State Liaison Roster, Reports and Updates · 2007-11-28 · Report Report LIAISONS Page LIAISONS...

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

ABA Business Law Section Committee on State Regulation of Securities

Subcommittee of Liaisons to the States and NASD

State Liaison Roster, Reports and Updates as of September 21, 2007

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. Grand Rapids, Michigan 49503 E-mail – [email protected] (616) 752-2145 (Work)

Report Report LIAISONS Page LIAISONS Page AL Ms. Carolyn L. Duncan 7 Cabaniss Johnston, et al. Ste. 700, 2100 Park Pl N Birmingham, Alabama 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 Suite 600, 900 West 5th Avenue, Anchorage, Alaska 99501-2044 Direct E-Mail – [email protected] (907) 276-6401 (Work) (907) 276-5093 (Fax) AZ Mr. Dee Riddell Harris Arizona Angels Venture Group, Inc. 2415 E. Camelback Rd., Suite 700 Phoenix, Arizona 85016 E-Mail – [email protected] (602) 508-6055 (Work) (602) 840-4078 (Home) (602) 508-6099 (Fax) (602) 840-6824 (Home Fax)

AR Mr. John S. Selig 12 Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C. 425 West Capitol Avenue, Suite 1800 Little Rock, Arkansas 72201-3525 E-Mail – [email protected] (501) 688-8804 (Work) (501) 821-1540 (Home) (501) 688-8807 (Fax) CA Mr. Keith Paul Bishop 13 Buchalter Nemer Fields & Younger 184 Von Karman Avenue, #800 Irvine, California 92612 E-Mail – [email protected] (949) 224-6293 (Work) (949) 224-6228 (Fax) CO/MT/WY Mr. Robert J. Ahrenholz 20 Kutak Rock LLP 1801 California Street, Suite 3100 Denver, Colorado 80202 E-Mail – [email protected] (303) 297-2400 (Work) (303) 292-7799 (Fax)

mailto:[email protected]








Report Report LIAISONS Page LIAISONS Page


CT Mr. Richard Slavin 44 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 Morris Nichols, et al. Wilmington, Delaware 19899-1347 E-Mail – [email protected] (302) 351-9202 (Work) (302) 658-3989 (Fax) DC Ms. Michele A. Kulerman 48 Hogan & Hartson L.L.P. Columbia Square 555 Thirteenth St., N.W. Washington, D.C. 20004-1109 E-Mail – [email protected] (202) 637-5743 (Work) (301) 279-6772 (Home) (202) 637-5910 (Fax) FL Mr. Donald A. Rett 52 Law Office of Donald Rett 1660 Metropolitan Circle Tallahassee, Florida 32308 E-Mail – [email protected] (850) 298-4454 (Work) (904) 894-0700 (Home) (850) 298-4494 (Fax) GA J. Steven Parker 54 Page Perry, LLC 1040 Crown Pointe Parkway Suite 1050 Atlanta, Georgia 30338 E-Mail – [email protected] (770) 673-0047 (Work) (770) 673-0120 (Fax)

HA Mr. David J. Reber 57 Goodsill Anderson Quinn & Stifel 1099 Alakea Street, Suite 1800 Honolulu, Hawaii 96813 E-Mail – [email protected] (808) 547-5611 (Work) (808) 395-7994 (Home) (808) 547-5880 (Fax) ID Mr. Jeffrey W. Pusch Batt & Fisher, LLP 101 South Capitol Boulevard, 5th Fl. P.O. Box 1308 Boise, Idaho 83701 E-Mail – [email protected] (208) 331-1000 (Work) (208) 331-2400 (Fax) IL [IL liaison changing) 62 IN Mr. Stephen W. Sutherlin 64 Stewart & Irwin 251 East Ohio Street Suite 1100 Indianapolis, Indiana 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 73 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 Polsinelli Law Firm 6201 College Blvd., Suite 500 Overland, KS 66211 E-Mail – [email protected] (913) 234-7414 (Work) (913) 451-6205 (Fax) (913) 345-0054 (Home) KY Mr. Manning G. Warren III University of Louisville Louis D. Brandeis School of Law 2301 South Third Street Louisville, Kentucky 40292 E-Mail – [email protected] (502) 852-7265 (Work) (502) 852-0862 (Fax) LA Mr. Carl C. Hanemann 78 Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P. Place St. Charles 201 St. Charles Avenue, 51st Floor New Orleans, Louisiana 70170-5100 E-Mail – [email protected] (504) 582-8156 (Work) (504) 861-3992 (Home) (504) 582-8012 (Fax) ME Mr. Wayne E. Tumlin 83 Bernstein, Shur, Sawyer & Nelson, P.A. 100 Middle Street – W. Tower P.O. Box 9729 Portland, ME 04104-5029 E-Mail – [email protected] [email protected] (207) 774-1200 (Work) (207) 774-1127 (Fax) MD Mr. Wm. David Chalk Piper Marbury Rudnick & Wolfe LLP 6225 Smith Avenue Baltimore, MD 21209-3600 E-Mail – [email protected] (410) 580-4120 (Work) (410) 580-3001 (Fax)

MA Mr. Michael M. Jurasic 87 Ropes & Gray One International Place Boston, MA 02110-2624 (617) 951-7754 (Work) (617) 235-0698 (Fax) E-mail – [email protected] MI Mr. Shane B. Hansen 90 Warner Norcross & Judd LLP 111 Lyon Street, N.W., Suite 900 Grand Rapids, Michigan 49503-2487 E-mail – [email protected] (616) 752-2145 (Work) (616) 942-7063 (Home) (616) 752-2500 (Fax) MN (See IOWA) 96 MS Mr. Daniel G. Hise 99 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) MT (SEE COLORADO) 101 NE Mr. David R. Tarvin, Jr. [New Street Address] Omaha, Nebraska 68102 E-Mail – david.tarvin@[email protected] (402) 960-1332 (Cell) NV Mr. Ken Creighton 9295 Prototype Drive Reno, NV 89511 E-Mail – [email protected] (775) 448-0119 (Work) (775) 825-1844 (Home) (775) 448-0120 (Fax)










mailto:david.tarvin@[email protected]




NH Mr. Richard A. Samuels 117 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 119

Norris, McLaughlin & Marcus, P.A. 721 Route 202-206 P. O. Box 1018 Somerville, New Jersey 08876-1018 E-Mail – [email protected] (856) 881-6621 (Work) (908) 356-4766 (Home) (908) 722-0755 (Fax) NM Mr. Robert G. Heyman 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. 129 Suite 2620 420 Lexington Avenue New York, New York 10170 E-Mail – [email protected] (212) 286-1384 (Work) (212) 369-8067 (Home) (212) 286-1389 (Fax) NC Mr. David N. Jonson 132 Kennedy Covington Lobdell & Hickman, L.L.P. 4350 Lassiter at North Hills Avenue Suite 300 (27609) Post Office Box 17047 Raleigh, North Carolina 27619-7047 E-Mail – [email protected] (919) 743-7308 (Work) (919) 639-0598 (Home) (919) 516-2008 (Fax)

ND Mr. Craig A. Boeckel Tschider & Boeckel Provident Life Building 316 N. 5th Street P. O. Box 668 Bismarck, North Dakota 58502-0668 E-Mail – [email protected] (701) 258-2400 (Work) (701) 258-9269 (Fax) OH Mr. Edward D. McDevitt 135 Bowles Rice McDavid Graff & Love LLP 60 Quarrier Street Charleston, WV 25301 P.O. Box 1386 Charleston, WV 25325-1386 E-Mail – [email protected] (304) 347-1711 (Work) (304) 343-3058 (Fax) OK Mr. C. Raymond Patton, Jr. 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. Richard M. Layne Layne & Lewis 111 SW Columbia Street, Suite 1000 Portland, OR 97201 E-Mail – [email protected] (503) 295-1882 (Work) (503) 246-1441 (Home) (503) 295-2057 (Fax) PA Mr. Michael Pollack 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)













PR [VACANT] RI Mr. John F. Corrigan 143 Adler Pollock & Sheehan PC 1 Citizens Plz. Ste. 800 Providence, Rhode Island 02903-1345 E-Mail – [email protected] (401) 274-7200 (Work) (401) 885-1025 (Home) (401) 751-0604 (Fax) or 351-4607 SC Mr. F. Daniel Bell III 145 Kennedy Covington Lobdell & Hickman L.L.A. 434 Fayetteville Street Mall, 19th Fl. Raleigh, NC 27602-1070 E-Mail – [email protected] (919) 743-7335 (Work) (919) 872-7886 (Home) (919) 516-2035 (Fax) SD Mr. Charles D. Gullickson 146 Davenport, Evans, Hurwitz & Smith, L.L.P. 206 West 14th Street P. O. Box 1030 Sioux Falls, South Dakota 57101-1030 E-Mail – [email protected] (605) 357-1270 (Work) (605) 331-3880 (Home) (605) 335-3639 (Fax) TN Ms. E. Marlee Mitchell Waller Lansden Dortch & Davis, PLLC Nashville City Center Suite 2100, 511 Union Street Nashville, Tennessee 37219-1760 E-Mail – [email protected] (615) 244-6380 (Work) (615) 298-2514 (Home) (615) 244-6804 (Fax)

TX Mr. Daniel R. Waller 151 Secore & Waller LLP Suite 1100 12221 Merit Dr. Dallas, TX 75251-2227 E-Mail – [email protected] (972) 776-0200 (Work) (972) 392-2452 (Home) (972) 776-0240 (Fax) USVI Mr. Tom Bolt 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) UT Mr. Arthur B. Ralph 157 Van Cott, Bagley, Cornwall & McCarthy, P.C. 50 South Main Street, Suite 1600 Salt Lake City, Utah 84144-0450 E-Mail – [email protected] (801) 532-3333 (Work) (801) 272-5027 (Home) (801) 534-0058 (Fax) VT Mr. William (Chip) A. Mason 169 Gravel and Shea 76 St. Paul Street, 7th Floor P.O. Box 369 Burlington, VT 05402-0369 E-Mail – [email protected] 802.658.0220 (Work) 802.658.1456 (Fax) VA Mr. Thomas G. Voekler 171 Hirschler Fleischer The Edgeworth Building 2100 E. Cary Street Richmond, Virginia 23223-7078 Post Office Box 500 Richmond, Virginia 23218-0500 E-mail – [email protected] (804) 771-9599 (Work) (804) 241-3529 (Cell) (804) 644-0957 (Fax)












WA Mr. John L. Mericle 172 Harris, Mericle & Wakayama 999 Third Avenue, Suite 3210 Seattle, Washington 98104 E-Mail – [email protected] (206) 621-1818 (Work) (206) 624-8560 (Fax) WV Mr. Edward D. McDevitt 175 Bowles Rice McDavid Graff & Love, PLLC 600 Quarrier Street Charleston, West Virginia 25314 E-Mail – [email protected] (304) 347-1711 (Work) (304) 345-4188 (Home) (304) 343-3058 (Fax) WI Mr. Terry Nelson 176 Foley & Lardner 150 East Gilman P.O. Box 1497 Madison, WI 53701 E-Mail – [email protected] (608) 258-4232 (Work) (608) 836-8855 (Home) (608) 258-4258 (Fax) WY SEE COLORADO 178 CAN Mr. Paul G. Findlay 184 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) NASD Mr. Peter W. LaVigne Sullivan & Cromwell LLP 125 Broad Street New York, NY 10004 E-Mail – [email protected] (212) 558-7402 (Work) (212) 558-3588 (Fax)






ALABAMA


ALABAMA STATE LIAISON REPORT

TO THE ABA STATE REGULATION OF SECURITIES COMMITTEE

This report summarizes significant development in the securities laws of Alabama during the past year, and updates matters previously reported to the Committee. Proposed Statutory Changes

Following unsuccessful attempts in 2004, 2005 and 2006 to adopt the 2002 Uniform Securities Act, the Alabama Securities Commission this year sought piecemeal legislation to increase filing fees, criminal penalties and civil fines, plus a few changes intended to conform the Alabama statutes to NSMIA. This year’s legislative attempt also failed, but only as a result of an overall political deadlock in the Alabama Senate and not as a consequence of any known opposition to the proposal. The bill is expected to be reintroduced in the next legislative session.

Alabama’s version of the 2002 Uniform Securities Act, a project of the Alabama Law Institute

and unanimously supported by the Law Institute’s Securities Act Committee, was repeatedly blocked by the life insurance industry over the issue of variable annuities. The proposed act would have included variable annuities within the definition of security, but exempt them from securities registration, thus giving the Securities Commission enforcement authority to address sales practice abuses. While variable annuities have been the subject of regulatory turf battles in some states, that is not the case here; in the last effort to pass the bill in 2006, the Commissioner of Insurance also supported the Securities Commission and the Law Institute.

The changes proposed for adoption this year, and expected to be reintroduced in the next

legislative session (beginning in February, 2008, or possibly later this year if a special session is called) are as follows:

Fee Increases

• Broker-dealer and investment adviser registration and annual fees will increase from

$200 to $250, and fees for agents/associated persons of broker-dealers and investment advisers will increase from $50 to $60 annually.

• Notice filing fees for mutual funds that are covered securities will increase slightly, from

$1040 initial filing and $1000 annually, to a graduated annual filing fee ranging from $350 for up to $25 million in net assets, to $1200 for over $100 million in net assets.

• Notice filing fees and fees for all other securities registrations will remain at one-tenth of

one percent, but the minimum and maximum fee amounts will increase from $40 and $1000 to $100 and $1500.

• Notice filing fees for Rule 506 offerings and fees for other exemptions requiring filing

fees, including requests for waivers, will increase from $250 to $300.

