors and raised no confidentiality issues. Beginning in February, 2007 the department issued eight subpoenas to the funds which SCM, SIG, and its principals. The recipients of the subpoenas made numerous complaints to the Department about the conduct of the investigation and the issuance of the subpoenas. The Department continued to subpoena documents in the spring of 2007 and to depose principals of SCM and its affiliates. On April 6, 2007 the attorney for SCM, SIG, and its principals sent a letter to the Department complaining that the February and March 2007 subpoenas were unduly burdensome and overbroad, indicating a willingness to negotiate the terms of compliance with the subpoenas. The Department did not fully respond; however, the subjects of the subpoena agreed to make production of the requested documents, even though they believed they had already produced some of them. After more letters the Department agreed to a “rolling” production of documents. Thousands of documents were provided to the Department over several weeks. On May 2, 2007 SCM wrote to the Department that it believed production was complete. The Department did not notify SCM that there were any deficiencies. On May 22, 2007 the Department issued a subpoena to SIG for documents covering a period form January 2004 to the present. The request was made just prior to the Memorial Day weekend. There were five document requests made including all SIG emails. SIG thought it had already complied and complained to the Department that the requests were duplicative and burdensome. The letter complained of the cost and claimed that the request involved 95,000 emails and 400,000 pages. SIG also believed that the identity of investors in Markland Technologies, Inc., a company with which it shared office space, was subject to strict

CONNECTICUT


disclosure requirements. Production was completed by June 11, 2007 and involved 200,000 email documents and cost $200,000. On August 27, 2007 the Department requested that SIG provide emails form January 1, 2004 to June 31, 2007 based on certain search terms. The request was made a few days before Labor Day. SIG had previously offered a targeted search of emails but that offer was rejected. On ‘august 30, 2007 SIG reasoned and expressed dismay with the request, citing the history of production to date and expressed concerns about the burdensome and duplicative nature of the request and the Department’s failure to accept offers of compromise. On September 14, 2007 SIG notified the Department of its compliance with the August 27, 2007 email. On September 6, 2007 the Department issued a second subpoena to SCM for documents relating to MTI covering the period from January 2004 to the present. On September 6, 2007 the Department also issued a subpoena to one of the principals for documents relating to MTI covering the same period. SCM complained that several months earlier the identical document requests had been sent to the same person pursuant to three requests. On September 6, 2007 the Department visited SIG and made more document requests. On September 12, 2007 SCM emailed the Department stating that almost all of the requested documents had been provi8ded and offering to resolve any problems. On September 25, 2007 the SCM attorney wrote to the Department expressing concerns about a September 17, 2007 conference call. In that call the Department asked for all SCM books and records. To comply SCM believed that it would ah veto shut down its business for an extended period of time. SCM contended that it had already produced most of the documents requested as well as financial statements. It expressed a willingness to negotiate compliance. In another conference call the Department, for the first time, stated that it was inquiring whether SCM should register under CUSA as an investment adviser. SCM believed it did not have to register as it had more than $25,000,000 under management. the Department indicated it was looking for financial working papers and the identity of investors in the funds it managed. In his testimony the Department’s principal examiner testified that “the subpoenas are broad in scope partly because of problems with parties narrowly defining the document requests. The Department needs to broadly define the terms to capture all of the necessary documents.” He also testified that the Department did not issue the November 5, 2007 subpoena to harass the SCM but that several investors in SCM funds had complained that they were unable to liquidate their positions. He stated that by November, 2007 the investigation had evolved into “ (1) trading in MTI Securities; (2) the valuation of assets under management; (3) the broker-dealer registration requirement; (4) the assessment of management fees; and (50 potential securities fraud violations.” He also testified that the Department did not believe that that all relevant documents were produced as it had obtained documents from other sources which indicated that there were missing emails.

CONNECTICUT


In September 2007 the department received a complaint from one of the investors in the funds regarding excessive management fees. The department was investigating whether some of the restricted securities were not valued properly in conformance with the subscription agreement resulting in excessive management fees. As a result of discussions between the parties after September 6, 2007 the department recognized that the plaintiff had some valid points regarding compliance and the working of some of the requests. The department wanted to review all the bank and brokerage statements and the audit reports to determine if the numbers reconciled. The department was focused on getting documents relating to the identity of investors and the backup for the valuation of assts under management. The parties engaged in discussions but could not resolve their differences. On October 30, 2007 the department set a November 2, 2007 deadline for compliance. When the documents were not produced it issued the November 5, 2007 subpoena. SCM believed that the November 5 subpoena was unreasonable in its totality and asked the department to narrow the scope of the subpoena. The list of investors continued to be a problem. SCM refused to list an unredacted list of investors. The department believed that it did not have sufficient reliable information to make a decision regarding registration /exemption. The Court determined that SCM had the burden of proof to show that the subpoenas were issued for an improper purpose in light of the presumption that they were issued legally. The court stated that “the scope of an investigatory subpoena will survive judicial review as long as the agency seeking the information has the authority to request the documents, the demands are not too indefinite, the information is reasonably relevant, and the information being sought is for a proper investigatory purpose.” Citing Hartford County Sheriffs v. Blumenthal, 47 Conn. Sup. 473-474 (2001) In its holding the Court discussed the issues raised by SCM as to cost, scope, registration confidentiality, and burdensomeness. The Court found that there was a lack of documentary evidence on production costs and failed to quash on that issue. It also found that SCM failed to provide some requested documents it had received from other sources and ignored some requests. It found that the department had “valid concerns” regarding SCM’s production. The court also noted that SCM argued that the exemption/registration status was an eleventh hour issue but reasoned that the assets under management issue which would determine whether SCM should be registered also would determine whether management fees were paid properly and, therefore, was relevant to the investigation. The Court also refused to accept the confidentiality arguments because SCM had not attempted to get its investors to waive confidentiality and that the Bahamian confidentiality law cited by SCM did not “supercede” the Connecticut Uniform Securities Act. Ultimately, the Court made the following findings:

1. The subpoena was issued in the course of an evolving investigation. 2. The department sought the production of documents that were reasonably relevant

to that investigation.

CONNECTICUT


3. The subpoena was issued after SCM failed to comply fully with the prior subpoenas.

4. The department had valid concerns regarding whether all the relevant documents were produced.

5. The department had received documents from other sources that were not produced by the Southridge parties.

6. the subpoena was necessarily broad to capture all of the relevant documents. 7. the department was not required to rely on audit reports in determining

compliance with state requirements. 8. SCM is subject to a general fraud inquiry by the department. 9. SCM must answer a department issued subpoena pursuant to a fraud investigation

under CUSA. 10. Under the circumstances, the November 5 subpoena timeframe was reasonable. 11. The subpoena was not unduly burdensome. 12. SCM must bear the production cost like any other cost of doing business. 13. The November 5 Subpoena was issued for a proper purpose and was not issued to

harass or punish the plaintiff. Ultimately, it appears that the department investigators probably issued too many duplicative subpoenas based on an improper reading of the law. Department investigators may have believed that if deadlines needed to be extended that they were required to issue new subpoenas which, of course, asked for the same documents. It appears that typical procedures in commercial litigation might have helped the parties in his case in that a discovery schedule with production requirements might have eased them through the process. By the time the court was faced with the escalating discovery battle the parties had expended large amounts of time and money and had created an apparent animosity which probably id not help them resolve any of the production issues. The Court’s findings certainly reinforced the Banking Department’s ability to investigate with a broad mandate to request documents and to make its own reasonableness determination; however, the Court also seemed to allow for a party moving to quash to make a more detailed showing along the many areas of its findings. Should a party have more specific evidence of costs and unreasonableness, it appears that this court might restrict the agency in the same case.

Arnold Chase Family, LLC, et al. v. UBSAG; UBS Securities, LLC, and UBS Financial Services, LLC

Federal District Court Judge Mark Kravitz determined that FINRA rules governing securities arbitrations do not prevent a Claimant from seeking a prejudgment remedy under Connecticut law. The issue was whether FINRA rule 12209 evinces an intent by FINRA to bar all ancillary proceedings while the arbitration is pending. Connecticut has a unique prejudgment remedy available to plaintiffs which allows them to achieve an attachment when a court, upon hearing, finds that there is probably cause that the case plaintiff may prevail.

CONNECTICUT


The problem for the arbitration respondent is a difficult one in that there will now be an evidentiary record, a potential attachment against the respondent, and a proceeding where a state or federal judge has determined that there is probable cause. The court here cites four reasons why Rule 12209 does not prevent a prejudgment remedy: (1) Rule 12209 does not state that it bars all other legal proceedings while an arbitration is pending, nor does it say what proceedings it does bar; (2) Rule !2209 does not, in fact, bar any legal proceeding as it is appropriate to seek a ruling from a court to compel arbitration , for example; (3) Rule 12209 can be read to allow the court to grant provisional remedies preserving the status quo, for example, while the arbitration proceeds and can insure that the parties do not litigate the same issues in a court; and (4) provisional remedies are necessary in arbitrations, particularly where a respondent may have insufficient resources to satisfy a judgment. The Court denied the motion and ordered the parties to attend a scheduling conference to proceed with the hearing on the prejudgment remedy application.

DELAWARE


DELAWARE STATE LIAISON REPORT

No report.

FLORIDA


FLORIDA STATE LIAISON REPORT

(As of January 31, 2008; supplemented to August 15, 2008) This report covers material developments affecting blue sky practitioners in Florida since August, 2007, and supplemented to August 15, 2008. Liaison: Donald A. Rett

Law Office of Donald A. Rett 1660 Metropolitan Circle Tallahassee FL 32308

Email: [email protected] Telephone: 850.298.4454 Cell phone: 850.566.0473 Fax: 850.298.4454 State Administrator: Richard A. White

Department of Financial Services 200 E. Gaines Street Tallahassee FL 32399-0372

Main Telephone: 850.410.9805 Main Fax: 850.410.9748 Internet: http://www.flofr.com

http://www.fldfs.com Short Title/Citation: Florida Securities and Investor Protection Act Chapter 517, Florida Statutes (Either web address, above, should get you there) Rules Name/Citation: Chapter 69W, Florida Administrative Code (Either web address, above, should get you there) Highlights of Material Developments Nothing to report. Securities Statutory Developments The Florida Legislature convenes on Tuesday, March 4, 2008, for its annual session which lasts sixty days. Commissioner Don Saxon recently told me that the securities agency has no plans for changes to Chapter 517 during this session. The Florida Securities Dealer’s Association says in its February Newsletter that the sub-prime mortgage situation is being investigated by the New York Attorney General’s Office, but the Florida Attorney General has noted orally that the Florida legislature has never delegated to the AG’s Office enforcement


http://www.flofr.com

http://www.fldfs.com

FLORIDA


authority over the securities industry. As I read the FSDA’s article, “Legislative Affairs”, it may be that Florida’s Chief Financial Officer is possibly also sympathetic. However, the FSDA has opposed such measures in the past, and would probably do so again in 2008. The current edition of “RUSA” has never been introduced in Florida. Securities Rules Developments On or about December 27, 2007, Florida shows amendments to the following Rules: Rule 69W-600.002 (“Application for Registration as Associated Person”) and Rule 69W-600.006 (“Associated Persons’ Fingerprints”). Administrative Orders and Announcements Nothing to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-related Case Law Developments Nothing to report. Other Statutory Developments Nothing to report. Administrator’s Staffing Changes Nothing to report. Other Noteworthy Practice Developments Nothing to report.

FLORIDA


Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in this state/province since January 31, 2008. Highlights of Material Developments Don Saxon, Commissioner, resigned his position on August 12, 2008, effective September 30, 2008. No successor has been announced. Securities Statutory Developments The Florida legislature made no changes to the securities act during its 2008 session. This is an election year for the legislature, with the next session to convene in March, 2009. Applicable State Statute of Limitations Periods See, section 95.031 and 95.11(4)(e), of the Florida Statutes. Generally speaking, it’s two years from “knew or should have known”, with an “absolute” of five years from the date of the violation. Securities Rules Developments As of mid-July, 2008, Florida has proposed the adoption of one new rule, which if adopted, will address the issue of misleading designations by brokers or investment advisers. The proposal is modeled after the NASAA Model Rule, adopted by the Association in March, 2008. Florida’s endeavor, once adopted, is to be numbered 69W-600.013. Florida will also increase the fingerprinting fee by $1.00, to $43.25, via an amendment to its rule 69W-600.002. While I do not have a direct link to these proposals, they can be found as follows: go to http://www.flofr.com; then click onto “Division of Securities; then click onto “resources”, Florida Rules 69W FAC; then click onto “recent f.a.w. notices”. Administrative Orders and Announcements Nothing to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-related Case Law Developments Noting to relate.

http://www.flofr.com

FLORIDA


Other Statutory Developments Nothing to report—The current edition of “RUSA” has never been adopted in FL. Administrator’s Staffing Changes (See above). Other Noteworthy Practice Developments Nothing to report.

GEORGIA


GEORGIA STATE LIAISON REPORT

(As of July 31, 2008) This is the Georgia Liaison Report as of July 31, 2008. Liaison: J. Steven Parker Page Perry, LLC

[Liaison’s Address] Email: Telephone: (770) 673-0047 Cell phone: Fax: (770) 673-0120 State Administrator: Hon. Karen C. Handel

Secretary of State of Georgia Commissioner of Securities for the State of Georgia, ex oficio Robert D. Terry Assistant Commissioner Securities and Director of the Division of Securities.

Main Telephone: Main Fax: Internet: http://www.

Short Title/Citation: Georgia Securities Act of 1973, as amended [Insert securities law’s official short title and cite] [If available on the Internet, give web address] Rules Name/Citation: [Insert official securities rule’s title and cite] [If available on the Internet, give web address] Highlights of Material Developments See Securities Statutory Developments below. Security Statutory Developments On May 12, 2008, Georgia adopted the Georgia Uniform Securities Act ("GUSA"). GUSA becomes effective on July 1, 2009. While representing a substantial adoption of the Uniform Securities Act (2002) it is non-uniform with respect to most matters relating to administration and enforcement, which provisions more closely resemble current law. Variable

GEORGIA


annuities are excluded from the definition of "security." Significant non-uniform provisions include the following:

• The GUSA does not follow the code section numbering scheme the drafters used in the Uniform Securities Act of 2002. The Georgia General Assembly instead used a code section numbering scheme that is similar to the one used in the Georgia Securities Act of 1973. The GUSA and the Uniform Securities Act of 2002 are otherwise structured consistently.

• Under the Uniform Securities Act of 2002, the limited offering exemption under Section 202(14) is available for offerings limited to twenty-five in-state purchasers. In contrast, the GUSA restricts the exemption to fifteen in-state purchasers (see Section 10-5-11(14)).

• The GUSA provides for a two-year statute of limitations for civil actions concerning registration-related violations (see Section 10-5-58(j)) while the Uniform Securities Act of 2002 has a one year statute of limitations (see Section 509(j)).

• Regarding the issue of defamation liability for statements made in records required by regulatory entities, the Uniform Securities Act of 2002 provides that the entity filing the record is immune against defamation claims unless it knew or should have known the statement was false or acted recklessly (see Section 507). The GUSA provides for broader immunity by limiting the exception to immunity only to those cases in which the filer actually knew of the falsity or acted recklessly.

Proposed rules based upon the North American Securities Administrators Association ("NASAA") Model Rules are presently being developed. In addition, Georgia anticipates relying upon the experience of other states that have recently adopted the Uniform Securities Act in an effort to achieve maximum uniformity with respect to the rules ultimately to be adopted. Applicable State Statute of Limitations Periods As mentioned above, the Georgia Uniform Act retains the current statute of limitations for civil remedies, namely two years. This is a non-uniform provision (the USA statute of limitations is one year). Securities Rules Developments None reported. Administrative Orders and Announcements None reported.

GEORGIA


Administrative Enforcement Proceedings In October 2007 Ameriprise Financial Services, Inc. entered into an Acceptance Waiver and Consent ("AWC") to resolve administrative charges brought by the Commissioner relating to allegations that two registered representatives of Ameriprise were engaged in fraudulent activities that included the forging of customer signatures in order to obtain payments for unauthorized financial plans. The Commissioner alleged that AmeriPrise failed to reasonably supervise the activities of those two and other securities salespersons by failing to detect the fraudulent practices. Ameriprise consented to broad relief including censure, the payment of a $40,000 civil penalty, payment of investigative and administrative costs, and two years of heightened supervision as specified in the AWC. In February 2008, Raymond James Financial Services, Inc. entered into an Acceptance Waiver and Consent (AWC) to resolve administrative charges brought by the Commissioner relating to allegations that, through its telephone customer service division, Raymond James executed securities transactions for Georgia customers by and through non-Georgia registered securities salespersons. Raymond James agreed to pay a $25,000 civil penalty and investigative and administrative costs, and agreed to other relief, including monitoring for a two year period as specified in the AWC. Securities-related Case Law Developments In Slater v. State Ex rel. Cox, 287 Ga. App. 738, 653 SE2d 58 (Ga. App. 2007), the Georgia Court of Appeals held that the specific deadline for filing an appeal from any administrative decision of the Commissioner of Securities trumps the general provision of the Georgia Administrative Procedures Act prescribing the deadline for filing a petition for review of a final decision of any state agency. Thus an appeal must be commenced by filing a notice within 20 days after the date of entry of the order appealed from, and the 30-day deadline established by the ATA is inapplicable. The court dismissed the appeal for lack of jurisdiction. Other Statutory Developments None reported. Administrator’s Staffing Changes The Securities Division has expanded its examination program by hiring, reassigning, and training examination staff for the purpose of increasing examination of broker-dealers and state-registered investment advisers. Other Noteworthy Practice Developments Georgia is one of eleven states participating in the auction rate securities task force coordinated by NASAA.

HAWAII


HAWAII STATE LIAISON REPORT

No report.

IDAHO


IDAHO STATE LIAISON REPORT

No report.

ILLINOIS


ILLINOIS STATE LIAISON REPORT

No report.

INDIANA


INDIANA STATE LIAISON REPORT

(As of February 13, 2008; supplemented to August 7, 2008) Liaison: Stephen W. Sutherlin

STEWART & IRWIN, P.C. 251 East Ohio Street Suite 1100 Indianapolis, Indiana 46204

E-mail: [email protected] Telephone: 317-396-9541 Cell Phone: 317-696-2254 Facsimile: 317-632-1319

State Administrator: Todd Rokita

Indiana Secretary of State 201 Statehouse Indianapolis, Indiana 46204 Telephone: 317-232-6531 Chris Naylor Securities Commissioner INDIANA SECURITIES DIVISION 302 West Washington Street Room E-111 Indianapolis, Indiana 46204 Main Telephone: 317-232-6681 Main Facsimile: 317-233-3675 Internet: http://www.in.gov/sos/securities/

Short Title Citation: Business Corporation Securities I.C. 23-2-1 http://www.in.gov/legislative/ic/code/title23/arz/chl.html Rules And Regulations Title 710 http://www.in.gov/legislative/iac/title710.html Highlights Of Material Development 1. New regulations are being drafted in an attempt to have approved by the effective date of the adopted Uniform Act that takes affect July 1, 2008. 2. Continual action in enforcement in both cases worked with the SEC and on their own.


http://www.in.gov/sos/securities/

http://www.in.gov/legislative/ic/code/title23/arz/chl.html

http://www.in.gov/legislative/iac/title710.html

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Securities Statutory Developments The Indiana Legislation has nothing pending that will have any significance to the Indiana Securities Act. The session ends by end of March. Securities Rules Development The redraft of the regulations to accompany the effective date of the modified Uniform Securities Act that becomes effective July 1, 2008, are to be out around May 1, 2008 for comment. I will circulate the new regulations as soon as they are to be published. In reality, it is probable that the new regulations will not be adopted before July 1, 2008. Administrative Orders And Announcements On January 7, 2008, an Administrative Order was issued that the Toronto Stock Exchange will be designated as an approved exchange for purposes of the Indiana Securities Act. Administrative Enforcement Proceedings Through the Securities Prosecutorial Assistance Section created by this Secretary of State’s initiative, the Division has been successful in contributing heavily to several Federal criminal cases in working with the SEC. Two cases in the United States District Court, Northern District of Indiana, U.S. v. Thomas Squibb and U.S. v. Marietta, resulted in sentences of 17.5 years and 8 years, respectively. The State has successfully prosecuted two cases obtaining sentences of 16 years and 4 years, in the past few months. The Commissioner also tells me that there are several probable cases pending and special interest in the collateralized debt obligations area, as well as other possible Act violations. Securities – Related Case Law Developments In Ralph E. Lean v. Charles D. Reed and Paul A. Reinken, and Galaxy Online, Inc. and Galaxy Internet, Inc., 876 N.E.2d 1104 (Ind. 2007), the Supreme Court in Indiana stated ignorance of the law is no defense for purposes of affirmative defense under the Indiana Securities Act, under which a director may avoid liability for a corporation’s violations of the Act if the director did not know, and in the exercise of reasonable care could not have known, of existence of facts by reason of which the liability is alleged to exist. The outside director did not establish “reasonable care” element of affirmative defense under Indiana Securities Act, under which a director could avoid liability for a corporation’s violations of the Act if the director did not know, and in exercise of reasonable care could not have known, of existence of facts by reason of which the liability was alleged to exist, by assuming that management and counsel had taken the appropriate steps to comply with

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legal requirements in issuing stock; there was no evidence of assurance from counsel, whether made directly by counsel or not, that the law applicable to the corporate acquisition had been examined and that the transaction conformed to all applicable law, and there was no evidence that lawyers familiar with securities or financing issues had reviewed the transaction. Other Statutory Developments I do not know of any other statutory developments that should fall within the interest of the Committee. Administrative Staff Changes Since my last report, there have been no staff changes to note. Other Noteworthy Practice Developments The Indiana Secretary of State, Todd Rokita, is currently serving as the President of the National Association of Secretary’s of State.

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Supplemented to July 31, 2008 Highlights of Material Developments

1. Indiana’s adoption of the Uniform Securities Act went into effect July 1, 2008. Regulations to the Act have been filed and are available to review through the Indiana Securities’ website. They are to become effective in late August, 2008.

2. Administrative Order 08-0079 A0 Issued June 30, 2008 Regarding the Notice

Filing Requirements for Mutual Fund Sales Registration of Federal Covered Securities:

a. Pursuant to I.C. 23-19-3-2 are issues of a federal securities for every

prospectus with the Securities Division before the initial offering and must include:

i. All records that are part of a federal registration statement filed

with Securities and Exchange Commission under the Securities Act of 1933 and a consent to service of process and a payment of a fee of either:

a) Five Hundred Dollars ($500) for an issuer with net assets not

exceeding Ten Million Dollars ($10,000,000); or

b) One Thousand Dollars ($1,000) for all other issuers.

After the initial offer, the issuer must file with the Securities Division:

ii. All records that are part of an amendment to a federal registration statement filed with the Securities and Exchange Commission under the Securities Act of 1993; and

iii. To the extent necessary or appropriate to compute fees, a report of

the value of the federal covered securities sold or offered to persons present in this State, and a payment of a fee of five hundreds of one percent (0.05%) of the excess of the dollar amount of securities sold during the fiscal year over the dollar amount of securities redeemed, not to exceed Two Thousand Dollars ($2,000) in any one year. The fee required in subdivision 1 shall be applied as a credit against the fee required under this subdivision.

iv. Pursuant to I.C. 23-19-3-2(b), this notice filing shall be effective

for one (1) year beginning on the later of the notice filing or the effectiveness of the registration filed with the Securities and Exchange Commission. I.C. 23-19-3-2(b) also allows for an issuer to renew this notice filing before its expiration, by filing a copy of

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those records filed with the Securities and Exchange Commission and by paying a fee of Two Hundred and Fifty Dollars ($250). Service of process may be incorporated by reference in this renewal.

3. Amended Statement of Policy Regarding Private Equity/Venture Capital Funds

and Investment Adviser Registration. Background The Indiana Securities Act (“Predecessor Act”), which is repealed as of July 1, 2008, contained an exemption from investment adviser registration for any person transacting business as an investment adviser if the person had five (5) or fewer clients in Indiana. I.C. 23-2-1-8(c)(3). This exemption applied regardless of where the investment adviser was located. Under the Indiana Uniform Securities Act, which takes effect July 1, 2008, any person transacting business as an investment adviser while located in Indiana must register with the Securities Division. I.C. 23-19-4-3(b)(3). A consequence of the change in this exemption is that managers of private equity/venture capital funds may be required to register as investment advisers. The definition of “investment adviser” is typically read broadly and includes any person that for compensation engages in the business of advising others as to the value of securities or to the advisability of investing in, purchasing, or selling securities. I.C. 23-19-1-2(15). Through a broad reading, the definition of “investment adviser” could include the managers of private equity/venture capital funds, who make recommendations to purchase securities of developing companies to other members of the fund. As a result, the managers of these funds with a place of business in Indiana would be required to register as investment advisers with the Securities Division. To facilitate the transition of private equity/venture capital funds managers from exempt status to registrant status under the Act, the Commissioner is issuing the following policy, which creates a temporary no action position for private equity/venture capital funds managers if they do not register as an investment adviser or investment adviser representative under the Act. The Commissioner shall provide more permanent guidance in the future. Policy

(a) Until such time as the Securities Commissioner gives further notice, the Securities Commissioner will not institute enforcement action against any person for failing to register as an investment adviser or investment adviser representative if the person:

(i) maintains a place of business in this state; (ii) has had during the preceding twelve (12) months, not more than

five (5) clients that are residents in Indiana;

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(iii) does not hold itself out generally to the public as an investment adviser;

(iv) is exempt from registration under the Investment Advisers Act of 1940, as amended by virtue of Section 203(b)(3) of that Act; and

(v) provides investment advise to venture capital companies only.

(b) For the purposes of this order, the following definitions shall apply:

(1) “Venture capital company” is defined to include any company if, on at least one (1) occasion during the annual period commencing with the date of its initial capitalization, and on at least one occasion during each annual period thereafter, at least fifty percent (50%) of its assets (other than short-term investments pending long-term commitment or distribution to investors), valued at cost, are venture capital investments or derivative investments.

(2) “Venture capital investment” is defined to include an acquisition of

securities in an operating company as to which the investment adviser, the entity advised by the investment adviser, or an affiliated person of either has or obtains management rights.

(3) “Derivative investment” is defined to include securities acquired

by a venture capital company in the ordinary course of its business in exchange for an existing venture capital investment either:

(i) upon the exercise or conversion of the existing venture

capital investment; or (ii) in connection with a public offering of securities or the

sale, merger, or reorganization of the operating company to which the existing venture capital investment relates.

(4) “Management rights” is defined to include the right, obtained

contractually or through ownership of securities, either through one person alone or in conjunction with one or more persons acting together or through an affiliated person, to substantially participate in, to substantially influence the conduct of, or to provide (or to offer to provide) significant guidance and counsel concerning the management, operations, or business objectives of the operating company in which the venture capital investment is made.

(5) “Operating company” is defined to include an entity, not an

individual or sole proprietorship, that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in:

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(i) the production or sale (including any research or development) of any product or service, other than the management or investment of capital; or,

(ii) the development, ownership, purchase, or sale of real property or interests therein.

(6) “Affiliated person” is defined to include a person that controls, is

controlled by, or is under common control with the other specified persons.

(7) “Control” is defined to include possessing, directly or indirectly,

the power to direct or cause the direction of management and policies.

Securities Statutory Developments Please reference the above information regarding the adoption of the Indiana Uniform Securities Act effective July 1, 2008, and the regulations currently on file to be approved by the end of August. Applicable State Statute of Limitations Periods I.C. 23-19-5-9 sets forth action under the statute of limitations shall be commenced within three (3) years after discovery by the person bringing the action of a violation. Securities Rules Development Please refer to the developments under highlights of material above regarding the filed regulations due to be adopted in late August. Administrative Orders and Announcements Please refer above to the administrative orders signed by the Commissioner of Indiana. Administrative Enforcement Proceedings Because of Indiana’s more recent emphasis on criminal proceedings, the Indiana Securities Division, through its prosecutorial assistance, work closely with prosecutors to bring more security criminal acts. Indiana continues to see criminal cases involving promissory note sales without registration and proper licensing. Several prosecutions brought in area of real estate investment and oil and gas. As a part of the Securities Division regulatory authority, the regulation of mortgage brokers has been a major issue in the past year. As many as one-half (1/2) of the licensed broker/dealers have chose not to renew their license or continue education for the renewal.

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Indiana has had a recent problem with faith based securities sales in Indiana in its failure to either register the offering, the broker/dealer or agent. The second largest church bond organization was placed under receivership due to fraud and co-mingling of funds. Indiana, in its effort to audit broker/dealers, has found many non-compliances. The Division has examined one hundred forty-seven (147) firms since January 1, 2008. Web-based offerings and alternative energy seems to be an ongoing problem with non-compliance as well. Securities – Related Case Law Developments An interesting case, Kesling v. Kesling, 546 F.Supp. 2d 627 (N.D. 2008). The facts of this case relate to Peter Kesling attempting rescission of a 2004 sale of securities from him to his son Andrew. Peter argues that Andrew was stealing from the company and had a fiduciary duty to deal fairly, honestly and openly with the corporation and with Peter. Peter, alternatively, argues that a confidential or fiduciary relationship existed because of Peter’s trust in his son, Andrew. Andrew moved for summary judgment, and the court granted that motion. Peter founded TP Orthodontics, Inc. (“TPO”) in 1955. Peter served as President from approximately 1960 until 1981, and he was Chairman of the Board of Directors from 1981 until about 2002. After 2002, Peter continued to serve on the Board of Directors and remained active in the company, still serving as a consultant to the research and development department. Andrew served on TPO’s Board from 1984 until 1988. Since 1988, Andrew also served as President of TPO; he succeeded his father as Chairman of the Board in 2002. Prior to the 2004 stock transfer to Andrew, Andrew owned less than five percent (5%) of the voting shares of the company. Peter owned fifty percent (50%) of the voting shares of TPO, maintaining controlling interest. In 2004, Peter believed it was in the best interest of TPO to transfer voting control of the company to Andrew. In June 2004, Peter agreed to sell his majority ownership to Andrew. Pursuant to the agreement, Andrew acquired slightly more than fifty-one percent (51%) of the voting shares of TPO and agreed to pay Peter approximately $765,000. The protocol for determining the price of shares was dictated by a 1973 agreement, which was subsequently amended. After the transfer, Andrew became majority shareholder of TPO, and he remained its President and Chairman of the Board. In addition to Andrew’s Board leadership, Andrew has been party to several licensing agreements with TPO. One such licensing agreement granted TPO a license to use technology of which Andrew patented. The agreement granted TPO the exclusive right to use the invention in exchange for five percent (5%) of the net sales generated by each use. In 2005, Peter came to believe that at least some of these payments under the licensing agreement were improper, because the products for which the royalties were paid were not covered by the patent. When the 2004 transfer took place, Peter was not aware that the

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royalty payments were improper. Peter says that this is because Andrew knowingly and intentionally hid it from him. Peter’s allegations concerning the improper receipt of royalties is the basis for the fraud claim. As a general rule, Indiana law holds that “shareholders in a close corporation stand in a fiduciary relationship to each other and, as such, must deal fairly, honestly, and openly with the corporation and their fellow shareholders.” But in the context of the sale of stock to one another, “the existence of the fiduciary duty [can turn] upon whether the corporation or the director, individually, was acquiring the stock from the shareholder.” Therefore, when a corporate director sells his personal shares or buys shares from other shareholders for his personal ownership, he “owes no fiduciary duty to disclose information he possesses regarding the value of the stock to other stockholders.” There are two (2) exceptions to the rule. First, is where the stock sale “affects the general wellbeing of the corporation.” Second, where the director is dealing with one who has a “limited roll” in the corporation and, therefore, has less access to the information the director possesses. Peter claims both exceptions are present. First, Peter argues that the general wellbeing of the corporation was at stake because the 2004 transaction transferred the absolute voting control of the corporation from one shareholder to another. The court opined that there was no duty because the value of the stock in the transaction was determined “by the mutual agreement of the parties and not by the financial report”, which the director had held from a shareholder. The court held the second exception, the limited director exception involving parties with unequal access to information, did not apply. The court predicated its answer on Peter’s relationship with TPO, stating “Peter was certainly not in the dark on the affairs of TPO. After all, he was the founder of TPO and served as its President and the Chairman of the Board for decades. At the time of the 2004 transaction, Peter was the majority shareholder and was on the Board of Directors. Even after the 2004 transaction, Peter was still involved in TPO’s research and development. Other Statutory Developments Nothing of significance is available to report. Administrative Staff Changes Since the installation of the new Indiana Security Commissioner in September of 2007, no significant changes have occurred in staffing and the staff remains of the approximate size it was a year ago.

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Other Noteworthy Practice Developments The Commissioner has relayed to me the need to review auction rate securities or options, and the current arbitration requirements of clients or customers of broker/dealers. Additionally, the Commissioner relayed to me that serious consideration is given to the adoption by the State of Indiana of the NASAA model rule on the use of senior-specific certifications and professional designations. Model Rule adopted earlier this year.

IOWA


IOWA STATE LIAISON REPORT

(As of February 22, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in Iowa since June 21, 2007, and supplemented to August 15, 2008. Liaison: Katherine G. Manghillis

Schottenstein, Zox & Dunn Co., L.P.A. 250 West Street Columbus, Ohio 43215

[email protected] Tel: (614) 462-1087 Fax: (614) 228-4846 State Administrator: Susan E. Voss, Commissioner

Iowa Insurance Division 330 Maple Street Des Moines, Iowa 50319-0065

Main Telephone: 515-281-5705 Toll Free (within Iowa) 877-955-1212 Main Fax: 515-281-3059 Internet: http://www.iid.state.ia.us/index.asp Jim Mumford, Superintendent of Securities Iowa Insurance Division Securities Bureau 340 Maple Street Des Moines, Iowa 50319-0066 Telephone: 515-281-4441 Fax: 515-280-3059 Internet: http://www.iid.state.ia.us/ia_securities_bureau/index.asp Short Title/Citation: [Insert securities law’s official short title and cite] [If available on the Internet, give web address] Rules Name/Citation: Iowa Administrative Code – Chapter 50: Securities Administrative

Rules http://www.legis.state.ia.us/ACO/IAChtml/191.htm#chapter_191_50 Highlights of Material Developments None to report.


http://www.iid.state.ia.us/index.asp

http://www.iid.state.ia.us/ia_securities_bureau/index.asp

http://www.legis.state.ia.us/ACO/IAChtml/191.htm#chapter_191_50

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Securities Statutory Developments None to report.

Securities Rules Developments Rule 191-50.1(3)(b)(502) regarding the filing of audited financial statement was changed to Rule 191-50.10(9) (502) Iowa Administrative Code and became effective on July 25, 2007. The new rule states:

Upon the administrator’s oral or written request, a broker-dealer shall provide to the administrator the broker-dealer’s most recent financial reports, audited or unaudited, within two business days of the request. A broker-dealer may utilize express mail delivery of transmission via electronic means to comply with a request pursuant to this subrule. Financial reports not received by the filing deadline are subject to a late fee of $50 per day beyond the filing deadline, not to exceed an aggregate penalty of $500. Imposition of the late fee is not a reportable event. In the event of the broker-dealer’s continued non-compliance, the administrator may also pursue sanctions authorized by Iowa Code 502.412. This rule is intended to implement Iowa Code §502.411(2).