ALABAMA


Criminal Penalty Increases

• Criminal penalties will be increased from Class C felonies to Class B felonies (two to twenty year prison terms and fines up to $10,000 plus twice the amount of any criminal gain) for:

o Willful violations of the strict liability provisions of Code of Alabama 1975, as

amended (the Code), § 8-6-3 (registration requirements for broker-dealers, agents, investment advisers and investment adviser representatives), and Code § 8-6-4 (securities registration requirements); and

o Violations of the anti-fraud statute, Code § 8-6-17 (a), (b) or (c).

NSMIA Conforming Changes

• A new Code section 8-6-5 would replace the existing provision for registration by notification, no longer of any use, with the equivalent of section 302 of the 2002 Uniform Act. This will not resolve all the statutory inconsistencies occasioned by NSMIA, but will at least clarify the filing requirements for covered securities of registered investment companies under 18(b)(2) and Rule 506 offerings under 18(b)(4)(D) of the Securities Act of 1933 (15 U.S.C. Section 77r(b)(4)(D).

The foregoing is a synopsis of House Bill 797, as introduced in the 2007 Regular Session of the Alabama Legislature, the full text of which is available from the Alabama Legislative Information System at

http://alisdb.legislature.state.al.us/acas/ACASLogin.asp. I will also be happy to send a copy to anyone who wishes. Regulatory Changes to be Considered

For several years now, the Commission has delayed a long-needed comprehensive review of its regulations in anticipation of the eventual adoption of the new Uniform Act. Given the unlikelihood of a new act in the foreseeable future, that review is expected to be undertaken in the next year. Commission Director Joe Borg requests that anyone who is aware of specific problem areas or otherwise has suggestions or comments please convey those, either directly to the Commission staff (contact Associate Counsel Ed Reed or Registration Manager Lisa Tolar), or to me. As the project gets underway, I will stay in close touch with the Commission and will be seeking input from the securities bar. Proposed new regulations will be published for comment prior to adoption, and I will also be happy to provide copies to anyone interested or otherwise facilitate bar involvement. Case Law: Immateriality as a Matter of Law A decision last fall by the Alabama Supreme Court has added another case to the relative few holding that alleged misrepresentations and omissions of fact were not material, as a matter of law. Blackmon v. Nexity Financial Corporation, 953 So.2d 1180 (Ala. 2006), explicitly relying on federal interpretations of materiality, held that materiality is not necessarily a factual question for a jury when the alleged misrepresentations and omissions

http://alisdb.legislature.state.al.us/acas/ACASLogin.asp

ALABAMA


“1) are of such common knowledge that a reasonable investor can be presumed to understand them; 2) present or conceal such insignificant data that, in the total mix of information, it simply would not matter; 3) are so vague and of such obvious hyperbole that no reasonable investor would rely upon them; or 4) are accompanied by sufficient cautionary statements.” Blackmon, 953 So.2d at 1192, quoting In re Amdocs Ltd. Sec. Litig., 390 F.3d 542, 548 (8th Cir. 2004).

In this instance, the private offering memorandum contained numerous specific cautionary statements relating directly to the alleged misrepresentations and omissions, sufficient to invoke the “bespeaks caution” doctrine. The Court also found that the that written cautionary statements took precedence over alleged contradictory oral representations and rendered the oral representations immaterial as a matter of law.

June 21, 2007 Carolyn L. Duncan Cabaniss, Johnston, Gardner, Dumas & O’Neal LLP Suite 700 2001 Park Place North Birmingham, Alabama 35203 Telephone (205) 716-5200 Fax (205) 716-5389 Email: [email protected]


ALASKA


ALASKA STATE LIAISON REPORT

-----Original Message----- From: Julius Brecht [mailto:[email protected]] Sent: Friday, June 15, 2007 7:10 PM To: Lieberman, Ellen Subject: ABA Committee State Securities 6/07 Report As requested, the report from Alaska on activities of the Alaska Division of Banking and Securities since my last report dated 1/13/07 is as follows: (1) The Alaska Division of Banking and Securities continues its interest and efforts to seek support for the repeal and reenactment of the Alaska Securities Act to follow the provisions of USA 2002. In 1959, Alaska was the first state to adopt the then Uniform Securities Act. In January 2007, the Alaska legislature convened the first session of a two session legislature. A committee was formed to work on the content of the bill submitted to the legislature, and I am on that committee. However, the bill remains in its first legislative committee of referral. I have spoken with the Alaska Administrator about the effort to be launched for the next session of the legislature in 2008. If the bill does not pass at that session it dies, and any further effort on change to ASA would have to be through a new bill submitted at the earliest to the new legislature to convene in 2009. (2) Under the current ASA, in addition to the "uniform" provisions of ASA having close correspondence with the uniform act, the Alaska Administrator of Securities has the unique responsibility to respond to complaints filed by shareholders of Native corporations as to the fair disclosure of information in proxy statements used in special and annual meetings of shareholders of the corporations. These Native corporations are ones formed pursuant to the Alaska Native Claims Settlement Act of 1991, as amended, and under the provisions of the Alaska corporate. Under ASA, the administrator adopted regulations in the early 1980s setting forth required content of proxy materials and allowable means of proxy solicitation. These regulations are based upon SEC regulations in place at that time and applying to corporations throughout the country and of a comparable size. Under this law, the division receives numerous proxy filings. During 2007, the division responded to numerous complaints. The complaints are processed through an independent hearing process administered through the division with an independent hearing officer making findings of fact and conclusions of law and recommendations for action to the administrator. (3) Changes to the Native proxy regulations proposed prior to 2006 have not been acted upon by the division. The state has a new governor as a result of an election late last year. Remains uncertain at this point as to what action if any might be taken with respect to the proposed regulations.


ALASKA


(4) While the division had ongoing investigations during this period, there were no other administrative actions or enforcement actions of note finalized during the period. (5) The division's senior securities examiner retired earlier this year. His replacement is Angela Otis. (6) The division's senior bank and financial institutions examiner will retire next month. No replacement had been announced as of the date of this report. The banking section and the securities section within the division work closely on investigations and other things of mutual interest regarding the areas regulated through the division. As in the past, please send me a copy of the full report to the committee in which the outline is placed. Thanks. 1967-2007: Celebrating 40 Years of Service in Alaska Julius J. Brecht Wohlforth, Johnson, Brecht, Cartledge & Brooking [email protected] www.akatty.com Phone: 907.276.6401 Fax: 907.276.5093


http://www.akatty.com

ARKANSAS


ARKANSAS STATE LIAISON REPORT

MEMORANDUM TO: Committee on State Regulation of Securities

FROM: John S. Selig

DATE: June 21, 2007

RE: Subcommittee on Liaison with Securities Administrators and NASD Arkansas Liaison Report and Enforcement Actions Through May 31, 2007

Ladies and Gentlemen:

This is the Arkansas Liaison Report as of May 31, 2007, to the Committee on State Regulation of Securities. This letter provides a status report since January 1, 2006, on legislative, regulatory, and enforcement activities with respect to Arkansas Uniform Securities Act, as amended (“Arkansas Securities Act”), and other matters of related interest.

The Arkansas Securities Act is administered by Arkansas Securities Commissioner (the “Commissioner”).

Arkansas Securities Act and Regulations

There have been no amendments to the Arkansas Securities Act nor any changes to the rules promulgated under the Act since January 1, 2006. The Uniform Securities Act of 2002 has not been adopted in Arkansas.

Change in Governor

Governor Mike Beebe, a Democrat, took office in January 2007 from Mike Huckabee, a Republican. The Commissioner serves at the pleasure of the Governor. The current Commissioner, Michael Johnson, was appointed by Governor Huckabee. No announcement has yet been made about whether Commissioner Johnson will stay or be replaced.

Please let me know if you have any questions.

John S. Selig

CALIFORNIA


CALIFORNIA STATE LIAISON REPORT

MEMORANDUM To: Ellen Lieberman, Chair

The State Regulation of Securities Committee of the Section of Business Law of the American Bar Association

File No.: 77706-0010

From: Keith Paul Bishop

Date: January 22, 2007

Subject: California Liaison Report

The following are the principal developments with respect to the California Department of Corporations and the California Corporate Securities Law of 1968: APPOINTMENT OF NEW COMMISSIONER On June 2, 2006, Governor Schwarzenegger appointed Preston DuFauchard as Commissioner of Corporations. Mr. DuFauchard previously acted as assistant general counsel for Bank of America. In that capacity, he supervised securities litigation related to mergers, investment banking, and broker-dealer operations. Before then, he was a partner in the law firm of Landels, Ripley and Diamond. He received his law degree from Boalt Hall School of Law at the University of California, Berkeley and his undergraduate degree from Stanford University. The appointment is subject to confirmation by the California Senate. MINOR LEGISLATIVE CHANGES During 2006, the California legislature enacted only minor changes to the Corporate Securities Law of 1968. Section 25005.1 was amended to include references to the newly enacted Uniform Partnership Act of 2008, which will become operative on January 1, 2008. (A.B. 339 §32, Chapter 495, Statutes of 2006). The legislature also made some non-substantive changes to Section 25100.1 (SB 1852, §83, Chapter 538, Statutes of 2006). PROPOSED AMENDMENTS TO COMPENSATORY BENEFIT PLAN RULES The Department of Corporations has proposed various amendments to its compensatory benefit plan regulations under the Corporate Securities Law of 1968. Specifically, the Department has proposed amending Sections 260.140.8, 260.140.41, 260.140.42, 260.140.45, and 260.140.46 of Title 10, California Code of Regulations. The proposed amendments relate to

CALIFORNIA


the standards governing exercise and purchase prices, vesting periods and approval procedures for compensatory option arrangements, The amendments would also make other clarifying and conforming changes. The comment period for these proposed amendments ended on December 18, 2006. The notice, a revised notice, proposed text of amendments, and initial statement of reasons are posted on the Department’s website, www.cal.ca.gov. PROPOSED AMENDMENTS REGARDING THE MANDATORY USE OF THE INVESTMENT ADVISOR REGISTRATION DEPOSITORY (IARD) The Department of Corporations has proposed to amend Sections 260.230, 260.231, 260.236.1, 260.241.4 and 260.242, and repeal Sections 260.231.2 and 260.236.2, of Title 10, California Code of Regulations. Legislation that took effect on January 1, 2005 (Chapter 461, Statutes of 2004) requires all investment adviser and investment adviser representative applications and other specified documents to be filed electronically with and transmitted to the web-based IARD, which is operated by the National Association of Securities Dealers. The proposed amendments would make conforming changes to the rules regarding the filing of applications and amendments. In 2003, the California legislature added Section 25612.3 to the California Corporations Code (Chapter 473, Statutes of 2003) to require the Commissioner of Corporations to use certain forms in connection with the licensing of broker-dealers and investment advisers. Because the forms are now required by statute, all existing versions of these forms are being redacted in this rulemaking proposal. Finally, this rulemaking action eliminates the reference to the appeal process pursuant to the Permit Reform Act. That law was repealed in 2003 (Chapter 229, Statutes of 2003). The comment period for this proposal ended on September 18, 2006. The notice, proposed text of amendments, and initial statement of reasons are posted on the Department’s website, www.cal.ca.gov. INVITATION FOR COMMENTS ON REGULATION OF FINDERS IN SECURITIES OFFERINGS The Department of Corporations has invited comments on the question of whether the Department should adopt an exemption and/or limited registration system for finders and private placement broker-dealers. The comment period ended on December 28, 2006. The invitation for comment is posted on the Department’s website, www.cal.ca.gov.

http://www.cal.ca.gov



CALIFORNIA


CALIFORNIA SUPREME COURT CLARIFIES WHETHER GUILTY KNOWLEDGE IS AN ELEMENT OF THE CRIME OF SELLING UNQUALIFIED SECURITIES In People v. Salas, 37 Cal.4th 967, 127 P.3d 40, 38 Cal.Rptr.3d 624 (2006), the California Supreme Court addressed whether a defendant’s good faith belief that the offer and sale of securities was exempt from qualification was relevant to the defendant’s criminal culpability. The court held that “a seller who believes reasonably and in good faith that a security is exempt is not guilty of the crime of unlawful sale of an unregistered security.” However, the court explained that guilty knowledge is not an element of the crime but an affirmative defense. This case follows the Supreme Court’s prior decision in People v. Simon, 9 Cal.4th 493, 37 Cal.Rptr.2d 278, 886 P.2d 1271 (1995). Simon involved a criminal conviction under California Corporations Code Section 25401 which prohibits the offer and sale of securities "by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made . . . not misleading." The court in Simon held that "knowledge of the falsity or misleading nature of a statement or of the materiality of an omission, or criminal negligence in failing to investigate and discover them, are elements of the criminal offense described in section 25401."

CALIFORNIA


MEMORANDUM To: Committee on State Regulation of Securities File No.: 77706-0010

From: Keith Paul Bishop

Date: June 12, 2007

Subject: California Liaison Report

1. Confirmation of Commissioner DuFauchard.

The California Senate has confirmed the appointment of Commissioner Preston DuFauchard by a vote of 36-0. Governor Schwarzenegger appointed Commissioner DuFauchard in June of last year. In California, a gubernatorial appointee may serve in office prior to confirmation. However, the office becomes vacant if the Senate fails or refuses to confirm within 365 days after the day the appointee first began performing the duties of the office. Cal. Gov. Code § 1774(c). Commissioner DuFauchard serves at the pleasure of the governor. Cal. Corp. Code § 25600. The Department of Corporations is part of the much larger California Business, Transportation & Housing Agency and the Commissioner of Corporations is subject to the general supervision of the Secretary of that agency. Cal. Gov. Code § 13978.

Mr. DuFauchard previously acted as assistant general counsel for Bank of America. In that capacity, he supervised securities litigation related to mergers, investment banking and broker-dealer operations. Before then he was a partner in the law firm of Landels, Ripley and Diamond. He received his law degree from Boalt Hall School of Law at the University of California, Berkeley and his undergraduate degree from Stanford University.

2. Commissioner Adopts Changes to Investment Adviser Regulations.

The Commissioner of Corporations has adopted regulations to clarify that all applications, reports and other documents must be filed electronically through the Investment Adviser Registration Depository in accordance with California Corporations Code Section 25231. The amendments also eliminate references to the California Permit Reform Act which was repealed in 2003. 2003 Stats. Ch. 229 (AB 1757). The sections amended are: 10 CCR §§ 260.230, 260.231, 260.236.1, 260.241.4, and 260.242. In addition, the following sections were repealed: 10 CCR §§ 260.231.2 and 260.236.2. The regulations were filed with the Secretary of State on March 6, 2007 and became effective on April 5, 2007.

3. Commissioner Finalizes Changes to Compensatory Benefit Plan Regulations.

The Commissioner of Corporations has completed the notice and comment process for proposed changes in the compensatory benefit plan regulations. This culminates many years of on and off again proposals to amend these regulations. The Department of Corporations first proposed amendments to these regulations in 1999 but the proposal was dropped. A few years later, the Department of Corporations adopted amendments to the regulations to account for options

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granted by limited liability companies. Although encouraged to do so, the Department declined to extend the rulemaking to the changes that it had proposed in 1999. In 2002, the Department issued an invitation for comment on amending the regulations. However, the Department again declined to take action. In November 2006, Commissioner DuFauchard proposed changes. This time the Department has completed the rulemaking process. The amendments affect the following sections: 10 CCR §§ 260.1 40.8 (restrictions on transfer); 260.140.41 (employee, director and consultant options); 260.140.42 (employee, director, manager and consultant purchases); 260.140.45 (limitation on the number of shares) and 260.140.46 (information to security holders). In accordance with California’s Administrative Procedure Act, the regulations have been filed with the Office of Administrative Law. That office reviews regulations for compliance with the rulemaking provisions of California law. If approved, the regulations are filed with the Secretary of State. Generally, regulations become effective 30 days after filing with the Secretary of State. Cal. Gov. Code Section 11343.4. However, I understand that the Commissioner has requested that the regulations become effective upon filing with the Secretary of State.

4. Covered Securities Filing Release.

On February 5, 2007, Commissioner DuFauchard issued a revision to Release 109-C. This revision updates the requirements with respect to filings under the National Securities Markets Improvement Act of 1996.

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MEMORANDUM To: Committee on State Regulation of Securities File No.: 77706-0010

From: Keith Paul Bishop Buchalter Nemer

Date: September 7, 2007

Subject: California Liaison Report - Update

1. Investment Adviser Omnibus Rulemaking. The Commissioner has proposed to adopt, repeal, and amend rules under the Corporate Securities Law of 1968 relating to the regulation of investment advisers. Specifically, the Commissioner proposes to effect the following changes to Title 10 of the California Code of Regulations:

• amend Sections 260.231, 260.235, 260.237, 260.237.2, 260.238, and 260.241.3;

• repeal Section 260.237.1; and

• adopt Sections 260.235.5, 260.238.1, 260.238.2, 260.238.3, and 260.238.4.

Comments on the Commissioner’s proposal may be submitted to Karen Fong, Office of Legislation and Policy, Department of Corporations, 1515 K Street, Suite 200, Sacramento, California, 95814-4052. Comments are due no later than 5:00 p.m., October 30, 2007.

2. Certifications of the NASDAQ Global Market. On August 9, 2007, the Commissioner of Corporations issued Revised Release Nos. 87-C and 88-C. Release No. 87-C provides certification of the NASDAQ Global Market of the NASDAQ Stock Market LLC, pursuant to subdivision (o) of California Corporations Code Section 25100. Section 25100(o) provides an exemption for securities listed on a national securities exchange, as certified by the Commissioner, from the qualification provisions of Sections 25110, 25120, and 25130. Release 88-C provides certification of the NASDAQ Global Market of the NASDAQ Stock Market LLC, pursuant to subdivision (a) of Corporations Code Section 25101. Section 25101(a) provides an exemption for securities of issuers whose securities are listed on certain national exchanges, in particular those exchanges certified by the California Corporations Commissioner, from the qualification provisions of Section 25130. 3. California Appellate Court Finds No NSMIA Preemption for State Attorney General Action. In People v. Jones (Aug. 24, 2007), the California Attorney General brought an action against a brokerage firm for failing to disclose adequately to investors and potential investors certain shelf-space” agreements under which the broker received additional compensation for selling certain preferred mutual funds. The Court of Appeal found that the action is not preempted by the National Securities Markets Improvement Act of 1966 because it is a type of action expressly permitted by that statute. The Court also concluded that the action is

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not preempted by the United States Securities and Exchange Commission Rule 10b-10 because the action does not conflict with that rule. 4. California Appellate Court Holds that Department of Corporations is not Liable for Investor Losses. In Dept. of Corp. v. Superior Court, 153 Cal. App. 4th 916 (2007), the Court of Appeal found that the Department of Corporations was not liable for investment losses suffered by investors who purchased fraudulent securities from brokers subject to "desist and refrain orders" after those orders were rescinded by the Department.

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COLORADO STATE LIAISON REPORT

January 2007 Update

COLORADO 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

I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in Securities Regulation: The Second Regular Session of the Sixty-Fifth General Assembly convened on January 11, 2006 and adjourned on May 10, 2006 and the First Extraordinary Session convened on July 6, 2006 and adjourned on July 10, 2006. Since the June 2006 Update, the following bill relating to Colorado securities and securities regulation law was passed by the Colorado General Assembly:

a. House Bill No.06-1356: Concerning the exemption of certain licensed professionals from the requirement to obtain a supervised lender license in order to take assignment of supervised loans in default and, in connection therewith, specifically exempting Colorado-licensed collection agencies and attorneys from supervised lender licensing when taking assignment of supervised loans in default. This bill exempts licensed collection agencies and collection attorneys licensed to practice law in the State of Colorado from also having to be licensed as supervised lenders when taking assignment of supervised loans only after such loans are in default. Effective April 18, 2006.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: Since the June 2006 Update, although there have not been any court decisions addressing novel questions of law the following summaries of Court of Appeals decisions:

a. No. 01CA2020. People v. Pahl. Securities Fraud—Theft—At-Risk Adult—Computer Crime—Farmout Agreement—Oil and Gas Lease—Investors—Motion to Suppress—Evidence—Search Warrant—Warrantless Search—Indictment—Simple Variance—Testimony—Jury Instructions. Defendant appeals the judgment of conviction entered on jury

1 The information contained in the foregoing paragraph was obtained on 01/22/07 at http://www.dora.state.co.us/Securities/ (last updated 01/22/07).

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

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

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verdicts finding him guilty of six counts of securities fraud, two counts of theft from an at-risk adult, and one count of computer crime.

The judgment is affirmed in part and reversed in part, and the case is remanded with directions. The evidence in this case established that defendant, in his capacity as president of Rautena Exploration Company (“Rautena”), entered into a “farmout” agreement with Samson Oil Co. (“Samson”) and Murfin Drilling Company (“Murfin”). Under the terms of the farmout, Samson and Murfin transferred their oil and gas lease rights to Rautena. Defendant then solicited investments from several people to drill a test well. Thereafter, defendant failed to drill the well, used the money for his personal expenses, and failed to disclose certain material facts to the investors before they decided to invest. This appeal follows defendant’s conviction for securities fraud, theft, and computer crime. Defendant contends the trial court erred in denying his motion to suppress evidence seized as a result of a search of his home conducted pursuant to a warrant. Where an affidavit includes information obtained unlawfully from a previous warrantless search, as well as information from lawful origins, evidence discovered by execution of the search warrant is admissible if the search pursuant to the warrant was supported by information from sources independent of the unlawfully procured information. After redacting the evidence obtained pursuant to the illegal search from the affidavit, the trial court concluded it was “eminently reasonable that a search of this apartment would have occurred and these items discovered.” Thus, the record supports the trial court’s conclusion that the later search and seizure were independent of the initial illegal entry. Defendant contends that the definitional instruction for a security impermissibly expanded the securities fraud charges alleged in the indictment. A simple variance occurs when the charged elements are unchanged, but the evidence presented at trial proves facts materially different from those alleged in the indictment. By adding other components of the statutory definition of “security” to the one listed in the indictment, the instruction did not change the elements of the offense, as the prosecution still had to prove defendant engaged in specified conduct in connection with a security. Thus, the difference between the indictment and the jury instructions was a simple variance, which did not prejudice defendant’s substantial rights. Defendant contends the evidence was insufficient to sustain his convictions for securities fraud. This was a question of fact for the jury, and reasonable jurors could find the agreement between defendant and the investors was a security. Defendant contends the trial court erroneously instructed the jury on the meaning of a security. The jury was given a definition of an investment contract, and was instructed to consider the totality of the circumstances in determining whether the venture was a security. This instruction was an adequate explanation of the law. Defendant contends the trial court erred in requiring the jury to find he acted willfully, instead of with specific intent. “Willfully” is the proper mental state for securities fraud. Defendant contends there was insufficient evidence to sustain his convictions for theft from an at-risk adult. As relevant here, an at-risk adult is any person who is 60 years of age or older. While the evidence was sufficient to support a reasonable inference that the trust and the corporation were victims of theft, it only shows these individuals served as conduits for the money between the corporation and trust and defendant. The judgment is reversed as to the two convictions of theft from an at-risk adult and the judgment is affirmed in all other respects. The case is remanded to the trial court to enter an order vacating the convictions and sentences for the two counts of theft from an at-risk adult.

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b. No. 04CA2347. Salazar v. Clancy Systems International, Inc. Stock Certificates—Restrictive Legends—Tort Claims—Uniform Commercial Code—CRS § 4-8-401. Plaintiff appeals from the trial court’s summary judgment in favor of defendant Clancy Systems International, Inc. The judgment determined that plaintiff’s tort claims relating to restrictive legends on stock certificates were preempted by state statute. The judgment is reversed and the case is remanded for further proceedings.

Plaintiff alleged in his complaint that the value of his stock had depreciated by approximately $2 million between the time of his initial request for a stock certificate and the date the certificate was reissued without the restrictive legend. He asserted, as relevant here, tort claims of trespass to chattel and intentional interference with prospective advantage, alleging that defendant’s inclusion of the restrictive legend was wrongful and malicious and deprived him of his legal right to sell the stock. Defendant moved for summary judgment, asserting that plaintiff’s common law tort claims were preempted by the Uniform Commercial Code (“UCC”), specifically CRS § 4-8-401. The trial court granted summary judgment in favor of defendant. Plaintiff contends that the trial court erred in granting defendant’s motion for summary judgment and in concluding that plaintiff’s common law tort claims were preempted by the UCC, specifically CRS § 4-8-401. Common law tort remedies remain available unless a provision of the UCC clearly states otherwise.

Although CRS § 4-8-401(b) affords a remedy for a failure or refusal to register a transfer, this provision does not evince a clear intent by the General Assembly to occupy the entire field regarding the transfer of securities, particularly with respect to the placement or removal of restrictive legends. Thus, co-extensive remedies under this provision and under the common law may exist and CRS § 4-8-401 does not preempt common law claims or remedies relating to the placement and removal of restrictive legends. The summary judgment is reversed, and the case is remanded for further proceedings consistent with this opinion.

c. No. 04CA1794. People v. Hoover. Securities Fraud—Theft—Colorado Organized Crime Control Act (COCCA)—Evidence—Testimony—Hearsay—Relevance—Jury Instructions—Prosecutorial Misconduct—Lesser-Included Offenses—Sentence. Defendant Hoover appeals the judgment of conviction entered on jury verdicts finding him guilty of securities fraud, theft, and violating the Colorado Organized Crime Control Act (“COCCA”). He also appeals the sentences imposed. The judgment and sentence are affirmed. The evidence at trial showed that, over a period of several years, defendant defrauded dozens of investors and converted more than $15 million from them. After a two-week trial, a jury convicted defendant of 22 counts of securities fraud, 21 counts of theft, and one count of organized crime under COCCA. Defendant contends that his convictions for securities fraud must be reversed, because the trial court erred in prohibiting him from testifying about his attorney’s advice on hearsay grounds. However, defendant’s belief that the Bird Ventures debentures were not a security and his reasons as to why he filed for bankruptcy protection were irrelevant to the securities fraud prosecution. Additionally, defendant’s counsel did not make an offer of proof on the remaining objections and, therefore, failed to preserve the remaining issues for appeal. Defendant next contends that his securities fraud convictions should be reversed on the grounds that there was insufficient evidence to establish that the Agency Account was a security. Defendant did not object to the jury instructions, and there was sufficient evidence to support the jury’s finding that the Agency Account was a security. Defendant also contends that

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his securities fraud convictions should be reversed because the prosecution committed misconduct during closing argument.

The record shows that the prosecution’s theory throughout the trial was that the Agency Account itself was a security, and this theory was consistent with the indictment and with those portions of defendant’s testimony used by the prosecution in closing argument. The prosecution’s comments were not an unfair characterization of defendant’s testimony and the legal inferences drawn by the prosecution were proper. Defendant contends that the trial court incorrectly answered a jury question and that his theft convictions therefore should be reversed. However, because defendant actively participated in preparing the response to the jury’s question and expressly agreed to it, defendant cannot now complain that the response was improper. Defendant contends that securities fraud and theft are lesser-included offenses of COCCA and that he should not have been convicted for both.