In a Memorandum with an effective date of July 25, 2007, from Joanne Herrmann of the Iowa Securities & Regulated Industries Bureau to Iowa licensed broker-dealers, the Securities Bureau clarified the new rule stating that:

Iowa will not require the filing of Audited Financial Statements, unless the firm is filing an initial application, or we specifically call, fax, or the email the firm requesting the financial.

The following Rules have been amended and became effective on January 23, 2008: 50.10, 50.12, 50.15, 50.39, 50.40, 50.41, 50.43, 50.66, and 50.102. The proposed rule amendments were published in the October 10, 2007, Iowa Administrative Bulletin. (Volume XXX Iowa Admin. Bull. pages 679-681 (Oct. 10, 2007)). A summary of the amendments, as adopted, was published in the December 19, 2007, Iowa Administrative Bulletin. (Volume XXX Iowa Admin. Bull. page 1138 (Dec. 19, 2007)).

The following are links to the October 10, 2007 and December 19, 2007 issues of the Iowa Administrative Bulletin, respectively:

http://www.legis.state.ia.us/Rules/2007/Bulletin/IAB071010.pdf http://www.legis.state.ia.us/Rules/2007/Bulletin/IAB071219.pdf.

Administrative Orders and Announcements None to report.

http://www.legis.state.ia.us/Rules/2007/Bulletin/IAB071010.pdf

http://www.legis.state.ia.us/Rules/2007/Bulletin/IAB071219.pdf

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Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Since the last report there were numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters.

Securities-related Case Law Developments In State of Iowa v. Wolford, 2007 Iowa App. LEXIS 1133 (Oct. 24, 2007), the Court of Appeals of Iowa, Wolford argued, among other things, that the district court erred in instructing the jury on the elements of securities fraud. The Defendant, along with his son and daughter, operated the Wolford Corporation and the Wolford Group (collectively, the “Wolford Company”). The Defendant was the person in charge of the Wolford Company. Id. at *1. The business plan was to purchase homes from distressed buyers and then sell the houses at a higher price. Id. at *2. Initially, the Defendant bought the houses on contract, but then began buying houses pursuant to real estate lease option agreements in which a trust was created in the seller’s name with the Wolford Company as the trustee. Id. In a typical transaction, the Defendant would sell a house to a buyer on a contract with a balloon payment due in twelve months; the buyer would make monthly payments to the Wolford Company, and the Wolford Company would make the monthly payments on the pre-existing mortgage. Id. The buyer would then find a lender before the balloon payment was due. Id. When the loan was approved, the lender would issue checks to the Wolford Company to off the balloon payment, and in turn, pay off the preexisting mortgage. Id. In 2002, the Defendant decided not to pay off preexisting mortgages on some properties, and used the money for other purposes, but continued to make monthly payments on the preexisting mortgages to avoid detection. Id.

In 2000, the Defendant had entered into an agreement with the Iowa Securities Bureau whereby he agreed that he would no longer solicit public funds for investment. Id. However, the Defendant continued to solicit investors for the Wolford Company, promising investors a fifteen percent (15%) return payable in monthly installments, and telling the investors that their investments were secured by an interest in specific properties. Id. at *3. The Defendant did not record the investors interests in the property and by the end of the summer 2003, the Wolford Company was forced into a receivership. Id. The Defendant was charged by trial information with seventeen (17) counts of criminal conduct, including theft, securities fraud, transacting business as an unregistered broker-dealer, sale of unregistered securities, and ongoing criminal conduct. Id. At trial a jury found the Defendant guilty on all counts and the district court sentenced the Defendant to a term of imprisonment totaling seventy-five (75) years. In his appeal, the Defendant argued that the district court erred when it did not instruct the jury that there must have been a specific intent to defraud in order to find him guilty of securities fraud under IOWA CODE §502.401. Id. *10. The Defendant claimed that the district court should have included the specific intent language found in the Iowa Supreme Court’s

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holding in State v. Taylor, 512 N.W.2d 552, 554 (Iowa 1994). Id. In Taylor the basis for the elements of the crime of securities fraud was the 1991 version of IOWA CODE §502.605, that stated:

Any person who willfully and knowingly violates any provision of this chapter or any rule or order under this chapter, shall be guilty of a class “D” felony.

(Emphasis added). In 2001, the Iowa legislature amended §502.605 so as to eliminate the requirement that a person must knowingly violate §502.401. Id. at *11 (citing 2001 Iowa Acts ch. 118, §13). Therefore, at the time Defendant’s crimes were allegedly committed, §502.605 only required proof that the Defendant willfully violated §502.401. The Court of Appeals held that the district court’s jury instruction adequately addressed the elements set forth in §§ 502.401 and 502.605, and did not err when it did not assign a label of specific intent or general intent. Id. at *12 - 13. In so holding, the court noted:

The crucial portion of this statute is the State’s burden to prove that [the Defendant] either (1) willfully engaged in an act, practice or course of business to defraud or deceive [investor] in connection with the sale of securities or (2) willfully made an untrue statement to [investor] or omitted to state a material fact to [investor] in connection with the sale of securities.

Id. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report.

Other Noteworthy Practice Developments None to report.

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Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in Iowa since February 22, 2008 to August 15, 2008.

Securities Statutory Developments None to report. Applicable State Statute of Limitations Periods I.C.A. §502.509. Civil Liability. An action must be instituted within one year after the violation occurred for the following: (1) liability of seller to purchaser for violation of §502.301; (2) liability of unregistered broker-dealer and agent; or (3) liability of unregistered investment adviser and investment adviser representative. IOWA CODE ANN. §502.509, subsection 10. An action must be instituted within the earlier of two years after discovery of the facts constituting the violation or five years after the violation for the following: (1) liability of seller to purchaser, other than for violation of §502.301, (2) liability of purchaser to seller; or (3) liability for investment advice. IOWA CODE ANN. §502.509, subsection 11.

I.C.A. §502.508. Criminal penalties. A person who willfully violates any provision of Chapter 502 (Uniform Securities Act (Blue Sky Law)), or any rule adopted or order issued under Chapter 502, is guilty of a class “D” felony. IOWA CODE ANN. §502.508(1)(a). A person who willfully violates §502.501 or §502.502, subsection 1, resulting in a loss of more than ten thousand dollars is guilty of a class “C” felony. IOWA CODE ANN. §502.508 (1)(b).

I.C.A. §802.3 Limitation of Criminal Actions (Felony – aggravated or serious misdemeanor). In all cases, except those enumerated in §§802.1, 802.2, 802.2A, or 802.10, an indictment or information for a felony or aggravated or serious misdemeanor shall be found within three years after its commission. IOWA CODE ANN. §802.3. I.C.A. §802.5. Extension for fraud, fiduciary breach. If the periods prescribed in §§802.3 and 802.4 have expired, prosecution may nevertheless be commenced for any offense a material element of which is either fraud or breach of fiduciary obligation within one year after discovery of the offense by an aggrieved party or by a person who has a legal duty to represent an aggrieved party and who is not a party to the offense, but in no case shall this provision extend the period of limitation otherwise applicable by more than three years. IOWA CODE ANN. §802.5.

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Securities Rules Developments None to report. Administrative Orders and Announcements None to report.

Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Since the last report there were numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters.

Securities-related Case Law Developments In Renewable Fuels, Inc. v. Iowa Insurance Commissioner, 752 N.W.2d 441 (2008), the court’s decision involved the interpretation of whether §502.604(2) imposes a mandatory or directory duty on the agency to schedule the hearing within fifteen days. Ultimately, the court concluded that the hearing time provision is directory and not mandatory. Renewable Fuels, 752 N.W.2d at 445. §502.604(2) states, in pertinent part:

[A cease and desist] order must include . . . a statement of the reasons for the order, and notice that within fifteen days after receipt of a request in a record from the person, the matter will be scheduled for a hearing. If a person subject to the order does not request a hearing and none is ordered by the administrator within thirty days after the date of service of the order, the order … becomes final as to that person by operation of law. If a hearing is requested or ordered, the administrator, after notice of an opportunity for hearing to each person subject to the order, may modify or vacate the order or extend it until final determination.

IOWA CODE ANNOTATED §502.604(2).6 To reach its conclusion, the court looked to the purpose of the statute. Id. (citing Iowa Supreme Court Attorney Disciplinary Bd. V. Attorney Doe No. 639, 748 N.W.2d 208, 209 (Iowa 2008)). The purpose of chapter 502 is to “protect the public from deceit perpetrated in the sale of securities.” Id. (citing Midwest Mgmt. Corp. v. Stephens, 291 N.W.2d 896, 901 (Iowa 1980)). If the statutory language of chapter 502 is susceptible to more than one construction, “it should be given the construction which will effect rather than defeat the purpose of the statute.” Id. The court noted that §502.604(2) does not state that the underlying administrative order must be automatically vacated and the matter dismissed with prejudice if the requested 6 Acts 2007 (82 G.A.) ch. 137, H.F. 499, § 5, in subsection. 2, in the third sentence, substituted “thirty” for “fifteen”.

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hearing is not scheduled within fifteen days. The court found that construing §502.604(2) in such a mandatory fashion would undermine the purpose of protecting the public by providing a technical basis for the sale of allegedly unregistered and misleading securities to the general public. In addition, the court pointed out that its directory construction is in accord with the general rule that “statutory provisions fixing the time, form and mode of preceding of public functionaries are directory because they are not the essence of the thing to be done but are designed to secure system, uniformity, and dispatch in public business.” Id. (citing Taylor v. Department of Transportation, 260 N.W.2d 521 (Iowa 1977)). In Baber v. First Republic Group, L.L.C., 2008 WL 2356868 (N.D. Iowa June 6, 2008), a federal district court concluded that: (1) Iowa courts would hold that a fiduciary relationship exists between securities brokers and their customers as a matter of law; and (2) defendants were under a statutory duty to disclose the allegedly excessive markups and markdowns. Baber alleged breach of fiduciary duty based on allegations that the defendant abused superior knowledge, trust and confidence by charging, without Baber’s knowledge or consent, unreasonable charges in the form of improper mark ups and mark downs to execute buy and sell orders in Baber’s account. The court ruled that the defendants were not entitled to summary judgment on the breach of fiduciary duty claims. Based on an Eighth Circuit case, Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206 (8th Cir. 1990), and on Iowa Supreme Court cases, Garren v. First Realty, Ltd., 481 N.W.2d 335, 337 (Iowa 1992) and Menzel v. Morse, 362 N.W.2d 465, 474 (Iowa 1985), that have imposed a fiduciary duty on real estate brokers, the court concluded that Iowa courts would hold that a fiduciary relationship exists between brokers and their customers as a matter of law. Baber, 2008 WL 2356868, *18. In addition, the court concluded that Iowa courts would likely recognize the “shingle theory” if presented with the question. Under the “shingle theory” “a securities dealer creates an implied duty to disclose excessive markups by hanging out its professional shingle.” Id. at *24 (citations omitted). The duty is “either not charge excessive markups [or mark downs] on securities transactions, or else to make sufficient disclosures so as to permit investors to make an informed decision about the transaction.” Id. (citations omitted). Thus, the court found that, as a matter of law, defendants were under a duty to disclose excessive mark ups and mark downs on transactions in Baber’s account and that proof of failure to do so would constitute proof of fraud under state and federal securities laws and state common law. Id. As there were genuine issues of material fact relating to whether the disclosures were sufficient to permit Baber to make an informed decision before each transaction, the court ruled that summary judgment on the plaintiff’s statutory fraud claims was not appropriate. Id. at *27. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report.

IOWA


Other Noteworthy Practice Developments None to report.

KANSAS


KANSAS STATE LIAISON REPORT

No report.

KENTUCKY


KENTUCKY STATE LIAISON REPORT

Mr. Edward D. McDevitt Bowles Rice McDavid Graff & Love LLP 60 Quarrier Street Charleston, WV 25301 Post Office Box 1386 Charleston, WV 25325-1386 E-Mail – [email protected] (304) 347-1711 (Work) (304) 343-3058 (Fax)

POST NASAA 91 “ADD-ON”

(“BORROWED FROM KENTUCKY ENFORCEMENT REPORT”) Regulatory Developments The Division has proposed to amend the administrative regulation concerning exemption claims from securities registration form. The proposed amendment would change the filing requirements for claims of exemption. This is proposed administrative regulation 808 KAR 10: 170 and is located at http://www.kfi.ky.gov/legalresources/proposed administrativeregulations/. The Division anticipates changes to the regulation governing unethical and dishonest practices. The proposal would suggest that the current regulation be split into two different regulations: one covering investment advisors and the other covering broker/dealers and agents. The two new regulations would be a significant expansion of the current regulation. The anticipated changes are based on the NASAA Model Rules. The OFI issued three advisory opinions in 2008. Advisory opinions are reported at http://www.kfi.ky.gov/legalresources/opinions.htm. One of the opinions was an order vacating a previously issued order and two of the opinions were in the form of Notices of Regulatory Position. The opinion vacating a previously issued order was issued in April 2008. It vacated an order issued July 10, 1997 that clarified the definition of “investment advisor” under the Kentucky Securities Act. In February 2008, OFI issued a Notice of Regulatory Position concerning the duty of an broker/dealer to amend Form U4 upon learning of subsequent developments that may make an applying agent ineligible for the Temporary Agent Transfer (“TAT”) process. This opinion puts an affirmative duty on the broker/dealer to amend Form U4 to ensure it does not contain false or misleading information related to the agent. The second Notice of Regulatory Position was also issued in February 2008. It alerts the public that the OFI has undertaken investigations into marketing efforts to promote


http://www.kfi.ky.gov/legalresources/proposed

http://www.kfi.ky.gov/legalresources/opinions.htm

KENTUCKY


financial planning services by individuals not licensed to conduct securities transactions or give investment advice with respect to securities. The notice warns that services offering “repositioning” or “rebalancing” that also include suggestions that securities be sold could fall within the activity which requires licensing as an investment advisor under the Kentucky Securities Act. The notice specified that individuals could protect themselves from enforcement actions by providing written proof that an insurance company has approved the promotional materials, by not making recommendations about specific securities when addressing the overall financial situation of the client, and by making a specified written disclosure signed by the client. The OFI issued an order in September 2007 adopting the web-based Investment Advisor Registration Depository (“IARD”) as an appropriate venue through which investment advisors and their investment advisor representatives can file their applications. Before this order, Kentucky was one of three states that not require these individuals to electronically file their applications with the OFI through the IARD. The order designated IARD to receive registration filings and collect initial and renewal filing fees with respect to investment advisors and their investment adviser representatives.

LOUISIANA


LOUISIANA STATE LIAISON REPORT

(As of August 14, 2008) This reports on material developments affecting blue sky practitioners in Louisiana since June 2007. Liaison: Carl C. Hanemann Jones, Walker, Waechter, Poitevent, Carrère & Denègre L.L.P.

201 St. Charles Avenue, 51st Floor New Orleans, LA 70170

Email: [email protected] Telephone: 504-582-8156 Fax: 504-589-8156 State Administrator: Ms. Rhonda Reeves

Deputy Commissioner of Securities 8660 United Plaza Blvd., 2nd Floor Baton Rouge, LA 70809

Main Telephone: 504-925-4660 Main Fax: 504-925-4548 Internet: http://www.ofi.state.la.us (click on Securities) Short Title/Citation: Louisiana Securities Law La. R.S. 51:701 et seq. http://www.legis.state.la.us/ Rules Name/Citation: Louisiana Administrative Code Title 10, Part XIII (Investment Securities) http://doa.louisiana.gov/osr/lac/10v01/10v01-19.doc#_Toc198978871 Highlights of Material Developments This year there have been notable developments in Louisiana on all three fronts – legislative, administrative and judicial. Worth a special note is that the Louisiana Commissioner has proposed an exemption for compensation-based issuances of securities along the lines of SEC Rule 701. Special thanks to a drafting committee of the State Regulation of Securities Committee consisting of Ellen Lieberman, Michele Kulerman, Peter Danias, Alan Parness, Maggie Murphy, and the preparer of this Liaison Report, who prepared a comment letter aimed at conforming the Louisiana rule to Rule 701 as closely as possible.


http://www.ofi.state.la.us

http://www.legis.state.la.us/

http://doa.louisiana.gov/osr/lac/10v01/10v01-19.doc#_Toc198978871

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Securities Statutory Developments The following are the more significant provisions of the two acts involving the Louisiana Securities Law (the “Louisiana Act”) that were enacted in the Regular Session of the 2008 Louisiana Legislature, both of which become effective August 15, 2008. Act No. 149 1. The definition of “racketeering activity” contained in Section 1352 of the Louisiana Code of Criminal Procedure (La. R.S. 15: 1352(A)) is amended to include violations of the Louisiana Act. 2. Section 723 of the Louisiana Act (La. R.S. 51:723) is amended to increase the penalties for violation to fines up to $10,000 or imprisonment at hard labor for not more than 5 years, or both. Each violation constitutes a separate offense. The amendment also authorizes courts to order any person convicted of willful violation of the Louisiana Act or of any rule or order of the Commissioner to pay restitution to the victim. Act No. 274 1. The definition of “dealer” contained in Section 702(5)(a) of the Louisiana Act is amended to add an exclusion from that definition for any managing member of an issuer or of any general partner of an issuer. 2. Section 703 of the Louisiana Act is amended to require registration and renewal of registration of investment advisor representatives to the same extent as required for investment advisors. The amendment also requires Federal Covered Advisors to make notice filings with the Louisiana Commissioner of the same documents they are required to file with the SEC. 3. Section 704 of the Louisiana Act, which provides for suspension or revocation of registration of dealers, salesmen and investment advisors, is amended to apply also to investment advisor representatives. An additional grounds for suspension or revocation of registration of dealers, salesmen, investment advisors and investment advisor representatives is added in the case where such a person “has failed to reasonably supervise any salesmen or investment advisor representative for whom he has supervisory responsibility.” The Commissioner is given authority to adopt rules and regulations with respect to supervision. Subsection C of Section 704 is amended to allow the Commissioner to require investment advisors to file financial statements. Applicable State Statute of Limitations Periods Section 714(C)(1) of the Louisiana Act provides, in part: “No person may sue under this Section [which provides for civil liability from sales of securities] more than two years from the date of the contract for sale or sale, if there is no contract for sale.” See the Sudo Properties decision below, however.

LOUISIANA


Securities Rules Developments The Louisiana Office of Financial Institutions has issued notices of intent to adopt two proposed rules. The notices were published in the June 20, 2008 edition of the Louisiana Register. Both notices of intent propose amendments to Title 10, Part XIII (Investment Securities) of the Louisiana Administrative Code. The first notice of intent proposes amendments to Sections 1301 and 1311 of Subpart 1 (Securities) of Part XIII (Investment Securities) of Title 10 of the Louisiana Administrative Code. Exemption from rules applicable to registration of investment advisors for “Third-Party Solicitors,” defined as an investment advisor representative who meets all of the following criteria:

1. investment advisory business consists solely of referring individuals to other investment adviser firm(s);

2. provides no advice to individuals regarding specific investments;

3. fees consist entirely of referral fees received from the investment adviser firms to whom the investment adviser representative makes referrals.

This exemption is intended to exempt, for example, accountants who refer their clients to investment advisory firms. The proposed rule is expected to become effective mid- to late- October. The second notice of intent proposes the adoption of a new Section 801 entitled “Compensatory Benefit Plan Exemption” to Subpart 1. The new Section 801 would provide for a rule equivalent to the SEC’s Rule 701 under the 1933 Act, the exemption for offers and sales of securities pursuant to compensatory benefit plans and contracts relating to compensation. With respect to this proposal the State Regulation of Securities Committee has provided comments, the purpose of which are to conform the exemption as closely as possible to Rule 701. It is expected that the new Section 801 will become effective in late November or early December of 2008, after compliance with the Louisiana Administrative Procedure Act. Administrative Orders and Announcements Nothing new to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Nothing new to report.

LOUISIANA


Securities-related Case Law Developments Sudo Properties, Inc. v. Terrebonne Parish Consolidated Government, 503 F.3rd

371, 2007 U.S. App. LEXIS 23598 (5th Cir. 10/3/07). In this case, the U.S. Fifth Circuit Court of Appeals reverses a summary judgment that had been granted by the district court in favor of the defendant on grounds that the suit was time-barred by the statute of limitations. Plaintiff had purchased from defendant a one-third interest in a limited liability company that owned an indoor football team. The principal issue was whether statutes of limitations under federal securities laws and the Louisiana Securities Law had expired prior to the filing of suit by plaintiff. As noted above, the applicable statute of limitations in Louisiana is provided in Section 714(C)(1) of the Louisiana Act, which provides, in part, “No person may sue under this Section more than two years from the date of the contract for sale or sale, if there is no contract for sale.” Citing a decision of the Louisiana Supreme Court in a case that did not involve the Louisiana Securities Law, the court found that the two-year limitations period begins to run “when the injured party has constructive knowledge of the facts that would entitle him to bring a suit.” Sudo, at 378. Based on facts indicating that plaintiff had not received information contradicting apparently false information received from officers of defendant until a date that was within two years prior to his filing of suit, the Fifth Circuit found that plaintiff did not have the requisite constructive knowledge of information that he had been deceived by defendant and, therefore, that his claims were not time-barred. Boes Iron Works, LLC v. Galatas, 974 So.2d 713, 2007 La. App. LEXUS 2234 (La. App. 5th Cir. 12/11/07). Plaintiffs had purchased variable life insurance policies from defendants, who represented that the policies could be maintained as benefit plans in which the plaintiff company could participate, as a result of which the premiums would be tax-deductible. This information was incorrect, as a result of which plaintiffs had a significant tax liability, including penalties. The court first determined that the Louisiana statute of limitations applicable to suits against insurance agents applied to this case and had expired before plaintiffs’ suit was filed. The court then declined to consider plaintiffs’ claim under the initial Louisiana Securities Law, finding that sales of variable life insurance policies were covered by statutes relating to insurance and should be resolved under those statutes rather than under the Louisiana Securities Law. Other Statutory Developments Nothing new to report. Administrator’s Staffing Changes Nothing new to report. Other Noteworthy Practice Developments Nothing new to report.

MAINE


MAINE STATE LIAISON REPORT

(As of February 15, 2008) This report summarizes material developments affecting blue sky practitioners in this state of Maine since June 21, 2007.

Liaison: [Successor Pending] BERNSTEIN SHUR 100 Middle Street, West Tower P.O. Box 9729 Portland, Maine 04104-5029 Email: Telephone: (207) 774-1200 Fax: (207) 774-1127 State Administrator: Bonnie E. Russell, Acting Securities Administrator

Department of Professional and Financial Regulation, Office of Securities 121 State House Station Augusta, ME 04333-0121

Overnight Deliveries: Department of Professional & Financial Regulation Office of Securities 124 Northern Avenue Gardiner, Maine 04345

Main Telephone: 1-877-624-8551 (toll free in Maine) or (207) 624-8551 Main Fax: (207) 624-8590 Internet: http://www.maine.gov/pfr/securities/index.shtml

Short Title/Citation: Maine Uniform Securities Act (32 M.R.S.A. §§16101-16702) http://www.maine.gov/pfr/securities/laws_rules.htm Rules Name/Citation: Office of Securities Rules http://www.maine.gov/pfr/securities/laws_rules.htm Highlights of Material Developments Amendments in 2007 to the Maine Uniform Securities Act (32 M.R.S.A. §§16101-16702)(the “Act”) expanded liability for unlicensed or unregistered securities sales activities to “control persons” of broker-dealers or investment advisors and made certain exemptions applicable to sales or offers to sale securities made not only by the issuer but also on behalf of the issuer.

http://www.maine.gov/pfr/securities/index.shtml

http://www.maine.gov/pfr/securities/laws_rules.htm

http://www.maine.gov/pfr/securities/laws_rules.htm

MAINE


Also, the Maine Office of Securities (the “Office”) has proposed several new rules to govern the issuance and sale of securities within Maine, as well as revisions to existing rules put into place by the Office. Securities Statutory Developments Amendments of note to the Act during 2007 include the following:

• §16202(14) and (15) governing exemptions for limited private offerings by any issuer or by a Maine issuer, respectively, now include a sale or offer to sale securities “by or on behalf of” an issuer rather than only by an issuer as previously formulated;

• §16306(7) and §16412(7) each now provide authority to the Securities

Administrator to appoint a presiding officer for hearings relating to, respectively, the denial, suspension or revocation of securities registration or the denial, suspension, withdrawal, restriction, condition or limitation of licensing in Maine; and

• As amended, §16412 extends liability for unlicensed or unregistered sales of

securities in Maine to “control persons” of a broker-dealer or investment adviser to the same extent as the person(s) making the unlicensed/unregistered sales or offers. A “control person” in this instance includes “a partner, officer or director of the broker-dealer or investment adviser, a person occupying a similar status or performing similar functions or a person directly or indirectly controlling the broker-dealer or investment adviser.”

Securities Rules Developments The Office has issued its 2007-2008 Regulatory Agenda outlining more than fifteen planned revisions to existing securities rules, including statutory updates to address policy, law, industry or other changes to the following areas governed by the Act and/or rules promulgated by the Office:

• Broker-dealer and agent licensing • Broker-dealers transacting business on the premises of financial institutions • Licensing exemption for certain Canadian broker-dealers • Broker-dealers, investment advisers and others using the Internet for general

dissemination of information about securities products and services • Change of ownership or control of a broker-dealer or investment adviser • Investment adviser licensing • Small company offering regulations • Securities offerings on the Internet • Limited private offering exemptions: purchasers present in Maine and single issue • Exemptions for offers and sales to accredited investors • Exemptions for offers and sales to the Finance Authority of Maine.

MAINE


Additionally, the Office has proposed five new rules relating to investment adviser licensing requirements, protection of elderly investors, procedural matters and the adoption, in whole or in part, and implementation of both the “Model Rules for State Coordination with the Multi-Jurisdictional Disclosure System” and the “Notice of Risk to Personal Data Act.” The Office anticipates that any rule revisions or new rules put into place in accordance with its 2007-2008 Regulatory Agenda will be adopted prior to October of 2008. Administrative Orders and Announcements In 2007, the Office entered into six Consent Agreements in resolution of administrative matters and executed six Administrative Orders. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) During 2007, the Office opened 69 enforcement cases and closed 65 cases. At year-end, a total of 41 enforcement cases remained open. The total amount collected by the Office in restitution was $140,714, while $40,130 was collected in fines and penalties. In securities-related civil matters, two new cases were referred to the Office of the Attorney General (“OAG”) for civil prosecution, while the OAG filed two civil suits and two civil cases were resolved by Consent Judgments. The Office referred one new securities case to the OAG for criminal prosecution and one person was indicted based on an investigation and referral by the Office. Four securities-related cases are currently awaiting trial. Twenty-one persons were sanctioned in 2007 for violations of the Act and the Office conducted 15 on-site examinations of investment adviser and broker-dealer offices in Maine. Securities-related Case Law Developments No judgments entered by Maine courts addressed securities laws or their enforcement during the period of July 1, 2007 to present. Other Statutory Developments An amendment to the Maine Business Corporation Act (13-C M.R.S.A. §§ 101-1702) adopted in June permits the Maine Secretary of State to revive a corporation which has been dissolved in any manner should the Secretary of State determine a need for such revival for a specific period of time. An application for such revival must be filed by an interested party before the Secretary of State may take steps to revive the dissolved corporation. Effective as of July 1, 2008, the Model Registered Agents Act (5 M.R.S.A. §§101- 120D) replaces all Business Corporation Act provisions governing clerks of both domestic corporations and foreign corporations conducting business in Maine. Each corporation

MAINE


formed or qualified in Maine must maintain a clerk, who must be a natural person or entity residing or qualified to conduct business in Maine. The corporation must also maintain a registered office address in Maine. The Model Registered Agents Act also governs service of process on entities formed or qualified in Maine and specifically states that appointment of a clerk does not by itself create the basis for personal jurisdiction over the represented entity in Maine. Further, the clerk’s address does not determine venue in an action or proceeding involving the represented entity. Administrator’s Staffing Changes Bonnie E. Russell was named Acting Securities Administrator in mid-2007, replacing Stephen L. Diamond, the former Securities Administrator, who assumed the position of Assistant Securities Administrator for Registration and Licensing. Other Noteworthy Practice Developments None.

MARYLAND


MARYLAND STATE LIAISON REPORT

(As of February 18, 2007; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since June 1, 2006, and supplemented to August 15, 2008. Liaison: Wm. David Chalk, Esq.

DLA Piper US LLP 6225 Smith Avenue Baltimore, Maryland 21209

Email: [email protected] Telephone: (410) 580-4120 Cell phone: (410) 499-9555 Fax: (410) 580-3120 State Administrator: Melanie Senter Lubin Securities Commissioner

Maryland Office of the Attorney General – Securities Division 200 St. Paul Place Baltimore, Maryland 21202-2020

Main Telephone: (410) 576-6360 (888) 743-0023 (toll free) (410) 576-6372 (TDD) Email: [email protected] Main Fax: (410) 576-6532 Internet: http://www.oag.state.md.us/securities

Short Title/Citation: Maryland Securities Act MD. CODE ANN., CORPS. & ASS’NS, §§11-101, et. seq. (LexisNexis

2007). http://www.dsd.state.md.us/comar/AnnotIndex.htm Rules Name/Citation: Code of Maryland Regulations Md. Code Regs. 02.02.01.00, et. seq. (2007) http://www.dsd.state.md.us/comar/ Highlights of Material Developments

• The United States District Court for the District of Maryland determined that the Securities Litigation Uniform Standards (or SLUSA) preempted state common law negligence claims of mutual funds investors. (See In re Mutual Funds Investment Litigation)



http://www.oag.state.md.us/securities

http://www.dsd.state.md.us/comar/AnnotIndex.htm

http://www.dsd.state.md.us/comar/

MARYLAND


• The United States District Court for the District of Maryland determined that a closed-end investment company could adopt serial poison pills to defend against a hostile tender offer. In addition, once a closed-end investment company had opted into the Maryland Control Share Statute, the defendants could vote shares of the closed-end investment company held at the time it opted-into the statute, but the defendants were precluded from voting any shares acquired after that date. (See Neuberger Berman Real Estate Income Fund v. Lola Brown Trust No. 1B)

• The Maryland Circuit Court held that viatical settlements are investment contracts and, therefore, securities under the Maryland Securities Act (the “Act”) and that the Maryland Securities Commissioner (the “Commissioner”) may not obtain damages against an alleged control person unless the primary violater is found liable.

• The Commissioner granted an Order of Exemption pursuant to the discretionary exemption contained in the Act for an exchange offer involving shares of a foreign private issuer. (See Gemalto N.V. No-Action Letter)

• The Securities Division of the Maryland Office of the Attorney General (the “Division”) granted no action relief from the issuer-agent registration requirements for the officers, directors and employees of a foreign corporation reincorporating as a Delaware corporation. (See Fuel-Tech N.V. No-Action Letter)

• The Division granted no-action relief from the investment advisor registration requirements for the general partners of investment partnerships who selected an affiliated entity to provide investment advisor services to the investment partnership. (See Lane Five Capital Management, LP No-Action Letter; GARP Capital, LLC No-Action Letter)

• The Commissioner granted an Order of Exemption pursuant to the discretionary exemption contained in the Act exempting from the Act’s registration requirements the offer and sale of contingent payment rights as part of the consideration of an exchange offer registered under the Securities Act of 1933, as amended (the “Securities Act”). (See ABN AMRO NV/Royal Bank of Scotland, plc No-Action Letter)

Securities Statutory Developments None to report. Securities Rules Developments None to report. Administrative Orders and Announcements

• Gemalto N.V. (f/k/a Axalto Holding N.V.) No-Action Letter: The Commissioner issued an Order of Exemption on June 19, 2006 granting Gemalto N.V. (f/k/a Axalto Holding N.V.) (“Gemalto”) an exemption from the registration requirements of the Act for an exchange offer involving shares of Gemplus International S.A. (“Gemplus”). Gemalto (which was then known as Axalto Holding N.V.) had entered into a

MARYLAND


Combination Agreement with Gemplus, which the two largest shareholders of Gemplus, who collectively owned 43.4% of the equity of Gemplus, had approved. These two Gemplus shareholders subsequently entered into separate Contribution in Kind Agreements with Gemalto. Pursuant to the Contribution in Kind Agreements each shareholder would receive two (2) Gemalto shares for every 25 Gemplus shares contributed. Following the completion of the exchanges pursuant to the Contribution in Kind Agreements, Gemalto desired to conduct a public tender offer for the remaining shares of Gemplus at the same exchange ratio used under the Contribution in Kind Agreements. Gemalto was not a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Gemplus, however, had American Depository Receipts (“ADRs”) listed on The Nasdaq National Market and was a reporting company under the Exchange Act. Gemalto advised the Division that the exchange offer was exempt from the registration requirements of the Securities Act, pursuant to an exemption under Rule 802 of the Securities Act for transactions involving an exchange offer of a foreign private issuer in which U.S. persons hold no more than 10% of the total outstanding securities that are the subject of the exchange offer. The Division granted an exemption for the exchange offer pursuant to the discretionary exemption contained in Section 11-602(17) of the Act.

• Fuel-Tech N.V. No-Action Letter: The Division agreed in a letter dated September 27,

2006 to take no action to require the registration of the officers, directors or employees of Fuel-Tech N.V. (“Fuel-Tech”) as issuer-agents under Section 11-401 of the Act. Fuel-Tech was undergoing a reorganization whereby it would reincorporate as a Delaware corporation and all of its outstanding common stock would be converted into common stock of the Delaware corporation pursuant to an exchange offer registered under the Securities Act on Form S-4. In addition, Fuel-Tech’s common stock was listed on The Nasdaq National Market under the ticker symbol “FTEK” and, following the reorganization, the Delaware corporation’s common stock would be listed The Nasdaq National Market under the same ticker symbol. Fuel-Tech’s common stock consequently constituted a “federal covered security” under Section 18(b)(1)(A) of the Securities Act. Under Rule 11 of Title 2, Subtitle 2, Chapter 9 of the Code of Maryland Regulations, a person engaged in the offer or sale of federal covered securities must register as a broker-dealer agent or an issuer-agent or be exempt from such registration requirements. Fuel-Tech argued that Section 11-101(b)(3)(i)(2) of the Act excludes from the definition of the term “agent” an individual representing an issuer in a securities transaction exempted from the Act’s registration requirements under Section 11-602 of the Act. Fuel-Tech further argued that its reorganization was an exempt transaction under Section 11-602(11) of the Act, which exempts from the Act’s registration requirements “any transaction under an offer to existing security holders of the issuer if no commission or other remuneration, other than a stand-by commission, is paid or given directly or indirectly for soliciting any security holder in Maryland.” Fuel-Tech claimed that the Delaware corporation was a continuation of Fuel-Tech and should be considered the “same issuer” for purposes of Section 11-602(11) of the Act. In addition, no commissions or other remuneration would be paid for the registration and conversion of Fuel-Tech’s shares into shares of the Delaware corporation. The Division granted Fuel-Tech’s no-action request based upon the facts presented.