However, the General Assembly clearly authorized separate punishments for COCCA and the underlying predicate offenses of theft and securities fraud. Defendant contends that the trial court abused its sentencing discretion by imposing a total prison sentence of 100 years. A review of the record shows that the sentencing court engaged in a careful analysis of the pertinent factors, arrived at a sentence that was consistent with the purposes of the Criminal Code with respect to sentencing, and articulated on the record its basic reasons for imposing the sentence. Therefore, there was no abuse of discretion in the sentences imposed by the trial court.

III. Developments Relating to NSMIA: 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.

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IV. Significant Development in the Division’s Enforcement of Regulation Activities: Since the June 2006 Update, there have been 5 press releases dealing with the Division’s enforcement activities: a. Press Release: Aurora Man Sentenced in Stock Scam. In a press release dated July 13, 2006, Arapahoe County District Attorney Carol Chambers and Colorado Securities Commissioner Fred J. Joseph, announced that Aurora resident Elvin Vern Jones, 73 years old, was sentenced in Arapahoe District Court for defrauding a Colorado investor of $114,000. Following Jones’ entry of a plea of guilty to the crimes of attempted securities fraud and theft, Arapahoe County District Court Judge Angela Arkin sentenced Jones to 10 years of probation and, citing Jones’ lack of remorse, imposed a 40-day jail sentence. Judge Arkin also ordered Jones, despite his age, to obtain employment in order to pay back the $114,000 that he admitted to taking as part of his investment scam. Following a joint investigation by the Aurora Police Department and the Colorado Division of Securities, Jones was charged with two counts of securities fraud, both class three felonies, and two counts of theft, class four felonies, in connection with the sale of securities. Jones met prospective investors at a local church and induced at least one investor to invest in his non-existent company, Optimum International, Inc. Jones promised that, in seven days, he would triple the amount of any investment in an international investment program. Jones diverted significant portions of the funds for his own personal use. This case was prosecuted jointly by the Arapahoe County District Attorney’s Office and the Colorado Attorney General’s Office. Commissioner Joseph said, “This conviction was the result of different Colorado agencies working together to obtain a result that will enhance investor protection here in Colorado. We especially want to thank the Aurora Police Department, the Arapahoe County District Attorney’s office, and the Colorado Attorney General’s Office, whose contributions to this case all made this conviction happen.”

b. Press Release: Colorado Man Indicted and Arrested for Stock Scam. In a press release dated September 11, 2006, Colorado Attorney General John W. Suthers and Colorado Securities Commissioner Fred J. Joseph, announced the arrest of Mark Steven Blakemore of Erie, Colorado (DOB: 11/20/56), for his alleged participation in a securities scam in the Boulder-Denver area. Blakemore was arrested on a warrant issued by the Denver District Court following the return of an indictment by the Colorado State Grand Jury on September 8, 2006. Blakemore was indicted on 17 counts of securities fraud and six counts of theft in connection with the sale of securities in Colorado, all class three felonies.

It is alleged that Blakemore sold phony investments, through his company, Great Plains Financial, LLC, to at least 38 investors totaling over $3.2 million. It is alleged that Blakemore represented to investors that his company, Great Plains Financial, sold “short-term corporate debentures” which paid investors an exceedingly high rate of return. Blakemore allegedly represented to investors that he had a confidential trading relationship with a major bank ranked in the top 25 worldwide which generated substantial profits when no such relationship existed. It is further alleged that Blakemore either sent the investors moneys to Michael W. Conley of Shawnee, Kansas, and his company, Konza Financial, who paid Blakemore significant commissions, or was kept for Blakemore’s own personal use. In March 2006, Michael W. Conley entered a plea agreement with the U.S. Attorney for the Eastern District of Virginia for his role in a scheme to defraud investors through his company, Konza Financial. Conley, in his plea agreement, waived being indicted in exchange for a plea of guilty to one count of mail fraud. Conley was sentenced to seven years in federal prison on his plea of guilty. Blakemore

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was arrested on September 8, 2006, and posted bond in the amount of $50,000. “Mr. Blakemore is accused of targeting teachers, convincing them to turn over their hard-earned money to a non-existent investment scheme,” said Attorney General Suthers. “This case is just another example of the successful partnership between our office and the Division of Securities.” Commissioner Joseph said, “The investment scheme promoted by Mr. Blakemore appears to be a variation of the ‘prime bank note’ schemes that have been circulating for years. This type of scheme continues to make regulator’s top ten list of investor’s traps.” Commissioner Joseph cautions investors to check out any investment opportunity, especially those promising high rates of return. (Note: Any indictment is merely an accusation and any defendant is presumed innocent until and unless proven guilty in a court of law.)

c. Press Release: Denver Man Sentenced to 48 Years for Financial Fraud. In a press release dated October 19, 2006, Attorney General John Suthers and Securities Commissioner Fred Joseph announced today that Raymond Paul Morris, 49, of Castle Rock, Colorado, was sentenced in Douglas County District Court yesterday to 48 years in the Department of Corrections after pleading guilty to four counts of securities fraud and one count of theft, all Class three felonies. Morris was also ordered to pay $2 million in restitution to his victims. Morris was indicted by the Colorado State Grand Jury in November 2005. “This case should be a lesson for both criminals and investors,” said Suthers. “Criminals are on notice that we take these crimes very seriously and will seek long jail sentences for such scams. Potential investors are cautioned that they must do their homework before investing.” Suthers further added, “I want to commend the Douglas County Sheriff’s Office for their diligent work on this case over the past several years.” Commissioner Joseph said, “The judge’s sentence in this case sends a clear message to all would-be con-artists. Colorado is a bad place to cheat investors. Don’t do it here because you will be caught, prosecuted and sent to jail for a long time.” According to the indictment, Morris employed several schemes to defraud his investors. Among those schemes, Morris promised lots in a parcel of land he did not yet own in an area he claimed to be developing for residential use, known as “Cherry Valley Land Development.” Morris failed to develop the land and investors never received title to the property for which they paid. Another alleged scheme Morris used to defraud investors was convincing them to lend money to third parties, offering promissory notes secured with forged deeds of trust to the third parties’ homes. However, the third parties were never involved in the transaction and never received any of the money. Morris also solicited and accepted investor money to trade in the foreign currency market promising substantial returns, but failed to disclose poor performance on prior returns. Morris further failed to inform the investors that some of the money would be used for personal purposes.

d. Press Release: 20 Year Prison Sentence for Defrauding Seniors. In a press release dated October 19, 2006, District Attorney Scott Storey and Securities Commissioner Fred Joseph announced that Andrew Paul Weis (DOB: 10/27/50), of Lakewood, was sentenced to 20 years in prison, plus five years mandatory parole, for securities fraud. He defrauded at least 25 people, most being older adults, out of almost $600,000. Weis operated under the business names of Total Financial Management, Total Financial Group, Total Financial Fund and Total Financial in Lakewood, Colorado. Between 1999 and December 2002, Weis held himself and his business out to the public as a safe way for people to invest their retirement savings. He solicited money,

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primarily in Colorado and New Mexico, and often through presentations at retirement and senior centers. Mr. Weis failed to invest this money as he indicated he would and, instead, used the money to pay his personal living expenses, supporting his $200,000 a year lifestyle. In a Ponzi-like fashion, some money was used to pay other investors a dividend so that they would think that their money was actually invested. Mr. Weis failed to tell investors that he was not licensed or authorized to transact business as a securities broker-dealer or sales representative. Many of the victims were “at risk” adults and two of the victims passed away during the course of the case.

District Attorney Storey was pleased with the sentence, saying, “As strong a message as this sentence will send to criminals, it also reinforces my commitment to continuing to educate our senior citizens about fraud and their finances through our Communities Against Senior Exploitation (“CASE”) program. Seniors need to be very cautious and seek second or third opinions before moving their retirement savings and consult with friends or family about these decisions.” At sentencing, Weis proposed a payment plan to the court that would include him being on probation, finding a job and paying $2000 a month to victims. Chief Judge Brooke Jackson found the proposed plan to be unacceptable given the amount of money stolen, the length of time it would take to pay victims in full at this rate, the speculative nature of the job prospect, and the nature of the defendant’s conduct and harm he had caused. Weis pled guilty on August 17 to two counts of Securities Fraud and one count of Theft of an At-Risk Adult, all class three felonies. Commissioner Joseph said, “Weis used ‘free lunch’ seminars to dupe investors, mainly seniors, into turning over their retirement savings to him.” Commissioner Joseph cautioned investors to do their homework before investing. “The length of the judge’s sentence puts con-artists on notice that ripping off investors, particularly seniors, carries severe consequences,” added Joseph.

e: Press Release. Klytie’s Developments, Hidai Friedman, Efrat Friedman, and Jason Sharkey Enjoined on Charges of Securities Law Violations—Canadian Company and Three Principals Alleged To Have Violated Law by Colorado Securities Commissioner. In a press release dated October 24, 2006, Colorado Securities Commissioner Fred J. Joseph announced that he has filed a complaint in Denver District Court and obtained a temporary restraining order against two entities and three individuals alleging that they are violating the anti-fraud provisions and securities registration provisions of the Colorado Securities Act (“the Act”). Named in the complaint, which was filed on October 23, 2006, and subject of the temporary restraining order, are Klytie’s Developments, Inc., Hidai Friedman, and Efrat Friedman, all of Calgary, Alberta, and Klytie’s Developments, LLC, and Jason Sharkey, all of Colorado. In the complaint, the Commissioner has alleged that since at least March 2005, the Defendants have offered and sold investments in the so-called “Global Real Estate Fund.”

Defendants represented to investors that they would pool investor moneys 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. The Defendants 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, Defendants made misrepresentations to prospective investors which are materially false and misleading, including, but not limited to the following: (i) Defendants represented to investors that Klytie’s Developments owned the properties listed in

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the Klytie’s Prospectus. In truth, some of the properties identified in the Prospectus do not even exist. (ii) Defendants 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 the Defendants. (iii) Defendants 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.

The Division of Securities is currently aware of at least 50 investors who have invested over $2.25 million with Klytie’s Developments. Investments in Klytie’s may exceed $7 million. On October 23, 2006, at the request of the Commissioner, Denver District Court Judge Joseph Meyer issued a Temporary Restraining Order against the defendants in the matter. In the Order, Judge Meyer prohibited the defendants from offering or selling unregistered securities in Colorado and violating the anti-fraud provisions of the Colorado Securities Act. The Judge’s Order also froze various bank accounts maintained by the Defendants. In a related action, on October 4, 2006, the Alberta Securities Commission obtained an Interim Cease Trade Order against Klytie’s and the Friedman’s for violations of the Alberta securities laws. Both the U.S. Securities and Exchange Commission and the Alberta Securities Commission assisted in the investigation of this case. The Commissioner is represented in the action by attorneys from the office of State Attorney General John Suthers.

V. New Developments in Corporation, Partnership and Association Law: The Second Regular Session of the Sixty-Fifth General Assembly convened on January 11, 2006 and adjourned on May 10, 2006, and the First Extraordinary Session convened on July 6, 2006 and adjourned on July 10, 2006. Since the June 2006 Update, the following bills relating to Colorado general corporate law were passed by the Colorado General Assembly: a. Senate Bill No. 06-187: Concerning Title 7 of the Colorado Revised Statutes. This bill Standardizes rights of creditors, owners, and the entity with respect to dissolved business entities. The bill clarifies the rights of creditors of a corporation or nonprofit corporation and standardizes rules for unlawful distributions for a limited liability partnership, a limited liability limited partnership, and a limited liability company.

This bill amends the corporation and association laws by: (i) adding a definition of a “mutual ditch company” to the “Colorado Revised Nonprofit Corporation Act”, (ii) clarifying trade name laws as such laws pertain to delinquent or dissolved entities; (iii) modifying the definition, contents and operation of an operating agreement of a limited liability company; (iv) clarifying the duties that a party to an operating agreement has to a limited liability company or to another member, manager, or other person that is a party to the operating agreement; (v) clarifying the role of managers and members of a limited liability company, including agency authority; (vi) modifying the voting requirements with respect to mergers and conversions; (vii) clarifying the liabilities of directors and officers of a nonprofit corporation that dissolves but continues to operate without winding up; and (viii) clarifying when a delayed effective date shall not be used when a document is delivered to the Secretary of State for filing. This bill expands the authority of the Secretary of State to propound interrogatories to a domestic entity that has a constituent-filed document in the records of the Secretary of State, and a foreign entity that is authorized to transact business or conduct activities in Colorado. This bill sets deadlines by which an entity shall respond to the interrogatories and increases the penalties for failure to respond to interrogatories. This bill makes provisions relating to trade names effective

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May 30, 2006. Portions of the bill became effective May 30, 2006 and portions effective July 1, 2006.

b. Senate Bill No.06-188: Concerning the Central Filing of an Effective Financing Statement. This bill clarifies the required elements to be included in an effective financing statement and clarifies the requirements for amending an effective financing statement. This bill requires that effective financing statements be on or in a medium as may be acceptable to the central filing officer and establishes filing requirements for effective financing statements. This bill allows the central filing officer to prepare, furnish and require the use of specific forms when filing an effective financing statement and to charge fees for filing and other services. This bill requires the central filing officer to publish and distribute a master list of effective financing statements electronically. This bill provides that the act is effective 90 days following certification in writing by the Secretary of State to the Revisor of Statutes that approval of changes to the central filing system enacted in the act has been obtained from the U.S. Department of Agriculture, and the Secretary of State has implemented the necessary computer system to publish and distribute the master list electronically and is able to do so. This bill became effective May 25, 2006.

c. House Bill No. 06-1042: Concerning the Repeal of Certain Provisions of the “Bank Electronic Funds Act.” This bill repeals certain provisions of the “Bank Electronic Funds Act,” except for provisions pertaining to consumer protection. This bill became effective August 7, 2006.

d. House Bill No.06-1119: Concerning Security Breaches Regarding Personal Identifying Information. This bill on and after September 1, 2006, requires an individual or a commercial entity that conducts business in Colorado and that owns or licenses computerized data that includes personal information about a resident of Colorado to, when it becomes aware of a breach of the security of the system, conduct in good faith a prompt investigation to determine the likelihood that the personal information has been or will be misused.