MARYLAND


• EIG Mutual Holding Company No-Action Letter: The Division agreed in a letter

dated January 23, 2007 that it would take no action to require the registration of securities to be issued to policy holders of Employers Insurance Company of Nevada (“EICN”), a member of EIG Mutual Holding Company (“EIG”), pursuant to the exclusion from the definition of “offer”, “offer to sell”, “sale”, and “sell” contained in Section 11-102(a)(3) and (a)(4) of the Act. EIG was converting from a mutual insurance holding company into a stock corporation. In order to effect the conversion, eligible policy holders of one of EIG’s members, EICN, would be entitled to receive shares of common stock of the new company, EIG Holdings, Inc. (“EIG Holdings”), cash or, in some cases, both stock and cash. Stock of EIG Holdings would also be offered in a separate underwritten public offering and listed on the New York Stock Exchange. The reorganization of EIG would be subject to the approval of certain policy holders of EICN, one of EIG’s members. EIG argued that Section 11-102(a)(3) and (a)(4) of the Act provides an exclusion from the definitions of “offer” and “sale” respectively for (i) any act incident to a class vote by security holders under the applicable corporation statute upon a merger, consolidation, split-up, spin-off, share exchange or reclassification of securities or similar transaction or (ii) any act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding securities, claims or property interests, or partly in such exchange for cash. The Division granted EIG’s no-action request based upon the facts presented.

• TMG Holding Co. No-Action Letter: The Commissioner issued an Order of

Exemption dated January 17, 2007 granting TMG Holding Company, Inc. (“TMG”) an exemption from the registration requirements of the Act in connection with the offer and sale of shares of TMG’s stock. TMG operated a financial services business through three wholly-owned subsidiaries. These subsidiaries in turn engaged accountants, certified financial planners, investment specialists and other financial professionals, which TMG referred to as its “affiliates”. TMG desired to offer and sell 5,000 shares of its stock at $10 per share for an aggregate offering of $50,000 to existing stockholders, which had preemptive rights to subscribe for any shares of stock subsequently offered by TMG, and to certain “affiliates”. The offering would qualify for an exemption from the Securities Act’s registration requirements under Rule 504 of Regulation D promulgated under the Securities Act, except that the offering might extend to more than 35 offerees within Maryland. Accordingly, TMG requested that the Division exempt the offering from the registration requirements of the Act because, among other things, (i) the offering would meet the requirements of the exemption under Section 11-602(9) of the Act, except that the offering might extend to more than 35 persons in Maryland, (ii) the offerees were familiar with TMG or had an existing relationship with TMG, (iii) all of the offerees were financial professionals and had experience with investments and financial matters, (iv) each offeree would receive a Confidential Offering Memorandum that was substantially similar to the MLOE-2, including financial statements, and (v) TMG would file an MLOE-1 within 15 days after the first sale of securities. The Division granted an exemption for the offering pursuant to the discretionary exemption contained in Section 11-602(17) of the Act.

MARYLAND


• Maestro Learning, Inc. No-Action Letter: The Division agreed in a letter dated March 19, 2007 to take no action to require the registration of the offer and sale of securities of Maestro Learning, Inc. (“Maestro”) to a single Maryland investor. Maestro desired to offer and sell up to $100,000 of securities with a minimum $10,000 investment per investor to various friends and family members of Maestro’s president. Maestro desired to offer and sell $10,000 of securities to one (1) investor resident in Maryland. The Division granted Maestro’s no-action request based upon the facts presented by Maestro, which was limited to the single investor resident in Maryland.

• Lane Five Capital Management, LP No-Action Letter: The Division agreed in a letter

dated June 13, 2007 to take no action to require the registration as an investment advisor of Lane Five Capital Management, LP (“Lane Five”), and its affiliate, Lane Five Partners GP, LLC (the “General Partner”). Lane Five was in the process of establishing an investment partnership (the “Partnership”) for which the General Partner would serve as general partner. The General Partner’s sole function would be managing the affairs of the Partnership, which would include hiring service providers such as an independent auditing firm and an investment advisor. The General Partner would only be authorized to select Lane Five or another affiliate of Lane Five as the Partnership’s investment advisor without the prior consent of the Partnership’s limited partners. Interests in the Partnership would be offered solely to “accredited investors” pursuant to an exemption from the registration requirements of the Securities Act under Rule 506 of Regulation D and, moreover, the Partnership would require a $1,000,000 minimum investment by all investors. Lane Five represented that the Partnership would also (i) provide an offering memorandum to all investors, which would describe the offering, the structure of the Partnership, the fees and expenses of the Partnership and the risks of the investment, (ii) provide annual audited financial statements to each investor and (iii) maintain all funds in an national bank or regulated brokerage firm. Lane Five further represented that the Partnership would be exempt from registration as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). In addition, Lane Five represented that it and the General Partner would be exempt from registration as an investment advisor under the Investment Advisor Act of 1940, as amended, because the Partnership would be their sole client. Section 11-101(h) of the Act defines an “investment advisor” as “any person who, for compensation . . .[e]ngages in the business of advising others . . . as to the value of securities, or who, for compensation and, as part of a regular business, issues or promulgates analyses or reports concerning securities; or [p]rovides or offers to provide, directly or indirectly, financial and investment counseling or advice, on a group or individual basis; or [h]olds out as an investment advisor in any way.” Lane Five argued that it would not offer financial planning services or hold itself out as an investment advisor. While not necessarily concurring with the reasoning contained in the letter, the Division granted Lane Five an exemption from the investment advisor registration requirements of the Act.

• GARP Capital LLC No-Action Letter: The Division agreed in a letter dated June 13,

2007 to take no action to require the registration as an investment advisor of GARP Capital, LLC, (“GARP Capital”). GARP Capital served as the general partner of a private investment partnership, The Weedflower LP (“Weedflower”). GARP Capital

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claimed that it did not provide investment advisory services to Weedflower, but rather managed Weedflower, including arranging for investment advisory services for Weedflower through an investment management agreement with GARP Capital’s affiliate, GARP Research Corp. (“GARP Research”). GARP Research was an investment advisor registered in the States of Maryland, Massachusetts and Nebraska. GARP Capital represented to the Division that, other than the selection of GARP Research, it would provide no advice regarding securities, asset allocation or other actions that could be considered investment advice. Moreover, GARP Capital was prohibited from replacing GARP Research as investment advisor to Weedflower without first obtaining the consent of the limited partners of Weedflower. Under Section 11-401(b) of the Act, no investment advisor may transact business in Maryland unless it is registered as an investment advisor or exempt from such registration requirements under the Act. Section 11-101(h) of the Act defines an “investment advisor” as “any person who, for compensation . . .[e]ngages in the business of advising others . . . as to the value of securities, or who, for compensation and, as part of a regular business, issues or promulgates analyses or reports concerning securities; or [p]rovides or offers to provide, directly or indirectly, financial and investment counseling or advice, on a group or individual basis.” GARP Capital argued that its one time selection of an investment advisor for Weedflower for which it did not receive any compensation other than its management fee for managing the affairs of Weedflower generally did not meet the definition of an “investment advisor” under the Act. While not necessarily concurring with GARP Capital’s reasoning, the Division agreed to take no action to require GARP Capital to register as an investment advisor pursuant to Section 11-401 of the Act.

• ABN AMRO NV/Royal Bank of Scotland Group, plc No-Action Letter: The

Commissioner issued an Order of Exemption dated July 9, 2007 granting a consortium of banks comprised of The Royal Bank of Scotland, plc (“RBS”), Banco Santander Central Hispano, S.A. and Fortis SA/NV and Fortis N.V. (collectively with RBS, the “Consortium”) an exemption from the registration requirements of the Act in connection with the offer and sale of contingent payment rights to shareholders of ABN AMRO NV (“ABN AMRO”). The Consortium had formed an acquisition entity (“BidCo”) that made a proposal to acquire all of the outstanding shares and American Depository Shares of ABN AMRO for cash and shares of RBS. The transaction would be conducted as a U.S. registered exchange offer on Form F-4. In connection with BidCo’s acquisition of ABN AMRO, Bank of America Corporation initiated a lawsuit against ABN AMRO relating to the sale to Bank of America Corporation of ABN AMRO’s U.S. subsidiary, ABN AMRO North America Holding Company, including its subsidiary LaSalle Bank Corporation (the “LaSalle Litigation”). Consequently, ABN AMRO and BidCo agreed that BidCo would defer payment of €1.00 of cash consideration per ABN AMRO share exchanged to satisfy any liabilities, including any award of damages, relating to the LaSalle Litigation. BidCo would deposit the deferred payment amounts into a special purpose vehicle (“SPV”) and the shareholders of ABN AMRO would be entitled to receive, along with the cash and RBS stock consideration, cash payments on a pro rata basis out of any funds remaining in the SPV after resolution of the LaSalle Litigation and payment of any related costs (the “contingent payment rights”). The Consortium argued that the contingent payment rights were not securities because the contingent

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payment rights (i) were not investments of money in a common enterprise, (ii) did not reflect an expectation of profits from the efforts of others, (iii) were not an evidence of indebtedness, or (iv) have any other characteristics of securities, such as have voting or dividend rights or represent an equity interest in another entity. The Division granted an Order of Exemption to RBS and its agents based upon the facts presented pursuant to the discretionary exemption contained in the Act.

• Blue Ridge Bank/Frederick Maryland De Novo Bank No-Action Letter: The

Division agreed in a letter dated August 6, 2007 to take no action to require the registration of certain officers and directors of a Maryland chartered commercial bank undergoing organization (the “Bank”) as issuer-agents under the Act. The Bank was in the process of becoming a state chartered commercial bank that would be subject to supervision by the Federal Deposit Insurance Corporation (“FDIC”) and the Maryland Commissioner of Financial Regulation (the “Banking Commissioner”). In connection with its organization, the Bank desired to offer and sell shares of its common stock through a non-underwritten public offering directed primarily to residents of Maryland. The Bank represented that its securities were exempt securities pursuant to Section 3(a)(2) of the Securities Act, which exempts any securities issued by a bank. Even though the Bank was a “bank in organization,” the Bank argued that its shares of common stock would still be exempt securities under Section 3(a)(2) of the Securities Act under a line of no-action letters issued by the Securities and Exchange Commission (the “SEC”). These no-action letter generally provided that the securities of “banks in organization” would be exempt under Section 3(a)(2) of the Securities Act if (i) during the organizational phase, the bank in organization would be subject to the laws and regulations of the jurisdiction in which it was formed and (ii) investors are afforded all of the protections associated with state supervision over the institution, including that any funds collected are held in escrow and not released until the bank in organization has received all necessary regulatory approvals to operate. The Bank represented that it satisfied these tests under the SEC’s no-action letters, including that all funds raised from its sales of common stock would be held in escrow. Since the Bank’s shares of common stock were exempt securities under Section 3(a)(2) of the Securities Act, its common stock constituted a “federal covered security” under Section 18(b)(4)(C) of the Securities Act. Under Rule 10 of Title 2, Subtitle 2, Chapter 9 of the Code of Maryland Regulations, a person engaged in the offer or sale of federal covered securities under Section 18(b)(4)(C) of the Securities Act must register as a broker-dealer agent or an issuer-agent or be exempt from such registration requirements. The Bank argued that Section 11-101(b)(3)(i)(1) of the Act excludes from the definition of “agent” an individual representing an issuer effecting a transaction in securities exempt from the Act’s registration requirements under Section 11-601 of the Act. Section 11-601(3) of the Act exempts securities issued by any “bank . . . organized and supervised under the laws of any state.” While not yet a bank “organized and supervised” under Maryland law, the Bank argued that the registration of its officers and directors as issuer-agents was not necessary because the offering of the Bank’s common stock would be conducted following the filing of its application with the FDIC and Banking Commissioner and, therefore, the Bank’s activities in connection with the offering would be supervised by such regulators. In addition, the Bank represented that it would (i) obtain permission to

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file and would file its Articles of Incorporation with the Maryland State Department of Assessments and Taxation, (ii) make the notice filings required under Rule 10 of Title 2, Subtitle 2, Chapter 9 of the Code of Maryland Regulations and (iii) hold all funds raised from its sales of common stock in escrow and not release such funds until the Bank received all regulatory approvals necessary to operate as a state chartered commercial bank. The Division granted the Bank’s no-action request based upon the facts presented.

Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-Related Case Law Developments 1. United States Court of Appeals for the Fourth Circuit

• Sherwood Brands, Inc. v. Levie, No. 06-1509, 2007 WL 4622915 (4th Cir. Dec. 28, 2007). Sherwood Brands, Inc. (“Sherwood”) brought an action against Leonard Levie (“Leonard”), the Chairman of the Board of Directors of Asher Candy, Inc. (“Asher”) and Eleanor Levie (“Eleanor”), Asher’s majority shareholder, alleging among other things, securities violations and fraud and seeking declaratory relief. In 2001, Sherwood and Asher entered into negotiations for the acquisition of Asher by Sherwood. The transaction closed on April 25, 2002 with the final purchase price of $2 million consisting of a “stock for stock” exchange in which Asher shareholders received a pro rata share of Sherwood stock in the amount of $1.75 million in the aggregate, plus warrants to acquire Sherwood shares up to a fair market value of $250,000 in the aggregate. After closing, Sherwood learned of information that negatively impacted Asher’s financial condition, including an increase in Asher’s accounts payable, a decrease in Asher’s accounts receivable, the underpayment of payroll taxes, a loan to Asher by Leonard’s company to pay certain health care premiums for Asher for which Leonard sought repayment, and an undisclosed shortfall in Asher’s 401(k) plan funding.

Sherwood’s complaint sought relief under Section 11-703(a)(1)(ii) of the Act, which imposes civil liability on any person selling securities using “any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made…not misleading.” Id. at *3. The statute also imposes control person liability on any person who directly or indirectly controls a person subject to Section 11-703(a) of the Act. Id.

On appeal, the Court of Appeals affirmed the District Court’s finding that Eleanor did not make any representations and warranties to Sherwood and therefore could not be individually liable under the statute. The Court of Appeals also affirmed the District Court’s rejection of Sherwood’s securities fraud claims against Leonard, but on an alternative basis from the District Court. The District Court had concluded that Sherwood could not reasonably rely on any of Leonard’s allegedly false statements or omissions of fact. The Court of Appeals concluded, however, that Leonard was not a control person, as Sherwood contended, and as such, could not be held liable under Section 11-703(a) of the Act. Id. The Court of Appeals noted that a control

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person is only liable to the same extent as the primary person liable (in this case, the seller). Id. Under the merger agreement, the seller was not Asher, but the shareholders of Asher. Since Asher was not the seller, Leonard’s role as Asher’s Chairman and his role during the merger negotiations could not be used to impose control person liability on Leonard. The only potentially viable “control person” under Sherwood’s theory would be Eleanor. Id. Eleanor, however, did not make any representations to Sherwood nor did she participate in any of the merger negotiations. Id. In light of these facts, the Court of Appeals found neither Eleanor nor Leonard liable to Sherwood under Section 11-703(a) of the Act. Id.

2. United States District Court for the District of Maryland

• In re Mutual Funds Investment Litigation, 437 F. Supp. 2d 439 (D. Md. 2006). Investors brought a class action suit against AIG Sunamerica Life Assurance Company Wiggenhorn, AXA Equitable Life Insurance Company Woodbury and Nationwide Life Insurance Company after purchasing variable annuities from the defendants that included mutual funds as investment options. The plaintiffs sought compensation for alleged dilutive damages to the value of their annuity accounts caused by the use of market timers that exploited “stale” mutual fund prices. In an effort to avoid the preemptive scope of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub. L. No. 105-353, 112 Stat. 3227, the plaintiffs only alleged that the defendants negligently breached state common law duties through their exploitation of “stale” mutual fund prices. The defendants filed motions to dismiss the complaints.

Under Section 78bb(f)(1) of the Exchange Act, a private party cannot

maintain a covered class action in any state of federal court alleging “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.” Id. at 442-43 (quoting 15 U.S.C. § 78bb(f)(1)). The U.S. District Court for the District of Maryland explained that the suit involved a “covered security” because variable annuities were “covered securities” under Section 78bb(f)(5)(E) of the Exchange Act. In addition, the District Court explained that all of the claims involved were “covered class actions” because they were direct suits and the plaintiffs sought to represent more than fifty investors. Id. at 443. The District Court explained that in Araujo v. John Hancock Life Insurance Co. the U.S. District Court for the Eastern District of New York found that “[t]he element of a misrepresentation or omission of a material fact is satisfied when a plaintiff alleges a misrepresentation concerning the value of the securities sold or the consideration received in return” (206 F. Supp. 2d 377, 382 (E.D.N.Y. 2002)). The District Court reasoned in the instant case that the plaintiffs alleged a misrepresentation of material fact by claiming that the defendants incorrectly priced certain investment options under the annuities. In re Mutual Funds Investment Litigation, 437 F. Supp. 2d at 443. Finally, the District Court considered whether the alleged misrepresentations or omissions of a material fact were “in connection with” the purchase or sale of a covered security. The District Court explained that in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, the

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U.S. Supreme Court found that the “in connection with” prong is satisfied if the fraud alleged is simply connected with the purchase or sale of a security. 547 U.S. 71 (2006). Based on Dabit, the District Court reasoned that, even though the plaintiffs did not directly engage in the purchase or sale of the securities in question, the “in connection with” prong was satisfied because the alleged harm arose from the defendants purchase and sale of such securities. In re Mutual Funds Investment Litigation, 437 F. Supp. 2d at 444. Based upon the foregoing analysis, the District Court held that the state law claims were preempted by SLUSA, granted the defendants motions to dismiss and entered judgment in favor of the defendants. Id.

• Neuberger Berman Real Estate Income Fund v. Lola Brown Trust No. 1B, 485

F. Supp. 2d 631 (D. Md. 2007). A closed-end investment company incorporated in Maryland, which invested primarily in real estate securities, brought suit against trusts domiciled and administered in South Dakota, whose principal business was investing in securities. Id. at 633. In September 2004, the defendant trusts filed a Schedule 13D stating that they had acquired 10.05% of the outstanding shares of the plaintiff fund and had commenced a partial tender offer to acquire over 50% of the remaining outstanding shares with the intent to change or expand the investment objectives of the plaintiff and to replace plaintiff’s directors, investment adviser and administrator. Id. The plaintiff responded by instituting numerous corporate defensive actions, including (1) entering into an agreement to sell certain unregistered shares to its sub-adviser, (2) electing to become subject to the Maryland Control Share Acquisition Act (“MCSAA”) (MGCL §§ 3-701, et. seq.) (3) adopting a poison pill and (4) undertaking a self tender offer. Id. at 634.

Subject to certain limitations, Section 23(b) of the Investment Company Act

prohibits a closed-end investment company from issuing shares at a price below its net asset value. Id. at 637. Section 18(d) of the Investment Company Act provides an exception to Section 23(b) by exempting securities issued pursuant to rights having a maturity of 120 days or less. Id. At issue in the instant case was whether the plaintiff could adopt a new poison pill every 120 days so that a poison pill would be in effect for the entire period of the defendants’ hostile tender offer.7 Id. The Court upheld the plaintiff’s adoption of serial poison pills noting that the plaintiff’s board of directors had not acted in contravention of the Investment Company Act in adopting serial poison pills that “though similar, [were] distinct and separate offerings, both in form and substance.” Id. at 638.

The Court also considered whether the defendant trusts were “‘grandfathered’

[out of the restrictions on holders of control shares under the MCSAA] by qualifying as a person ‘who has become a holder of control shares’ before the

7 The Court had previously concluded that the plaintiff could adopt a poison pill under the Investment Company Act. See Neuberger Berman Real Estate Income Fund v. Lola Brown Trust No. 1B, 342 F. Supp. 2d 371 (D. Md. 2004) (noting that the use of a poison pill by the Maryland closed-end investment company was not inconsistent with Section 18(d), 18(i) or 23 of the Investment Company Act.)

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[plaintiff’s] adoption of a resolution opting in to the MCSAA.” Id. at 639 (quoting Md. Code Ann. Corp.’s & Assn’s § 3-702(c)(4)). As a closed-end investment company fund, the plaintiff was not originally subject to the MCSAA. Id. Nevertheless, the plaintiff was allowed to elect to become subject to (or “opt-in” to) the MCSAA, provided that such election would not “be effective with respect to any person who has become a holder of control shares” prior to the election. Id. The defendant was a holder of control shares, prior to the plaintiff opting-in to the MCSAA, but once the hostile tender offer was initiated, the plaintiff took a series of actions to dilute the defendant’s holdings below the 10% control share threshold. Id. The plaintiff subsequently opted-in to the MCSAA and argued that because the defendant was below the 10% threshold, the plaintiff’s election to be subject to the MCSAA was effective against the defendant. Id. The Court disagreed with the plaintiff, holding that because the defendant did not “voluntarily divest itself of what amounted to ‘control shares’ before [the plaintiff’s board opted-in to the MCSAA, the defendant] remains free to vote those shares unfettered by the proscriptions of the statute.” Id. at 640. The Court, however, determined that any shares obtained by the defendant after the plaintiff’s election to be subject to the MCSAA would be subject to the voting restrictions on holders of control shares imposed by the MCSAA. Id.

• Williams v. Lubin, 516 F. Supp. 2d 535 (D. Md. 2007). On August 15, 2007, the

Commissioner issued a Summary Order to Cease and Desist (the “Cease and Desist Order”) against Andrew H. Williams, POS Dream Home LLC (“POS”), Metropolitan Grapevine LLC and Laveda Whitfield (collectively, the “Restricted Parties”), to prevent such Restricted Parties from marketing and selling securities or advance-fee investments in or from Maryland, prior to a hearing on the matter. Id. at 537. Pursuant to two separate programs, the Restricted Parties had solicited (i) home owners to pay an advance fee to POS in exchange for POS’s promise to pay such home owner’s entire mortgage (including, interest) within five years, at which time POS would also receive fifty percent of the equity value of the home, and (ii) investors to lend between $125,000 and $150,000 to POS in exchange for a promise to repay such investors $52,000 per year for five years, without registering either program as an offering of securities in Maryland. Id. at 537-38. Additionally, none of the Restricted Parties were registered as brokers or dealers or investment advisors under the Act. Further, Mr. Williams had been permanently enjoined from engaging in “securities businesses” by the Circuit Court for Prince George’s County for a matter unrelated to POS’s business. Id. at 538. Prior to resolution of the administrative issues by the Commissioner, the Restricted Parties filed suit in the United States District Court for the District of Maryland seeking the issuance of a temporary restraining order to enjoin the Commissioner from enforcing the Cease and Desist Order. Id. at 536-37. Specifically, the Restricted Parties alleged that the Cease and Desist Order violated their due process rights under the Fourteenth Amendment to the United States Constitution. Id. at 537. The District Court exercised its power of equitable restraint and abstained from hearing the case, because any action at the federal level would “interfere with an ongoing state administrative proceeding that implicates the important state interest of regulating and stabilizing the market for securities.” Id. at 547. Moreover, the

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District Court opined that in balancing the private and public interests in this case, the Cease and Desist Order was a proper means of protecting the public from securities violations and that the District Court could not conclude that there was “any significant risk of an erroneous deprivation of property through the procedures used by the [Commissioner].” Id. at 544-47.

3. Maryland Circuit Courts

• Aiello v. Ferris, Baker, Watts, Inc., No. 24-C-02-006218 (Cir. Ct. Balt. City June 30, 2006). Mary Aiello (“Aiello”), filed a petition with the Circuit Court for Baltimore City to vacate an arbitration award in favor of Ferris, Baker, Watts, Inc. (“FBW”) and one of its stock brokers. In an arbitration action, Aiello had alleged that the investment recommendations of the broker and the transactions he executed on her behalf were inappropriate investments resulting in losses to Aiello of approximately $1.7 million. After the death of her husband, Aiello invested approximately $3.2 million with her deceased husband’s stockbroker, an employee of FBW. These funds were used to purchase numerous variable annuities, at least one life insurance policy and other investments. Aiello contended that these investments were inappropriate for her because they were not liquid, were unable to generate sufficient income and some were speculative and risky. The Court noted that the party seeking to vacate an arbitration award bears the “heavy burden” of proving one of the few narrow grounds that warrant vacatur of an arbitration award, observing that the Court’s review is “to determine only whether the arbitrator did his job – not whether he did it well, correctly or reasonably, but simply whether he did it.” Id. at 5 (quoting Mountaineer Gas Co. v. Oil, Chem. & Atomic Workers Int’l Union, 76 F.3d 606 (4th Cir. 1996)). The Court reviewed the arbitration proceeding and denied Aiello’s petition noting that she failed to mention or discuss any violation of Section 11-401(b) of the Act which, with certain limited exceptions, requires that an investment advisor be registered, or Section 11-703(a)(3)(i) of the Act, which provides for civil liability for a violation of Section 11-401(b) of the Act. Id. at 16-17.

• Lubin v. Beneficial Assurance, Ltd., No. 24-C-02-006515 (Cir. Ct. Balt. City

July 21, 2006). Beneficial Assurance, Ltd. (“Beneficial Assurance”), a Maryland corporation and subsidiary of Beneficial Financial Services, Inc. (“Beneficial Financial”), offered for sale and sold investments in viatical settlements. Hirsch served as Beneficial Assurance’s Vice President and then its President. He also served as the CEO and Chairman of the Board of Directors for Beneficial Financial. As part of the proceeding on the motion for reconsideration, the Court was asked to decide three principle issues: (1) whether a viatical settlement constitutes an “investment contract”, and thus a “security”, under Section 11-101(r) of the Act, (2) whether the Division could proceed against Hirsch for alleged violations of the Act as a control person, and (3) the extent to which Hirsch could be held liable as a primary violator under the Act. Id. at 8.

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In a case of first impression, the Circuit Court held that a viatical settlement constitutes an “investment contract”, and thus a “security”, under Section 11-101(r) of the Act. Id. at 15. Section 11-101(r) of the Act defines a “security” as, among other things, a note, stock, treasury stock, bond, debenture, evidence of indebtedness or investment contract. In deciding this issue, the Circuit Court noted that the term “investment contract” “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of money of others on the promise of profit.” Id. at 10 (quoting Ak’s Daks Commc’ns, Inc. v. Md. Sec. Div., 138 Md. App. 314, 771 A.2d 487 (2001)). The Circuit Court observed that while the Act does not specifically define an “investment contract,” the Maryland Court of Special Appeals had adopted the federal three part definition as set out in SEC v. Howey, 328 U.S. 293 (1946), and as refined by later judicial decisions to mean the following: “[1] an investment of money [2] in a common enterprise [3] with an expectation of profits derived solely from the efforts of others.” Lubin, No. 24-C-02-006515, at 11 (quoting Ak’s Daks Commc’ns, Inc. v. Md. Sec. Div., 138 Md. App. 314, 771 A.2d 487 (2001)).

The Circuit Court noted that the issue in the instant matter was whether

viatical settlements satisfied the third prong of the Howey test. Id. Hirsch had not contested that the viatical settlements at issue involved an investment of money in a common enterprise. Rather, Hirsh asserted that the viatical settlement did not involve an expectation of profits to be derived solely from the efforts of others because Beneficial Assurance only performed ministerial, as opposed to managerial, tasks after their purchase. The Circuit Court observed the term “solely” in the third prong of the test is to be interpreted flexibly to prevent circumvention of the securities laws and to effectuate their purpose, the protection of investors. The Circuit Court indicated that the emphasis is on who performs the “significant managerial and entrepreneurial efforts.” Id. (quoting Ak’s Daks Commc’ns, Inc. v. Md. Sec. Div., 138 Md. App. 314, 771 A.2d 487 (2001). The Circuit Court reviewed the opinion of the D.C. Circuit in SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir 1996), reh’g denied, 102 F.3d 587 (D.C. Cir 1996), noting the following bright-line test: “if the promoters’ entrepreneurial and managerial efforts occur pre-purchase, then the investment does not qualify as a security.” Id. at 12. If on the other hand, the promoters’ significant efforts occur after the purchase, then the investment qualifies as a security. Id. The Circuit Court pointed out that the reasoning of the Life Partners case had been rejected by several federal and state courts as being inconsistent with the U.S. Supreme Court’s decision in Howey. Id. at 13-14. The Circuit Court, however, did not rule on whether a Maryland court would endorse the Life Partners test because it held that the viatical settlements at issue would be investment contracts even under the Life Partners test. Id. at 14-15.

The Circuit Court then reviewed the significant managerial and

entrepreneurial efforts undertaken by Beneficial Assurance. The Circuit Court found that such functions were performed after the investor entered into the

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agreement and the escrow agent had accumulated enough funds from other investors to purchase a policy for the requested period of investment. Id. at 14. The Circuit Court observed that Beneficial Assurance’s personnel evaluated the insured’s medical records, sent the insured to a medical consultant, obtained a life expectancy evaluation from the consultant and then negotiated the purchase of the policy after the investors entered into a binding agreement to purchase the viatical settlements, and it was these efforts of Beneficial Assurance that were essential to the profitability of the investment. Id. Based upon these facts, the Circuit Court concluded that the viatical settlements sold by Beneficial Assurance were investment contracts under section 11-101(r) of the Act. Id. at 15.

The Circuit Court also held that for liability to be imposed upon a control

person, the primary violator must first be found liable. Id. at 16-18. The Circuit Court explained that whether the action is based on contribution for damages or on some other basis of liability, prior rulings of the Maryland Court of Appeals make it clear that there can be no control person liability without the primary violator having been adjudicated liable. Id. Because Beneficial Assurance had not been adjudicated liable, the Division could not seek damages from Hirsh under the principles of control person liability. Id.

Other Statutory Developments None to report. Administrator’s Staffing Changes Timothy F. Cox has left the Division. Joy Sakamoto-Wengel has assumed Mr. Cox’s duties. Other Noteworthy Practice Developments None to report.

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Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in this state/province since February 18, 2008. Highlights of Material Developments There were no material developments in Maryland’s securities laws since our last report to the Committee dated February 18, 2008. Securities Statutory Developments None to report. Applicable State Statute of Limitations Periods The statute of limitations governing the period of time during which an investor is able to file a civil claim for a violation of the state securities laws is found at MD. CODE ANN., CORPS. & ASS’NS, §11-703(f) (LexisNexis 2007).

• The Maryland statute of limitation for civil claims involving violations of §11-304(b), §11-401(a) or §11-402(a) of the Maryland Securities Act, or any rule or order under §11-205 of the Maryland Securities Act which requires the affirmative approval of sales literature before it is used, in each case, is the earlier to occur of (a) three (3) years after the contract of sale or purchase or (b) one (1) year after the violation on which it is based. (CORPS. & ASS’NS, §11-703(f)(1), (f)(2)(i)).

• The Maryland statute of limitation for civil claims involving offers or sales of

securities or offers to purchase or purchases of securities, in each case, by means of any untrue statement of a material fact or omission of a material fact necessary to make the statements made, in light of the circumstances in which made, not misleading, is the earlier to occur of (a) three (3) years after the contract of sale or purchase or (b) one (1) year after the discovery of the untrue statement or omission or one (1) year after the discovery of such untrue statement or omission should have been made by exercise of reasonable diligence. (CORPS. & ASS’NS, §11-703(f)(1), (f)(2)(ii)).

• The Maryland statute of limitations for civil claims for violations of the broker-dealer

and investment advisor provisions of the Maryland Securities Act is the earlier of (a) three (3) years after the date of the advisory contract or rendering of investment advice, or (b) two (2) years after the discovery of the facts constituting the violation. (CORPS. & ASS’NS, §11-703(f)(3)).

Securities Rules Developments None to report.

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Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None to report. Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

MASSACHUSETTS


MASSACHUSETTS STATE LIAISON REPORT

(As of August 18, 2008) This reports on material developments affecting blue sky practitioners in this state/province since August 27, 2007. Liaison: Michael Jurasic

Ropes & Gray LLP One International Place Boston, MA 02110

Email: [email protected] Telephone: 617-951-7754 Cell phone: Fax: 617-235-0698 State Administrator: William Francis Galvin

Secretary of Commonwealth Massachusetts Securities Division One Ashburton Place, 17th Floor Boston, MA 02108

Main Telephone: (617) 727-3548 Main Fax: (617) 248-0177 Internet: http://www.sec.state.ma.us/index.htm Short Title/Citation: Massachusetts Uniform Securities Act http://www.sec.state.ma.us/sct/sctreg/regidx.htm Rules Name/Citation: 950 CMR 10.00 et seq., Code of Massachusetts Regulations Highlights of Material Developments None to report. Securities Statutory Developments None to report. Applicable State Statute of Limitations Periods Section 410(e) [no person may sue more than 4 years after the discovery by the person bringing the action of a violation]


http://www.sec.state.ma.us/index.htm

http://www.sec.state.ma.us/sct/sctreg/regidx.htm

MASSACHUSETTS


Securities Rules Developments None to report. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings The Division has an active enforcement division. Civil and administrative actions are listed on the Division’s website at http://www.sec.state.ma.us/sct/sctidx.htm. Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments While it had been widely rumored that Secretary Galvin would run for governor of Massachusetts in 2006, Secretary Galvin instead ran for re-election as Secretary of State. However, it appears that Secretary Galvin’s aspirations for governor are not over, as he continues to be in the spot light in a number of high profile enforcement actions against Wall Street firms.

http://www.sec.state.ma.us/sct/sctidx.htm

MICHIGAN


MICHIGAN STATE LIAISON REPORT

(As of February 18, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since June 2007, and supplemented to August 15, 2008. Liaison: Shane B. Hansen, Partner Marcus R. Jones, Associate

Warner Norcross & Judd LLP 111 Lyon Street, N.W. Grand Rapids, Michigan 49503

Email: [email protected] Telephone: 616-752-2145 Cell phone: 616-540-1027 Fax: 616-222-2145 State Administrator: Ken Ross, Commissioner

Office of Financial and Insurance Regulation

Official and delivery address: Ottawa Building, 3rd Floor 611 W. Ottawa Lansing, MI 48933-1070

Mailing address: Office of Financial and Insurance Services P.O. Box 30220 Lansing, MI 48909-7720

Main Telephone: (877) 999-6442 Main Fax: (517) 335-4978 Internet: http://www.michigan.gov/ofis Short Title/Citation: Michigan Uniform Securities Act of 1964, as amended; Public Act

No. 265 of 1964 http://www.legislature.mi.gov/(S(lo4bbdveme0v0r45oikjx545))/mileg.aspx?page=getobject&objectname=mcl-act-265-of-1964

Rules Name/Citation: Michigan Administrative Code, R. 451.601 et al

http://www.state.mi.us/orr/emi/admincode.asp?AdminCode=Single&Admin_Num=45100601&Dpt=CI&RngHigh=


http://www.michigan.gov/ofis

http://www.legislature.mi.gov/(S(lo4bbdveme0v0r45oikjx545))/mi

http://www.state.mi.us/orr/emi/admincode.asp?AdminCode=Singl

MICHIGAN


Highlights of Material Developments The Uniform Securities Act of 2002 has been reintroduced as H.B. 5008, and referred to the House Committee on Commerce. A substitute bill addressing minor technical changes is expected to be introduced very soon. Committee hearings have not yet been scheduled. Legislative action can be tracked on the state’s website at: http://www.legislature.mi.gov/(S(j2ptr445zizuxkezyqal4br2))/mileg.aspx?page=getobject&objectname=2007-HB-5008&queryid=19399528 Effective April 6, 2008, the Office of Financial and Insurance Services (OFIS) will be renamed as the Office of Financial and Insurance Regulation (OFIR). Securities Statutory Developments There have been no amendments to the Michigan Securities Act since the June 2007 report. The Uniform Securities Act of 2002 was reintroduced in the current legislative session. There have been no noteworthy cases under the MUSA reported since the last report. Securities Rules Developments No new rules have been promulgated since the June 2007 liaison report. Administrative Orders and Announcements OFIS issued a press release quoting from the 2007 national study conducted by NASAA, the SEC, and FINRA showing that unsolicited invitations to “free investment meal seminars” should raise red flags for older investors. http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-184032--,00.html Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) OFIS brought the following enforcement proceedings since the last report (since the second quarter of 2007, OFIS has only released the final enforcement orders report). Final Orders include: July 30, 2007 06-537-SR, In the matter of OFIS v. Management Consultants International, Inc. and Raymond V. Michael, regarding revocation of securities registrations pursuant to provisions of the Michigan Uniform Securities Act (MCL 451.501). Defendant was offering unregistered investment contracts. In addition, defendants were not registered as broker dealers in the sale of these securities. The commissioner also alleged that the defendants were making fraudulent statements in the sale of the investment contract and did not provide material information about said investment contracts. The defendants were ordered to cease and desist and pay a $10,000 fine.

http://www.legislature.mi.gov/(S(j2ptr445zizuxkezyqal4br2))/mileg.aspx?page=getobject&objec

http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-184032--,00.html

MICHIGAN


Securities-related Case Law Developments None to report. Other Statutory Developments See the note above regarding the reintroduction of the Uniform Securities Act of 2002, as H.B. 5008. Administrator’s Staffing Changes On February 22, 2008, Governor Jennifer Granholm appointed Ken Ross as Commissioner of the OFIS. Ross, 40 of Dewitt, Michigan, most recently served as OFIS acting commissioner, and prior to that appointment, he served as OFIS deputy commissioner for policy. Before coming to OFIS, Ross served as vice president of regulatory and legal affairs for the Michigan Credit Union League (MCUL). In addition to Ross’s tenure at OFIS and his work at the MCUL, his previous experience includes serving as an assistant attorney general under Attorneys General Frank J. Kelley and Jennifer M. Granholm. Ross earned his law degree with honors from Thomas M. Cooley Law School and his bachelors degree, with a double major in philosophy and political science, from the University of Michigan-Dearborn. Michigan was one of the first states to coordinate regulation banking, insurance, and securities industries under the federal Financial Services Modernization Act of 1999. Ross replaces Linda Watters who resigned in October 2007. Other Noteworthy Practice Developments None to report.

MICHIGAN


Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in Michigan since February 2008 to August 15, 2008. Highlights of Material Developments None to report. Securities Statutory Developments The Uniform Securities Act of 2002 was introduced in the Michigan House of Representatives as HB 5008 on July 10, 2007 to replace the Michigan Uniform Securities Act of 1956, as amended (“MUSA”). House substitute bill H-2 passed the Michigan House on April 30, 2008, and was transmitted to the Michigan Senate. On May 1, 2008, HB 5008(H-2) was referred to the Senate Committee on Banking and Financial Institutions. Legislative developments with respect to the USA 2002 in Michigan can be tracked on the Michigan Legislature’s website at: http://www.legislature.mi.gov/(S(fkga3v55rlgicv55rm4h5p55))/mileg.aspx?page=getobject&objectname=2007-HB-5008&queryid=19399528. Applicable State Statute of Limitations Periods Administrative Enforcement Actions. Section 408(e) [MCLA §451.808(e)], provides:

(e) The administrator shall not commence any action or proceeding under this act more than 6 years after the violation.

Civil Actions. Sections 410(e) and (f) [MCLA §§451.810(e) and (f)], provide:

(e) A person may not bring an action under subsection (a)(1) more than 2 years after the contract of sale. A person may not bring an action under subsection (a)(2) more than 2 years after such person, in the exercise of reasonable care, knew or should have known of the untruth or omission, but in no event more than 4 years after the contract of sale. A person may not bring an action under this section if the buyer received a written rescission offer, before the action and at a time when he or she owned the security, to refund the consideration paid together with interest at 6% per year from the date of payment, less the amount of any income received on the security, and he or she failed to accept the offer within 30 days of its receipt, or if the buyer received such an offer before the action and at a time when he or she did not own the security unless he or she rejected the offer in writing within 30 days of its receipt. The documents making full written disclosure about the financial and business condition of the issuer and the financial and business risks associated with the retention of the securities shall be provided to the offeree concurrently with the written rescission offer. Such an offer shall not be made until 45 days after the date of sale of the securities and acceptance or rejection of the

http://www.legislature.mi.gov/(S(fkga3v55rlgicv55rm4h5p55))/mileg.aspx?page=getobject&obj

MICHIGAN


offer shall not be binding until 48 hours after receipt by the offeree. The rescission offer shall recite the provisions of this section. A rescission offer under this section shall not be valid unless the offeror substantiates that it has the ability to fund the offering and this information is set forth in the disclosure documents. (f) No person who has made or engaged in the performance of any contract in violation of any provision of this act or any rule or order hereunder, or who has acquired any purported right under any such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any suit on the contract.

Criminal Actions. Section 409(d) [MCLA §451.809(d)], provides:

(d) Any criminal complaint or indictment for violation of this act shall be filed within 6 years after the commission of the offense, but any period during which the party charged was not usually and publicly resident within this state shall not be included as part of the 6 years.

Securities Rules Developments No new rules have been adopted. Administrative Orders and Announcements No new orders or announcements to report. A reminder to Form D filers that the OFIR previously issued Bulletin 2007-03-SEC, In the Matter of Rule 803.7(c)(ii) of the Michigan Uniform Limited Offering Exemption and its application to Regulation D Rule 506 offerings (which in part superseded Release No. 97-2-S), in which the Commissioner said that Michigan will not require issuers relying on a Rule 506 exemption to provide an undertaking to furnish offering materials pursuant to Rule 803.7(7)(c)(ii) of the MUSA because the SEC does not require issuers making Rule 506 offerings to provide such an undertaking. The bulletin can be found on the OFIR website at: http://www.michigan.gov/dleg/0,1607,7-154-10555_12900_13381---,00.html Administrative Enforcement Proceedings On August 27, 2008, the OFIR announced that it had recovered over $4.3 million on behalf of Michigan consumers in the 1st and 2nd quarters of 2008, including $3.6 million of the recoveries involving insurance and securities products. The recoveries were based on 3,425 complaints resolved by the agency in the 1st and 2nd quarters. For the full press release go to: http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-198958--,00.html. Reported enforcement actions during the first two quarters of 2008 primarily involved insurance and mortgage products. Of continuing interest, the OFIR previously adopted the Guiding Principles For the Settlement of Enforcement Cases (January 2007), which is available on its website at: http://www.michigan.gov/dleg/0,1607,7-154-10555_20594_46950---,00.html

http://www.michigan.gov/dleg/0,1607,7-154-10555_12900_13381---,00.html

http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-198958--,00.html

http://www.michigan.gov/dleg/0,1607,7-154-10555_20594_46950---,00.html

MICHIGAN


Securities-related Case Law Developments Lyle G. Myers, Plaintiff, v. OTR Media, Inc., Richard Underwood, and Carl Flewallen, jointly and severally, Defendants, Case No. 1:05-CV-101, United States District Court for the Western District Of Kentucky, Bowling Green Division, 2008 U.S. Dist. LEXIS 19297 (March 12, 2008). Plaintiff’s summary judgment motion was granted finding, as a matter of law, an agent registration violation of the MUSA for failure of an issuer’s agent to register as such because he received “commissions,” as broadly defined in the MUSA, in connection with the offer and sale of the issuer’s stock. Jack Burket, et al., Jennifer Adams, et al., William Cliff, et al., Plaintiffs, v. Hyman Lippitt, P.C., et al., Defendants. Hyman Lippitt, P.C., et al., Counter- and Third-Party Plaintiff, v. Keith Mohn, et al., Counter- and Third-Party Defendants, Case No. 05-72110, Case No. 05-72171, Case No. 05-72221, United States District Court for the Eastern District of Michigan, Southern Division, 2008 U.S. Dist. LEXIS 33546 (April 23, 2008). The court concluded that its analysis of Plaintiffs' securities fraud claims brought under § 10(b) and Rule 10b-5 govern Plaintiffs' securities fraud claims brought under section 451.501 of the MUSA. According to the court, Section 451.501 of the MUSA is nearly identical to § 10(b) and therefore courts apply case law interpreting § 10(b) to claims brought under section 451.501 of MUSA. See Dep't of Commerce v. DeBeers Diamond Inv., Ltd., 89 Mich. App. 406, 410, 280 N.W. 2d 547, 550 (1979). These three cases have extensive histories involving various claims against a law firm with respect to an off-shore securities offering and related activities. Other Statutory Developments None to report. Administrator’s Staffing Changes Commissioner Ken Ross appointed Stephen Hilker as OFIR’s Chief Deputy Commissioner effective on August 11, 2008. With the appointment of a single Chief Deputy, OFIR will no longer be divided into the Office of Financial Evaluation and the Office of Regulatory Compliance & Consumer Assistance. The new executive level structure will bring greater cohesiveness to the agency and increase communication across division lines. For the full press release go to: http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-198327--,00.html. Effective June 2, 2008, Commissioner Ken Ross appointed Jean Boven as Deputy Commissioner of the Regulatory Compliance Division, Jenita Moore as Deputy Commissioner for Policy, and Joe Garcia as Ross’s Chief of Staff. Jean Boven’s primary responsibilities include the supervision of the Insurance, Consumer Finance and Product Review sections. Jenita Moore’s primary responsibilities include serving as the OFIR’s legislative affairs director and policy advisor. Joe Garcia’s primary responsibilities include working with OFIR staff, a variety of external stakeholders and administration officials to ensure the execution of the Commissioner's agenda and the efficient day to day management of agency operations. For the

http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250

MICHIGAN


full press release go to: http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250-193711--,00.html. Other Noteworthy Practice Developments None to report.

http://www.michigan.gov/dleg/0,1607,7-154-10555_13222_13250

MINNESOTA


MINNESOTA STATE LIAISON REPORT

(As of February 22, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since June 21, 2007 and supplemented to August 15, 2008. Liaison: Katherine G. Manghillis

Schottenstein, Zox & Dunn Co., L.P.A. 250 West Street Columbus, Ohio 43215

[email protected] Tel: (614) 462-1087 Fax: (614) 228-4846 State Administrator: Glenn Wilson, Commissioner

Minnesota Department of Commerce 85 Seventh Place East, Suite 500 St. Paul, Minnesota 55101

Main Telephone: (651) 296-7588 Main Fax: Internet: http://www.state.mn.us/portal/mn/jsp/home.do?id=-

536881512&agency=Commerce Short Title/Citation: Brett Bordelon Staff Attorney, Department of Commerce [email protected] Rules Name/Citation: Minnesota Administrative Rules Minn. Rules 2875.0110-.9970

(2005) https://www.revisor.leg.state.mn.us/arule/a160.html Highlights of Material Developments None to report. Securities Statutory Developments As noted in the last report, in 2006 the Minnesota State Legislature adopted an amended version of the Uniform Securities Act of 2002, codified at Minn. Stat. §§80A.40-90. The new statute became effective on August 1, 2007.

Securities Rules Developments The rules promulgated pursuant to Minnesota Statutes §§80A.01-31 were automatically repealed effective August 1, 2007. The new act does contain provisions


http://www.state.mn.us/portal/mn/jsp/home.do?id=


https://www.revisor.leg.state.mn.us/arule/a160.html

MINNESOTA


authorizing rulemaking. As a result, the Minnesota Department of Commerce is considering the following: (1) which of the rules promulgated under the old act may be repromulgated with suitably amended language; (2) allowing to lapse rules that (a) are inconsistent with the new act, (b) are not authorized under the new act, or (c) have been preempted by federal laws; and (3) the adoption of new rules related to registrations required by, exemptions from certain provisions of enforcement of, and administration of the new act. See, Minnesota Department of Commerce, Division of Market Assurance, Request for Comments dated February 6, 2007, published March 12, 2007. In the March 12, 2007 issue of the State Register, the Minnesota Department of Commerce published a Request for Comments regarding the possible adoption of, amendment to, and repeal of rules governing the regulation of securities, Minnesota Rules, 2875.0110-9970. Interim Guidelines, discussed below, that became effective on August 1, 2007, are the latest published guidance from the Department of Commerce. The rule making process is ongoing; however, new rules have not yet been adopted.

Administrative Orders and Announcements On July 30, 2007, the Minnesota Commissioner of Commerce issued an Order titled Interim Guidelines Related to the Minnesota Securities Act Becoming Effective on August 1, 2007. The Order provided for the following:

1. An extension of the institutional investor exemptions for broker-dealers whose only transactions effected in Minnesota are with accredited investors, and investment adviser registration and federal covered investment adviser notice filings for transactions whose only clients in Minnesota are accredited investors;

2. A requirement for notice (but no fee) to be filed at least ten (10) days in advance of any sale in connection with: (a) a transaction in reliance on Section 80A.46(14) (limited purchasers), provided that no notice filing is required with respect to sales to ten (10) or fewer purchasers in Minnesota during any 12-month period; (b) a transaction in reliance on Section 80A.46(15) (existing shareholder exemption); (c) a transaction in reliance on Section 80A.46(18) (mergers and consolidations exemption); and (d) a transaction in reliance on Section 80A.46(21) (employee plan exemption);

3. A requirement for notice filings and fees in connection with securities issued by an investment company; and

4. A requirement for notice filings and fees in connection with Rule 506 offerings.

The complete Order is available online at: http://www.state.mn.us/mn/externalDocs/Commerce/2007_Security_Laws_Guidelines_072707032049_Order_InterimSecurityGuidelines.pdf

http://www.state.mn.us/mn/externalDocs/Commerce/2007_Security_Laws_Guidelines_0

MINNESOTA


Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None to report.

Securities-related Case Law Developments None to report.

Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

MINNESOTA


Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in this state/province since February 22, 2008.

Highlights of Material Developments None reported. Securities Statutory Developments Effective May 2, 2008, the Minnesota State Legislature adopted amendments to various sections of the Minnesota Uniform Securities Act. The unofficial version of Chapter 256 of the Minnesota 2008 Session Laws is available at

https://www.revisor.leg.state.mn.us/laws/?year=2008&type=0&doctype=Chapter&id=256 §80A.41 (1) contains a defined term “accredited investor” which incorporates the SEC definition in Rule 501(a) of Regulation D.

§80A.56(b)(1) has been amended to include an exemption from broker-dealer registration for a broker-dealer with no place of business in Minnesota which effects transactions with accredited investors in MN. §80A.58(b)(1) has been amended to include an exemption from investment adviser registration for an adviser whose only clients in Minnesota are accredited investors. §80A.60(b)(1) has been amended to include an exemption from the notice requirement for federal covered investment advisers for an SEC-registered adviser with no place of business in Minnesota whose only clients in Minnesota.

§80A.46 has been amended to require presale notice filings for the exempt transactions in subsections (14) (with an exception for a sale to 10 or fewer Minnesota investors in twelve (12) months), (15), (18) and (21). Applicable State Statute of Limitations Periods MINN. STAT. ANN. §80A.76. Section 509; civil liability. An action must be instituted within one year after the violation occurred for the following: (1) liability of seller to purchaser for violation of §80A.49; (2) liability of unregistered broker-dealer and agent; or (3) liability of unregistered investment adviser. MINN. STAT. ANN. §80A.76(J)(1). An action must be instituted within the earlier of two years after discovery of the facts constituting the violation or five years after the violation for the following: (1) liability of seller to purchaser, other than for violation of §80A.49, (2) liability of purchaser to seller; or (3) liability for investment advice. MINN. STAT. ANN. §80A.76(j)(2).

https://www.revisor.leg.state.mn.us/laws/?year=2008&type=0&doctype=Chapter&id=256

MINNESOTA


MINN. STAT. ANN. §628.26. Criminal Accusation – Limitations. In all cases, except those enumerated in §628.26(a)-(j), indictments or complaints shall be filed within three (3) years after commission of the offense. MINN. STAT. ANN. §628.26(K).

Securities Rules Developments The rules promulgated pursuant to Minnesota Statutes §§80A.01-31 were automatically repealed effective August 1, 2007.

In the March 12, 2007 issue of the State Register, the Minnesota Department of Commerce published a Request for Comments regarding the possible adoption of, amendment to, and repeal of rules governing the regulation of securities, Minnesota Rules, 2875.0110-9970. Interim Guidelines, discussed in the February 22, 2008 Report, that became effective on August 1, 2007, are the latest published guidance from the Department of Commerce. The rule making process is ongoing; however, new rules have not yet been adopted.

Administrative Orders and Announcements None to report.

Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None to report.

Securities-related Case Law Developments In Risdall v. Brown – Wilbert, Inc., 2008 WL 2917601 (July 31, 2008), the Minnesota Supreme Court held that: (1) federal law does not preempt state registration requirements with respect to securities that purport to be, but are not in fact, federal covered securities; and (2) a securities offer need not result in a sale in order to be integrated with other offers and sales for purposes of determining whether a state registration exemption applies. Id., syllabus at ¶¶1 and 2. The Appellants, Charles Risdall, Len Dozier and John Risdall (as personal representative of the estate of Mary Risdall) sued defendant Brown-Wilbert, Inc., and respondents Christopher C. Brown and funeral.com, Inc. seeking damages and rescission of purchases of funeral.com stock. Id. at *1. On March 2, 2000, funeral.com issued a private placement memorandum (PPM1) for the sale of funeral.com stock. Id. In March and April 2000, Appellants purchased shares of funeral.com stock. Id. PPM1 disclosed that the shares were not registered and were offered pursuant to the registration exemption for sales of stock to “accredited investors” as defined in Regulation D. Id. On May 17, 2000, funeral.com issued a second private placement memorandum (PPM2) for the sale of funeral.com stock. Id. Information PPM2 was posted on the internet, circulated via e-mail and mailed to potential investors. Id. Appellants argued that they were entitled to rescind the stock purchases under Minn.Stat. §80A.23, subd. 1 (2006), because respondents sold unregistered securities in violation of Minn.Stat. §80A.08 (2006). Id. at *2. Appellants argued that the stock offering did not

MINNESOTA


qualify for the Minn.Stat. §80A.15, subd. 2(h) (2006), exemption from registration because respondents violated a condition of the exemption by engaging in general solicitation and advertising. Id. The court noted that the outcome of the case turned on resolution of the following issues: (1) whether federal law preempts state registration requirements with respect to securities that purport to be, but are not in fact, federal covered securities; and (2) whether a securities offer must result in a sale in order to be integrated under Minn.Stat. §80A.15, subd. 2(h)(10), and Rule 502 of Regulation D, 17 C.F.R. §230.502. Id. at *3

The court, relying on the plain language of 15 U.S.C. §77r and Rule 506, found that the federal law only preempts state registration requirements with respect to securities that actually qualify as federal covered securities. Id. at *4. Next the court addressed whether the sales under PPM1 and the offers under PPM2 can be integrated into a single offering for purposes of determining whether the state registration exemption applies. The court stated that the issue it must resolve is “whether a securities offer must result in a sale in order to be integrated under Minn.Stat. §80A.15, subd. 2 (h)(10), and Rule 502(a) of Regulation D, 17 C.F.R. §230.502(a). Id. at *6. If integration occurs, then respondents are not entitled to the state exemption provided in Minn.Stat. §80A.15, subd. 2(h).

The “integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to the multiple offerings that would not be available for the combined offering. Id. (citing Revisions of Limited Offering Exemptions in Regulation D, Securities Act Release No. 8828, Investment Company Act Release No. 27,922, 72 Fed.Reg. 45, 116, 45,129 (proposed Aug. 10, 2007)). Ultimately, the court found that “[B]ecause the integration test of Rule 502, as incorporated in Minnesota law, is best interpreted as not containing a sales requirement, we hold that a securities offer need not result in a sale in order to be integrated. Id. at 9.

Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

MISSISSIPPI


MISSISSIPPI STATE LIAISON REPORT

(As of February 22, 2008; supplemented to September 1, 2008) This report on material developments affecting blue sky practitioners in this state/province since June 20, 2007. Liaison: Daniel G. Hise

Butler, Snow, O’Mara, Stevens & Cannada, PLLC Post Office Box 22567 Jackson, MS 39225-2567

Email: [email protected] Telephone: 601-985-4509 Cell phone: 601-260-4389 Fax: 601-985-4500 State Administrator: Dave Scott, Assistant Secretary of State

Mississippi Secretary of State’s Office Post Office Box 136, Jackson, MS 39205-0136 700 North Street, Jackson, MS 39202

Main Telephone: 601-359-6747 Main Fax: 601-359-1499 Internet: http://www.sos.state.ms.us Short Title/Citation: Mississippi Securities Act www.sos.state.ms.us MCA 75-71-105, et seq. Rules Name/Citation: Mississippi Securities Act Rules www.sos.state.ms.us Highlights of Material Developments Delbert Hosemann was elected as the new Secretary of State in November 2007 and took office in January 2008. Securities Statutory Developments None to report. Securities Rules Developments A number of amendments to the rules have been proposed but are not yet final. The proposed changes are posted on the Secretary of State web site. There are several changes


http://www.sos.state.ms.us



MISSISSIPPI


designed to bring the investment adviser rules into conformity with NASAA Guidelines or with SEC regulations. There are also changes designed to clarify notice filing rules. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes The new Secretary of State has not yet hired a replacement for Jim Nelson as the Assistant Secretary of State for the Business Regulation and Enforcement Division. Michael Huggs ahs recently been named Division Director. Since the last report, Patricia Melvin has joined the Division as Senior Attorney. Other Noteworthy Practice Developments None to report.

MISSISSIPPI


Supplemented to September 1, 2008 This reports on material developments affecting blue sky practitioners in this state/province since February 22, 2008. Highlights of Material Developments Dave Scott was appointed in March 2008 as Assistant Secretary of State for Business Regulation and Enforcement. The Secretary of State has created a new Division of Policy and Research. That Division is currently working with a task force of outside experts to do a thorough review of the Mississippi Securities Act and possibly recommend changes. Securities Statutory Developments None Securities Rules Developments As previously reported, a number of amendments to the rules have been proposed but are not yet final. The proposed changes are posted on the Secretary of State web site. There are several changes designed to bring the investment adviser rules into conformity with NASAA Guidelines or with SEC regulations. There are also changes designed to clarify notice filing rules. Administrative Orders and Announcements None Administrative Enforcement Proceedings Reported separately Securities-related Case Law Developments None Other Statutory Developments None Administrator’s Staffing Changes The new Secretary of State has hired Dave Scott as a replacement for Jim Nelson as the Assistant Secretary of State for the Business Regulation and Enforcement Division. Since the last report, Melanie Thomas has joined the Division as Senior Attorney, along with Marla

MISSISSIPPI


Breeland, Director of Examinations; Mona Shedd, Senior Examiner; Ricky Martin, Examiner; Carolyn Neal, Examiner; and Cindy Sumrall, Special Projects Officer. Other Noteworthy Practice Developments None

MISSOURI


MISSOURI STATE LIAISON REPORT

No report.

MONTANA


MONTANA STATE LIAISON REPORT

(February 18, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since August 2007, and supplemented to August 15, 2008. Liaison: Robert J. Ahrenholz, Esq.


Email: [email protected] Telephone: 303-297-2400 Cell phone: Fax: 303-292-7799 State Administrator: John Morrison, State Auditor Primary Contact: Lynne Egan, Acting Deputy Securities Commissioner

Montana State Auditor’s Office Securities Department 840 Helena Avenue Helena, MT 59601

Main Telephone: 406-444-2040 Main Fax: 406-444-5558 Internet: http://sao.mt.gov/securities/index.asp Short Title/Citation: Securities Act of Montana MONT. CODE ANN. §§ 30-10-101

through 30-10-326 http://data.opi.state.mt.us/bills/mca_toc/30_10.htm Rules Name/Citation: Administrative Rules of Montana, Securities Regulations, Mont.

Admin. R. 6-10-101 through 6-10-150 http://www.mtrules.org/gateway/ChapterHome.asp?Chapter=6.10 Highlights of Material Developments

The Montana State Auditor serves as the State of Montana’s Securities Commissioner. The Securities Department of the Montana State Auditor’s Office regulates securities transactions by registering securities, brokerage firms, investment advisory firms and individuals working for those firms. In addition to its regulatory function, the Securities Department of the Montana State Auditor’s Office has the authority to investigate violations of the Securities Act of Montana, with jurisdiction over fraudulent securities transactions and broad enforcement authority to file administrative and injunctive actions and to refer criminal matters


http://sao.mt.gov/securities/index.asp

http://data.opi.state.mt.us/bills/mca_toc/30_10.htm

http://www.mtrules.org/gateway/ChapterHome.asp?Chapter=6.10

MONTANA


to county attorneys or other criminal justice agencies. For additional information, visit the Montana State Auditor’s Office’s Web site at: www.sao.mt.gov.8

On February 12, 2008, Lynne Egan, the Deputy Securities Commissioner at the Montana State Auditor’s Office, confirmed that Montana is fully compliant with the provisions and exceptions of NSMIA.


The last regular session of the Montana State Legislature adjourned in April 27, 2007. No changes were made to Montana’s Security Act. There was a Special Session called on May 10, 2007 which adjourned May 15, 2007. This session dealt primarily with the budget and made no changes to Montana’s Security Act. There was a Special Session called on September 5, 2007 which adjourned the same day. This session dealt primarily with wildfire suppression and made no changes to Montana’s Security Act.


Since the August 2007 update, there have not been any material developments in securities rules.


Since the August 2007 update, there have not been any material administrative orders and announcements.


The Montana Securities Department has taken a proactive approach in the monitoring of sales activities and practices of securities brokers in regards to the sale of variable annuities. Additionally, the Department is monitoring the activities of insurance salespeople to ensure they are not improperly acting as unregistered investment advisers in regards to discussing and making recommendations regarding their clients’ securities portfolios. The Department has implemented a program entitled InvestSmart, which provides educational tools to investors to protect themselves against fraud as well as providing law enforcement training to law enforcement agents throughout the state of Montana to help detect securities fraud and other white collar crimes.

The Montana State Auditor’s Office has provided the following releases to help warn investors of fraudulent activity:

a. Press Release dated October 24, 2007. Morrison Fines Insurance Agent $80,000; Revokes License.

Montana State Auditor John Morrison today announced a proposed order issued against Troy insurance agent Martin O. Bower. The proposed order bans the former Banker’s

8 The information contained in the foregoing paragraph was obtained on 02/05/08 at http://sao.mt.gov/securities/secintro.asp.

http://www.sao.mt.gov

http://sao.mt.gov/securities/secintro.asp

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Life insurance agent from becoming licensed to sell insurance for five years and fines him $80,000 for victimizing two elderly Montana women in northwestern Montana. The case resulted from a complaint by a family concerned about their mother who is an Alzheimer’s victim.

“Montana senior citizens should be able to feel that their investments are suitable and their retirement is secure,” said Morrison, Montana’s Securities Commissioner. “This is a matter of consumer protection. We will not allow people who don’t play by the rules to coerce senior citizens to buy inappropriate investment products.”

Bower had been to the Alzheimer’s victim’s home near Ronan on several occasions convincing her to liquidate her securities accounts to purchase an insurance product, a fixed-index annuity. A second complainant lived in an assisted living apartment in Kalispell and Bower attempted to obtain inappropriate control over her Glacier Bancorp stock certificates in order to sell her a fixed annuity.

Morrison has indicated his concern about the suitability of some investments for senior citizens, particularly certain annuity products and viaticals.

“Investors must be fully informed before they make decisions to buy or sell securities or annuities,” Morrison said. “They should obtain full disclosure about any investment opportunity and consult an expert before investing.”

He said investors should understand whether there are financial consequences with the sale of a security, such as a capital gains tax or deferred sales charges. Investors also need to realize the risks and obligations of investing in annuities. There may be a lengthy holding period, penalties for early withdrawal, a lack of liquidity or other significant factors.

“This office will continue to pursue action that protects Montana consumers, particularly our seniors, who are victims of a larger percentage of scams than any other segment of society,” Morrison said. “We will not tolerate the actions of individuals who target seniors and prey on their vulnerabilities.”

Montanans concerned about persons offering investment advice they should call the Auditor’s office toll free at 800-332-6148 to verify their expertise.

b. Press Release dated Nov. 5, 2007: Morrison Reaches Settlement With Agent, Firm Charged In Securities Fraud Case

Spokane Stockbroker Richard Westerman and broker-dealer firm Raymond James Financial Services ordered to pay fines, restitution for Unsuitable Recommendations and Churning Allegations.

Montana State Auditor John Morrison has reached a settlement in the administrative action against former stockbroker Richard Westerman and broker-dealer firm Raymond James Financial Services. In the action filed by the Securities Department of the Auditor’s Office allegations included Westerman committed securities fraud when he churned an IRA owned by a Missoula resident and alleged the company failed to reasonably supervise

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Westerman. The Notice of Proposed Agency Disciplinary Action and Opportunity for Hearing, filed May 31, also alleged Westerman conducted the fraudulent trading in the IRA account without the account owner’s authorization or knowledge.

Raymond James Financial Services agreed to and paid a $10,000 fine to the State of Montana and has contributed $6,296.76 to the Investor Protection Trust for the benefit of Montana investors. Westerman agreed to pay the Missoula victims $15,000 in restitution and will not seek registration as a securities salesperson or an investment advisor representative or an investment advisor in Montana. Westerman currently lives in Washington.

The Investor Protection Trust provides independent, objective information needed by consumers to make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and uses grants to underwrite important initiatives carried out by other organizations. The IPT recently provided the Montana State Auditor’s Office with a grant to develop an investor education documentary entitled “Fraud Under the Big Sky.” To learn to protect yourself from securities fraud, you can order a copy of this DVD by calling (800) 332-6148.

c. Press release dated Nov. 09, 2007: Morrison Orders New York Broker-Dealer Firm To Cease And Desist

Auditor Alleges Securities Fraud Committed Against Polson Investor. Montana State Auditor John Morrison filed a disciplinary action and cease and desist order against Ehrenkrantz King Nussbaum Financial Services (EKN), a New York broker-dealer firm. The action also names stockbrokers Larry Lubarsky, Igor Sirota, Thomas Giugliano, George Tamborello and Gabriel Iezzoni. The Auditor alleges EKN, Lubarsky, Sirota and Giugliano committed securities fraud against a Polson investor and alleges Tamborello and Iezzoni failed to supervise these EKN brokers.

In July 2004, the Polson investor opened an account at EKN with instructions that he wanted conservative investments with growth and income potential. Instead of following the investor’s instructions, Lubarsky, Sirota and Giugliano engaged in a pattern of excessive and unsuitable trading in his account, executing at least 195 trades in a 16-month period in speculative stocks, and charging excessive fees and commissions amounting to over $141,000. The investor’s EKN investment portfolio would have had to grow at a rate of 81.99% during the 16-month period for the investor to simply break even. Instead, the investor lost over $62,000.

“While we deal aggressively with cases like this, we also try to prevent financial fraud through investor education,” said Morrison. “Because knowledge is an investor’s best defense against fraud, we developed a comprehensive investor education program called InvestSmart Montana. This program helps Montanans recognize financial schemes like churning and unsuitable trading.”

The action seeks restitution for the victim, fines and the suspension and/or revocation of each of the named respondents’ securities license in the State of Montana.

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Meanwhile, Morrison imposed a temporary cease and desist order to prevent the named respondents from engaging in any activity that violates the Montana Securities Act.

“Our office works hard every day to prosecute firms and brokers and to make the victims whole", said Morrison “but we know that the best kind of law enforcement is to prevent the crime in the first place. That’s what InvestSmart is all about – giving investors the tools that they need to protect themselves from fraud.”

For Montanans wanting to learn more about protecting themselves from financial fraud, Auditor Morrison encourages them to request a copy of the documentary “Fraud Under the Big Sky”. The documentary highlights two high-profile securities cases prosecuted by the Auditor’s Office and includes important information on how to recognize, detect and prevent securities fraud. The documentary was funded by the Investor Protection Trust and produced by InvestSmart. For more information log onto www.InvestSmartMT.org or call 1-800-603-6035.


Since the August 2007 update, there does not appear to have been any material securities related case law developments in the areas of corporate or securities law addressing novel questions of law or changing prior interpretations of law in 2007. Additionally, Ms. Lynne Egan, the Deputy Securities Commissioner at the Montana State Auditor’s Office, confirmed that there were no court decisions of interest to date relating to securities and securities regulation.


Since the August 2007 update, there have not been any material statutory developments.


Since the August 2007 update, there have not been any material changes in the Administrator’s staffing.


Since the August 2007 update, there have not been any material or other noteworthy practice developments.

http://www.InvestSmartMT.org

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The Montana State Auditor serves as the State of Montana’s Securities Commissioner. The Securities Department of the Montana State Auditor’s Office regulates securities transactions by registering securities, brokerage firms, investment advisory firms and individuals working for those firms. In addition to its regulatory function, the Securities Department of the Montana State Auditor’s Office has the authority to investigate violations of the Securities Act of Montana, with jurisdiction over fraudulent securities transactions and broad enforcement authority to file administrative and injunctive actions and to refer criminal matters to county attorneys or other criminal justice agencies. For additional information, visit the Montana State Auditor’s Office’s Web site at: www.sao.mt.gov.9 On August 15, 2008, Lynne Egan, the Deputy Securities Commissioner at the Montana State Auditor’s Office, confirmed that Montana is fully compliant with the provisions and exceptions of NSMIA. Securities Statutory Developments

The last regular session of the Montana State Legislature adjourned in April 27, 2007. No changes were made to Montana’s Security Act. There was a Special Session called on May 10, 2007 which adjourned May 15, 2007. This session dealt primarily with the budget and made no changes to Montana’s Security Act. There was a Special Session called on September 5, 2007 which adjourned the same day. This session dealt primarily with wildfire suppression and made no changes to Montana’s Security Act. Securities Rules Developments

In September 2008, the Montana Deputy Securities Commissioner will propose the adoption of the North American Securities Administrators Association Model Rule on the use of senior-specific certifications and professional designations in its entirety. Administrative Orders and Announcements


The Montana Securities Department has taken a proactive approach in the monitoring of sales activities and practices of securities brokers in regards to the sale of variable

9 The information contained in the foregoing paragraph was obtained at http://sao.mt.gov/securities/secintro.asp (last visited on Aug. 12, 2008).

http://www.sao.mt.gov

http://sao.mt.gov/securities/secintro.asp

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annuities. Additionally, the Department is monitoring the activities of insurance salespeople to ensure they are not improperly acting as unregistered investment advisers in regards to discussing and making recommendations regarding their clients’ securities portfolios. The Department has implemented a program entitled InvestSmart, which provides educational tools to investors to protect themselves against fraud as well as providing law enforcement training to law enforcement agents throughout the state of Montana to help detect securities fraud and other white collar crimes. The Montana State Auditor’s Office has provided the following seven releases since the February 2008 Supplemented to help warn investors of fraudulent activity:10 a. Press Release dated August 7, 2008. Morrison Prevails in Fraud Case Against Tennessee Oil Promoter. $147,513.33 in restitution ordered; $505,000 levied in fines. An administrative hearing examiner has ruled in favor of the Securities Department of the Montana State Auditor’s Office in its case against Mid-America Energy, Inc., a Tennessee based oil and gas development company. State Auditor John Morrison previously issued a Cease and Desist Order and Proposed Agency Action against Mid-America as well as its president, Gary Milby and operations manager Clinton Goff after Missoula residents invested approximately $120,000 in the company. In his order, Morrison directed the respondents to halt their fraudulent activities in the state and to stop violating the Montana Securities Act.