This bill requires the individual or the commercial entity to give notice as soon as possible to the affected Colorado resident, unless the investigation determines that the misuse of information about a Colorado resident has not occurred and is not reasonably likely to occur. This bill requires notice to be made in good faith, in the most expedient time possible and without unreasonable delay, consistent with the legitimate needs of law enforcement and with any measures necessary to determine the scope of the breach and to restore the reasonable integrity of the computerized data system. This bill requires the notification to be either written or electronic, unless the cost of the notice exceeds $250,000, the affected class exceeds 250,000 people, or there is insufficient contact information, in which case conspicuous Internet posting and notification to statewide media suffices.

This bill provides if an individual or commercial entity is required to notify more than 1,000 Colorado residents of a breach of the security of the system, requires the individual or commercial entity to also notify, without unreasonable delay, all consumer reporting agencies that compile and maintain files on consumers on a nationwide basis of the anticipated date of the notification to the residents and the approximate number of residents who are to be notified. The bill allows the attorney general to file suit to enforce the act and became effective September 1, 2006.

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e. House Bill No.06-1140: Concerning the Registration of Trademarks. This bill repeals and reenacts the Colorado trademark laws. The bill establishes requirements and filing procedures for statements of trademark registration, as well as statements regarding the renewal, transfer or withdrawal of trademark registration.

The bill requires an individual or entity filing a statement of trademark registration to certify that such registrant believes the registrant has the right to use the trademark in connection with the goods and services identified in the filing; that the registrant is currently using the trademark; and that the registrant’s use of the trademark does not infringe the rights of any other person in that trademark. This bill requires that the filing be accompanied by a specimen demonstrating its use. This bill states that filing a statement of trademark registration does not confer substantive rights to the registrant or entitle the registrant to remedies not available at common law. This bill defines the period during which a statement of trademark registration is effective and the dates during which the Secretary of State may notify the registrant of an impending trademark expiration.

This bill establishes procedures for the cancellation of a statement of trademark registration and establishes procedures for service of process on a registrant. This bill makes an existing statement of trademark registration valid until its expiration under current law. This bill is effective May 29, 2007.

f. House Bill No.06-1156: Concerning Increased Consumer Rights Regarding the Use of Social Security Numbers. This bill prohibits any person or entity from: (i) publicly posting or displaying in any manner an individual’s social security number (“SSN”); (ii) printing an individual’s SSN on a card required for the individual to access products or services provided by the person or entity; (iii) requiring an individual to transmit his or her SSN over the Internet, unless the connection is secure or the SSN is encrypted; (iv) requiring an individual to use his or her SSN to access an Internet Web site, unless a password or unique personal identification number or other authentication device is also required to access the Internet Web site; and (v) printing an individual’s SSN on any materials that are mailed to the individual, unless state or federal law requires, permits or authorizes the SSN to be on the document to be mailed.

This bill lists exceptions, including uses required, permitted or authorized by state or federal law. This bill allows a preexisting nonconforming use of a SSN to continue if each of the following conditions is met: (A) the use of the SSN is continuous; and (B) the person or entity provides the individual with an annual disclosure that informs the individual that he or she has the right to stop the nonconforming use of his or her SSN. This bill requires the person or entity to implement a written request by an individual to stop the nonconforming use within 30 days after the receipt of the request. This bill prohibits the person or entity from denying services to an individual because the individual makes such a written request. This bill includes a SSN in financial data that may not be inspected as part of a public record, unless disclosure is required, permitted or authorized by state or federal law. This bill became effective January 1, 2007.

g. House Bill No.06-1247: Concerning the Adoption of Changes to the “Uniform Commercial Code” Proposed by the National Conference of Commissioners on Uniform State Laws and, in Connection Therewith, Repealing and Reenacting Articles 1 and 7 of the “Uniform Commercial Code.” This bill repeals and reenacts Articles 1, regarding general provisions, and 7, regarding documents of title, of the “Uniform Commercial Code” (“UCC”) as proposed by the

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national conference of commissioners on uniform state laws. Regarding Article 1, the act this bill: (i) harmonizes the Article with the drafting conventions of other, more recently amended articles of the UCC; (ii) specifies that the substantive rules apply only to transactions within the scope of the other UCC articles; (iii) redefines, subject to the narrower definition in Article 5 of the UCC, “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing”; (iv) adds the concept of “course of performance,” currently used only in Articles 2 and 2.5 of the UCC, to course of dealing and usage of trade as the contextual factors that a court may use to interpret a contract; (v) deletes the statute of frauds requirement on transactions not otherwise governed by the UCC; and (vi) clarifies and simplifies the definition of “security interest” to distinguish “true leases” from transactions that are leases in form but security interests in substance. Regarding Article 7, of the act this bill: (A) generally updates the article to provide a framework for the further development of electronic documents of title; (B) allows commercial practice to determine which records issued by bailees are “in the regular course of business or financing” and thus adequately evidence that the person in possession or control of the record is entitled to receive, control, hold and dispose of the record and the goods the record covers; (C) specifies that control of an electronic document of title is equivalent to possession and endorsement of tangible document of title; (D) allows parties to substitute an electronic document of title for an already issued paper document and vice versa; and (E) to the extent possible, harmonizes the rules for electronic documents of title with the rules for tangible documents of title. This bill became effective September 1, 2006.

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LIAISON’S REPORT FOR THE ABA STATE REGULATION OF SECURITIES COMMITTEE

STATES OF COLORADO, WYOMING AND MONTANA August 2007 Update

COLORADO 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.2

I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in Securities Regulation: 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.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: Since the January 2007 Update, although there have not been any court decisions addressing novel questions of law the following are summaries of Court of Appeals decisions:

a. No. 01CA2020. People v. Pahl. Securities Fraud—Theft—At-Risk Adult—Computer Crime—Farmout Agreement—Oil and Gas Lease—Investors—Motion to Suppress—Evidence—Search Warrant—Warrantless Search—Indictment—Simple Variance—Testimony—Jury Instructions. Defendant appeals the judgment of conviction entered on jury verdicts finding him guilty of six counts of securities fraud, two counts of theft from an at-risk adult, and one count of computer crime.

The judgment is affirmed in part and reversed in part, and the case is remanded with directions. The evidence in this case established that defendant, in his capacity as president of Rautena Exploration Company (“Rautena”), entered into a “farmout” agreement with Samson Oil Co. (“Samson”) and Murfin Drilling Company (“Murfin”). Under the terms of the farmout, Samson and Murfin transferred their oil and gas lease rights to Rautena. Defendant then solicited investments from several people to drill a test well. Thereafter, defendant failed to drill the well, used the money for his personal expenses, and failed to disclose certain material facts to the investors before they decided to invest. This appeal follows defendant’s conviction for securities fraud, theft, and computer crime. Defendant contends the trial court erred in denying his motion

2 The information contained in the foregoing paragraph was obtained on 01/22/07 at http://www.dora.state.co.us/Securities/ (last updated 01/22/07).

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

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

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to suppress evidence seized as a result of a search of his home conducted pursuant to a warrant. Where an affidavit includes information obtained unlawfully from a previous warrantless search, as well as information from lawful origins, evidence discovered by execution of the search warrant is admissible if the search pursuant to the warrant was supported by information from sources independent of the unlawfully procured information. After redacting the evidence obtained pursuant to the illegal search from the affidavit, the trial court concluded it was “eminently reasonable that a search of this apartment would have occurred and these items discovered.”

Thus, the record supports the trial court’s conclusion that the later search and seizure were independent of the initial illegal entry. Defendant contends that the definitional instruction for a security impermissibly expanded the securities fraud charges alleged in the indictment. A simple variance occurs when the charged elements are unchanged, but the evidence presented at trial proves facts materially different from those alleged in the indictment. By adding other components of the statutory definition of “security” to the one listed in the indictment, the instruction did not change the elements of the offense, as the prosecution still had to prove defendant engaged in specified conduct in connection with a security.

Thus, the difference between the indictment and the jury instructions was a simple variance, which did not prejudice defendant’s substantial rights. Defendant contends the evidence was insufficient to sustain his convictions for securities fraud. This was a question of fact for the jury, and reasonable jurors could find the agreement between defendant and the investors was a security. Defendant contends the trial court erroneously instructed the jury on the meaning of a security. The jury was given a definition of an investment contract, and was instructed to consider the totality of the circumstances in determining whether the venture was a security. This instruction was an adequate explanation of the law. Defendant contends the trial court erred in requiring the jury to find he acted willfully, instead of with specific intent. “Willfully” is the proper mental state for securities fraud. Defendant contends there was insufficient evidence to sustain his convictions for theft from an at-risk adult. As relevant here, an at-risk adult is any person who is 60 years of age or older.

While the evidence was sufficient to support a reasonable inference that the trust and the corporation were victims of theft, it only shows these individuals served as conduits for the money between the corporation and trust and defendant. The judgment is reversed as to the two convictions of theft from an at-risk adult and the judgment is affirmed in all other respects. The case is remanded to the trial court to enter an order vacating the convictions and sentences for the two counts of theft from an at-risk adult.

b. No. 04CA2347. Salazar v. Clancy Systems International, Inc. Stock Certificates—Restrictive Legends—Tort Claims—Uniform Commercial Code—CRS § 4-8-401. Plaintiff appeals from the trial court’s summary judgment in favor of defendant Clancy Systems International, Inc. The judgment determined that plaintiff’s tort claims relating to restrictive legends on stock certificates were preempted by state statute. The judgment is reversed and the case is remanded for further proceedings.

Plaintiff alleged in his complaint that the value of his stock had depreciated by approximately $2 million between the time of his initial request for a stock certificate and the date the certificate was reissued without the restrictive legend. He asserted, as relevant here, tort claims of trespass to chattel and intentional interference with prospective advantage, alleging that defendant’s

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inclusion of the restrictive legend was wrongful and malicious and deprived him of his legal right to sell the stock. Defendant moved for summary judgment, asserting that plaintiff’s common law tort claims were preempted by the Uniform Commercial Code (“UCC”), specifically CRS § 4-8-401. The trial court granted summary judgment in favor of defendant. Plaintiff contends that the trial court erred in granting defendant’s motion for summary judgment and in concluding that plaintiff’s common law tort claims were preempted by the UCC, specifically CRS § 4-8-401. Common law tort remedies remain available unless a provision of the UCC clearly states otherwise.

Although CRS § 4-8-401(b) affords a remedy for a failure or refusal to register a transfer, this provision does not evince a clear intent by the General Assembly to occupy the entire field regarding the transfer of securities, particularly with respect to the placement or removal of restrictive legends. Thus, co-extensive remedies under this provision and under the common law may exist and CRS § 4-8-401 does not preempt common law claims or remedies relating to the placement and removal of restrictive legends. The summary judgment is reversed, and the case is remanded for further proceedings consistent with this opinion.

c. No. 04CA1794. People v. Hoover. Securities Fraud—Theft—Colorado Organized Crime Control Act (COCCA)—Evidence—Testimony—Hearsay—Relevance—Jury Instructions—Prosecutorial Misconduct—Lesser-Included Offenses—Sentence. Defendant Hoover appeals the judgment of conviction entered on jury verdicts finding him guilty of securities fraud, theft, and violating the Colorado Organized Crime Control Act (“COCCA”). He also appeals the sentences imposed. The judgment and sentence are affirmed. The evidence at trial showed that, over a period of several years, defendant defrauded dozens of investors and converted more than $15 million from them. After a two-week trial, a jury convicted defendant of 22 counts of securities fraud, 21 counts of theft, and one count of organized crime under COCCA. Defendant contends that his convictions for securities fraud must be reversed, because the trial court erred in prohibiting him from testifying about his attorney’s advice on hearsay grounds. However, defendant’s belief that the Bird Ventures debentures were not a security and his reasons as to why he filed for bankruptcy protection were irrelevant to the securities fraud prosecution. Additionally, defendant’s counsel did not make an offer of proof on the remaining objections and, therefore, failed to preserve the remaining issues for appeal. Defendant next contends that his securities fraud convictions should be reversed on the grounds that there was insufficient evidence to establish that the Agency Account was a security. Defendant did not object to the jury instructions, and there was sufficient evidence to support the jury’s finding that the Agency Account was a security. Defendant also contends that his securities fraud convictions should be reversed because the prosecution committed misconduct during closing argument.

The record shows that the prosecution’s theory throughout the trial was that the Agency Account itself was a security, and this theory was consistent with the indictment and with those portions of defendant’s testimony used by the prosecution in closing argument. The prosecution’s comments were not an unfair characterization of defendant’s testimony and the legal inferences drawn by the prosecution were proper. Defendant contends that the trial court incorrectly answered a jury question and that his theft convictions therefore should be reversed. However, because defendant actively participated in preparing the response to the jury’s question and expressly agreed to it, defendant cannot now complain that the response was improper.