“Part of the mission of our office is to foster capital formation in Montana and help legitimate entrepreneurs comply with Montana law when raising money for their business ventures,” said Morrison. “We are also entrusted with the responsibility of protecting Montana investors from becoming fraud victims. We won’t tolerate unscrupulous investment promoters in Montana and I will do all that I can administratively to halt these investment abuses and will seek criminal sanctions when warranted.”

In its previously filed action, the Montana Securities Department alleged Mid-America Energy, Milby and Goff acted fraudulently by promising incredible returns, including a 100% return on investments in 12 months and dividend checks of $3,600 each month. Montana investors identified by the Department have received nothing for their investments and have been unable to make contact with the company in over a year. About the same time Mid-America Energy was receiving investment monies from Montana investors and not living up to the promised returns, Milby threw a 16th birthday party for his daughter that was well publicized, including a feature on MTV’s “My Super Sweet 16” television show. Milby reportedly spent over $100,000 on the party and presented her with a brand new BMW as a birthday gift. The widespread scam was the focus of an extensive New York Times article earlier this spring. In his order, Hearing Examiner Michael Rieley found the respondents were not properly registered or licensed in Montana and they used fraudulent practices to induce Montanans to invest in Mid-America Energy. Mr. Rieley ordered respondents to pay restitution

10 The following press releases can be found at http://sao.mt.gov/news/news_archive.asp (last visited Aug. 13, 2008).

http://sao.mt.gov/news/news_archive.asp

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in the amount of $147,513.33 to the Montana investors and levied fines totaling $505,000 against Mid-America, Milby and Goff.

“Time and time again we see investors harmed by the fraudulent activity of firms and their representatives,” Morrison said. “The message here is that my office will continue to enforce the law and these parties will pay the price for behavior that harms consumers. But investors should always be skeptical of any investment promoter’s claims and take the necessary steps to investigate before investing. An informed investor is the best defense against investment fraud.”

b. Press Release dated July 14, 2008: Morrison Announces a Win in Case Against Fraudulent Energy Operation. Through efforts of the SEC, nearly all investment dollars to be returned to Montanans. Montana State Auditor John Morrison announced that his office has won a securities fraud case against a group operating an energy scam in the state. An administrative hearing examiner has ruled in favor of Montana’s Securities Department in its case against a consortium of companies and individuals holding themselves out as coal miners and/or promoters of the coal mining companies, including TriEnergy, Inc., H & J Energy, Inc., Marina Investors Group, Robert Jennings, Arthur Simburg, Lowell Decker, Thomas Avery, Henry Jones and Debbie Loveless.

"The sale of fraudulent energy investments is a recurring problem that gets worse when energy prices are high," said Morrison. “The surge in energy prices has created a heightened interest in investment in energy-related business ventures. Whenever economic circumstances create an opportunity for money to be made legitimately, scamsters follow in the shadows to take advantage of the situation.”

The Department alleged TriEnergy, H & J Energy and Marina Investors acted as unregistered investment programs seeking investors to fund an alleged coal mining operation, offering extremely high returns on the investments. The individuals named by the Department took specific actions to promote, offer and sell the investment opportunities in the companies. Some of the investments offered involved a vague reference to a Middle Eastern “gold investment” apparently created and promoted by Marina and Jones. None of the named respondents was properly licensed or registered with the Montana Securities Department. All of the named respondents relied on fraudulent practices, including material omissions and misrepresentations, to offer and sell the investments. Nine Montana investors invested approximately $257,000 in these fraudulent securities. A federal case initiated by the Securities and Exchange Commission obtained funds to repay most of the investment dollars. “The sanction won by the State Auditor’s Office, together with the investment recovery by the SEC, add up to a great result. I commend the fine work of the SEC to investigate and prosecute this case,” said Morrison. “Because these fraudulent promoters were operating across state lines, the participation of agencies at the federal level was essential to break up this investment scheme and get people’s money back.”

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In his order, Hearing Examiner Michael Rieley found the respondents were not properly registered or licensed in Montana and they used fraudulent practices to induce Montanans to invest with the companies and individuals. Mr. Rieley issued a permanent cease and desist order against each of the respondents except Decker and Loveless. Decker and Loveless entered into settlement agreements with the Department earlier this year, where they each accepted a permanent ban from the securities industry.

“Anyone solicited to invest in oil and gas, coal or other energy investment offers should call the Securities Department of the Montana State Auditor’s Office to ensure that the offering is registered and that the salesperson is licensed,” said Morrison. “Scam artists usually tell prospective victims that they are licensed and their investment is registered — and they can be quite convincing. But unless you can afford to lose your money, don’t take them at their word; find out for sure.”

c. Press release dated July 3, 2008: Morrison Announces Ruling in Favor of State Auditor’s Office. Fines and restitution of more than $350,000 ordered in securities fraud case. Montana State Auditor John Morrison announced today that an administrative hearing examiner has ruled in favor of Montana’s Securities Department in its case against Roundup residents Gordon and Ann Walters and their companies, Cascade Water Holdings and Cascade Exploration, Inc. The Department’s action against the Walters’ alleged they were taking money from Montana investors to support their companies without making honest disclosures about the companies and the Walters’ ability to perform as promised. The hearings examiner concluded the Walters issued fake surety bonds that purported to be backed by the U.S. Small Business Administration and that neither of the Walters was properly registered or licensed to sell securities and the investments in their companies were also not properly registered in Montana.

“The securities laws exist for a reason. Investors have to be given accurate information, companies have to be registered and investment products have to be genuine,” said Morrison. “When these laws are broken we will come down on the violators and when possible get people’s money back.”

In his order, Hearing Examiner Michael Rieley found the Department was entitled to a summary judgment in its favor based on the Walters’ refusal to respond to certain discovery requests and the affidavits of many of the victims of the Walters’ fraudulent activities. Rieley fined the Walters’ and their companies $300,000 and ordered $52,240 in restitution to the victims. Danny Kegel, a named respondent entered into a settlement agreement with the Department in April of 2007 resulting in a fine of $5,000 and a permanent ban from the securities industry in Montana. Calvin Statelen, also a respondent, entered into a settlement agreement with the Department in April of 2007 resulting in a $10,000 fine, 500 hours of community service and a permanent ban from the securities industry in Montana. Both Kegel and Statelen agreed to assist the Department in its prosecution of the Walters and their companies.

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d. Press release dated June 25, 2008: Morrison Announces $450,000 Settlement to Resolve Allegations of Securities Fraud. 356 Customer Accounts to Receive Restitution. Montana State Auditor John Morrison announced a $450,000 settlement with Concord Equity Group LLC, a broker-dealer firm, Concord Equity Group Advisors, an investment advisory firm and Leo Lapito, a former representative for both companies. In the settlement agreements the broker-dealer firm, the advisory firm and Lapito each agreed to pay $150,000 into a restitution fund to be paid to Montana and Wyoming customers of the firms.

“Montana law requires that investors be given accurate, honest information by securities firms,” said Morrison. “These respondents violated that trust.”

The settlement agreements resolve previously filed disciplinary actions against Concord Equity Group, LLC and Concord Equity Group Advisors. In the actions Morrison alleged these companies committed securities fraud by omitting material facts their customers needed to make informed decisions regarding mutual fund purchases. Additional allegations in the actions included fraud for placing customers into fee-based accounts that were unsuitable and failure to reasonably supervise their representative, Leo Lapito. As early as September 2003, Concord Equity customers were sold mutual funds in Class B and C shares, which the Auditor’s office alleged resulted in denying the customers opportunity for breakpoint advantages as well as higher expenses associated with the classes. The allegations also accused the companies of placing customers in over-diversified mutual fund portfolios with the same result. Additionally, the Auditor alleged the companies charged customers excessive fees by charging both a retail commission and an advisory account fee. The Auditor’s office will begin sending letters to affected investors this week informing them of the restitution fund and how to make a claim. The restitution amount of $450,000 represents commissions, missed break points, advisory fees and sales charges that occurred in 356 customer accounts during 2003 and 2007.

"This settlement again demonstrates the commitment of our office to protect investors from fraud and abuse," said Morrison. “We will do everything in our power to protect Montanans, obtain restitution for victims and bring the perpetrators to justice."

Lapito has fully cooperated with the Auditor’s office in uncovering the evidence that led to the filing of the previous disciplinary action and the subsequent settlements. Additionally, Lapito willingly created a restitution fund to “do the right thing” for his customers. As a result of these actions, Lapito was not charged. Any unclaimed monies from the restitution fund will be transferred to the Investor Protection Trust, a non-profit organization that provides independent, objective information needed by consumers to make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and

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uses grants to underwrite important initiatives carried out by other organizations. The IPT recently provided the Montana State Auditor’s Office with a grant to provide investor education seminars throughout the state this fall in a campaign entitled Montana Investor Awareness Campaign: Targeting the People the Con Artists Target. e. Press release dated June 5, 2008: Morrison Takes Legal Action to Shut Down$2 Million Alleged Investment Scam Operating in Montana. Twenty-two Montanans invest more than $2 million in sports marketing scheme. State Auditor John Morrison has issued a Notice of Proposed Agency Action and Cease and Desist Order against Global Sports Marketing Corporation, also known as Global Broadcast Digital Network, the firm’s CEO, Wayne Butler of Norristown, Pennsylvania and Chairman, Craig Steen, of Bozeman. The action alleges Global Sports Marketing, Butler and Steen defrauded at least 22 individuals who invested more than $2,067,000 in an investment opportunity. The Auditor’s Office alleges that during the period between 2003 - 2005, Butler and Steen solicited and sold Montana investors an investment opportunity which they claimed would double the investors’ money or better in the first year. An offering document used to solicit investors was entitled “Join the Millionaire Club! Turn 37K into $100,000 a month.” To make these outstanding returns, Butler and Steen told investors that Global Sports Marketing would purchase large plasma screen televisions using investors’ money, place the plasma screens in high traffic areas at sports venues and other locations throughout the country, sell advertising for the screens at $4 per minute and then return $2 per minute from the ads back to investors. While Global Sports Marketing raised enough money from investors to purchase at least 147 plasma screen televisions, it does not appear any were actually purchased nor was any advertising sold.

“This alleged scheme has taken more than $2 million out of the pockets of Montanans while failing to provide the promised investment returns,” said Morrison. “No one can absolutely guarantee a profit from any investment. An offering claiming to double your money in a short period of time should raise a red flag in your mind that the offer could be a scam.”

In addition, the Auditor’s Office alleges that through numerous letters, Butler made false promises that misled investors about the investment’s potential. For example, the Auditor’s action alleges Butler told investors Global had secured approximately 40 major building locations to install the plasma screens. However, Global had not secured these locations nor had it purchased any plasma screens. Investors were told that by purchasing two screens, at a total cost of $37,000, they could expect to receive approximately $45,320 per month in advertising revenue. To date, no investor has received a return of principal and most investors have received minimal or no return on their investment. Individual investments in Global range from a few thousand to several hundred thousand dollars. One investor, who was formerly retired, claims he has had to go back to work as a result of this investment.

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The Auditor’s office is seeking restitution, including 10% interest annually, for each of the investors, as well as a fine of $5,000 for each alleged violation of the Montana Securities Act. Morrison said that Montanans should look for specific warning signs of a fraudulent investment scheme when presented with an investment opportunity. Red flags include: 1) “Guaranteed” double-digit returns, 2) “Risk-free” investments and 3) Salespeople emphasizing the exclusivity of an investment opportunity and the importance of keeping the investment a secret from your friends and family. f. Press release dated May 27, 2008: Chicago Firm Settles Enforcement Action Involving Sale of Unregistered Securities in Montana. Company ordered to return commissions to Montana investors; Pay fine to state. Montana State Auditor John Morrison has entered into a settlement with Chicago-based broker-dealer firm Rothschild Investment Corp. In a previously filed action, the Securities Department of the Auditor’s Office alleged the firm, as well as a number of brokers, had transacted securities business with at least 11 investors in the Missoula and Kalispell areas over the past two years without being properly registered in Montana.

“Montana’s citizens should be able to feel their investments are safe and the securities business they are transacting is with a reputable, licensed firm.” said Morrison. “My office will take appropriate action to ensure firms and brokers do not benefit from doing business with Montana citizens without first complying with the law.”

Under the terms of the consent agreement, Rothschild Investment Corp. agreed to return $22,741.65 in commissions to the 11 Montana investors, pay a $2,500 fine to the State of Montana and contribute $2,500 to the Investor Protection Trust for the benefit of Montana investors. The firm and brokers are now properly licensed to do business in Montana. g. Press release dated February 25, 2008: Morrison Orders Montana Firm to Stop Violating State Securities Laws. Bigfork decorative tile company ordered to cease illegal activity; more than $1 million allegedly defrauded from investors. Montana State Auditor John Morrison issued a Cease and Desist Order last week against Style N’ Tile, LLC, and Flathead County residents Fredrick (Fritz) Keck, Sydnee Keck, Louise Tidwell and James Coolidge, ordering them to stop violating the Montana Securities Act. Morrison’s order follows a Notice of Proposed Agency Disciplinary Action issued the previous week against these same respondents which alleges they committed securities fraud when they made material omissions and misrepresentations to at least 22 investors of Style N’ Tile, LLC.

“Violating securities laws is a serious matter and registration requirements have an important consumer protection purpose,” said Morrison. “Montanans must use caution when deciding where to invest their hard-earned dollars. I encourage any resident who has been offered a questionable investment to contact my office. We rely on these reports

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to find and take action against individuals who should not be offering financial products in or from Montana.”

The Auditor’s Office alleges that beginning in 1998 Fritz Keck started soliciting investors for a new business venture, Style N’ Tile. Style N’ Tile promoted itself as a decorative tile company manufacturing kiln-fired murals and single tiles featuring exclusively-licensed original art work by well-known artists such as Cézanne, Van Gogh and Norman Rockwell. Since 1998, Style N’ Tile has received at least $1,156,750 from investors. Most of the investors received promissory notes that were not registered with the Montana State Auditor’s Office. As the promissory notes came due, instead of paying the terms of the note, Style N’ Tile rolled the investor’s funds into new promissory notes or convinced the investor to convert their note into an LLC membership interest. In addition the Auditor’s Office alleges that through numerous letters and emails, the Keck’s, Tidwell, and Coolidge made false promises that misled investors about the investment’s potential. For example, the Auditor’s action alleges Fritz Keck told one investor that he would get his investment back within 10 to 20 months, if not sooner. Additionally, the action alleges Fritz Keck told numerous investors that in the event of his death, investors would receive their investment money back because each investor was named on his personal life insurance policy. The Auditor’s action alleges no such life insurance policy exists. The Auditor’s office is seeking restitution, including 10% interest annually, for each of the investors, as well as a fine of $5,000 for each alleged violation of the Montana Securities Act. Securities-related Case Law Developments

On August 15, 2008, Ms. Lynne Egan, the Deputy Securities Commissioner at the Montana State Auditor’s Office, confirmed that there have not been any material securities related case law developments in the areas of corporate or securities law addressing novel questions of law or changing prior interpretations of law since the February 2008 update. Other Statutory Developments

Since the February 2008 update, there have not been any material statutory developments. Administrator’s Staffing Changes

Since the February 2008 update, there have not been any material changes in the Administrator’s staffing. Other Noteworthy Practice Developments

Since the February 2008 update, there have not been any material or other noteworthy practice developments.

NEBRASKA


NEBRASKA STATE LIAISON REPORT

No report.

NEVADA


NEVADA STATE LIAISON REPORT

No report.

NEW HAMPSHIRE


NEW HAMPSHIRE STATE LIAISON REPORT

(As of February 18, 2008) Report on material developments affecting blue sky practitioners in this state/province since August 2007. Liaison: Richard A. Samuels

McLane, Graf, Raulerson & Middleton, Professional Association 900 Elm Street, Box 326 Manchester, NH 03105-0326

Email: [email protected] Telephone: 603-628-1470 Cell phone: 603-496-7610 Fax: 603-625-5650 State Administrator: Mark Connolly, Deputy Secretary of State

New Hampshire Bureau of Securities Regulation Suite 317A, 3rd Floor (Mail/Overnight) State House, Room 204 Concord, NH 03301-4989

Main Telephone: 603-491-1463 Main Fax: 603-491-7933 Internet: http://www.sos.nh.gov/securities

Short Title/Citation: NH Rev.Stat.Ann. ch. 421-B http://www.gencourt.state.nh.us/rsa/html/NHTOC/NHTOC-

XXXVIII-421-B.htm Rules Name/Citation: Rules, previously labeled “ATG,” are expired and not readopted. Highlights of Material Developments There have been no material developments in New Hampshire securities law since the August 2007 report. Securities Statutory Developments There have been no statutory changes (or judicial decisions since the July 1, 2007 amendments described in the August 2007 report.


http://www.sos.nh.gov/securities

http://www.gencourt.state.nh.us/rsa/html/NHTOC/NHTOC

NEW HAMPSHIRE


Securities Rules Developments The Bureau, a division of the Office of the Secretary of State, does not promulgate rules. Administrative Orders and Announcements In November 2007 the New Hampshire Bureau announced that the federal court order in Florida against Cromwell Financial Services, Inc., for fraudulent commodity options sales practices, was prompted by the complaint of a New Hampshire resident made to the Bureau. The complaint prompted an investigation by the Bureau, which then provided information to the CFTC. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) In October 2007 the New Hampshire Bureau brought a second enforcement action against Ameriprise Financial Services, formerly American Express Financial Services. The initial New Hampshire enforcement action was settled in 2005 for $7.4 million in fines, penalties, and restitution. The new action, in which the Bureau stated that penalties and restitution could reach $10 million, alleged failure to deliver financial plans, forgery, document tampering, unapproved sales contests, intentionally limited compliance oversight, and failure to disclose fraudulent practices to the Bureau following resolution of the 2005 action. Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

NEW JERSEY


NEW JERSEY STATE LIAISON REPORT

(As of February 18, 2008) This reports on material developments affecting blue sky practitioners in this state/province since June 21, 2007, the date of the Supplement to my March 13, 2007 Liaison Report. Liaison: Peter D. Hutcheon, Esq.

Norris McLaughlin & Marcus, PA 721 Route 202-206 North Bridgewater, NJ 08807

Email: [email protected] Telephone: (908) 722-0700 Ext. 4216 Cell phone: Fax: (908) 722-0755 State Administrator: Chief Vincent J. Oliva

New Jersey Bureau of Securities 153 Halsey Street, 6th Floor, Newark, NJ 07102 P.O. Box 47029, Newark, NJ 07101

Main Telephone: (973) 504-3600 Main Fax: Internet: http://www.state.nj.us/lps/ca/bos/index.html Short Title/Citation: [Insert securities law’s official short title and cite] [If available on the Internet, give web address] Rules Name/Citation: [Insert official securities rule’s title and cite] [If available on the Internet, give web address] Highlights of Material Developments None reported. Securities Statutory Developments New Jersey’s General Elections were held in November 2007. All pending legislation in the session ending January 2008 expired, (including legislation noted in my March 13, 2007 Report as Supplemented). Assemblyman Neil M. Cohen (D. District 20) introduced A-1976 on January 28, 2008, which would make fraud in the sale of securities a consumer fraud under the New Jersey Consumer Fraud Act, entitling a plaintiff to recover treble damages and attorney’s fees.


http://www.state.nj.us/lps/ca/bos/index.html

NEW JERSEY


Assemblyman Cohen introduced this legislation in several prior legislative sessions. To date it has not been enacted into law. Also on January 28, 2008, Assemblyman Cohen introduced A-1971 which would make hedge fund sales a type of “merchandise” covered under the New Jersey Consumer Fraud Act. Securities Rules Developments Regulations of New Jersey Departments and Agencies (except for public health and safety regulations) “sunset” every five years as part of New Jersey’s administrative law process. This is intended to cause the promulgating Department or Agency to review the regulations in order to determine if all are required and/or if changes are required. The Regulations of the New Jersey Bureau of Securities, NJAC 13: 47A-1.1 et. seq., will sunset in 2008. The Bureau intends to publish in The New Jersey Register a full set of replacement regulations; publication prior to the sunset date is sufficient to avoid a regulatory gap. The Bureau is interested in receiving comments and suggestions now from Blue Sky practitioners identifying desirable regulatory amendments and innovations. Administrative Orders and Announcements None reported. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None reported. Securities-related Case Law Developments

In July 2007 the New Jersey Attorney General and the Bureau of Securities announced the resolution of two separate enforcement actions against Citigroup Global Markets, Inc. and its Smith Barney division. In one Citigroup was ordered to cease and desist from violations of New Jersey’s version of the Uniform Securities Law and to pay $5 million in civil money penalties. The action resulted from market timing activities conducted from a New Jersey Smith Barney office between 2000 and 2003 involving over 250,000 market timing transactions for over 1100 customers (including a hedge fund based in New Jersey) which adversely affected mutual funds and their regular customers. The second enforcement action was for failure to supervise two Smith Barney agents who altered customer records and had those customers engage in a short sale trading strategy unsuitable for them. Citigroup was ordered to pay $478,000 in restitution and $500,000 as a civil money penalty.

In September 2007 the New Jersey Attorney General and her Director of the Division of Criminal Justice announced the indictment of the two co-owners of a Red Bank, New Jersey private wealth management firm, Lafferty & Partners, LLC for conspiracy, money laundering and theft of over $500,000 from clients. Lafferty & Partners LLC specialized in

NEW JERSEY


advising podiatrists. The indictment alleges that defendants Jeffery Lafferty and Vincella Ross spent the money on their home in Pennsylvania and for personal expenses.

In January 2008 the New Jersey Attorney General announced that the Bureau had obtained a judgment for $7.95 million against Fred J. Miller, Eric Riedman and their Bergen County based companies, which raised over $3.3 million from about 160 investors from 1996 to 2003 through the sale of unregistered securities, including 12% promissory notes. Of the $7.95 judgment, $3.6 million is to pay restitution to the investors. The rest is a civil money penalty. Other Statutory Developments None reported. Administrator’s Staffing Changes

On October 15, 2007 Vincent J. Oliva became the new chief of the New Jersey Bureau of Securities succeeding Franklin K. Widmann to become the sixth Chief of the Bureau since its founding. Chief Oliva came to the Bureau after leaving his position as Director and Senior Associate General Counsel of UBS Financial Services, Inc. Previously, Chief Oliva had served as an FBI agent, Assistant District Attorney in the Trial Division of the New York County District Attorney’s Office and Assistant United States Attorney in the Complex Crimes Unit in Denver, Colorado. As an AUSA, Chief Oliva prosecuted four major fraud trials, one of which involved manipulation of penny stocks.

Former Chief Widmann, after some 12 years at the Bureau has returned to the Division of Law in the New Jersey Department of Law and Public Safety as a Deputy Attorney General. Other Noteworthy Practice Developments None reported.

NEW MEXICO


NEW MEXICO STATE LIAISON REPORT

No report.

NEW YORK


NEW YORK STATE LIAISON REPORT

(As of February 25, 2008; supplemented to August 25, 2008) This reports on material developments affecting blue sky practitioners in this state since June 26, 2007. Liaison: F. Lee Liebolt, Jr. Suite 2620 420 Lexington Avenue New York, New York 10170 E-mail: [email protected] Telephone: (212) 286-1384 Fax: (212) 286-1389 State Administrator: David A. Markowitz, Esq., Chief

Investor Protection Bureau Office of the Attorney General 120 Broadway, 23rd Floor New York, New York 10271

Main Telephone: (212) 416-8200 Main Fax: (212) 416-8816 Internet: http://www.oag.state.ny.us

Short Title/Citation: New York General Business Law – Ch. 20, Art. 23-A (“Martin

Act”) Rules Name/Citation: Codes, Rules and Regulations of the State of New York – Tit. 13,

Ch. 11 Highlights of Material Developments None Securities Statutory Developments None Securities Rules Developments None


http://www.oag.state.ny.us

NEW YORK


Administrative Orders and Announcements A series of four no-action (or more properly, no-filing) letters has been released by the New York Department of Law. Signed by Diane Ridley Gatewood, Chief of Registration at the Investor Protection Bureau, in November 2007, they confirm that New York would take no action to require dealer registration or the filing of any exemption application or of any state notices for transactions involving one or a very limited number of New York residents. Because the Department of Law has never defined what is a private offering in New York, practitioners use various rules of thumb for determining when an offering is not “to the public” under § 359-e. These letters should not be taken, however, as imposing limits on what kinds of offerings would not require a filing. In one case, a North Carolina bank holding company was merging with a local bank and trust company. Of the 1,031 shareholders of record in the bank and trust, only two were New York residents. Bank of the Carolinas Corporation, N.Y. Investor Protection Bureau No-Action Letter, 2A Blue Sky L. Rep. (CCH) ¶ 42,592, at 37,591 (Nov. 16, 2007). In a second, a Texas limited partnership was offering interests to a total of 19 investors, only one of whom was a New York resident. That investor was also a friend and business associate of the chairman of the board. No broker-dealer would be involved. Lumient, LP, N.Y. Investor Protection Bureau No-Action Letter, 2A Blue Sky L. Rep. (CCH) ¶ 42,593, at 37,593 (Nov. 30, 2007). In a third, a Delaware corporation was offering shares of its preferred stock in a private offering to no more than 15 accredited investors known to the corporation, of whom only four were New York residents. No commissions would be paid. DataBanq, Inc., N.Y. Investor Protection Bureau No-Action Letter, 2A Blue Sky L. Rep. (CCH) ¶ 42,594, at 37,593 (Nov. 30, 2007). In the fourth, a Delaware company was offering shares of its common stock in a private placement to 10-12 accredited investors, of whom two were New York investors. The company had previously obtained a no-action letter with respect to the first New York investor. The second investor had a pre-existing business relationship with the founder and chairman of the company. No broker-dealer would be involved and no commissions would be paid. Rain King Software, Inc., N.Y. Investor Protection Bureau No-Action Letter, 2A Blue Sky L. Rep. (CCH) ¶ 42,595, at 37,594 (Nov. 30, 2007). Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) The United States District Court for the Southern District of New York on September 27, 2007, dismissed a lawsuit by an investment adviser and its president seeking to bar the New York Attorney General from investigating the advisory fees charged by the firm for its financial services. J.W. Seligman & Co. Inc. v. Spitzer, S.D.N.Y., 05 Civ. 7781 (KMW) (Sept. 27, 2007). See Sec. Reg. & L. Rep. (BNA), Oct 15, 2007, at 1589. In reaching its decision, the court applied the three-part test enunciated by the United States Supreme Court in Younger v. Harris, 401 U.S. 37 (1971), and abstained from deciding the merits of the controversy. Having concluded that abstention was “appropriate,” the court did not consider the plaintiffs’ argument that the Attorney General’s investigation was preempted by federal law. Securities-related Case Law Developments A divided New York Court of Appeals (the state’s highest court) decided on February 14, 2008, that members of a limited liability company may bring a derivative action on

NEW YORK


the LLC’s behalf, even though New York’s 1994 limited liability company law does not provide for such a cause of action. Tzolis v.Wolff, N.Y. No. 5 (Feb. 14, 2008). See Sec. Reg. & L. Rep. (BNA), Feb. 25, 2008, at 289. Although the law contains no reference to derivative actions, “this omission does not imply such suits are prohibited,” the court said. The case arose out of a lawsuit brought by 25 percent of the membership interests in an LLC which owned a Manhattan apartment building. The plaintiffs sued both individually and on behalf of the company. They alleged that those in control of the LLC, in concert with others, arranged first to lease and then sell the LLC’s principal asset for below-market value and that the defendants, as fiduciaries, benefited personally from the sale. The dissent called the result reached by the majority “unique in the annals of the Court of Appeals. Never before has a majority of the Court read into a statute provisions or policy choices that the enacting Legislature unquestionably considered and rejected.” The trial court had dismissed the action. The intermediate appeals court reversed and permitted the defendants to appeal on a certified question. The state high court affirmed. The New York Court of Appeals on February 7, 2008, rejected efforts by the Financial Industry Regulatory Authority to collect a $1 million penalty imposed on a brokerage firm and its owner, ruling that the state courts did not have jurisdiction over the FINRA lawsuit. Financial Industry Regulatory Authority, Inc. v. Fiero, 1 No. 2 (Feb. 7, 2008). See Sec. Reg. & L. Rep. (BNA), Feb. 11, 2008, at 208. The case arose from a disciplinary complaint filed by FINRA (then the National Association of Securities Dealers) in early 1998 alleging that the respondents had carried out a “bear raid” to drive down the price of securities underwritten by a competitor, causing that firm to collapse and generating significant profits for the respondents. A hearing panel in 2000 concluded that the respondents had violated section 10(b) of the Securities Exchange Act of 1934 and various rules and ordered them expelled from the NASD, barred them from associating with any NASD member and fined them jointly and severally $1 million. The findings and sanctions were upheld by the NASD National Adjudicatory Council. In 2003, the NASD filed an action in New York Supreme Court to collect the fine. Although the respondents filed various motions, the NASD ultimately obtained a summary judgment awarding it $1.3 million in fines, costs and interest. The judgment was affirmed by the Appellate Division, First Department. In reversing, the state high court held that the state courts did not have subject matter jurisdiction over the lawsuit, pointing out that the NASD was not seeking to enforce a state law claim but rather a penalty imposed as a result of disciplinary proceedings brought to enforce the 1934 Act. Furthermore, although the question of jurisdiction was not raised earlier, the court said that subject matter jurisdiction is not waivable and may be considered by a court on its own motion. The New York Supreme Court (the state trial court) on September 27, 2007, ruled that a law firm that advised a group of hedge funds and certain affiliated entities and individuals must face New York fraud and malpractice charges based upon its alleged failure to disclose that its representation of the plaintiffs was subject to “inherent and unwaivable conflicts of interest.” Veras Investment Partners LLC v. Akin, Gump, Strauss, Hauer & Feld LLP, N.Y. Sup. Ct., 600340/2007 (Sept. 27, 2007). See Sec. Reg. & L. Rep. (BNA), Oct. 8, 2007, at 1550. The conflict arose from the fact that the law firm undertook to represent the plaintiffs in regulatory investigations by the Texas State Securities Board and the Commodities Futures Trading Commission without disclosing that it was subject to an inherent, non-waivable conflict of interest based upon the law firm’s earlier engagement to assist the plaintiffs in forming hedge

NEW YORK


funds to engage in “market timing” trading strategies. At the same time, the law firm was defending its partner who advised on the market timing strategy, which caused the firm to place its own interests above those of the plaintiffs. Other Statutory Developments None. Administrator’s Staffing Changes None. Other Noteworthy Practice Developments The Attorney General, Andrew M. Cuomo, perhaps taking a leaf from his boss and the former Attorney General, Governor Eliot L. Spitzer, has been using the Martin Act to conduct an investigation into the country’s subprime mortgage loan mess. Under the act, the Attorney General is authorized to bring criminal as well as civil charges. Already, the Attorney general has subpoenaed several Wall Street banks which are big underwriters of mortgage securities, the three major credit-rating agencies and a number of mortgage consultants, known as due diligence firms, which vetted the loans. See N.Y. Times, Jan. 12, 2008, at A1.

At a news conference held on January 18, 2008, after its first meeting, Governor Spitzer’s New York State Commission to Modernize the Regulation of Financial Services recommended that the state have one regulator to oversee the securities industry instead of the current four authorities (the Insurance Department, the Department of State, the Banking Department and the Attorney General’s office). The group of state officials and financial executives also suggested proposals for principles-based regulation. Several of the executives said in prepared remarks that the state’s regulatory system needed to catch up with the marketplace and that principles-based regulation would help in that effort. The chairman of the commission, Eric R. Dinallo, the state Insurance Superintendent and formerly the New York securities bureau chief (1999-2003), said that the group’s recommendations might serve as a template for regulatory change at the federal level. See N.Y. Times, Jan. 19, 2008, at C3. Problems in the subprime mortgage market have created a crisis for the nation’s municipal bond insurers, most or all of which are based in New York. As they reached beyond the municipal market into insuring mortgage bonds, the insurers have potentially become the next casualties of the world-wide credit crunch. To address the problem, New York State Insurance Superintendent Dinallo called together a group of bankers on January 23, 2008, to propose ways in which the insurers might be bailed out. News that such an attempt was being discussed caused shares of some of the insurers to soar, only to fall sharply the next day when Mr. Dinallo had to issue a statement cautioning that the problems were complex and could take time to resolve. Although several big banks which have already had to take large write-offs of their mortgage debt might be affected by any weakness of the bond insurers, it is not clear whether those institutions have the money, or the inclination, to come to the rescue of the insurers. See Wall St. J., Jan. 25, 2008, at C1.

NEW YORK


Supplemented to August 25, 2008 This reports on material developments affecting blue sky practitioners in New York since February 25, 2008. Highlights of Material Developments None Securities Statutory Developments None Securities Rules Developments None Administrative Orders and Announcements None Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) In two cases involving expungements from the Central Registration Depository, New York trial courts have confirmed arbitration awards expunging all references to the customer dispute. See Kay v. Abrams, N.Y. Sup. Ct., N.Y. Co., IAS Part 19, No. 100235/07 (Feb. 21, 2008), 3A Blue Sky L. Rep. (CCH) ¶ 74,689; BNY Investment Services Inc. v. Bacchus, N.Y. Sup. Ct., N.Y. Co., No. 109678/07 (June 13, 2008), 3A Blue Sky L. Rep. (CCH) ¶ 74,715. The long saga over the pay package of former New York Stock Exchange chief Richard Grasso ended on July 1, 2008, when New York Attorney General Andrew Cuomo announced that he would not appeal the New York Supreme Court Appellate Division’s partially divided ruling earlier that day absolving Mr. Grasso of any statutory violations. People v. Grasso, N.Y. App. Div., Slip Op. 05970 (July 1, 2008). The court explained that it was questionable whether the Attorney General’s authority to prosecute under the not-for-profit corporation law continued once the NYSE became a for-profit corporation. The lawsuit had originally been brought by former New York Governor Eliot Spitzer in May 2004 when he was then the Attorney General. See Sec. Reg. & L. Rep. (BNA), July 7, 2008, at 1045. Auction-rate securities, which were represented to investors as highly-liquid cash equivalents which could easily be redeemed at scheduled auctions, have been the subject of numerous investigations by state and federal regulators since auctions of the first such securities issued by municipalities failed on February 13, 2008, in the increasingly difficult credit environment. Settlements were reached by Attorney General Cuomo, the North American Securities Administrators Association and the Securities and Exchange Commission with Citigroup Inc., JP Morgan Chase & Co., Morgan Stanley, UBS AG, and Wachovia Corp on

NEW YORK


August 20, 2008, requiring the financial services companies and their affiliates to buy back $41.5 billion of illiquid ARS at par from retail investors, charities and small- to mid-sized businesses. The firms will also pay $360 million in penalties and agreed to pay damages to customers selling the securities at a loss. On August 21, 2008, Mr. Cuomo announced settlements with three additional firms and their affiliates: Deutsche Bank AG, Goldman Sachs Group Inc. and Merrill Lynch & Co. Inc. In addition, as part of his ongoing investigation into the marketing and selling of ARS, Mr. Cuomo has issued subpoenas to so-called downstream brokerages that did not underwrite the securities but did sell them to their clients. See Sec. Reg. & L. Rep. (BNA), Aug. 25, 2008, at 1349. Attorney General Cuomo announced on August 27, 2008, that power company Excel Energy had agreed to a groundbreaking disclosure regimen to provide investors with information on the financial risks posed by climate change. See Sec. Reg. & L. Rep. (BNA), Sept. 1, 2008, at 1385. In September 2007, Mr. Cuomo, acting under the Martin Act, issued subpoenas to Xcel Energy and four other energy companies seeking detailed disclosures on carbon emissions expected from several planned coal-fired power plants. In a statement Mr. Cuomo said, “This landmark agreement sets a new industry-wide precedent that will force companies to disclose the true financial risks that climate change poses to their investors. Coal-fired power plants can significantly contribute to global warming, and investors have the right to know all associated risks.” The agreement, reached in an assurance of discontinuance under the act, calls for the company to include in its Form 10-K filing with the Securities and Exchange Commission an analysis of financial risks from climate change related to present and probable future climate- change regulation and legislation, climate-change-related litigation and physical impacts of climate change. Securities-related Case Law Developments The Appellate Division of New York State Supreme Court ruled that the Martin Act (N.Y. General Business Law, art. 23-A) does not preclude a private party from prosecuting an otherwise valid common-law fraud claim in connection with the sale of securities whenever the alleged fraudulent conduct is such that the New York Attorney General would be authorized to bring an action against the defendant under the act. Kramer v. W10Z/515 Real Estate Limited Partnership, N.Y. Sup. Ct., App. Div., 1st Dep’t (Oct. 16, 2007), [2003-2008 Transfer Binder] Blue Sky L. Rep. (CCH) ¶ 74,666. Compare this decision with a slightly earlier one in which the United States District Court for the Southern District of New York held that the Martin Act authorizes only the Attorney General to enforce its provisions and that, although it does not preclude claims of common law fraud involving securities because they require a plaintiff to prove intent or scienter, the Martin Act itself permits no private rights of action. In re Bayou Hedge Fund Litigation, S.D.N.Y., 06-MDL-1755 (CM) & 06-CV-2943 (CM) (July 31, 2007), [2003-2008 Transfer Binder] Blue Sky L. Rep. (CCH) ¶ 74,647. Further compare both decisions with the slightly later case of Jana Master Fund, Ltd. v. JPMorgan Chase & Co., N.Y. Sup. Ct., N.Y. Co., No. 604005/06 (Mar. 12, 2008), 3A Blue Sky L. Rep. (CCH) ¶ 74,695, in which the trial court held that, since the Martin Act confers exclusive jurisdiction on the Attorney General to enforce its prohibitions against fraudulent practices in the sale of securities which do not involve proof of scienter, the plaintiffs’ claims for negligent misrepresentation and aiding and abetting breach of fiduciary duty arising out of a private placement of securities were barred.

NEW YORK


The statute barred the plaintiffs’ common law claims because the facts alleged would have provided the Attorney General with grounds for instituting an action, the court ruled. The Appellate Division has ruled that variable annuity contracts sold in the life settlements market do not constitute securities under the Martin Act. Accordingly, the Attorney General’s claim against life settlement brokers for securities violations was properly dismissed to the extent that it pertained to: (i) variable annuity policies already subject to regulation by the Department of Insurance or (ii) conduct not within or from the State of New York. Cuomo v. Coventry First LLC, N.Y. Sup. Ct., App. Div., 1st Dep’t, No. 404620/06 (June 17, 2008), 3A Blue Sky L. Rep. (CCH) ¶ 74,716. Other Statutory Developments None Administrator’s Staffing Changes David Markowitz became the new bureau chief on April 7, 2008. Previously he was an enforcement attorney with the SEC, based in the New York regional office. Other Noteworthy Practice Developments None

NORTH CAROLINA


NORTH CAROLINA STATE LIAISON REPORT

(As of June 23, 2008) Liaisons: David N. Jonson Email: [email protected]

K&L Gates LLP 3450 Lassiter at North Hills Ave, Suite 300 Raleigh, NC 27609

Telephone: 919-743-7308 Fax: 919-516-2008 State Administrator: Elaine F. Marshall, Secretary of State David S. Massey, Deputy Securities Administrator

Department of the Secretary of State Securities Division 228 S. Wilmington Street P.O. Box 29622 (27626) Raleigh, NC 27601

Main Telephone: 919-733-3924 Email: [email protected] Main Fax: 919-821-0818 Internet: http://www.secretary.state.nc.us/sec/

Short Title/Citation: North Carolina Securities Act, N.C. Gen. Stat. Chapter 78A N.C. Investment Advisers Act, N.C. Gen. Stat. Chapter 78C http://www.secretary.state.nc.us/sec/statutes.aspx Rules Name/Citation: 18 N.C. Admin. Code 6.1101 et seq. Applicable State Statute of Limitations Periods North Carolina does not impose a statute of limitations for felony offenses.

N.C. Gen. Stat. § 78A-56(f) requires that civil actions for violations of securities registration requirements be brought within two years after the sale or contract of sale. Suits for other violations may be brought until three years after the person discovers the violation, but in any case no later than five years after the sale or contract of sale. An exception is made if the alleged offender conceals the violation or induces the claimant to forgo civil action; in those cases, the injured party must bring suit within three years after that person discovered or should have discovered the fraud or deceit.

N.C. Gen. Stat. § 78C-38(d) requires that civil actions for violations of registration requirements of the Investment Advisers Act be brought within three years after the rendering of investment advice. Other violations are subject to a limitation of three years after the person discovers the violation, but in any case no later than five years after the rendering of



http://www.secretary.state.nc.us/sec/

http://www.secretary.state.nc.us/sec/statutes.aspx

NORTH CAROLINA


investment advice, with the exception that, when the person alleged to have committed the violation conceals the violation or induces the claimant to forgo civil action, the claimant must bring suit within three years after that person discovered or should have discovered the fraud or deceit.

Securities Rules Developments The Division has not issued, amended, or repealed any securities rules or regulations within the past year. The Division has discussed taking a closer look at its rules to evaluate whether any changes are necessary to better harmonize North Carolina regulations with those of other states.

Administrative Enforcement Proceedings During the past year, the Division has completed or entered into at least fourteen administrative actions. These include the following: one Order of Summary Postponement; four Consent Orders to Cease and Desist; five Final Orders to Cease and Desist; two Temporary Orders to Cease and Desist; and two Summary Orders. The Division’s administrative actions are reported at http://www.secretary.state.nc.us/sec/actions.aspx. Most of these actions involved the sale or offer of unregistered securities or the sale of securities by unregistered broker/dealers or agents. Examples of the unregistered securities at issue included investment programs related to payphones, investment in promissory notes collateralized by inventory and equipment of a retail jewelry merchant, and the sale of an interest in a real estate trust.

On May 6, 2008, Senior United States District Judge W. Earl Britt sentenced five defendants in the Mobile Billboards scheme. Defendants were charged with fraudulently soliciting over $70,000,000 from investors by selling interests in billboards which they represented would pay a 13.5% return on investors’ original investments based on the advertising revenues from the billboards. Sentences ranged from 30 months imprisonment with two years supervised release to 240 months imprisonment with three years supervised release. The Division aided the Federal Bureau of Investigation and the United States Postal Inspection Service in the investigation of the case.

The Division indicted Cauzae McCall in May 2008 in connection with McCall Business Group’s (“MBG Global”) alleged involvement in an affinity investment fraud scheme. The indictment alleges that McCall used false promises of high returns to collect $200,000 from Elizabeth Missionary Baptist, a Monroe church, and $25,000 each from the church’s pastor and a second man. McCall is charged with obtaining property by false pretenses and securities fraud. McCall and MBG Global are under investigation in Connecticut for similar activity.

http://www.secretary.state.nc.us/sec/actions.aspx

NORTH DAKOTA


NORTH DAKOTA STATE LIAISON REPORT

No report.

OHIO


OHIO STATE LIAISON REPORT


On the non-enforcement side Ohio has been relatively quite this year. A few changes are in the works with “how the Division does things”. First, the Ohio Securities Bulletin, as we have known it is no longer. There are no 2008 editions of what was once a quarterly publication. It is anticipated that the Bulletin will be back but as a “consumer” publication. The Division points out that its website does have the cases listed and copies of the orders are there in PDF format. This is a real loss I believe. Mike Quinn reports that the Division is continuing to look hard at licensing but has made an adjustment or two in its approach. The Division now is containing professionals personally for additional information when they confront an issue rather than going right to a denial and notice of right to a hearing. This change appears to reflect a sensitivity to the negative impact of these type of orders on registered reps. Mike made it clear that Division is still looking closely at those wanting to sell in Ohio and will do their best to keep out those whose history show that they should not be granted the privilege of selling or advising in Ohio. Additionally, the Division appears to be making a concentrated effort to modernize and streamline its operations. The Division has engaged an outside consultant to assist in helping to establish a new and modern data base. A review of the Division’s infrastructure is ongoing in an effort to streamline and increase efficiency.


OKLAHOMA


OKLAHOMA STATE LIAISON REPORT

(As of February, 2008) Liaison Report on material developments affecting blue sky practitioners in Oklahoma since the prior report. Liaison: Ray Patton

Conner & Winters, LLP 4000 One Williams Center Tulsa, Oklahoma 74172-0148 Email: [email protected] Webpage: www.cwlaw.com Telephone: (918) 586-8523 Cell phone: (918) 629-2436 Fax: (918) 586-8623 State Administrator: Irving L. Faught, Administrator

Oklahoma Department of Securities Suite 860, First National Center 120 N. Robinson, Oklahoma City, OK 73102

Main Telephone: (918) 280-7700 Main Fax: (918) 280-7742 Internet: http://www.securities.ok.gov

Short Title/Citation: Oklahoma Uniform Securities Act of 2004 Title 71, Section 1, et seq., Oklahoma Statutes Annotated http://securities.ok.gov/OUSA-2005.htm Rules Name/Citation: TITLE 660. Administrative Rules of the Department of

Securities http://www.securities.ok.gov/Rules-2007.htm Highlights of Material Developments None since last report. Securities Statutory Developments None since last report.


http://www.cwlaw.com

http://www.securities.ok.gov

http://securities.ok.gov/OUSA-2005.htm

http://www.securities.ok.gov/Rules-2007.htm

OKLAHOMA


Securities Rules Developments None since last report. Administrative Orders and Announcements The Department has an excellent website with timely litigation and general press announcements. http://www.securities.ok.gov Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) http://www.securities.ok.gov Securities-related Case Law Developments http://www.securities.ok.gov Other Statutory Developments None since last report. Administrator’s Staffing Changes Staffing for Administrative sections and Division level supervisors of the Department has been remarkably stable for many years. There has been no material staffing changes since the last report. Other Noteworthy Practice Developments None since last report.




OREGON


OREGON STATE LIAISON REPORT

(As of February 18, 2008; supplemented to July 22, 2008) This reports on recent material developments affecting blue sky practitioners in this state/province during 2007, and supplemented to July 22, 2008. Liaison: Jacob A. Heth

Davis Wright Tremaine LLP 1300 SW Fifth Avenue Suite 2300 Portland, Oregon 97201

Email: [email protected] Telephone: 503-778-5396 Fax: 503-778-5299 State Administrator: David Tatman

Department of Consumer & Business Services Division of Finance and Corporate Securities 350 Winter Street NE, Room 410 Salem, Oregon 97301

Main Telephone: 503-378-4140 or 503-378-4387 Main Fax: 503-947-7862 Secure Fax: 503-947-2333 Internet: http://www.cbs.state.or.us/external/dfcs Short Title/Citation: Oregon Revised Statutes (ORS) Chapter 59 Rules Name/Citation: Oregon Administrative Rules (OAR) Chapter 441 Highlights of Material Developments See below. Securities Statutory Developments SB 119 authorizes the Attorney General, with the consent of the Director of Department of Consumer & Business Services, to investigate and prosecute violations of the Oregon Securities Law in certain instances. Under SB 119, the Attorney General will be able to pursue alleged violations involving companies whose securities are listed on the national stock exchanges or where the Attorney General is also pursuing an investigation or litigation regarding unlawful trade practices, racketeering or antitrust.


http://www.cbs.state.or.us/external/dfcs

OREGON


Securities Rules Developments None of note. Administrative Orders and Announcements None of note. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) In the Matter of Daniel Michael Wheatley; S-07-0009-1. Order to Cease and Desist; Order Barring from Industry; Order Denying Exemptions; Order Imposing Civil Penalties; Consent to Entry of Order. In the Matter of Edwin Tolentino Garcia; S-07-0009-3. Order to Cease and Desist; Order Barring from Industry; Order Denying Exemptions; Order Imposing Civil Penalties; Consent to Entry of Order. In the Matter of Elder Research Corporation, an Oregon corporation; Ronald R. Elder; and Rita M. Elder; S-07-0022. Order to Cease and Desist; Order Imposing Civil Penalty; Consent to Entry of Order. In the Matter of Jack Kleck, doing business individually and under the name Jack Kleck Investments; S-07-0001. Order to Cease and Desist; Order Denying Exemptions; Order Assessing Civil Penalties; Order of Revocation of Broker-Dealer Salesperson License of Jack Kleck. In the Matter of Southwest Exchange, Inc., a Nevada corporation, dba Arrow 1031 Exchange, aka Southwest 1031 Exchange, Inc.; S-07-0015. Final Order to Cease and Desist and Denying use of Exemptions Entered by Default. In the Matter of Sunshine Elise Merie Simmons; S-07-0009-2. Order to Cease and Desist; Order Barring from Industry; Order Denying Exemptions; Order Imposing Civil Penalties; Consent to Entry of Order. In the Matter of the January 2007 Rescission Offering of Morgan Stanley DW Inc. and/or Morgan Stanley & Co. Incorporated; 2007-WVR-01. Order Granting Waiver Pursuant to ORS 59.045(1)(b). Securities-related Case Law Developments None of note. Other Statutory Developments None of note.

OREGON


Administrator’s Staffing Changes None of note. Other Noteworthy Practice Developments The Division of Finance and Corporate Securities continued to move toward electronic filing systems. For instance, mutual fund and unit investment trust filings may be made using BlueExpress, an Internet-based electronic filing system. Since commencement of this electronic filing system in 2004, approximately 75% of the filings are now made using this electronic filing system.

OREGON


Supplemented to July 22, 2008 This reports on material developments affecting blue sky practitioners in this state to July 22, 2008. Highlights of Material Developments See below. Securities Statutory Developments ORS 59.015 (19) (a), which defines “security” under Oregon law, has been amended to add “variable annuities” to the definition of security. Applicable State Statute of Limitations Periods No action or suit may be commenced under §59.115 more than three years after the sale, except that an action under §59.115 for a violation of subsection (1) (b) or ORS 59.135 may be commenced within three years after the sale or two years after the person bringing the action discovered or should have discovered the facts on which the action is based, whichever is later. ORS § 59.115(6). Securities Rules Developments Oregon amended administrative rules 441-325-0010, 441-325-0020, 441-325-0030, 441-325-0040, 441-325-0050, which govern the sale of franchises, in response to new regulations adopted by the Federal Trade Commission (FTC). Effective June 30, 2008, the FTC updated its franchise regulations to, among other things, specify the types of disclosures a seller of a franchise must provide to a prospective purchaser. Oregon’s amended rules reflect the changes necessary in order for Oregon’s rules to remain consistent with federal requirements. Sellers of a franchise in Oregon need only meet the requirements of the FTC federal regulations in terms of disclosure. Administrative Orders and Announcements The Oregon Department of Consumer and Business Services (DCBS), Division of Finance and Corporate Securities is working with a national task force of state securities regulators to investigate auction-rate securities sales practices. The securities fees currently in effect in Oregon will remain unchanged until 2010. Pursuant to the legislature’s requirement that Oregon’s licensing fees and fees for securities registration be as equal as possible to the national midpoint, the Department of Consumer and Business Services conducted a survey to compare Oregon’s fees with other states. The survey results demonstrated that the fees currently adopted by Oregon match the national midpoints and so no changes are necessary.

OREGON


On 3-3-08, Michael K. Frazier of 726 McDonald Rd, Spokane, WA formerly from Sutherlin, OR, was arrested and lodged on 8 counts of Aggravated Theft 1, in addition to one count each of: Sales of Unregistered Security, Securities Fraud, and Unlicensed Sale of Security. All listed crimes are Class B Felony charges. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None of note. Securities-related Case Law Developments None of note. Other Statutory Developments None of note. Administrator’s Staffing Changes None of note. Other Noteworthy Practice Developments The Division is now closely enforcing OAR 441-075-0020, which covers specific procedures and requirements relating to the renewal of securities registrations. Applicants seeking renewal of an active securities registration are advised to submit all relevant materials at least 30 days before the expiration. Additionally, in the compensatory benefit plan arena (OAR 441-065-0270) the Division is interpreting OAR 441-065-0270 (2) (c), which covers the application requirements, to require that #15B of a U-4 salesperson application be executed.

PENNSYLVANIA


PENNSYLVANIA STATE LIAISON REPORT

No report.

RHODE ISLAND


RHODE ISLAND STATE LIAISON REPORT

No report.

SOUTH CAROLINA


SOUTH CAROLINA STATE LIAISON REPORT

(As of June 20, 2008) Liaisons: F. Daniel (Dan) Bell, III Email: [email protected]

K&L Gates LLP 4350 Lassiter at North Hills Avenue, Suite 300 Raleigh, NC 27609

Telephone: 919-743-7335 Fax: 919-516-2035 State Administrator: Henry McMaster, Attorney General

T. Stephen Lynch, Deputy Securities Commissioner Office of the South Carolina Attorney General Securities Division Rembert C. Dennis Office Building, Suite 501 1000 Assembly Street P.O. Box 11549 (29211) Columbia, SC 29201

Main Telephone: 803-734-4731 Email: [email protected] Main Fax: 803-734-3677 Internet: http://www.scattorneygeneral.com/securities/index.html

Short Title/Citation: Uniform Securities Act, S.C. Code Chapter 35, §§ 35-1-101 et seq. http://www.scstatehouse.net/CODE/t35c001.htm Rules Name/Citation: S.C. Code Regs. 13-201 et seq. http://www.scstatehouse.net/coderegs/13.htm Applicable State Statute of Limitations Periods For violations of securities registration requirements, S.C. Code § 35-1-509(j)(1) limits civil relief to actions instituted within three years after the violation occurred.

Otherwise, S.C. Code § 35-1-509(j)(2) limits civil relief to actions instituted within the earlier of three years after discovery of the violation or five years after the violation.

South Carolina has no statute of limitations for felony offenses.



http://www.scattorneygeneral.com/securities/index.html

http://www.scstatehouse.net/CODE/t35c001.htm

http://www.scstatehouse.net/coderegs/13.htm

SOUTH CAROLINA


Administrative Enforcement Proceedings During the past year, the Division completed or entered into at least three administrative actions. These include the following: two Cease and Desist Orders and one Notice of Intent. The Cease and Desist Orders concerned the offering of unregistered securities by individuals not registered to offer or sell securities in South Carolina. The Notice of Intent was issued against Capital Intrastate Funding LLC and was notice of the Division’s intent to seek the issuance of a stop order denying effectiveness to Capital Intrastate Funding, LLC’s registration statement based on the Division’s belief that it was incomplete.

On September 11, 2007, following an investigation by Division and other state officials, Attorney General McMaster announced the indictment of Tony Pough, Timothy McQueen and Joseph Brunson on state charges of securities fraud for selling unregistered securities. An arrest by federal officials followed in May 2008, and the men were indicted by a federal grand jury in June 2008 on 35 counts of mail fraud. The indictments represent the next steps in the ongoing investigation of Capital Consortium Group, Inc., 3 Hebrew Boys, LLC, and the three men. At gatherings in homes and churches, the men claimed to have been rescued from financial disaster by divine intervention and promised huge returns from foreign currency investments. They gathered over $80 million from at least 7,000 investors in two dozen states, but state and federal officials allege that less than $40,000 of the money was actually invested, with the rest used on NFL season tickets, automobiles, real estate, and a jet. State and federal investigations could result in more charges being filed.

In March 2008, Attorney General McMaster subpoenaed Arthur M. Field, the manager of Capital Investment Funding, LLC, requesting documents relevant or material to the investigation of alleged securities fraud perpetuated by Capital Investment Funding, LLC. The company was involved in making loans for commercial real estate development which were funded by the issuance of promissory notes to investors.

Securities-related Case Law Developments The State v. Morris, Blue Sky Rep. (CHH) ¶ 74,684 (S.C. 2008), the Supreme Court of South Carolina held that a defendant was not entitled to immunity from criminal prosecution as a result of his pre-trial statement to representatives of the South Carolina Securities Commissioner during an administrative investigation. The record contained no evidence that state Attorney General used his statutory authority as Securities Commissioner to compel defendant to either appear before his representatives or offer self-incriminating testimony. The investigators were not required to inform defendant of his constitutional rights because defendant was not in the government’s custody when he gave his statement at the Securities Commissioner’s office. There was no showing that the prosecution was constitutionally improper, or that the government pursued the initial investigation solely to obtain evidence for a criminal prosecution.

SOUTH CAROLINA


In Beechwood Dev. Group, Inc. v. Konersman, Blue Sky Rep. (CCH) ¶ 74,667 (D.S.C. 2007), the United States District Court for the District of South Carolina held that removal jurisdiction was improper where resolution of plaintiff’s state law claims did not necessarily depend on a substantial question of federal law. Defendants had sought to remove the matter to federal court, contending that plaintiff’s cause of action under the South Carolina Uniform Securities Act required the court to determine the availability of registration exemptions that were based on federal statutes and regulations. The court held, however, that federal subject matter jurisdiction did not exist because plaintiff’s alternative theory of liability under the Act, that of misrepresentation, did not require the interpretation of federal law. Moreover, even if resolution of plaintiff’s claims had turned exclusively on the applicability of federal exemptions, the issue did not rise to the level of substantiality required for a finding of federal jurisdiction. Accordingly, the court granted plaintiff’s motion and remanded the matter to state court.

SOUTH DAKOTA


SOUTH DAKOTA STATE LIAISON REPORT

(As of February 15, 2008; supplemented to August 6, 2008) This reports on material developments affecting blue sky practitioners in this state/province since May 21, 2007 and supplemented to August 6, 2008. Liaison: Charles D. Gullickson

Davenport, Evans, Hurwitz & Smith, L.L.P. 206 West 14th Street, P.O. Box 1030 Sioux Falls, South Dakota 57101-1030 Email: [email protected] Telephone: (605) 357-1270 Cell phone: Fax: (605) 335-3639 State Administrator: Gail Sheppick, Director

Division of Securities South Dakota Department of Revenue & Regulation 445 East Capitol Avenue Pierre, South Dakota 57501-3185

Email: [email protected] Main Telephone: (605) 773-3311 Main Fax: (605) 773-6729 Internet: http://www.state.sd.us/drr2/reg/securities/

Short Title/Citation: Uniform Securities Act of 2002, codified at SDCL Ch. 47-31B

http://legis.state.sd.us/statutes/DisplayStatute.aspx?Type=Statute&Statute=47-31B

Rules Name/Citation: Administrative Rules of South Dakota Article 20:08 (cited as

ARSD Article 20:08) http://legis.state.sd.us/rules/DisplayRule.aspx?Rule=20:08

Highlights of Material Developments The South Dakota Division of Securities regulates South Dakota’s franchise statutes and prepared a bill for the 2008 legislative session that updates and revises South Dakota’s existing franchise statutes and repeals the existing franchise statutes found at SDCL Ch. 37-5A. The bill also amends South Dakota’s statutes on business opportunities which are codified at SDCL Ch. 37-25A. The bill, which has been identified as Senate Bill 52 in the 2008 legislative session, has passed the South Dakota Senate and is awaiting action in the South Dakota House of Representatives.



http://www.state.sd.us/drr2/reg/securities/

http://legis.state.sd.us/statutes/DisplayStatute.aspx?Type=Statute&Statute=47-31B

http://legis.state.sd.us/rules/DisplayRule.aspx?Rule=20:08

SOUTH DAKOTA


Also on the topic of franchises, beginning July 1, 2007, the Division allowed franchisors the option of filing the NASAA – Adopted UFOC Disclosure Statement or the new 2007 Federal Trade Commission Franchise Rule Disclosure document. Also, in the latter part of 2006 the South Dakota Division of Securities amended certain of its securities law regulations (see below). Securities Statutory Developments There were no amendments to South Dakota’s securities statutes in 2007, and no legislation is pending in the 2008 session to amend South Dakota’s securities statutes. As noted above, legislation is pending before the current session which would amend South Dakota’s franchise and business opportunity statutes. Securities Rules Developments As I reported in more detail in my liaison report of May 21, 2007, amendments became effective on October 18, 2006, to South Dakota’s securities regulations. The amendments repealed ARSD 20:08:03:12, which required a broker dealer to notify the Director of the Division of Securities concerning the opening or closing of a branch office and enacted a new regulation concerning finder’s (see ARSD 20:08:03:17). The amendments also enacted a new regulation at ARSD 20:08:07:37 which limits the transaction exemption from registration found in SDCL 27-31B-202(14) to an issuer having its principal place of business in South Dakota, and the amendments also enacted a new regulation found at ARSD 20:08:07:38 concerning the ability of a potential issuer of securities to present a business plan at a public meeting to facilitate economic development. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None to report. Securities-related Case Law Developments None to report. Other Statutory Developments Enough signatures have been gathered to place an initiative on the ballot for South Dakota’s November 2008 general election which would effectively ban short sales of

SOUTH DAKOTA


securities. The Division of Securities is opposed to passage of the initiative and has informally advised that the law, if adopted, would be preempted by federal law and would almost inevitably lead to litigation. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

SOUTH DAKOTA


Supplemented to August 6, 2008 Highlights of Material Developments New statutes concerning the offering of franchises in South Dakota became effective on July 1, 2008. The new statutes are codified at SDCL Ch. 37-5B entitled “Franchise Investment.” South Dakota’s prior franchise statutes found in SDCL Ch. 37-5A have been repealed. According to Gail Sheppick, Director of the South Dakota Division of Securities, the new South Dakota franchise statutes are the first franchise act in the United States that coordinates state franchise law with federal law. Securities Statutory Developments Noting new to report. Applicable State Statute of Limitations Periods

Under South Dakota’s Uniform Securities Act, codified at SDCL Ch. 47-31B, a person may not obtain relief for a violation of the securities registration requirements located at SDCL § 47-31B-301 (selling unregistered securities), 47-31B-401(a) (unregistered broker-dealer), 47-31B-402(a) (unregistered agent), 47-31B-403(a) (unregistered investment advisor), 47-31B-404(a) (unregistered investment advisor representative) or 47-31B-506 (misrepresentations concerning registration or exemption), unless the action is instituted within one year after the violation occurred. SDCL § 47-31B-509(j)(1).

Causes of actions for liability of seller to purchaser and purchaser to seller for the sale or purchase of a security by means of an untrue statement of a material fact, or for a failure to state a material fact necessary to make the statement made not misleading, must be brought within the earlier of two years after discovery of the facts constituting the violation or five years after the violation. SDCL § 47-31B-509(j)(2). Additionally, a person may not obtain relief, under SDCL § 47-31B-509(f), for investment advice which employs a device, scheme, or artifice to defraud the other person unless the action is instituted within the earlier of two years after discovery of the facts constituting the violation or five years after the violation. SDCL § 47-31B-509(j)(2).

Additional Security-Related Statutes: SDCL Ch. 37-5B (franchise investment); see especially SDCL § 37-5B-50. SDCL Ch. 37-25A (business opportunities); see especially SDCL § 37-25A-52.

SOUTH DAKOTA


Securities Rules Developments The Director of the Division of Securities is working on amendments to regulations concerning investment advisors found in ARSD Ch. 20:08:05. According to the Director of the Division of Securities most of the amendments will be non-substantive, but the amendments will include a new rule that prevents the use of false or misleading titles by investment advisors such as “senior advisors.” According to the Director the new rules will also have an exemption from registration for certain investment advisors that replicates the exemptions found in § 203(b) of the Federal Investment Advisors Act. Administrative Orders and Announcements Noting new to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Noting new to report. Securities-related Case Law Developments Noting new to report. Other Statutory Developments Noting new to report. Administrator’s Staffing Changes Noting new to report. Other Noteworthy Practice Developments Noting new to report.

TENNESSEE


TENNESSEE STATE LIAISON REPORT

No report.

TEXAS


TEXAS STATE LIAISON REPORT

(As of August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since March 2008. Liaison: Dan R. Waller

Secore & Waller, L.L.P. 12222 Merit Drive, Suite 1350

Dallas, Texas 75251 Email: [email protected] Telephone: 972-776-0200 Cell phone: 214-684-5253 Fax: 972-776-0240 State Administrator: Denise Voigt Crawford

Texas State Securities Board 208 E. 10th Street, 5th Floor Austin, Texas 78701-2407 Mailing Address: P.O. Box 13167 Austin, Texas 78711-3167

Main Telephone: 512-305-8300 Main Fax: 512-305-8310 Internet: http://www.ssb.state.tx.us Short Title/Citation: The Texas Securities Act

Vernon’s Ann. Texas Civ. St. Art. 581-1 www.ssb.state.tx.us Rules Name/Citation: Rules and Regulations of the State Securities Board

Texas Administrative Code, Title 7, Chapter 7 www.ssb.state.tx.us Highlights of Material Developments

On July 22, 2008, the Texas State Securities Board filed a Notice of Hearing to decide whether to suspend the Texas securities dealer registrations of UBS Financial Services, Inc. (“UBS Financial”) and its affiliate UBS Securities, LLC (“UBS Securities”) until Texas investors who purchased auction rate securities from the firms were reimbursed. The hearing was to be held on September 22, 2008, and was to also consider whether to assess an administrative fine against UBS Financial and UBS Securities and to order them to cease and desist from engaging in fraudulent conduct in connection with the sale of securities.


http://www.ssb.state.tx.us



TEXAS


UBS Financial and UBS Securities have now settled with securities regulators,

including the Texas State Securities Board, as of August 8, 2008, and have agreed to buy back the action rate securities from both individual and institutional investors. The Texas State Securities Board helped negotiate the settlement on behalf of the North American Securities Administrators Association (“NASAA”).

On August 7, 2008, the Securities Board announced a settlement in the investigation of Citigroup, Inc., also relating to auction rate securities. The investigation, led by the Securities Board, involved allegations that Citigroup misled its clients by falsely assuring them that auction rate securities were as safe and liquid as cash. Citigroup settled with NASAA, the SEC and the New York Attorney General. As part of the terms of the settlement, Citigroup will offer to repurchase, at par, no later than November 5, 2008, all auction rate securities from all Citigroup retail customers who held such securities on February 12, 2008. Securities Statutory Developments Nothing to Report Applicable State Statute of Limitations Periods Criminal (fraud) – 4 years Texas Securities Act, Section 29-1 Civil: Texas Securities Act, Section 33.H

Liability of sellers, and non-selling issuers which register (including control persons and aiders), generally:

• Registration violations – 3 years after the sale. If statutory rescission offer

was received and rejected with right to sue reserved, one year after such offer was rejected.

• Sale based on untrue statement or omission – 3 years after discovery of

truth or omission or after discovery should have been made, or 5 years after the sale. If statutory rescission offer was received and rejected with right to sue reserved, one year after such offer was rejected.

Liability of buyers (including control persons and aiders), generally:

TEXAS


• Purchase based on untrue statement or omission – 3 years after discovery of truth or omission or after discovery should have been made, or 5 years after the purchase. If statutory rescission offer was received and rejected with right to sue reserved, one year after such offer was rejected.

Securities Rules Developments Nothing to report. Administrative Orders and Announcements See ABA Enforcement Subcommittee Report. Administrative Enforcement Proceedings See ABA Enforcement Subcommittee Report. Securities-related Case Law Developments Nothing to report. Other Statutory Developments Nothing to report. Administrator’s Staffing Changes Nothing to report. Other Noteworthy Practice Developments Nothing to report.

UTAH


UTAH STATE LIAISON REPORT

No report.

VERMONT


VERMONT STATE LIAISON REPORT

(As of February 14, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since June 20, 2007, and supplemented to August 15, 2008. Liaison: William A. Mason, IV

Gravel and Shea 76 St. Paul Street, P.O. Box 369 Burlington, Vermont 05401

Email: [email protected] Telephone: (802) 658-0220 Cell phone: (802) 373-8545 Fax: (802) 658-1456 State Administrator: Anna Drummond

State of Vermont Department of Securities 89 Main Street Montpelier, Vermont 05620-3101

Main Telephone: (802) 828-3420 Internet: http://www.bishca.state.vt.us/SecuritiesDiv/securindex.htm Short Title/Citation: Vermont Uniform Securities Act, 11 V.S.A. §§5101-5615 http://www.leg.state.vt.us/statutes/sections.cfm?Title=09&Chapter=150 Rules Name/Citation: 3A CCH Blue Sky Reporter ¶¶58,400 et seq. (1999) Highlights of Material Developments None to report. Securities Statutory Developments The following amendments were adopted in the 2007 Legislative Session to clarify provisions of the Vermont Uniform Securities Act: Termination of Employment or Association of Agents and Investment Adviser Representatives. Section 5408(b), regarding termination of the employment or association of an agent with a registered broker-dealer, is amended to change the reference to the "Investment Adviser Registration Depository" to the “Central Registration Depository.” Fees; the Securities Regulation and Supervision Fund. A new Section 5613 is added to reinstate the provisions of Section 4230 of the Repealed Securities Act regarding the


http://www.bishca.state.vt.us/SecuritiesDiv/securindex.htm

http://www.leg.state.vt.us/statutes/sections.cfm?Title=09&Chapter=150

VERMONT


disposition of fees and the maintenance of the Securities Regulation and Supervision Fund. Section 5613 also includes a provision regarding supplementing a shortfall in the annual appropriation of the Banking Division. Section 5613 is effective retroactive to July 1, 2006. Recovery of Expenses. A new Section 5614 is added to reinstate provisions of Sections 4231 and 4233 of the Repealed Securities Act regarding the Securities Division’s recovery of fees and expenses in connection with investigations and examinations. Exemption from the federal Philanthropy Protection Act. A new Section 5615 is added to reinstate the provisions of Section 4204b of the Repealed Securities Act. Section 5615 provides that Vermont is not subject to the federal Philanthropy Protection Act, which imposes limitations on the ability of states to regulate certain securities offered by charitable organizations. Section 5615 is effective retroactive to July 1, 2006. Exemption of Broker-Dealers from Registration. Section 5401(b) is amended to authorize the Commissioner to exempt a qualified person transacting business as a broker-dealer from the requirement to register as a broker-dealer under the Securities Act. Fee for Processing Requests for Exemption from Registration. Section 5305 is amended to add a new subsection (k), which requires payment of a $200 fee in connection with the filing of documentation regarding exemption from securities registration. This reinstates the $200 exemption fee included in Section 4208 of the Repealed Securities Act. Notice Filings and Fees for Certain Federal Covered Securities. Section 5302 is amended to add provisions specific to notice filings and notice filing fees required with respect to four classes of federal covered security:

• Offers and sales of securities to “qualified purchasers” (Section 18(b)(3) of the federal Securities Act of 1933);

• Certain secondary trades of securities (Section 18(b)(4)(A) of the federal

Securities Act of 1933). Section 18(b)(4)(A) of the federal Securities Act applies to securities exempt from registration under Section 4(1) and Section 4(3) of the federal Securities Act, where the issuer of the securities files regular reports with the Securities Exchange Commission;

• Unsolicited trades by brokers in securities traded on a national exchange or over-

the-counter (Section 18(b)(4)(B) of the federal Securities Act of 1933); and

• Certain securities exempt from registration under the federal Securities Act (defined at Section 18(b)(4)(C) of the federal Securities Act of 1933).