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Defendant contends that securities fraud and theft are lesser-included offenses of COCCA and that he should not have been convicted for both.

However, the General Assembly clearly authorized separate punishments for COCCA and the underlying predicate offenses of theft and securities fraud. Defendant contends that the trial court abused its sentencing discretion by imposing a total prison sentence of 100 years. A review of the record shows that the sentencing court engaged in a careful analysis of the pertinent factors, arrived at a sentence that was consistent with the purposes of the Criminal Code with respect to sentencing, and articulated on the record its basic reasons for imposing the sentence. Therefore, there was no abuse of discretion in the sentences imposed by the trial court.

III. Developments Relating to NSMIA: 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.

IV. Significant Development in the Division’s Enforcement of Regulation Activities: Since the January 2007 Update, there have been 14 press releases dealing with the Division’s enforcement activities:

a. Press Release: Kansas Oil and Gas Promoters Settle Colorado Securities Law Violations. In a press release dated February 1, 2007, Colorado Securities Commissioner Fred J. Joseph, announced that he has settled his enforcement action against the Key Resource Companies (Key Resource Group, LLC, Key Gas Corp., and Key Gas Holding), and their president Dale C. Lucas, and vice-presidents, Russell Kilgariff and Michael J. McNaul, all of Wichita, Kansas, arising from their marketing and promotion of interests in oil and gas wells to Colorado investors.

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Under the terms of the settlement, the Key Resource Companies have paid the Securities Commissioner $300,000 in restitution for 15 Colorado investors. Also, all the Defendants consented to a permanent injunction entered by Judge Larry Naves of the Denver District Court barring them from the securities industry in Colorado and permanently enjoining them from further violation of the registration, licensing and anti-fraud provisions of the Colorado Securities Act.

In his complaint, the Securities Commissioner alleged that from at least 2003 through 2006, the defendants sold investments in various oil and gas related investment programs. Also, the defendants represented to investors that they acquired producing oil and gas properties, and then retained operators to drill and operate the wells. The defendants recruited sales agents to market and sell the interests in the oil and gas wells. The sales agents received up to 50 percent of the invested amount in commissions. The Securities Commissioner further alleged in his complaint that the defendants engaged in a scheme to defraud the oil and gas investors by falsely promising investors “rebates,” by conducting telephone conferences with investors that were staged, scripted presentations designed to promote the sale of the interests, telling the investors that the investment was a “for sure” deal. The defendants also failed to disclose to investors that they were paying sales agents up to 50 percent of the invested amount in commissions, and that at lease one of its sales agents was a convicted felon, who has at least two cease and desist orders entered against him by different state securities regulators. “With the recent spike in gasoline prices last summer, oil and gas investment schemes are the ‘fraud de jour’ and have come back to haunt the investing public,” said Securities Commissioner Joseph. “With the number of complaints we are receiving on oil and gas deals, investors need to be particularly cautious before investing in any oil and gas venture. These ventures are very speculative and highly illiquid. And even where the underlying project is legitimate, any profits can vanish through high sales commissions and so-called expenses skimmed off by the promoters,” said Joseph.

b. Press Release: Texas Oil and Gas Company Sanctioned by Securities Commissioner. In a press release dated February 6, 2007, Colorado Securities Commissioner Fred 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 and sale of securities in and from Colorado. Named in the Order are North Texas Exploration, Inc., its president Larry W. Shopher, its vice-president and chief operating officer, Jeffrey S. Goerges, and two salesmen, Isaac H. Bolch, and Kyle B. Bolch, all of San Antonio, Texas.

The Staff of the Division of Securities (the “Staff”) has alleged that from January of 2006, through November of 2006, the Respondents attempted to sell investments in an oil and gas related venture in three oil and gas wells to be drilled in Okfuskee County, Oklahoma. The Staff alleged that the Respondents engaged in a scheme to defraud potential oil and gas investors by failing to disclose to investors that Shopher and Goerges were subject to an Order of Prohibition and Revocation issued by the Wisconsin Division of Securities in 2004, and that Goerges was subject to an Administrative Order issued by the Pennsylvania Securities Commission in 2000. The Staff also alleged that North Texas offered and sold its securities in Colorado that were not registered, or exempt from registration, and without the proper license, in violation of the registration and licensing provisions of the Act.

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The cease and desist order, which North Texas Exploration, Shopher, Goerges, Isaac Bolch, and Kyle Bolch 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 provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on February 5, 2007.

c. Press Release: Kentucky Oil and Gas Company Sanctioned by Securities Commissioner. In a press release dated February 8, 2007, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Kentucky oil and gas company for allegedly violating the securities registration and licensing provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in Colorado.

Named in the Order are Petrotech Resources Corporation, its president, John Burness, and two salesmen, George Robert McDaniel, and Brian Evans, all of Glasgow, Kentucky.

The Staff of the Division of Securities (the “Staff”) has alleged that in November of 2006, the Respondents attempted to sell investments in an oil and gas related venture. The purpose of the venture was to drill four oil and gas wells in Barren, Metcalfe and Green Counties in Kentucky. The venture is named the Center Field Reef Discovery Prospect No. 3. The Staff alleged that the Respondents attempted to sell these interests, which are securities, without registering the securities with the Division, and without being properly licensed with the Division, all in violation of the Act. Petrotech had prior regulatory problems with the State of Kentucky. Petrotech entered an Order with the State of Kentucky whereby Petrotech agreed that its employees would make no reference to specific offerings of the company on telephone calls and only sales agents registered with the Kentucky Office of Financial Institutions may solicit sales of oil and gas interests. The cease and desist order, which Petrotech, Evans, Burness, and McDaniel 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, licensing, and anti-fraud provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on February 7, 2007.

d. Press Release: Colorado Company Sanctioned by Securities Commissioner. In a press release dated February 22, 2007, Colorado Securities Commissioner Fred J. Joseph announced that he has entered a final cease and desist order against a Colorado company that touted adult oriented web sites for allegedly violating the securities registration and licensing provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in and from Colorado.

Named in the Order are Income Solutions, Inc., Kevin Lorimer, its president, and Nona Lee, all of Steamboat Springs, Colorado. Lorimer used the trade name of Goliath Productions to conduct his adult oriented web site business in conjunction with Income Solutions. The Staff of the Division of Securities (the “Staff”) has alleged that in March of 2005, the Respondents offered investments in Income Solutions and Goliath through online advertisements in the Boulder Weekly newspaper. At least one Colorado investor invested in this investment opportunity. In exchange for his investment, the investor received the alleged right to receive a percentage from every membership in the Goliath Production web sites, the right to receive 12% interest on the investment, and upon incorporation of Goliath Productions, receive shares of

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common stock. The Staff alleged that the Respondents attempted to sell, and did sell, these interests, which are securities, without registering the securities with the Division, and in a fraudulent manner. The cease and desist order, which Income Solutions, Lorimer, and Leigh 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 and anti-fraud provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act.

e. Press Release: Oppenheimerfunds Distributor, Inc. Agrees to Settlement with Colorado Securities Commissioner. In a press release dated February 27, 2007, Colorado Securities Commissioner Fred J. Joseph announced that OppenheimerFunds Distributor, Inc. (“OFDI”) has agreed to settle the Division’s investigation of certain agreements between OFDI and various financial intermediaries that had selling agreements with OFDI.

In the settlement agreement with the Division, OFDI has agreed to the following conditions: - OFDI will terminate the agreements. OFDI will deliver to the Division

within thirty days the documents evidencing the termination of these agreements.

- OFDI will pay $394,500 in restitution to the impacted Oppenheimer Funds.

- OFDI will pay to the State of Colorado the amount of $100,000.

In the settlement agreement, the Division alleged that OFDI entered into certain Telephone Exchange Agreements with a number of financial intermediaries (“TEA firms”) who were permitted to submit mutual fund exchange requests on behalf of their clients in bulk, regardless of whether the firm was the broker of record on the accounts. Other firms could not place bulk exchange requests for client accounts directly with OFDI unless the firm was the broker of record on the account. The TEA firms were also permitted to exchange up to 400% of their assets under management each year, but were required to comply with exchange limitations established by Oppenheimer Funds’ prospectuses, and other limitations established by OFDI. The Division alleged that from 2000 through 2003, the TEA firms’ bulk exchange activity caused the funds to experience both positive and negative dilution, ultimately resulting in negative dilution in nine of the thirteen funds involved. Further, during this time period, OFDI failed to maintain adequate records and appropriately monitor the bulk exchange activity of the TEA firms, and failed to disclose the existence of these agreements in Oppenheimer Funds prospectuses, statements of additional information, and other documents distributed in Colorado. By entering into the agreement, OFDI neither admits nor denies that any of allegations or grounds alleged by the Division are true. The Division’s investigation was done in conjunction with an investigation conducted by the Securities Division of the Washington State Department of Financial Institutions. f. Press Release: West Virginia Company Sanctioned by Securities Commissioner. In a press release dated April 4, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has entered a final cease and desist order against a West Virginia company for allegedly

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violating the securities registration and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in and from Colorado.

Named in the Order are Jacobs Invention Group, Inc., its owner and chief executive officer, Herman E. Jacobs, Ernest Baisden, and Carol D. Kitzmiller, all of Romney, West Virginia.

The Staff of the Division of Securities (the “Staff’) has alleged that in September of 2006, Jacobs placed an advertisement in the Denver Post to solicit investors for venture capital in Jacobs Invention Group. Jacobs Invention purportedly was developing well fire control devices for the oil and gas industry. In its promotional material, Jacobs Invention was touted as a “multimillion dollar business” which projected profits of $4.2 million in 2007 and increasing each year up to $56.4 million in 2010. The Staff further alleged that the Respondents engaged in a scheme to defraud potential investors by failing to disclose the degree of financial risk associated with losing an investment made in Jacobs Group to the investor, and failing to disclose that market value of the oil/gas well fire control devices to be offered by Jacobs Group is between $75,000.00 and $150,000.00 per device and any risks relating to the inability of the company to actually sell the products or sell them for that price range. The Staff also alleged that the Respondents offered and sold 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 Jacobs Invention, Jacobs, Baisden, and Kitzmiller agreed to, orders them to immediately and permanently cease and desist offering or selling any “security” in or from the State of Colorado, committing or causing any violation and any future violations of the Act, or otherwise engaging in conduct in violation of any provision of the Act. g. Press Release: Texas Oil and Gas Company Sanctioned by Securities Commissioner. In a press release dated April 6, 2007, Colorado Securities Commissioner Fred J. Joseph announced today 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 and sale of securities in and from Colorado.

Named in the Order are Signal Oil and Gas Company, its Chief Executive Officer, James E. Van Blaricum, and a salesman, James D. Butler, all of Fort Worth, Texas.

The Staff of the Division of Securities (the “Staff’) has alleged that beginning in January of 2003, and through January of 2007, the Respondents sold at least one investment to a Colorado resident in a venture in three oil and gas wells. Respondents represented that the three wells packaged were “proven wells” currently pumping 300 barrels of oil per day with an estimated production time frame of 10 years. Respondents stated that an investor could expect a monthly return of $4,218.75 on an initial investment of $51,750.00. The Staff has alleged that after the initial investment did not pay out as promised, the investor was encouraged to leave their investment in the hands of Signal Oil and Gas to be rolled over into a new oil and gas prospect called “Industry Partner Drilling Program II” in January of 2007. The Staff alleged that Signal Oil offered and sold its securities in Colorado that were not registered, or exempt from registration, in violation of the registration and licensing provisions of the Act. The cease and desist order, which Signal Oil and Gas, James E. Van Blaricum, and John David Butler 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, licensing

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and anti-fraud provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on April 6, 2007.

“In the last 4 months alone, cease and desist orders have been entered against 4 different oil and gas companies for violations of our Act,” said Commissioner Joseph. “It is a strong indication that oil and gas investment schemes are alive and well, and will continue to be a threat to unwary investors.” All investors are encouraged to contact the Division of Securities to verify that these oil and gas deals are in full compliance with law. h. Press Release: Boulder Man Enjoined in Resort Properties Timeshare Scheme. In a press release dated May 22, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has entered into a stipulation with Louis Welt, a Boulder man, that has resulted in the entry of a permanent injunction against Mr. Welt barring him from the securities industry in Colorado, and a judgment in the amount of $1.6 million for allegedly violating the securities registration, licensing, and anti-fraud provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in and from Colorado.

In April, 2007, Commissioner Joseph filed a complaint in Denver District Court against Welt alleging that Welt offered and sold to Colorado investors, mostly seniors, investment opportunities in Resort Holding International (“RHI”), which has also been known as Yucatan Resorts, Avalon Resort, Majesty Travel, World Phantasy Tours, and Galaxy Property Management. RHI was promoted by Welt as owning 11 four and five star resort properties, mostly in Cancun, Mexico. The investment consisted of purchasing a “timeshare” condominium at one of RHI’s resorts. Under a so-called “Universal Lease Program,” the investor then hired a third party management company to rent and manage the timeshare condominiums. Welt allegedly guaranteed investors a 9% annual return on their investment over a period of 25 years. The Commissioner alleged in the complaint that, contrary to the representations made by Welt, none of the investors ever saw a 9% return, and in fact, most investors lost their entire investment.

Michael Kelly, the purported owner of RHI, was indicted by the U.S. Attorney’s office in Chicago and arrested by the FBI in December of 2006 for operating RHI in what the FBI called a $400 million Ponzi scheme. Denver District Court Judge Michael Mullins entered judgment against Welt for $1.6 million, which represents the amount of losses suffered by Colorado investors who invested in RHI through Welt. In addition, Judge Mullins entered a permanent injunction barring Welt 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.