Securities Rules Developments None to report.

VERMONT


Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) None to report. Securities-related Case Law Developments None to report. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

VERMONT


Supplemented to August 15, 2008 This reports on material developments affecting blue sky practitioners in this state since February 14, 2008. Highlights of Material Developments: None. Securities Statutory Developments: None. Securities Rules Developments: None. Administrative Orders and Announcements: None. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) Securities-related Case Law Developments: None. Other Statutory Developments:

The Vermont legislature enacted an amendment to 8 V.S.A. §2201 exempting person who make convertible loans from the requirement of obtaining a license from the Department of Banking prior to making a “loan.” The amendment is set forth in 8 V.S.A. §2201(c)(13) and requires that the loan be expressly subordinate to senior indebtedness.

Administrator’s Staffing Changes: None. Other Noteworthy Practice Developments: None.

VIRGINIA


VIRGINIA STATE LIAISON REPORT

(As of August 15, 2008) This reports on material developments affecting blue sky practitioners in Virginia since August 2007. Liaison: Thomas G. Voekler

Hirschler Fleischer, P.C. The Edgeworth Building 2100 East Cary Street Richmond, Virginia 23223-7078

E-mail: [email protected] Telephone: (804) 771-9599 Cell phone: (804) 241-3529 Fax: (804) 644-0957 State Administrator: Ronald W. Thomas, Director

Virginia State Corporation Commission Courier Address: 1300 East Main Street, 9th Floor Richmond, Virginia 23219 Mailing Address: P.O. Box 1197 Richmond, Virginia 23218

Main Telephone: (804) 371-9051 Main Fax: (804) 371-9911 Internet: http://www.scc.virginia.gov/division/srf

Short Title/Citation: Virginia Securities Act, 13.1 Va. Code Ann. § 501 et seq http://www.scc.virginia.gov/srf/lawsregs.aspx Rules Name/Citation: Virginia Administrative Code, Title 21. Securities and Retail

Franchising http://www.scc.virginia.gov/srf/lawsregs.aspx Highlights of Material Developments Securities Statutory Developments


http://www.scc.virginia.gov/division/srf

http://www.scc.virginia.gov/srf/lawsregs.aspx

http://www.scc.virginia.gov/srf/lawsregs.aspx

VIRGINIA


Applicable State Statute of Limitations Periods The statute of limitations for criminal claims is three years (VA Code 13.1-5 2d(C)).

For civil claims, the statute of limitations is two years (VA Code 13 1-522(D)), and begins to run on the date of the last transaction. If there are continuing sales, the courts look at the last transaction. Securities Rules Developments

Rule 21 VAC 5-20-280 has been revised to include new prohibited conduct for broker-dealers and agents. No broker-dealer or agent shall, in connection with the offer, sale, or purchase of securities, use a certification or professional designation that indicates or implies that the user has special certification or training in advising or servicing senior citizens or retirees in such a way as to mislead any person. Such misuse includes:

(1) Use of a certification or designation by a person who is ineligible to use that

certification or designation; (2) Use of a nonexistent or self-conferred certification or designation; (3) Use of a certification or designation that implies a level of occupational a

qualification obtained through education, training, or experience that the person does not have; or

(4) Use of a certification or designation obtained either from an organization that

is primarily engaged in the business of instruction in sales or marketing, or from an organization that does not have reasonable procedures for assuring the competence, ethical conduct, or continuing education of its designees.

There is a rebuttable presumption that a certifying organization is not disqualified if it has

been accredited by an appropriate agency. In determining whether a combination of words (or an acronym standing for a combination of words) constitutes a certification implying that a person has special certification or training in advising or servicing senior citizens or retirees, factors to be considered shall include:

(1) Use of one or more words such as “senior,” “retirement,” or “elder,” combined

with one or more words such as “certified,” “chartered,” “advisor,” “specialist,” or “planner”; and

(2) The manner in which those words are combined in the name of the

certification or designation.

Rule 21 VAC 5-80-200 has been amended to apply the same standards to investment advisors and their representatives and to the advisory services they provide to senior citizens or retirees.

VIRGINIA


Rule 21 VAC 5-80-10 has been amended to eliminate the need for paper filing of certain

portions of the application for registration as an investment advisor. Administrative Orders and Announcements Administrative Enforcement Proceedings The State Corporation Commission is not an administrative agency and doesn't bring administrative cases. All of its cases are civil cases, of which there are numerous proceedings that are not recorded in this report, as they do not relate to new issues. One can check the Commission's website for case information. Securities-related Case Law Developments

In Andrews v. Browne, 276 Va. 141, 662 S.E.2d 58 (2008), the Supreme Court of Virginia rejected the “sale of business” doctrine, under which transactions involving the sale of 100 percent of the stock of a closely held corporation are not covered by securities laws. Andrews involved the purchase of a corporation that operated a health club in Prince William County. After receiving information suggesting that the sellers had not accurately reported the income history of the corporation, Andrews filed a complaint in which he sought judgment against the sellers under Va. Code § 13.1-522 for making untrue statements of material fact and omitting material facts in furtherance of the sale of a security. The lower court held that the transaction was a sale of business and as such was not covered by the Virginia Securities Act. The Supreme Court of Virginia reversed, noting that the U.S. Supreme Court held in 1985 that the “sale of business” doctrine was not applicable under the federal securities acts. While there continues to be a split of authority as to whether the doctrine should apply to individual state securities acts, there are sound policy reasons that support its rejection. When the instrument purchased is labeled as “stock” and possesses the characteristics of stock, an investor is more likely to believe the transaction is covered by securities laws. In such cases, a court is not required to look to the economic substance of the transaction to determine whether the stock is a “security.” The Virginia Securities Act applies to transactions involving the sale of all of the stock of a close corporation, regardless of whether or not control of the business changes hands. Other Statutory Developments Administrator’s Staffing Changes Other Noteworthy Practice Developments

WASHINGTON


WASHINGTON STATE LIAISON REPORT

(As of February 18, 2008; supplemented to August 8, 2008) This reports on material developments affecting blue sky practitioners in Washington State since June 20, 2007, and supplemented to August 8, 2008. Liaison: John L. Mericle

Harris, Mericle & Wakayama 999 Third Avenue, Suite 3210 Seattle, Washington 98104 Email: [email protected] Telephone: (425) 742-3985 Cell phone: (206) 601-9993 Fax: (425) 742-4676 State Administrator: Michael E. Stevenson

Department of Financial Institutions Securities Division P.O. Box 9033 Olympia, WA 98507-9033 Physical Address (for deliveries or visitors) Department of Financial Institutions Securities Division 150 Israel Rd. SW Tumwater, WA 98501

Main Telephone: (360) 902-8760 Main Fax: (360) 902-0524 Internet: http://www.dfi.wa.gov/sd/

Short Title/Citation: The Securities Act of Washington, RCW 21.20 et seq. http://dfi.wa.gov/sd/statutes.htm Rules Name/Citation: Washington Administrative Code, Title 460 http://dfi.wa.gov/sd/statutes.htm Securities Statutory Developments There are no securities-related bills pending in the current session of the Washington State Legislature. The Revised Uniform Securities Act of 2003 was not reintroduced this year.


http://www.dfi.wa.gov/sd/

http://dfi.wa.gov/sd/statutes.htm

http://dfi.wa.gov/sd/statutes.htm

WASHINGTON


Securities Rules Developments Request for Comments re Proposed Amendments to SEC Regulation D. The Securities Division has filed a Preproposal Statement of Inquiry (Form CR-101), soliciting comments on the possible amendment of its rules pertaining to several exemptions from registration for private and limited offerings in light of the possible amendment of related federal rules. The explanation accompanying the filing may be found at: http://www.dfi.wa.gov/sd/rulemaking/pdf/private_limited_letter.pdf If you have any questions or comments, contact Faith Anderson at (360) 725-7825 or by email at [email protected] Use of Professional Designations. In June 2007 the Securities Division solicited comments on the possible amendment of its rules to clarify that (1) a person who uses a professional designation which a reasonable person would interpret as relating to investment advice or planning may be holding himself out as a financial planner, thereby necessitating registration as an investment adviser, and (2) that the misleading use of professional designations is prohibited.

This expands the scope of the Division’s inquiry into possible rule-making concerning professional designations as originally contemplated in the rule-making notice published by the Division in April 2007, which pertained to the use of professional designations relating to senior citizens by broker-dealers, investment advisers, and their representatives.

Questions or comments regarding both of these inquiries may be directed to Faith Anderson by telephone at (360) 725-7825 or by e-mail at [email protected].

Administrative Orders and Announcements Update and Adoption of NASAA Guidelines and Policies. On February 6, 2008, the Director of the Department of Financial Institutions adopted amendments to the Securities Division’s rules to reflect the latest versions of the NASAA policies and guidelines previously adopted by Washington. The amendments also adopt NASAA’s Statement of Policy Regarding Church Extension Fund Securities and NASAA’s Uniform Disclosure Guidelines for Cover Legends for the first time. The amendments become effective March 8, 2008. If you have any questions or comments, contact Jill Vallely by telephone at (360) 902-8801 or by e-mail at [email protected]. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement)

http://www.dfi.wa.gov/sd/rulemaking/pdf/private_limited_letter.pdf




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Securities-related Case Law Developments In what appears to be the first precedential holding on the question, Division Two of the Washington State Court of Appeals has held that the Securities Act of Washington’s express statutory provision regarding suitability of broker recommendations, RCW 21.20.702, does not carry with it a private right of action. Ives v. Ramsden, 174 P.3d 1231 (Wash. App. 2008). Nevertheless, the Court held that the statute creates a common law duty (and standard) of care, the breach of which may give rise to a common law action.

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Supplemented to August 8, 2008 The following report concerns material developments in Washington State “Blue Sky” law since February 18, 2008. Securities Statutory Developments The Revised Uniform Securities Act of 2003, while technically reintroduced this year, was not acted upon by the Washington State Legislature. There were no other securities-related bills introduced in the most recent session. Securities Rules Developments Request for Comments re Proposed Amendments to SEC Regulation D. Effective September 15, 2008, the Securities Division has amended its rules in response to rule-making activity at the federal level. In order to coordinate its rules with recent amendments with recent amendments to the SEC’s related rules, the Division’s amendments include:

• Adoption of the text of the new federal safe harbor from general solicitation or general advertising necessitated by the public availability of Forms D on the SEC website;

• Adoption of the new filing extension implemented by the SEC for Forms D filed in

reliance on our uniform limited offering exemption and for notice filings made pursuant to federal Rule 506 where the filing deadline falls on a Saturday, Sunday or holiday, in which case the due date will be the first business day following;

• Adoption of the text of the amendments to the SEC rules setting forth the requirements

for filing amendments to previously filed Forms D and for annual filings; and • Amendments to provide for the future electronic filing of Form D through a designee of

the Administrator once an electronic filing system acceptable to the Administrator has been developed.

In response to comments received from our ABA Committee on State Regulation of Securities, the amendments adopted by the Division vary from the proposals contained in the original Notice of Proposed Rule Making (Form CR-102) that was filed with the Office of the Code Reviser for publication on March 19, 2008 (Issue No. 08-06) in the following ways:

• The text of the rules proposed was revised to clarify that the Division will accept paper copies of new Form D filed either in electronic or paper format with the Securities and Exchange Commission; and

• The text of the rules proposed were revised to clarify that amendments to notice filings

made for offerings made in reliance on Regulation D and through the filing of Temporary Form D are required to be filed with the Securities Division consistent with the amendment filing requirements adopted by the Securities and Exchange Commission.

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The Division also clarified that the filing of a uniform consent to service of process will continue to be required for issuers that file a notice using Temporary Form D. The text of these final rules, blacklined to the existing rule, is found at: http://dfi.wa.gov/sd/rulemaking/pdf/private-limited-text.pdf Use of Professional Designations. The Securities Division has adopted a new chapter in its rules to regulate the use of senior designations and certifications that is based on the Model Rule on the Use of Senior-Specific Certifications and Professional Designations adopted by the North American Securities Administrators Association, Inc. on March 20, 2008. The Division also amended its rules to clarify that it is a dishonest and/or unethical business practice for investment advisers, broker-dealers and their representatives to use a term or abbreviation thereof in a manner that misleadingly states or implies that a person has special expertise, certification, or training in financial planning, including the misleading use of a senior certification or designation.

The final rules are found at http://dfi.wa.gov/sd/rulemaking/pdf/pro_designations_cr_103.pdf

Investment Adviser Custody Rules. The Securities Division has proposed to amend and update its rules that impose safeguard requirements for investment advisers that maintain custody or possession of clients’ funds or securities. The proposal may be found at: http://dfi.wa.gov/sd/rulemaking/pdf/cr_102_custody_rules.pdf A public hearing has been held on these proposals, and they remain under consideration. Holding Out As An Investment Adviser. The Securities Division had solicited comments on the possible amendments of its rules to clarify that a person who uses a professional designation may be holding himself out as a financial planner, thereby necessitating registration as an investment adviser, and that the misleading use of professional designations is prohibited. It is my understanding that further action on these proposals will not be forthcoming at the present time. Administrative Enforcement Proceedings Please see the current report to the Subcommittee on Enforcement. Securities-related Case Law Developments Attached is an excellent article, written by David Taylor and Angela Martinez of the Perkin Coie law firm (Seattle, WA), summarizing recent judicial interpretations of the Securities Act of Washington. This article is included by permission of the authors and the Washington State Bar Association.

http://dfi.wa.gov/sd/rulemaking/pdf/private-limited-text.pdf

http://dfi.wa.gov/sd/rulemaking/pdf/pro_designations_cr_103.pdf

http://dfi.wa.gov/sd/rulemaking/pdf/cr_102_custody_rules.pdf

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LIABILITY UNDER THE SECURITIES ACT OF WASHINGTON: 2007 IN REVIEW

By David F. Taylor and Angela R. Martinez11

Plaintiffs frequently base claims for investment-related fraud on the Securities Act of Washington (the “WSSA” or the “Act”). Appellate and trial courts issued at least ten decisions in 2007 concerning the interpretation and application of the Act. This article reviews some of those decisions, with the goal of illustrating frequently litigated issues and shedding light on recent interpretations of the Act.12

A. Background

The WSSA provides civil, administrative, and criminal remedies for misstatements and omissions in connection with the offer and sale of securities, the sale of unregistered securities, and certain other unlawful practices.13 Most civil claims under the WSSA are based on Section 21.20.010 of the Act, which prohibits certain misstatements or omissions. A claim for primary liability under Section 21.20.010 requires a plaintiff to prove that: (i) the defendant made a misstatement or omission of material fact; (ii) in connection with the sale, offer, or purchase of a security; (iii) the plaintiff relied upon the misstatement or omission; and (iv) the defendant was a seller of the security (or, less commonly, an offeror or buyer).14 There is no scienter requirement.15 Thus, a claim under the WSSA does not require any showing of intent, or even of negligence.

The WSSA also provides for secondary liability. Secondary liability is imposed on: (i) any person who directly or indirectly controls a seller or buyer who is liable for a violation of the WSSA; (ii) every partner, officer, director, or person who occupies a similar status or performs a similar function for such a seller or buyer; and (iii) every employee, broker-dealer, and salesperson (and certain other persons) who materially aids in the transaction. Such a person is jointly and severally liable to the plaintiff unless the person shows that he or she did not know, and in the exercise of reasonable care could not have known, the facts giving rise to liability.16 No such affirmative defense is available to primary violators.

Relief under the WSSA is rescissionary. A successful plaintiff who tenders the security at issue is entitled to recover the consideration paid for the security, plus interest at eight percent per annum, costs and reasonable attorneys' fees, minus any income received on the security. If the plaintiff no longer owns the security, the plaintiff may recover damages equivalent to the amount that would have been recoverable upon tender, minus the value of the security when the buyer disposed of it, and eight percent interest per annum from the date of disposition.17

11 Mr. Taylor is a partner and Ms. Martinez is an associate in the Seattle office of Perkins Coie LLP. 12 Many of the cases discussed in this article are unpublished. 13 See RCW 21.20.010, .390-.430. 14 See RCW 21.20.010, .430. See generally Hines v. Data Sys. Inc., 114 Wn.2d 127, 134, 787 P.2d 8 (1990). 15 Kittilson v. Ford, 93 Wn.2d 223, 226, 608 P.2d 264 (1980). 16 See RCW 21.20.430(3). 17 RCW 21.20.430(1).

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B. Decisions During 2007

Courts interpreting the WSSA during 2007 addressed a number of issues, some frequently litigated, and others novel. This section discusses five of those issues: (1) who may be primarily liable for violations of the Act; (2) who may be secondarily liable; (3) whether a seller is liable for misstatements made by others; (4) when is a misrepresentation made “in connection with” an offer, sale, or purchase of securities; and (5) when does a plaintiff have sufficient knowledge of a violation to trigger the statute of limitations?

1. Primary Liability

One of the most frequently litigated issues under the WSSA is whether a defendant is a “seller” subject to primary liability. The term “seller” is not limited to one who passes title directly to a buyer; instead, the term includes any person whose acts are “a substantial contributing factor” in the sales transaction.18 Whether a defendant is a seller for purposes of imposing primary liability is an important issue. A third party who is not primarily liable as a seller may not otherwise face liability under the Act. Moreover, a seller is deprived of the affirmative defense available to secondary actors and will be liable regardless of whether he or she knew or reasonably could have known the facts giving rise to liability. The question of whether a defendant is a seller subject to primary liability is often litigated at the outset of a case, on a motion to dismiss under Rule 12(b)(6). Two such motions produced noteworthy decisions during 2007. In In re Metropolitan Securities Litigation, 532 F. Supp. 2d 1260 (E.D. Wash. 2007), an underwriter and an auditing firm moved to dismiss WSSA claims on the ground that they were not “sellers” within the meaning of the WSSA. The court denied the motions, citing three factors relevant to determining whether an act is a substantial contributing factor in a sale sufficient to make a party a “seller”: (i) the number of other factors that contribute to the sale and the extent of the effect that they have in producing it; (ii) whether the defendant's conduct “has created a force or series of forces which are in continuous and active operation up to the time of the sale, or has created a situation harmless unless acted upon by other forces for which the actor is not responsible,” and (iii) lapse of time.19 The court further held that the term “seller” may include professional service providers who offer something more than routine professional services. Focusing on that question, the court held that the “natural roles” of both auditors and underwriters go beyond providing routine professional services such that they may be sellers subject to primary liability under the WSSA. Auditors, the court held, assume a public responsibility that transcends the relationship with the client and includes communicating to investors about corporations and their securities. Underwriters likewise serve the public interest because they are responsible for evaluating the terms of the offering. For those reasons, the court concluded that the auditing firm and the underwriter had provided more than routine professional services and might be sellers under the WSSA.20 In Silver Valley Partners, LLC v. De Motte, No. 06-429-N-ELJ, 2007 WL 2802315 (D. Idaho Sept. 24, 2007), the court considered motions to dismiss claims under both the WSSA and the Idaho Securities Act. With respect to the WSSA, the court held that the 18 Haberman v. WPPSS, 109 Wn.2d 107, 130-31, 744 P.2d 1032 (1987). 19 In re Metropolitan Secs. Litig., 532 F. Supp. 2d 1260, 1300 (E.D. Wash. 2007) (internal quotation marks and citations omitted). 20 Id. at 1301.

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substantial factor test does not require direct contact between a buyer and a seller and is designed to extend liability to those whom “policy dictates should be subject to liability,” regardless of whether there is privity between the buyer and seller.21 The court examined each alleged sales transaction to determine whether the plaintiffs had alleged facts sufficient to show that the defendant was a seller as to that sale. The court denied the motions to dismiss both where a defendant directly sold securities to the plaintiff and where a defendant was alleged to have substantially contributed to the sales. However, the court dismissed those claims for which the defendant's acts were not alleged to have been a contributing factor to the sale at issue.22

Both Metropolitan and Silver Valley underscore the uncertainty (some would say flexibility) inherent in the “substantial factor test,” exemplified by the court's acknowledgement in Silver Valley that “policy” dictates who is a seller under the test. This leaves room for courts to take differing approaches to the question. In Silver Valley, the court carefully parsed the claims to determine whether each individual defendant should be considered a seller with respect to each specific sales transaction at issue. This careful approach resulted in a mixed bag for the defendants, with some claims being dismissed and others allowed to proceed. The court in Metropolitan took a broader approach, basing its decision on the duties and responsibilities of auditors and underwriters generally. Although one can question whether it makes sense to find an auditor or underwriter to be a seller simply by virtue of its general duties to the investing public, the result is probably driven by the procedural posture of the case; the court seemed reluctant to resolve the issue on a motion to dismiss at the outset of the lawsuit.

2. Secondary Liability

In addition to providing for primary liability, the WSSA also imposes secondary liability in some circumstances. The WSSA establishes specific categories of persons who may be subject to secondary liability. Whether a person is secondarily liable will often turn on the person's relationship with both the seller and the transaction at issue. A person will be a “control person,” for example, only if the person exercises control over the seller's affairs generally and has the power to control the securities transaction. Likewise, an employee will be secondarily liable only if, in addition to having an employment relationship with the seller, he or she materially aids the transaction at issue. Two recent decisions examining whether the plaintiffs had pled facts sufficient to establish secondary liability under the WSSA underscore this approach. In Tumelson Family Limited Partnership v. World Financial News Network, No. 05-35813, No. 05-35821, No. 05-35995, 2007 WL 650329 (9th Cir. Feb. 28, 2007), the court rejected claims that a defendant was a control person subject to secondary liability under the WSSA. Following the Washington Supreme Court's lead in Hines v. Data Line Systems, Inc.,23 the court applied the two-part test followed under the federal securities laws to determine control person liability. Under that test, a defendant is a control person only if the defendant (i) exercised control over the operations of the corporation and (ii) possessed the power to control the transaction that violated the securities law.24 The court held that the defendant was not a 21 Silver Valley Partners, LLC v. De Motte, No. 06-429-N-ELJ, 2007 WL 2802315, at *9 (D. Idaho Sept. 24, 2007). 22 Id. 23 114 Wn.2d 127, 787 P.2d 8 (1990). 24 Tumelson Family Ltd. P'ship v. World Fin. News Network, No. 05-35813, No. 05-35821, No. 05-35995, 2007 WL 650329, at *1 (9th Cir. Feb. 28, 2007).

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control person because there was no evidence that he played any role in the day-to-day operations of the business.25 The court held that a second defendant was subject to secondary liability because the “jury could have found that [he] was an employee who materially aided the sale of securities.”26 Specifically, the defendant gave a twenty-minute PowerPoint presentation to investors at which he held himself out as the company's chief financial officer, and he made at least one baseless statement about the health of the company that was specific, factual, and material.27 In Silver Valley Partners, LLC v. De Motte, No. 06-429-N-ELJ, 2007 WL 2802315 (D. Idaho Sept. 24, 2007), discussed above, the court found that the plaintiffs alleged facts sufficient to state a claim against one defendant for secondary liability but dismissed the secondary liability claims against a second defendant. The court found that the complaint failed to allege a sufficient relationship between the primary violator and the defendant.

3. Liability for the Statements of Others?

Is a seller primarily liable for the misstatements or omissions of others? In Trimble v. Holmes Harbor Sewer District, No. 59054-5-I, 2007 WL 959899 (Wash. Ct. App. Apr. 2, 2007), review denied, 163 Wn.2d 1003 (2008), the Washington Court of Appeals squarely answered no. The case involved claims by investors against an underwriter who was not directly involved in selling the securities and who did not participate in any of the alleged misrepresentation. The court held that the underwriter could not be liable for the statements of others for four reasons. First, the plain language of the WSSA imposes liability on a seller “only when a person makes a material statement or a statement that is misleading absent a material fact.” Second, Washington case law likewise “clearly” requires that the party sought to be held liable must make a misrepresentation or omission. Third, the federal courts have interpreted Rule 10b-528 to preclude liability for the misstatements of others. And finally, Washington courts will not impose strict liability “absent a clear indication that the Legislature intended to do so.”29 For all these reasons, the court held that the underwriter was not liable because it did not participate in making or omitting material facts. This holding imposes a significant limitation on the scope of primary liability under the WSSA. This holding may be especially important in limiting the exposure of third parties, such as auditors, underwriters and other professionals, who often do not participate in making the types of statements on which claims under the WSSA are based. The holding also underscores the importance of clearly identifying the misrepresentations or omissions of fact for which a plaintiff seeks to hold a defendant liable.

25 Id. 26 Id. at *2. 27 Id. 28 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. 29 Trimble v. Holmes Harbor Sewer Dist., No. 59054-5-I, 2007 WL 959899, at *8 (Wash. Ct. App. Apr. 2, 2007), review denied, 163 Wn.2d 1003 (2008).

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4. Misrepresentations or Omissions in Connection With the Offer, Sale, or Purchase of a Security

As set forth above, the WSSA applies only to misstatements and omissions “in connection with” the offer, sale, or purchase of a security. Although this element may be easily satisfied where a claim arises from a straightforward investment transaction, it can present an obstacle to plaintiffs asserting claims that arise in more unusual circumstances. As the following cases illustrate, finding whether a misstatement or omission was made “in connection with” the offer, sale, or purchase of a security can sometimes be a complex and fact-intensive exercise. The court's decision in Kinney v. Cook, 159 Wn.2d 837, 154 P.3d 206 (2007), discussed below, provides some guidance on this issue, with its holding that a sale requires a mutual agreement to exchange a security and that an offer requires a unilateral intent to exchange a security. This holding may limit the reach of the WSSA in some circumstances, as it did in Kinney itself.

In Kinney, the plaintiffs won a judgment to rescind their sale of stock to the defendant.30 In ordering rescission of the transaction, the court also ordered reinstatement of a promissory note evidencing the loan which the defendant had made to the plaintiffs to finance their original purchase of the stock. Subsequently, the plaintiffs paid off the note without the defendant having disclosed that he had burdened the corporation with a multimillion-dollar debt. The plaintiffs then brought an action alleging a violation of the WSSA.31 The court found that the WSSA did not apply because the plaintiffs' payment on the note was not in connection with a sale or offer to sell a security. Noting that Washington courts had not examined the definition of sale under the WSSA, the court turned to federal securities laws, as well as the legislative purposes behind the WSSA. The court concluded that a “sale” requires, at a minimum, a mutual agreement to exchange a security, while an “offer to sell” requires a unilateral intent to exchange a security. The court found no such agreement or intent because the plaintiffs owned the stock before they made the payments at issue. According to the court, the plaintiffs paid the defendant because they were legally bound to do so by the terms of the note, not as consideration for a concurrent investment. Payment on the note therefore was not in connection with the sale or offer of a security. Furthermore, even if the court-ordered rescission were a sale, the court explained, it does not follow that the defendant was the seller because “[r]ather than encouraging the judicial rescission, [the defendant] fought it.”32

The plaintiffs in Stonebridge Securities, LLC v. Devine, No. 58458-8-1, 2007 WL 1464431 (Wash. Ct. App. May 21, 2007), were noteholders who had loaned the defendant corporation money in exchange for promissory notes convertible to stock in the corporation.33 The corporation's principal signed a guaranty agreement as consideration for the plaintiffs' agreement not to seek to enjoin a merger. After the merger, the corporation defaulted on the notes, and the plaintiffs filed suit against the principal for breach of the guaranty agreement and securities fraud.34 The parties agreed that the notes were securities, but they disagreed on,

30 Kinney v. Cook, 159 Wn.2d 837, 839-40, 154 P.3d 206 (2007). 31 Id. at 840-41. 32 Id. 33 Stonebridge Sec., LLC v. Devine, No. 58458-8-1, 2007 WL 1464431, at *1 (Wash. Ct. App. May 21, 2007). 34 Id. at *1-2.

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among other things, whether the original securities agreement was executory or executed by the time the principal signed the guaranty agreement.35

Under Washington law, a stock purchase agreement must be executory for post-agreement representations to be “in connection with the offer, sale, or purchase” of the security.36 In Stonebridge, the appellate court upheld the trial court's determination that the original securities agreement was executed when the principal signed the guaranty agreement.37 The court reasoned that its conclusion was “supported by the WSSA's reliance rule” because here, “it was not possible that the noteholders relied on the guaranty agreement during the offer, sale, or purchase of the securities (the promissory notes) because they had already loaned [the corporation] money and received the promissory notes.”38 On the other hand, the court held that there was a genuine issue of fact regarding whether the guaranty agreement was at least indirectly “in connection with the offer, sale, or purchase of” securities because it was the condition precedent for the merger, which resulted in new securities.39

5. Statute of Limitations

The WSSA requires a plaintiff to file a claim within three years of discovering a violation, or within three years of when a violation would have been discovered in the exercise of reasonable care.40 In Alexander v. Cadaret, Grant & Co., No. 57743-3-I, 2007 WL 1041380 (Wash. Ct. App. Apr. 9, 2007), review denied, 163 Wn.2d 1002 (2008), the plaintiffs invested in a private placement program offered by Resource Development International (“RDI”).41 From the time of their initial investment through February 2001, the plaintiffs received monthly payments as promised. During this time, some plaintiffs made additional investments in RDI. However, the payments stopped in March 2001. The plaintiffs contacted the broker, who assured them their investments were safe. The plaintiffs then received regular letters “providing explanations for the delay and assuring [them] they would receive their money soon.”42 The letters generally informed the plaintiffs that an unidentified “banking compliance entity” had put a hold on the account, that RDI would refuse any additional investments “because it feared the government would accuse if of running a Ponzi scheme,” and that the events of September 11, 2001, had caused further delay. The last letter was sent in January 2002. A few months later, SEC agents raided the office of RDI's president. A Tacoma newspaper published a story two days later, on March 27, 2002, reporting on the raid and the SEC's decision to charge the president, his brother, and RDI with securities fraud.43 The plaintiffs filed a complaint against the securities broker on March 10, 2005. The superior court dismissed the action as time-barred, and the court of appeals affirmed. The court held that “[a] cause of action for a securities act violation accrues when the plaintiff knows 35 Stonebridge, 2007 WL 1464431, at *3. 36 See Helenius v. Chelius, 131 Wn. App. 421, 445, 120 P.3d 954 (2005), review denied, 158 Wn.2d 1026 (2007). 37 Stonebridge, 2007 WL 1464431, at *4. 38 Id. at *5 (internal quotation marks and citations omitted). 39 Id. at *6-7 (noting that the merger agreement was approved just three days after the guaranty agreement was signed). 40 RCW 21.20.430(4)(b). 41 Alexander v. Cadaret, Grant & Co., No. 57743-3-I, 2007 WL 1041380, at *1 (Wash. Ct. App. Apr. 9, 2007), review denied, 163 Wn.2d 1002 (2008). 42 Id. 43 Id. at *1-2.

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or should know the relevant facts of the fraud, whether or not the plaintiff also knows that these facts are enough to establish a legal cause of action. The plaintiff must exercise due diligence in discovering the basis for a cause of action, and the plaintiffs' actions are judged against those of a reasonable investor.”44 The court held that the plaintiffs were on inquiry notice as a result of the missed payments and the string of letters with “vague promises” and “mysterious references,” including a reference to a Ponzi scheme. Because they failed to file within three years of receiving such information, their action was time-barred.

C. Conclusion

Although the WSSA is often preempted by federal law in class action cases, it remains a viable basis for claims in other settings. Courts therefore continue to interpret the Act and to apply it in a variety of circumstances, often turning to the plain language of the Act, the growing body of case law concerning the Act, and analogous provisions of federal securities laws.

44 Id. at *3.

WEST VIRGINIA


WEST VIRGINIA STATE LIAISON REPORT


For the fiscal year ended June 30, 2008, the Securities Commission reports that there were no new “major” cases undertaken. During that period the Commission issued 28 new C&D’s, all but two (2) of which have become final. The statistics for the year are that 191 complaints were investigated, 18 involving annuities, five (5) fraudulent practices, nine (9) broker dealer, nine (9) oil and gas and 150 “miscellaneous products and services”. Still languishing about is the “Improper Mutual Fund Trading Practices” investigation. This matter has been open since early (February) 2004. While one fund, for business reasons, settled early, virtually all other of the cases remain open. Word is that a couple of funds have agreed to settlements but these have not been reduced to formal agreements (and thus not subject to FOIA requests). Counsel for one fund is still waiting for a Scheduling Order and hearing date, something they say they requested a couple of years ago. Outside counsel for the Division has lately been trying to push for more settlements. Justin Southern, Communications Director for the Office of the Auditor, advises that efforts continue to allow greater access to Securities Division actions and that the Division is working toward making all of its orders available on its website. Justin did not give a launch date on this.


WISCONSIN


WISCONSIN STATE LIAISON REPORT

(As of February 1, 2008; supplemented to August 1, 2008) This reports on material developments affecting blue sky practitioners in Wisconsin since January 22, 2007 and supplemented to August 1, 2008. Liaison: Terry D. Nelson

Foley & Lardner LLP 150 East Gilman Street Madison, WI 53703

Email: [email protected] Telephone: (608) 258-4215 Cell phone: Fax: (608) 258-4258 State Administrator: Patricia D. Struck, Administrator

Wisconsin Division of Securities Department of Financial Institutions 345 West Washington Avenue, 4th Floor Madison, WI 53703

Mailing Address: P.O. Box 1768

Madison, WI 53701-1768

Main Telephone: (608) 266-1064 Main Fax: (608) 264-7979 Internet: http://www.wdfi.org/fi/securities Short Title/Citation: Ch. 551, Wis. Stats. Rules Name/Citation: Chapter DFI-SEC of the Wisconsin Administrative Code http://www.wdfi.org/fi/securities/statutes.htm Highlights of Material Developments Legislation expected to be introduced in 2008 session to enact Uniform Securities Act (2002 version) to replace existing securities law. The proposed version generally tracks the USA (2002) except for certain exceptions unique to Wisconsin law and practice. Securities Statutory Developments None.


http://www.wdfi.org/fi/securities

http://www.wdfi.org/fi/securities/statutes.htm

WISCONSIN


Securities Rules Developments None. Administrative Orders and Announcements None. Administrative Enforcement Proceedings From January 1, 2007 through January 11, 2008, enforcement actions have been taken by the Wisconsin Securities Administrator in 43 separate matters resulting in orders against 89 individuals or entities. In a majority of the matters, “summary” orders were issued by the Administrator based upon the uncontested allegations by the staff. Most matters involved allegations of the offer or sale of non-registered and non-exempt securities. Such summary orders usually resulted in the prohibition of any such offers and sales and a revocation of the use of any securities registration exemptions by the subject(s) of the order. Only 11 of the 43 matters were resolved via a “consent” order which generally results after the target(s) negotiate with the staff over the allegations and/or the resolution of the matter. One matter of note is where a registered investment company (see Prudential Investment Portfolios, Inc., File No. S-07098) consented to the issuance of a Consent Order of Prohibition and Assessment ($5,000) after failing to file a timely notice with the Administrator for “covered securities” for certain mutual funds. All enforcement orders that have been issued can be found at http://www.wdfi.org/newsroom/admin_orders/dos_default.htm. Securities-related Case Law Developments No material events. Other Statutory Developments None (but see above under “Highlights of Material Developments” for efforts to enact new securities law in Wisconsin). Administrator’s Staffing Changes None material. Other Noteworthy Practice Developments None material.

http://www.wdfi.org/newsroom/admin_orders/dos_default.htm

WISCONSIN


Supplemented to August 1, 2008 This reports on material developments affecting blue sky practitioners in Wisconsin since February 1, 2008. Highlights of Material Developments The Uniform Securities Act (2002 version) was enacted to replace existing securities law as of January 1, 2009. The new securities law generally tracks the USA (2002) except for certain exceptions unique to Wisconsin law and practice. Administrative rules to accommodate the new securities law have been published for comment. Comments are due by no later than August 20, 2008. A copy of the proposed rules can be found at the Division’s website listed above. Securities Statutory Developments See Highlights above. Applicable State Statute of Limitations Periods Pursuant to Sec. 551.59(5), Wis. Stats, action must be commenced before the expiration of three (3) years after the act or transaction constituting the violation. Securities Rules Developments See Highlights above. Administrative Orders and Announcements None. Administrative Enforcement Proceedings From January 1, 2008 through June 30, 2008, enforcement actions have been taken by the Wisconsin Securities Administrator in sixteen (16) separate matters resulting in orders against various individuals or entities. In a majority of the matters, “summary” orders were issued by the Administrator based upon the uncontested allegations by the staff. Most matters involved allegations of the offer or sale of non-registered and non-exempt securities. Such summary orders usually resulted in the prohibition of any such offers and sales and a revocation of the use of any securities registration exemptions by the subject(s) of the order. Eight (8) matters were resolved via a “consent” order which generally results after the target(s) negotiate with the staff over the allegations and/or the resolution of the matter. All enforcement orders that have been issued can be found at http://www.wdfi.org/newsroom/admin_orders/dos_default.htm.

http://www.wdfi.org/newsroom/admin_orders/dos_default.htm

WISCONSIN


Securities-related Case Law Developments In Cuene v. Hilliard, No. 2007AP124, the Wisconsin Court of Appeals held that a plaintiff in a securities fraud case under Wisconsin’s blue sky law does not have to prove reliance. The Court ruled that proof of a material misrepresentation or omission creates a presumption of reliance. The Court’s decision in Cuene v. Hilliard overrides, in part, Carney v. Mantuano, 204 Wis.2d, 527, 528, 554 N.W.2d 584 (Ct. App. 1986) where the court in that case ruled the investor needed to prove reliance upon the misrepresentation. The Court of Appeals distinguished federal securities law where proof of causation is required in a fraud case because the seller may be liable to persons other than the purchaser of the security. Under the Wisconsin blue sky law, where proof of causation is not required, the seller is liable only to the purchaser. Accordingly, the causal connection under the Wisconsin blue sky law is established when a statutory violation is established. Other Statutory Developments See above under “Highlights of Material Developments.” Administrator’s Staffing Changes David A. Cohen resigned his position as Supervising Attorney of the Bureau of Regulation and Enforcement. Leslie Van Buskirk, formerly the Staff Attorney is now the Supervising Attorney. Other Noteworthy Practice Developments None material.

WYOMING


WYOMING STATE LIAISON REPORT

(February 18, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since August 2007, and supplemented to August 15, 2008. Liaison: Robert J. Ahrenholz, Esq.


Email: [email protected] Telephone: 303-297-2400 Cell phone: Fax: 303-292-7799 State Administrator: Karen Wheeler, Director

Compliance Division State Capitol Building 200 West 24th Street Cheyenne, WY 82002-0020

Main Telephone: 307-777-7370 Main Fax: 307-777-7640 Internet: http://soswy.state.wy.us/Compliance/Compliance.aspx

Short Title/Citation: Wyoming Uniform Securities Act, WYO. STAT. ANN. §§ 17-4-101

through 17-4-132 http://legisweb.state.wy.us/statutes/statutes.aspx?file=titles/Title17/T17CH4.htm Rules Name/Citation: Wyoming Securities Rules-Secretary of State Securities Division

Rules and Regulations Chapter 1-9 http://soswy.state.wy.us/Rules/Rule_Search_Main.asp Highlights of Material Developments

The Wyoming Uniform Securities Act (“WUSA”) grants to the Wyoming Secretary of State the authority to investigate any violation or potential violation of the WUSA. Pursuant to the WUSA, the Secretary of State is charged with the authority to bring administrative actions against the registrations of persons who violate provisions of the law. Such actions may be taken under W.S. 17-4-106, W.S. 17-4-112, and W.S. 17-4-114 (select Title 17, Chapter 4 and then the specific section). Administrative actions are commenced according to the provisions of Wyoming's Administrative Procedure Act. W.S. 16-3-101 et seq. (select Title 16, Chapter 3) and the provisions found in Wyoming Securities Rule, Chapter 8, regarding orders, contests and hearings.


http://soswy.state.wy.us/Compliance/Compliance.aspx

http://legisweb.state.wy.us/statutes/statutes.aspx?file=titles/Title17/T17CH4.htm

http://soswy.state.wy.us/Rules/Rule_Search_Main.asp

WYOMING


The Secretary of State may also refer evidence of criminal wrong-doing to the Attorney General or to county attorneys who may institute the appropriate criminal proceedings under this act.

For additional information, visit the Wyoming Securities Division’s Web site at: http://soswy.state.wy.us/securiti/securiti.htm.45


Tom Cowan, the Director of the Wyoming Securities Division stated on February 11, 2008 that there have not been any statutory amendments, new or amended regulations, or new or amended administrative procedures relating to Wyoming securities or securities regulation law during 2007.

Mr. Cowan stated that he is not aware of any bills relating to Wyoming securities or securities regulation law that were either proposed or passed during the 2007 Budget Session that convened on January 9, 2007 and adjourned March 1, 2007. Mr. Cowan stated on February 11, 2008 that the 2008 session is a twenty day budget session and given the short time, few bills other than budget matters are considered.


Since the August 2007 Update, there have not been any material developments in securities rules.


Since the August 2007 Update, there have not been any material administrative orders and announcements.


In January 2007, Mr. Cowan reiterated that because of the small size of the Wyoming Securities Division (six persons), enforcement has dealt almost exclusively with criminal violations of Wyoming securities law. Mr. Cowan indicated that the Division is part of a “task force” arrangement comprised of state and federal agencies handling white collar crimes. That group, including Postal Inspectors, FBI, IRS Criminal Investigation Division, the Secretary of State’s Securities Division and the State Division of Criminal Investigation, is led by the U.S. Attorney’s Office for the District of Wyoming. The focus of the task force is on securities fraud, “Ponzi” schemes, “Prime Bank” schemes and theft by registered stock brokers. On February 11, 2008, Mr. Cowan stated that there were no new developments to report.

45 The information contained in the foregoing paragraph was obtained on 02/05/08 at http://soswy.state.wy.us/securiti/enforce.htm (last updated 10/12/06).

http://soswy.state.wy.us/securiti/securiti.htm

http://soswy.state.wy.us/securiti/enforce.htm

WYOMING



Since the August 2007 Update, there have not been any court decisions addressing novel questions of law.


Since the August 2007 Update, there have not been any material developments in other statutory matters.


Since the August 2007 Update, there have not been any material changes in the Administrator’s staffing.


On August 28, 2007, Mr. Cowan affirmed that Wyoming is “100% compliant” with the provisions and exceptions of NSMIA. Mr. Cowan confirmed on February 11, 2008 that there have not been any new developments with respect to NSMIA since the August 2007 update and that there are no NSMIA-related bills in the pipeline for the 2008 Budget Session.

The Wyoming State Legislature entered into a General Session on January 9, 2007 and adjourned on March 1, 2007. There were no bills relating to corporation, partnership and association law that were passed during the 2007 Budget Session. There were three separate bills enacted relating to Wyoming general corporate law during the 2007 General Session:

a. House Bill No. HB0004: Business entities-reinstatement. This act relates to limited partnerships and registered limited liability partnerships; providing for reinstatement within two years of administrative dissolution or lapse of registration for failure to pay fees; and providing for an effective date.

b. House Bill No. HB0009: Corporations Share Certificate Requirements. This act prohibits corporations from issuing shares in bearer form, i.e. a form in which the certificate is payable to the bearer of the certificate without endorsement. The act requires corporations to conform to any shares outstanding by October 1, 2007.

c. House Bill No. HB0056: Limited Liability Limited Partnerships. This act allows for the creation of foreign and domestic limited liability limited partnerships which are limited liability partnerships where the general partner is not personally liable for obligations of the limited liability partnership. The act permits a limited liability partnership to elect to become a limited liability limited partnership after creation. The act clarifies that on obligation based in contract is deemed to have arisen at the time the entity entered into the contract.

The 2008 General Session began on Monday, February 11, 2008. There are no bills relating to corporations, partnerships and associations that would cause material changes in the law set to be heard.

WYOMING



The Wyoming Uniform Securities Act (“WUSA”) grants to the Wyoming Secretary of State the authority to investigate any violation or potential violation of the WUSA. Pursuant to the WUSA, the Secretary of State is charged with the authority to bring administrative actions against the registrations of persons who violate provisions of the law. Such actions may be taken under W.S. 17-4-106, W.S. 17-4-112, and W.S. 17-4-114 (select Title 17, Chapter 4 and then the specific section). Administrative actions are commenced according to the provisions of Wyoming's Administrative Procedure Act. W.S. 16-3-101 et seq. (select Title 16, Chapter 3) and the provisions found in Wyoming Securities Rule, Chapter 8, regarding orders, contests and hearings. The Secretary of State may also refer evidence of criminal wrong-doing to the Attorney General or to county attorneys who may institute the appropriate criminal proceedings under this act. For additional information, visit the Wyoming Securities Division’s Web site at: http://soswy.state.wy.us/Compliance/Enforcement.aspx.46 Securities Statutory Developments

Since the February 2008 update, there have not been any material developments in Wyoming statutes addressing securities. Securities Rules Developments

Since the February 2008 update, there have not been any material developments in securities rules. Administrative Orders and Announcements


In January 2007, Division Director reiterated that because of the small size of the Wyoming Securities Division (six persons), enforcement has dealt almost exclusively with criminal violations of Wyoming securities law. The Director indicated that the Division is part

46 The information contained in the foregoing paragraph was obtained at http://soswy.state.wy.us/Compliance/Enforcement.aspx (last visited Aug. 12, 2008).

http://soswy.state.wy.us/Compliance/Enforcement.aspx

http://soswy.state.wy.us/Compliance/Enforcement.aspx

WYOMING


of a “task force” arrangement comprised of state and federal agencies handling white collar crimes. That group, including Postal Inspectors, FBI, IRS Criminal Investigation Division, the Secretary of State’s Securities Division and the State Division of Criminal Investigation, is led by the U.S. Attorney’s Office for the District of Wyoming. The focus of the task force is on securities fraud, “Ponzi” schemes, “Prime Bank” schemes and theft by registered stock brokers. On August 15, 2008, the Project Administrator from the Compliance Division stated that there were no new developments to report. Securities-related Case Law Developments

Since the February 2008 update, there have not been any court decisions addressing novel questions of law. Other Statutory Developments

During the 2008 Budget Session of the Wyoming State Legislature, legislation was passed that provided regulation of the registered agent industry. This legislation created the Registered Agent and Registered Office Act, effective beginning January 1, 2009. This new legislation provides that an individual registered agent will become "Commercial Registered Agents" when they represent more than 10 business entities. Once a registered agent hits that magic threshold of 11 entities, the registered agent must register with the Compliance Division as a Commercial Registered Agent by submitting a Commercial Registered Agent Registration Form which is found on our website. A Commercial Registered Agent's registration is valid until December 31st of each year and must be filed annually. If the registration is allowed to expire, every entity that a Commercial Registered Agent represents will no longer have a registered agent and will be subject to administrative dissolution by our office. This new legislation also gives the Secretary of State's Office enforcement authority to investigate violations of the Registered Agent and Registered Office Act and to file administrative actions and refer criminal matters to local, state or federal authorities. Until January 1, 2009, regulation of Commercial Registered Agents still reside within the Business Division of this Office. Administrator’s Staffing Changes

Since the February 2008 update, Wyoming reorganized the Division of Securities, placing all matters dealing with securities under the auspices of the newly created Compliance Division headed by Director Karen Wheeler.

WYOMING


Other Noteworthy Practice Developments The 2008 Budget Session began on February 11, 2008 and adjourned on March 7, 2008. There were no bills relating to corporations, partnerships and associations that caused material changes in the law.

DISTRICT OF COLUMBIA


DISTRICT OF COLUMBIA LIAISON REPORT

(As of February 20, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this jurisdiction since June 21, 2007, and supplemented to August 15, 2008. Liaison: Michele A. Kulerman

Hogan & Hartson LLP Columbia Square 555 Thirteenth Street, N.W. Washington, DC 20004

Email: [email protected] Telephone: 202.637.5743 Cell phone: Fax: 202.637.5910 State Administrator: Theodore A. Miles, Associate Commissioner, Securities

Department of Insurance, Securities and Banking 810 First Street, NE, Washington, DC 20002

Main Telephone: (202) 727-8000 Main Fax: (202) 442-8661 Internet: http://www.disb.dc.gov

Short Title/Citation: Securities Act of 2000, DC Official Code Sections 31- 5601.01 et

seq. Westlaw link to Title 31, Insurance and Securities, Subtitle X.

Securities, Chapter 56. Securities: DC-ST-ANN http://weblinks.westlaw.com)

Rules Name/Citation: Title 17, Chapter 18, District of Columbia Municipal Regulations

(DCMR) - 17 DCMR Chapters 18 and 19 were repealed and a new Chapter 18, Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives was added: http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/NOTICEOFFINALRULEMAKINGBD-IA.pdf&disrNav_GID=1632

Broker-Dealer and Investment Adviser regulations:

http://disb.dc.gov/disr/cwp/view,a,1300,q,616661.asp

Securities Offerings: http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/news_room/securities/sec.pdf&group=1632


http://www.disb.dc.gov

http://weblinks.westlaw.com)

http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/NOTICEO


http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/news_room/se



Highlights of Material Developments The Examinations Division of the Securities Bureau, DISB, initiated a “Meet and Greet” program, in which members of the Division staff visit new licensees within 60 days of their licenses becoming effective, to introduce them to the requirements of the DC laws and regulations in a non-confrontational format. The Licensing Division has been comparing the licensing data for holders of insurance licenses for sales of variable annuities with data for holders of securities licenses, to identify any discrepancies. The Licensing Division has also been conducting desk audits of new licensees. Securities Statutory Developments Bill No. B17-251, the “Securities Act of 2007” (The DC version of the Uniform Securities Act of 2002) was introduced into the City Council of the District of Columbia June 30, 2007. Hearings are expected to take place in the spring of 2008. http://www.dccouncil.washington.dc.us/images/00001/20070625120257.pdf Securities Rules Developments DISB plans to propose new regulations to implement the Securities Act of 2008 after that Bill becomes law. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) 1. Administrative Order, Order No. SB-07-003: In October of 2007, DISB issued a Cease and Desist Order against Metro Dream Homes, Inc. and related individuals, for engaging in the offer and sale of certain mortgage payment program agreements without registration or an exemption from registration under the D.C. Securities Act. The agreements were considered “investment contracts, notes, certificates in interest or participation in a profit-sharing agreement and evidences of indebtedness, each of which constitute securities within the meaning of section 101(31) of the Act (D.C. Official Code Section 31-5601.01(31). http://disb.dc.gov/disr/frames.asp?doc=/disr/pdf/2administrative_order_no.sb-07-003.pdf 2. Order No.: SB-07-002: On August 17, 2007, DISB issued an Administrative Consent Agreement and Order (Approved and Ordered by the Commissioner Thomas E. Hampton on August 27, 2007) against WWW.MONEYBALANCE.COM and related individuals for engaging in certain investment advisory and planning services transactions and activities without being properly licensed in the District of Columbia, and which constituted violations of section 202 of the Securities Act, D.C. Official Code section 31-5602.02(a). The complaint was originally filed on November 3, 2005, by the NASD (now known as FINRA). http://disb.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/bulletin_sb-07-002.pdf

http://www.dccouncil.washington.dc.us/images/00001/20070625120257.pdf

http://disb.dc.gov/disr/frames.asp?doc=/disr/pdf/2administrative_order_no.sb-07-003.pdf

http://www.MONEYBALANCE.COM

http://disb.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/bulletin_sb-07-002.pdf



Securities-related Case Law Developments There have been no cases interpreting the Securities Act of 2000. Other Statutory Developments 1. The "Financial Literacy Council Establishment Act of 2007" was introduced. The Bill’s principal features are the establishment of a Financial Literacy Council that will report to the Mayor of Washington, DC. (The Department of Insurance, Securities and Banking will have a representative on the Council.) The Bill also directs the Chancellor of the DC Public Schools to develop and implement a Financial Literacy Plan for District high school students. http://www.dccouncil.washington.dc.us/images/00001/20071009025813.pdf 2. 2007 District of Columbia Legislative Bill No. 134, Washington DC Council Period Seventeen, adopted on November 29, 2007. The Bill requires the divestment, and prohibits the investment, of public funds in the stocks, securities, or other obligations of certain companies which do business with the Government of Sudan. The Bill defines the terms “Direct Holdings” and “Indirect Holdings” in a company. Administrator’s Staffing Changes James M. (Mike) McManus, (202) 442-7826, [email protected], has become the Director of the Corporation Finance Division of the Securities Bureau, replacing Larry Coates, who retired after many years of government service. Senayet (Sunny) Meaza, (202) 442-4794, [email protected], has become the Director of the Examinations Division of the Securities Bureau, replacing Jay Knight, who went to FINRA. Other Noteworthy Practice Developments To access the listing of Press Releases By Month, see, http://www.disb.dc.gov/disr/cwp/view,a,3,q,576915,disrNav_GID,1643,disrNav,\32838\,.asp




http://www.disb.dc.gov/disr/cwp/view,a,3,q,576915,disrNav_GID,1643,disrNav



Supplemented to August 15, 2008

Applicable State Statute of Limitations Period: The statute of limitations for civil matters is 3 years. See D.C. Official code 31-§5606305(f)(1). The statute of limitations for criminal matters is 3 years, but can be extended an additional two years if the accused intentionally concealed evidence of a violation related to fraud, manipulation of the market, misleading filings, or unlawful representations. See D.C. Official Code §5606.04(d). Rules Name/Citation: Title 17, Chapter 18, District of Columbia Municipal Regulations (DCMR) - 17 DCMR Chapters 18 and 19 were repealed and a new Chapter 18, Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives was added. http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/NOTICEOFFINALRULEMAKINGBD-IA.pdf&disrNav_GID=1632 Broker-Dealer and Investment Adviser regulations: http://disb.dc.gov/disr/cwp/view,a,1300,q,616661.asp Securities Offerings: http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/news_room/securities/sec.pdf&group=1632 Highlights of Material Developments: The Examinations Division of the Securities Bureau, DISB, initiated a “Meet and Greet” program, in which members of the Division staff visit new licensees within 60 days of their licenses becoming effective, to introduce them to the requirements of the DC laws and regulations in a non-confrontational format. The Licensing Division has been comparing the licensing data for holders of insurance licenses for sales of variable annuities with data for holders of securities licenses, to identify any discrepancies. The Licensing Division has also been conducting desk audits of new licensees. Securities Statutory Developments: Bill No. B17-251, the “Securities Act of 2007” (The DC version of the Uniform Securities Act of 2002) was introduced into the City Council of the District of Columbia June 30, 2007. Hearings are expected to take place in the spring of 2008. The link is at: http://www.dccouncil.washington.dc.us/images/00001/20070625120257.pdf

http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/pdf/NOTICEOFFINALRULEMAKINGBD


http://disr.dc.gov/disr/frames.asp?doc=/disr/lib/disr/news_room/securities/sec.pdf&group=1632




Securities Rules Developments: DISB plans to propose new regulations to implement the Securities Act of 2008 after that Bill becomes law. Administrative Enforcement Proceedings: See the current report to the Subcommittee on Enforcement.

PUERTO RICO


PUERTO RICO STATE LIAISON REPORT

No report.

VIRGIN ISLANDS


VIRGIN ISLANDS STATE LIAISON REPORT

No report.

CANADA


CANADA LIAISON REPORT

(As of February 15, 2008; supplemented to August 15, 2008) This reports on material developments affecting blue sky practitioners in this state/province since March 20, 2007, and supplemented to August 15, 2008. Liaison: Paul G. Findlay

Borden Ladner Gervais LLP Scotia Plaza, Suite 4400 40 King Street West Toronto, Ontario M5H 3Y4

Email: [email protected] Telephone: 416 367 6191 Cell phone: Fax: 416 361 7083 State Administrator: Note that the co-ordinates for all of the provincial and territorial

securities regulatory authorities can be found at http://www.csa-acvm.ca/html_csa/members.html. The following information is for Ontario: Ontario Securities Commission 20 Queen Street West P.O. Box 55, 19th Floor Toronto, Ontario M5H 3S8

Main Telephone: 416 593 8314 Main Fax: various Internet: http://www.osc.gov.on.ca Short Title/Citation: Securities Act, R.S.O. 1980 c.5.5, as amended [Ontario] Rules Name/Citation: R.R.O. 1990, Reg. 1015, as amended [Ontario] Highlights of Material Developments 1. Passport System. The 30+ year debate in Canada continues as to whether there should be a national securities commission instead of the 13 provincial and territorial securities regulatory authorities. The Federal government has been trying to convince the provinces to go along with its efforts in this regard, but have found only Ontario as a supporter. A major advantage of having the debate is that the other 12 provinces and territories tend to work together to eliminate the perceived adverse effects of the multiplicity of securities regulators in


http://www.csa

http://www.osc.gov.on.ca

CANADA


order, in effect, to be able to show that the current system works essentially as well as a system with a common regulator. Accordingly, effective March 17, 2008, the 12 provinces and territories, other than Ontario, are implementing a "Passport System" with respect to prospectuses and applications for exemption. Currently, under the Mutual Review and Reliance System, a filer need only deal with its "principal regulator", although the other regulators provide input to the principal regulator and can decide whether to opt in or out of the decision being made by the principal regulator. Under the Passport System, the filer deals only with the principal regulator whose decision will bind the other participants in the Passport System, without their having the right to participate or to opt in or out. As Ontario is not part of the Passport System, a separate "interface" arrangement has been made: if Ontario is the principal regulator, its decision will bind the other regulators; if it is a non-principal regulator, it will have the ability to opt in or out of the other regulator’s decision. Initially the Passport System will apply to prospectuses and applications for exemptive relief. It is contemplated that it will apply to dealer and adviser registration once the new National Instrument is in place (see item 5 below). 2. Take-Over Bids. As part of the drive to uniformity, the Canadian Securities Administrators have updated and harmonized their take-over bid rules. The last major change to these rules was made in 1987. Of particular note to members of the Committee is the new foreign take-over bid exemption. This provides that a take-over bid would be exempt from the Canadian take-over bid requirements if:

(a) security holders whose registered address is in Canada hold less than 10% of the outstanding securities of the class that is subject to the bid;

(b) the bidder reasonably believes that security holders in Canada beneficially own less than 10% of the outstanding securities of the class;

(c) the published market on which the greatest dollar volume of trading in securities of that class occurred during the 12 months immediately preceding the commencement of the bid was not in Canada;

(d) security holders in Canada are entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of security holders of the same class;

(e) at the same time as the material relating to the bid is sent to other security holders, the material is filed and sent to security holders in Canada;

(f) if the bid materials are not in English, a brief summary of the key terms of the bid prepared in English (and/or French in Quebec) is filed and sent to Canadian security holders at the same time as the bid materials are filed and sent; and

CANADA


(g) if no material relating to the bid is sent to security holders of the class that is subject to the bid but a notice of or advertisement of the bid is published in the jurisdiction where the target company is incorporated or organized, an advertisement of the bid specifying where and how security holders may obtain a copy of, or access to, the bid documents is filed and published in English (and/or French in Quebec) in at least one major daily newspaper of general and regular paid circulation in the applicable provinces and territories.

3. Forward-Looking Information. An amendment to National Instrument 51-102 – Continuous Disclosure Obligations requires that a reporting issuer must not disclose forward-looking information unless it has a reasonable basis for the forward-looking information and it provides the following disclosure:

(a) it identifies the forward-looking information as such;

(b) it cautions users of forward-looking information that actual results may vary from the forward-looking information and identifies material risk factors that could cause actual results to differ materially from the forward-looking information;

(c) it states the material factors or assumptions used to develop the forward-looking information; and

(d) it describes the reporting issuer's policy for updating forward-looking information (unless the policy is to update such information in the issuer's MD&A or by way of news release).

If the information is a financial outlook, the issuer must include disclosure that:

(a) states the date management approved the financial outlook, if the document containing the financial outlook is undated; and

(b) explains the purpose of the financial outlook and cautions readers that the information may not be appropriate for other purposes.

At the same time, the Ontario Securities Commission amended its Rule 45-501 to require similar disclosure in any offering memorandum that is used in connection with a private placement. For example, where, in connection with a public offering or private placement in the U.S., the U.S. prospectus or private placement memorandum is used to offer the securities on a private placement basis in Canada, typically with a Canadian "wrapper", it will have to contain this disclosure. In such circumstances, a determination will have to be made as to whether the disclosure contained in the U.S. document complies with the Canadian requirements. If not, appropriate disclosure would have to be contained in the Canadian wrapper. Note that this applies even for investment funds, notwithstanding that NI 51-102 does not apply to investment funds. 4. SOX 404. The Canadian Securities Administrators have backed down from their proposal to require auditor attestation of management's certification as to the

CANADA


effectiveness of internal controls over financial reporting. The last proposal, published March 30, 2007, would require management to evaluate an issuer's internal controls over financial reporting and provide disclosure in the issuer's MD&A about their conclusions about its effectiveness. Furthermore, the CSA has decided no longer to require the CEO and CFO of a "venture issuer" to certify that they have designed and evaluated the effectiveness of disclosure controls and procedures and internal control over financial reporting. A "venture issuer" is one that does not have any of its securities listed or quoted on the Toronto Stock Exchange, a U.S. marketplace or a marketplace outside Canada and the United States, other than the Alternate Investment Market of the London Stock Exchange or the PLUS markets provided by PLUS Markets Group PLC. In Canada, venture issuers would be typically those listed on the TSX Venture Exchange. 5. Registration Reform. In my last report I described proposed National Instrument 31-103 that would modernize, harmonize and streamline the Canadian dealer and adviser registration regime. This proposal attracted a significant number of comments. It is expected that a revised version will be published for further comment in the next few weeks, more than a year after the last publication. (One of the disadvantages, or advantages depending on your point of view, of the current Canadian regulatory system is that it takes an exceedingly long time to implement changes to the regulatory regime as demonstrated by the progress of this Instrument and the one described in the previous section.) I will advise as to its effect in my next report. Securities Statutory Developments None to report. Securities Rules Developments None to report. Administrative Orders and Announcements None to report. Administrative Enforcement Proceedings (See the current report to the Subcommittee on Enforcement) In the Matter of AiT Advanced Information Technologies Corporation et al. the staff of the Ontario Securities Commission alleged that the corporation had undergone a "material change" and therefore should have made a public announcement when it entered into a non-binding letter of intent for a merger. The corporation and its CEO entered into settlement agreements but a director who was also external counsel did not. At the hearing, a panel of the OSC disagreed with staff and found that under the circumstances no disclosure was required because there was not sufficient evidence by which the board of directors could have concluded that there was a sufficient commitment from the parties to proceed and a substantial likelihood that the transaction would be completed.

CANADA


Securities-related Case Law Developments In a rare securities case to reach the Supreme Court of Canada, Kerr v. Danier Leather, the Court determined that a corporation was not liable to purchasers in an IPO where subsequent to the filing of the prospectus but before the closing of the offering, a material fact (but not a material change) occurred. The material fact was that management realized that the sales expectations that underlay a financial forecast in the prospectus were not being met. Other Statutory Developments None to report. Administrator’s Staffing Changes None to report. Other Noteworthy Practice Developments None to report.

CANADA


Supplemented to August 15, 2008 Highlights of Material Developments Forward-Looking Information in Private Placements. In my last report I reported that the Ontario Securities Commission had amended its Rule 45-501 to require specific disclosure relating to forward-looking information in any offering memorandum that is used in connection with a private placement. For example, where, in connection with a public offering or private placement in the U.S., the U.S. prospectus or private placement memorandum is used to offer the securities on a private placement basis in Canada, typically with a Canadian "wrapper", it will have to contain this disclosure. In such circumstances, a determination has to be made whether the disclosure contained in the U.S. document complies with the Canadian requirements (which generally it would not). If not, appropriate disclosure must be contained in the Canadian wrapper. Since my last report, the OSC has granted an exemption from these requirements for certain international dealers. It has also published for comment amendments to Rule 45-501 which would undo these amendments. Dealer and Adviser Registration Reform. In February, the Canadian Securities Administrators published for comment a second time proposed National Instrument 31-103 ("NI 31-103") that would modernize, harmonize and streamline the Canadian dealer and adviser registration regime.

The following is a summary of the impact that proposed NI 31-103 would have on non-Canadian participants in the Canadian securities market.

Proposed NI 31-103 would eliminate the registration categories of "international dealer" and "international adviser". The eight registration categories contemplated under proposed NI 31-103 will be dealer, including investment dealer, mutual fund dealer, scholarship plan dealer, exempt market dealer and restricted dealer, and adviser, including portfolio manager and restricted portfolio manager, and investment fund manager. Non-Canadian firms may register in one or more of these categories provided that they comply with the general conditions for such registration and specific rules applicable to non-Canadian firms, including specified client notifications and custody requirements, as well as continued registration in their home jurisdictions. The proficiency requirements applicable to advising or dealing representatives, as well as to chief compliance officers are capable of being met by non-Canadian individuals (although completion of certain Canadian securities exams may still be necessary). Entities that currently are registered as international dealers or international advisers (or in equivalent registration categories) may seek to be registered in one of the appropriate registration categories proposed by NI 31-103 as described above or they may seek to avoid registration by availing themselves of proposed new registration exemptions. International dealers registered in that category on the date NI 31-103 comes into force will become automatically registered (without further action on their part) as exempt market dealers. The proposed rules are unclear as to whether these entities will be required to submit a formal exemption application within 6 months of that

CANADA


date and it is not entirely clear when the fit and proper requirements and conduct rules that apply to that category of registration will apply to those entities. Entities that today are registered as international advisers will see their registration lapse as of the coming into force of NI 31-103. International advisers will have to determine if their activities are such that they need to be registered as portfolio managers or whether they can rely on the exemption for non-Canadian advisers described below. The same considerations will apply to registered international dealers – there may be no need to continue to be registered as EMDs if they can rely on the exemption described below.

NI 31-103 proposes exemptions from dealer and portfolio manager registration requirements for non-Canadian dealers and advisers subject to compliance with certain conditions. The proposed exemption will only be available to an entity that is registered under the securities legislation of the foreign jurisdiction in which its head office or principal place of business is located. The exemption will allow non-Canadian dealers and advisers to deal with or advise only prescribed lists of clients for limited purposes: "permitted clients" (essentially, a sub-category of super accredited investors). To rely on the proposed exemptions, international dealers and advisers will have to make certain prescribed filings to the appropriate securities regulators, together with prescribed disclosures to permitted clients before dealing with or advising them. Note that as currently drafted, an international dealer does not need to provide the required client notifications to a registered dealer or adviser for whom it is acting, but this is not clearly stated in the proposals. We have suggested improvements to the drafting of these provisions as they apply to international dealers.

Non-Canadian advisers will only be permitted to rely on the international adviser registration exemption if they advise only on non-Canadian securities, except on an incidental basis. The CSA also propose an exemption for advisers, whether non-Canadian or Canadian, that wish to act as sub-advisers to Canadian registered advisers. This exemption is designed to codify the series of exemptions granted to Canadian registrants in recent years to allow them to hire non-Canadian sub-advisers or sub-advisers that are not registered in a particular Canadian jurisdiction for their managed account programs. Similar conditions are proposed in the exemption to be provided for in NI 31-103 as have been imposed under the series of exemptions, including a condition that the sub-adviser cannot be registered in any Canadian province without also being registered in Manitoba, if the sub-adviser wishes to make use of the exemption for a Manitoba client.

Under proposed NI 31-103 an investment fund manager – "a person or company that is permitted to direct the business, operations and affairs of an investment fund" – must be registered in this new category. However, if an investment fund manager and its funds are located outside Canada, the CSA now clarify that the firm does not need to be registered in Canada, unless it is directing the management of a fund from inside Canada.

Securities Statutory Developments Nothing to report.

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Applicable State Statute of Limitations Periods No action shall be commenced to enforce a right created by Part XXIII (Civil Liability) more than,

(a) in the case of an action for rescission, 180 days after the date of the transaction that gave rise to the cause of action; or

(b) in the case of any action, other than an action for rescission, the earlier of,

(i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or

(ii) three years after the date of the transaction that gave rise to the cause of action. (Ontario Securities Act s. 138)

No action shall be commenced under section 138.3 (Civil Liability for Secondary Market Disclosure)

(c) in the case of misrepresentation in a document, later than the earlier of,

(i) three years after the date on which the document containing the misrepresentation was first released, and

(ii) six months after the issuance of a news release disclosing that leave has been granted to commence an action under section 138.3 or under comparable legislation in the other provinces or territories in Canada in respect of the same misrepresentation;

(d) in the case of a misrepresentation in a public oral statement, later than the earlier of,

(i) three years after the date on which the public oral statement containing the misrepresentation was made, and

(ii) six months after the issuance of a news release disclosing that leave has been granted to commence an action under section 138.3 or under comparable legislation in another province or territory of Canada in respect of the same misrepresentation; and

(e) in the case of a failure to make timely disclosure, later than the earlier of,

(i) three years after the date on which the requisite disclosure was required to be made, and

(ii) six months after the issuance of a news release disclosing that leave has been granted to commence an action under section 138.3 or under comparable legislation in another province or territory of Canada in

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respect of the same failure to make timely disclosure. (Ontario Securities Act s. 138.14)

Otherwise, no proceeding under the Act shall be commenced later than six years from the date of the occurrence of the last event on which the proceeding is based. (Ontario Securities Act s. 129.1)

Securities Rules Developments Nothing to report. Administrative Orders and Announcements Nothing to report. Administrative Enforcement Proceedings (See the current, separately bound report to the Subcommittee on Enforcement.) Securities-related Case Law Developments Nothing to report. Other Statutory Developments Nothing to report. Administrator’s Staffing Changes Nothing to report. Other Noteworthy Practice Developments Nothing to report.

State and Canadian Liaison Roster and Reports · 2010-04-28 · AR Mr. John S. Selig N/R Mitchell,...

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Transcript of State and Canadian Liaison Roster and Reports · 2010-04-28 · AR Mr. John S. Selig N/R Mitchell,...