“I encourage investors to call our office,” said Commissioner Joseph. “With a simple phone call, we could have told investors that Mr. Welt was not licensed to sell securities in Colorado, and provided to the investor information about the numerous cease and desist orders from other jurisdictions that were in effect against RHI at the time.”

i. Press Release: Life Partners, Inc., and Life Partners Holdings, Inc., Enjoined on Charges of Securities Law Violations in Connection with the Sale of Viatical Securities in Colorado. Sale of Life Partners’ Viatical Securities Halted in Colorado. In a press release dated May 30, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has filed a complaint in Denver District Court and obtained a temporary restraining order against two

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entities alleging that they are violating the registration, licensing and anti-fraud provisions of the Colorado Securities Act (“Act”). On May 29, 2007, Denver District Court Judge Robert McGahey entered a temporary restraining order which prohibits the Defendants Life Partners, Inc., and Life Partners Holdings, Inc., from offering or selling securities in Colorado and violating the anti-fraud provisions of the Act. Named in the complaint and subject of the temporary restraining order, are Life Partners, Inc., and Life Partners Holdings, Inc., both located in Waco, Texas. Also named in the Complaint is Scott Peden, president of Life Partners.

In the complaint, the Commissioner has alleged that from as early as 2004 and continuing through the present, the Defendants raised over $11.5 million from more than 110 Colorado investors through a fraudulent, unregistered offering of securities in the form of fractionalized interests in viatical and life settlements. A viatical or life settlement is the sale of a life insurance policy by a terminally-ill person or senior citizen (the viator) at a price discounted from the face value of the policy. Investors pay the premiums and receive the face value of the life insurance policy when the insured, or viator, dies. In turn, the viator receives a portion of the proceeds of his life insurance policy as a lump sum.

According to the Commissioner’s complaint, Life Partners failed to register the viatical securities in Colorado, and falsely represented that it was entitled to sell viatical securities here without registration. Also, Life Partners promised investors fixed returns, depending upon the term of investment chosen by the investor. The life expectancy figure determined for each viator was a key factor in determining the maturity date of the investment, the rates of return to the investors and the amount of funds needed for payment of future premiums. In the complaint, it is alleged that Life Partners failed to disclose to investors the method by which life expectancy was determined, the high frequency rate in which viators outlived the life expectancies predicted by Life Partners, and that if the viator outlived the life expectancies, the investor was liable to make the premium payments. It is further alleged that Life Partners failed to disclose the original purchase price of the policy and commissions paid to the sales agents, making it impossible for an investor to determine the true market value of the policy.

Also named in the Complaint for selling the viatical securities in Colorado without a license are Tim Harper, Waco, Texas, Scott Beemer, Colorado Springs, Colorado, Eric Cox, Fort Collins, Colorado, Lowry Lynne Davis, Fort Collins, Colorado, Gary Hanson, Colorado Springs, Colorado, Kenneth Keller, Fort Collins, Colorado, Mike Lowe, Fort Collins, Colorado, Larry Mickelson, Loveland, Colorado, John Roth, Fort Collins, Colorado, and Ralph Seibert, Colorado Springs, Colorado. None of the Defendants are licensed in any capacity with the Securities Commissioner. The Commissioner’s complaint charges the defendants with violating the anti-fraud, 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. The Commissioner is represented in the action by attorneys from the Office of State Attorney General. A copy of the complaint and temporary restraining order can be found at http://www.dora.state.co.us/securities/enforcement.htm#Injunctions

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

COLORADO


j. Press Release: Movie Company Sanctioned by Securities Commissioner. In a press release dated June 14, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has entered a final cease and desist order against a California movie production company for allegedly violating the securities registration and licensing provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in and from Colorado. Named in the Order are Oak Films, LLC, located in Studio City, California, Modern Twain Partners II, LLC, also located in Studio City, California, Oak Films and Modern Twain’s owners, Joseph Reilly, of Hollywood, California, and Tom Kelly, of Studio City, California, and John Yang, of Studio City. The Staff of the Division of Securities (the “Staff”) has alleged that from March of 2007, through May of 2007, the Respondents attempted to sell investments in a movie production company that was set to distribute its most recent feature length film project, tentatively titled “A Modern Twain Story: Tom Sawyer.” The Respondents were attempting to raise $7 million to fund the production, distribution and marketing of the movie project. The Staff alleged that the Respondents offered and sold its securities in Colorado that were not registered, or exempt from registration, and without the proper license, in violation of the registration and licensing provisions of the Act. The cease and desist order, which Oak Films, Modern Twain Partners, Joseph Reilly, Tom Kelly, and John Yang 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, licensing, and anti-fraud provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on June 13, 2007.

k. Press Release: Media Company Sanctioned by Securities Commissioner. In a press release dated June 19, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has entered a final cease and desist order against a California multi-media company for allegedly violating the securities registration and licensing provisions of the Colorado Securities Act (“Act”) in connection with the offer and sale of securities in and from Colorado. Named in the Order are Vergence Entertainment, LLC, F-H-S Legacy Corporation, the owner of Vergence and F-H-S Legacy, Robert J. Feeney, and co-founder, Brent W. Barkley, all of Glendale, California.

The Staff of the Division of Securities (the “Staff’) has alleged that in May of 2007, Respondents attempted to sell “units” of Vergence in Colorado. Respondents represented that the Vergence was organized to finance “the development and integration of original entertainment brands and technologies for multi-media exploitation.” Vergence intended to provide “turnkey content for TV networks, consumer product distributors and online/wireless service providers.” The Respondents are attempting to raise $7.5 million to fund their business operations. The Staff alleged that the Respondents offered and sold its securities in Colorado that were not registered, or exempt from registration, and without the proper license, in violation of the registration and licensing provisions of the Act. The cease and desist order, which Vergence, F-H-S Legacy, Robert J. Feeney, and Brent W. Barkely 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 and

COLORADO


licensing provisions of the Act or otherwise engaging in conduct in violation of any provision of the Act. The order was made final on June 19, 2007.

l. Press Release: Lakewood Woman Charged with Securities Law Violations. In a press release dated July 17, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that he has filed a complaint in Denver District Court against Terry L. Fields, alleging that she has violated the anti-fraud, licensing and registration provisions of the Colorado Securities Act in connection with her promotion and sale of so-called “timeshares” in Resort Holdings International. Ms. Fields resides in Lakewood, Colorado.

In the complaint, the Commissioner has alleged that the Defendant offered and sold to Colorado investors, mostly seniors, investment opportunities in Resort Holding International (“RHI”), which has also been known as Yucatan Resorts, Avalon Resort, Majesty Travel, World Phantasy Tours, and Galaxy Property Management. RHI was promoted by Fields as owning various four and five star resort properties, mostly in Cancun, Mexico. The investment consisted of purchasing a “timeshare” condominium at one of RHI’s resorts. Under a so-called “Universal Lease Program,” the investor then hired a third party management company to rent and manage the timeshare condominiums. Fields allegedly guaranteed investors a 9% return on their investment over a period of 25 years. The Commissioner alleged in the complaint that, contrary to the representations made by Fields, none of the investors ever saw a 9% return, and most investors lost their entire investment. Fields is not licensed with the Commissioner in any capacity. It is alleged that Fields sold to at least 4 Colorado senior investors investments in excess of $110,000.00 in RHI. Michael Kelly, the purported owner of RHI, was indicted by the U.S. Attorney’s office in Chicago and arrested by the FBI in December of 2006 for operating RHI in what the FBI called a $400 million Ponzi scheme. http://chicago.fbi.gov/pressrel/2006/dec27_06.htm

The Commissioner is represented in the action by attorneys from the office of the State Attorney General John W. Suthers.

m. Press Release: Securities Commissioner Obtains Court Order Placing Hedge Funds in Receivership. In a press release dated August 24, 2007, Colorado Securities Commissioner Fred J. Joseph announced today that Denver District Court Judge Gloria A. Rivera entered an Order appointing a Receiver over two Colorado Springs area hedge funds, Integrity Fund, LP, and Integrity Fund II, LP, and the adviser to the two funds, Secured Financial Companies, Inc. The Receiver appointed by the Court is Andrew C. Snyder, Esq.

In addition, Commissioner Joseph has filed a complaint in Denver District Court against these entities, and their principal, Brian J. Peterson, alleging that they have violated the anti-fraud provisions of the Colorado Securities Act in connection with the operation of the two hedge funds by Mr. Peterson. The Complaint alleges that beginning in approximately February, 2004, about 30-40 investors invested approximately $3 million into the two funds. Each hedge fund was marketed as a fund-of-funds. A fund-of-funds is an investment fund that pools investor funds and then re-invests the pooled investor money in other investment funds run by other investment advisers and financial managers. The Complaint alleges that Mr. Peterson has effectively abandoned the operation and management of the funds, and has been uncommunicative with investors. The Complaint also alleges further violations of the Act, including self-dealing by Mr. Peterson, and breach of Mr. Peterson’s fiduciary duties to the investors.

http://chicago.fbi.gov/pressrel/2006/dec27_06.htm

COLORADO


“Our investigation of this matter is on-going,” said Commissioner Joseph. “The appointment of the Receiver will serve to preserve and protect the assets of these funds for the benefit of the investors while the investigation continues.” The Integrity Funds conducted business at 90 S. Cascade Avenue, Suite 1110, Colorado Springs, Colorado. Brian Peterson’s last known address is 3770 Strawberry Field Grove, #G, Colorado Springs, Colorado.

The Commissioner is represented in the action by attorneys from the office of State Attorney General John W. Suthers.

V. New Developments in Corporation, Partnership and Association Law: The First Regular Session of the Sixty-Sixth General Assembly convened on January 10, 2007 and adjourned on May 9, 2007. Since the January 2007 Update, the following law relating to Colorado general corporate law was passed by the Colorado General Assembly:

a. House Bill No. 07-1135: Concerning Business Entities Regulated under Title 7 of the Colorado Revised Statutes. The law clarifies merger and conversion provisions, consolidation provisions for cooperatives, and share exchange provisions for corporations. Changes in certain instances, the term “principal office address” to “principal address” to cover individuals and persons. The law establishes that a member of a limited liability company ceases to be a member on assignment or transfer of all the member’s membership interest. After July 27, 2009, allows a limited partnership to elect to be a reporting entity. The law requires a new limited partnership to file an annual report. The law was effective on May 29, 2007.

CONNECTICUT


CONNECTICUT STATE LIAISON REPORT

RICHARD SLAVIN

Cohen and Wolf P.C.

1115 Broad St. P.O. Box 1821

Bridgeport, CT 06604 Fax 203-394-9901

[email protected]

Please Reply To Bridgeport Writer’s Direct Dial: (203) 337-4103

November 26, 2007 Attorney Ellen Lieberman, Chair ABA State Securities Committee Debevoise & Plimpton LLP 919 Third Avenue New York, N.Y. 10022 Re: Liaison with the Connecticut Banking Commissioner and the Securities and Business Investments Division of the Connecticut Banking Department Dear Ellen: Having already reported on the recent Connecticut Uniform Securities Act legislation effective on October 1, 2006, I shall give a current update on the status of the Connecticut hedge fund task force. This group was established in the Securities and Business Investments Division of the Banking Department and consists of certain examiners who have been charged with learning more about the hedge fund industry. Stopping short of adopting new regulations, the Banking Department has not been specific about what the task force is supposed to find or to do once it finds it. More realistically, it appears that this task force will certainly be positioned to investigate complaints received about hedge fund activities and to recommend regulations should they be needed. Connecticut Governor Jodi Rell appointed a new Banking commissioner in fall 2006. He is Howard Pitkin a career banking examiner and administrator. Prior to his appointment Commissioner Pitkin had worked at the Banking Department for approximately thirty years. At this stage of his tenure it does not appear that Mr. Pitkin’s appointment will cause a change in Banking Department policy in connection with securities regulation; however, it is still too soon to tell. The administrative leadership of the Securities and Business Investments Division remains the same and has been in place for many years.

Sincerely, Richard Slavin


CONNECTICUT


RS:ke cc: Don Rett, Esq. Subcommittee on Liaison with the Securities Administrators and the NASD ABA State Regulation of Securities Committee 1660 Metropolitan Circle Tallahassee, Fl 32308

CONNECTICUT


RICHARD SLAVIN

Cohen and Wolf P.C.

1115 Broad St. P.O. Box 1821

Bridgeport, CT 06604 Fax 203-394-9901

[email protected]

Please Reply To Bridgeport Writer’s Direct Dial: (203) 337-4103

November 26, 2007

Don Rett, Esq. Subcommittee on Liaison with the Securities Administrators and the NASD ABA State Regulation of Securities Committee 1660 Metropolitan Circle Tallahassee, Fl 32308 Shane Hansen, Esq. Subcommittee on Liaison with the Securities Administrators and the NASD ABA State Regulation of Securities Committee Warner Norcross & Judd, LLP 111 Lyon Street, N.W. Suite 900 Grand Rapids MI 49503-2487 Re: Liaison with the Connecticut Banking Commissioner and the Securities and Business Investments Division of the Connecticut Banking Department Dear Don and Shane: Hedge Funds There were two bills introduced in the legislature having to do with hedge funds. One of those bills would have imposed reporting and registration requirements on Connecticut hedge funds. Neither bill escaped the committee process. New Legislation Public Act 07-91 adopted one slight change to the Banking commissioner’s summary suspension power by adding the following highlighted language to Section 36b-15 of the Connecticut General Statutes:


CONNECTICUT


The commissioner may by order summarily postpone or suspend registration or require a registrant to take or refrain from taking such action that in the opinion of the commissioner will effectuate the purposes of sections 36b-2 to 36b-33, inclusive, as amended by this act… The Act also adds the same language to the articulation of the commissioner’s enforcement powers in Section 36b-27.

Sincerely, Richard Slavin RS:ke

DISTRICT OF COLUMBIA


DISTRICT OF COLUMBIA STATE LIAISON REPORT

M E M O R A N D U M By E-Mail TO: Ellen Lieberman Chair, American Bar Association State Regulation of Securities Committee Donald A. Rett Chair, Subcommittee on Liaison with Securities Administrators and NASD FROM: Michele A. Kulerman DATE: January 22, 2007 RE: District of Columbia Liaison Report – July 2006 Update ABA Committee on State Regulation of Securities The following provides an update from the June, 2006 Liaison Report and lists the current news from the District of Columbia Department of Insurance, Securities and Banking Securities Bureau (the “Securities Bureau”). Washington, DC elects a new Mayor. On January 2, 2007, Mayor Adrian M. Fenty began his four year term. His Deputy Mayor for Economic Development (the Economic Development cluster includes the Department of Insurance, Securities and Banking (“DISB”)) is Neil O. Albert. Mayor Fenty has reappointed Thomas E. Hampton as Commissioner, DISB. DC City Council changes The City Council of Washington, DC is also undergoing transition. Council Chair Linda Cropp resigned her seat to run for Mayor, and was defeated by Councilmember Fenty. Council Member Vincent Gray (Ward 6) was elected Chair of the Council. Jim Graham (Ward 1) is leaving the chairmanship of the City Council’s Committee on Consumer and Regulatory Affairs (DISB’s jurisdictional committee). His successor as chair of that committee is Mary Cheh (Ward 3). The DC version of the Uniform Securities Act of 2002 is on the legislative agenda of DISB. The legislation will have to be reintroduced in the Council and DISB is hopeful that the Council will take up the legislation in the spring of 2007. DISB’s Consumer Protection Plan DISB has issued its first comprehensive Consumer Protection Plan (the “Plan”). The securities component of the Plan includes (i) heightened review of license applications, (ii) increased on-site



coverage by the Examinations Division, (iii) significant increases in investor education activities and a proposed survey of DC consumers of financial services to report data about the experience of DC residents with the financial services professions. Securities Bureau activities As previously reported in the June, 2006 memorandum, the Securities Bureau is continuing its review of the level of hedge fund activity in the District and the registration and notice filing status of District-based hedge fund advisers. The Securities Bureau hopes to develop an on-line service for inquiries by or on behalf of issuers regarding the status of certain types of corporate filings. Securities Bureau Director Miles serves on the Legal Services and Corporate Governance Project Groups of the North American Securities Administrators Association (NASAA). Assistant Director (Corporation Finance) James M. (Mike) McManus is a member of the Direct Participation Programs Policy Project Group of the NASAA Corporation Finance Section, and other members of the Securities Bureau staff are on other NASAA project groups. Other Securities-Related Issues: None.

* * * If you should have any questions regarding the details of this report, and the specific activities of the Securities Bureau, please call me directly or, you can reach Lilah R. Blackstone, Securities Attorney, DC Department of Insurance, Securities and Banking at Securities Bureau, 202.442.7750 (tel.) MAK



Michele A. Kulerman Counsel (202) 637-5743 [email protected]

M E M O R A N D U M By E-Mail TO: Ellen Lieberman Chair, American Bar Association State Regulation of Securities Committee Shane Hansen Chair, Subcommittee on Liaison with Securities Administrators and NASD FROM: Michele A. Kulerman DATE: June 21, 2007 RE: District of Columbia Liaison Report – June 2007 Update ABA Committee on State Regulation of Securities Ladies and Gentlemen: This is the District of Columbia Liaison Report of June 21, 2007 to the Committee on State Regulation of Securities. This Memorandum provides a status report on any legislative, regulatory or enforcement activities with respect to the District of Columbia Securities Act (the “Act”) and other matters of related interest as reported by the District of Columbia Department of Insurance, Securities and Banking Securities Bureau (“DISB”). District of Columbia Securities Act and Regulations There have been no new or amended rules or regulations promulgated under the Act, and no new procedures, policies or interpretations to the Act have been adopted. Any State Developments Relating to USA 2002 or NSMIA The District of Columbia version of the Uniform Securities Act of 2002 was not reviewed by the City Council this past Spring 2007, as was originally expected by the DISB. However, the DISB understands




that this legislation will be reintroduced in the next legislative session, but no specific date for such a review has been set. Court or Administrative Decisions Involving Material and Novel Questions of Law None interpreting the Act or its regulations. Unusual or Noteworthy Happenings with Respect to Securities Practice in the District of Columbia None. DISB ORDERS Any orders that have been issued by the DISB to securities firms can be found on the DISB website at www.disb.dc.gov.

* * * If you should have any questions regarding the details of this report, and the specific activities of the Securities Bureau, please call me directly or, you can reach Theodore Miles, Director, or Lilah R. Blackstone, Attorney, DC Department of Insurance, Securities and Banking at the Securities Bureau, 202.442.7750 (tel.) MAK

http://www.disb.dc.gov

FLORIDA


FLORIDA STATE LIAISON REPORT

DONALD A. RETT

ATTORNEY AT LAW 1660 Metropolitan Circle

Tallahassee, Florida 32308 Telephone 850.298.4454 Facsimile 850.298.4494 www.donrett.com [email protected]

June 21, 2007 Ellen Lieberman, Counsel Debevoise & Plimpton 919 Third Avenue New York, NY 10022 RE: Florida Liaison Report - 2007 ABA Annual Meeting Dear Ellen: The following constitutes my report. NSMIA - NSMIA, to best of my recollection, has never been introduced in the Florida legislature. Recent Statutory Amendments - During the recently-concluded legislative session, the licensing fee for brokers was increased, from $30 to $50. (This was reported to our Committee's leadership, and posted to the listserv in May, 2007). During a prior session (2005) of the Florida legislature, a law was passed that amended a provision of the Florida Insurance Code (s. 626.112, F.S.). This amendment, which was passed to implement federal legislation, was subsequently interpreted by Florida's Department of Financial Services to require individual securities branch offices to obtain insurance licenses, and required that an "agent in charge" ("AIC") be physically present in each branch office. Under the law, AIC's could not cover multiple locations, thus presenting an expensive compliance problem for broker-dealers. This year, the Florida legislature - with support from the Florida Securities Dealers Association ("FSDA") - amended the 2005 legislation to exempt broker-dealers from the insurance licensing provision. FSDA Florida Review May 22, 2007. <[email protected]>

http://www.donrett.com


mailto:<[email protected]>

FLORIDA


Amended Regulations - In May and June, 2007, Florida implemented a number of rule revisions, including: Rules for Eleemosynary and Religious Organizations, Governing Offering Circular Content; Rules for Government Securities Exemptions; Computation of Number of Persons in a FL Private Placement; and Definitions (including "branch offices"). All of them can be found at <http.www.fldfs.com/ofr>, then click: :Division of Securities; :Resources; :Fla. Rules 69W, F.A.C.; and, :Rule Versions that Became Effective. Other Matters of Interest - I reported in 2005 that the Business Law Section of The Florida Bar had appointed a Committee to study the Florida Securities Act, and report back with suggestions. That matter remains "pending", as of the date of this Report. Very truly yours, Donald A. Rett DAR/hs

http://www.fldfs.com/ofr>

GEORGIA


GEORGIA STATE LIAISON REPORT

MEMORANDUM To: Committee on State Regulation of Securities American Bar Association From: J. Steven Parker Date: June 21, 2007

Re: Sub-Committee on Liaison with Securities Administrators and NASD Ladies and Gentlemen: This is the Georgia Liaison Report as of June 21, 2007, to the Committee on State Regulation of Securities. This letter provides a status report since our last report as to legislative, regulatory, and enforcement activities with respect to the Georgia Securities Act of 1973, as amended (“Georgia Securities Act”). The Georgia Securities Act is administered by the Secretary of State of Georgia, who serves, ex officio, as the Commissioner of Securities for the State of Georgia. In January, 2007, Karen Handel was sworn in as Secretary of State. On February 19, 2007, Secretary Handel appointed Robert D. Terry as Assistant Commissioner of Securities and Director of the Division of Securities. Mr. Terry previously held that position from 1997 to 2001. Georgia Securities Act There have been no amendments to the Georgia Securities Act or any changes to the rules promulgated under that act since the date of last report. The Securities Division is presently working with legislators, the State Bar and other interested groups in crafting a bill that would substantially adopt the Revised Uniform Securities Act (2002). The bill is expected to be introduced in the next session of the Georgia General Assembly in January, 2008. Examinations The Securities Division has recently expanded its examination program, with special focus on state-registered investment advisors and local offices of independent broker-dealers. Website

GEORGIA


The Division is presently enhancing its website with improved functionality, including online access to enforcement orders, scheduled to be available in September 2007. Investor Education Earlier this year, in connection with settlements of administrative enforcement actions, broker-dealers agreed to contribute $250,000 to the Investor Protection Trust, a nonprofit organization. These funds will be used for investment educational programs throughout the state of Georgia. Enforcement Matters In re: Logiquote, Inc. (CRD No. 131299) Thomas D. Lesniak (CRD No. 736852) ENSC00628 In this case, Logiquote and Mr. Lesniak were, during the relevant time period, registered as Investment Adviser and Investment Adviser Representative respectively, under the Act. Respondents violated numerous sections of O.C.G.A §10-5-12 by soliciting clients by means of false and misleading information, making representations that constituted an untrue statement of a material fact, distributing advertisements that did not comply with Rule 206(4)-1 under the Investment Advisers Act of 1940 (an act prohibited by Rule 590-4-8-.18(1)(l)) and engaging in unsuitable trading activity contrary to, among other things, the clients investment objectives, financial situation and needs. On May 2, 2007, the case was resolved by Consent Order, in which Respondents consented to cease and desist all violations of the Act and to a permanent bar from association with any person subject to the jurisdiction of the Commissioner of Securities of the State of Georgia pursuant to O.C.G.A.§10-5-1 et seq. In re: Pinnacle Development Partners, L.L.C. and Gene A. O'Neal The Respondents violated the Georgia Securities Act by offering to sell and selling unregistered real estate syndications to Georgia investors and by misrepresenting material facts in connection with those transactions. The Respondents placed advertisements in several national publications, including the Wall Street Journal and Newsweek. These advertisements touted returns of 25% in as little as 60 days. The Respondents sold approximately $69 million worth of syndications throughout the United States. Pinnacle Development is now under court-ordered receivership and Mr. O'Neal's assets are frozen. Respondents entered into consent orders with the Commissioner to settle administrative proceedings. The Commissioner's staff worked with the Atlanta District Office of the Securities and Exchange Commission to bring an appropriate and timely resolution to this matter. In re: American Enterprises, Inc. and Robert F. and Donna D. Yeager

GEORGIA


The Respondents violated the Georgia Securities Act by offering to sell and selling unregistered notes and membership units to Georgia investors and by omitting to disclose material facts in connection with those transactions. The Respondents received more than $2 million from Georgia investors. American Enterprises is now under court-ordered receivership and the Yeagers's assets are frozen. The Commissioner settled the charges against American Enterprises through a consent order and entered a cease and desist and bar order against the Yeagers. cc: Mr. Donald A. Rett, Subcommittee Co-chair

HAWAII


HAWAII STATE LIAISON REPORT

HAWAII


ILLINOIS


ILLINOIS STATE LIAISON REPORT

Dykema Gossett PLLC 10 South Wacker Drive Suite 2300 Chicago, Illinois 60606 WWW.DYKEMA.COM Tel: (312) 876-1700 Fax: (866) 643-7257 Misty S. Gruber Direct Dial: (312) 627-2122

Email: [email protected] June 21, 2007

Memorandum

To: Committee on State Regulation of Securities From: Misty S. Gruber; Gregory Wright and Sean Dudley (Summer Associate) Date: June 21, 2007

Re: Subcommittee on Liaison with Securities Administrators and NASD – Illinois Liaison Report through June 21, 2007

Ladies and Gentlemen:

This is the Illinois Liaison Report to the Committee on State Regulation of Securities. This letter provides a status report covering the period from June 1, 2006 through the date of this memo, on legislative, regulatory, and enforcement activities with respect to the Illinois Securities Law of 1953, as amended (“Illinois Securities Law”), and other matters of related interest.

Illinois Securities Act and Regulations

There have been no significant amendments to the Illinois Securities Law or the rules promulgated thereunder.

Pending Legislation

In May 2007, the Illinois General Assembly and Senate passed a bill` limiting state business transactions with Sudan [S.B. 1169, 95th Gen. Assem., Reg. Sess. (Ill. 2007)] to replace the 2005 version that was permanently enjoined by the Northern District of Illinois in February 2007 on grounds that it violated the U.S. Constitution’s Supremacy Clause, Foreign Affairs Clause, and Foreign Commerce Clause [National Foreign Trade Council, Inc. v. Giannoulias, No. 06-C-4251, 2007 U.S. District LEXIS 13341 (N.D. Ill. 2007)]. The prior law barred the deposit of Illinois state funds in any financial institution that did not certify that neither the

ILLINOIS


institution nor its borrowers do business related to Sudan. In addition, the law barred public pension funds from investing in companies with commercial connections to that country. Similarly, the new bill would prohibit, inter alia, state retirement systems and certain state and local pension funds from investing in securities of a “forbidden entity,” the definition of which related to having business ties to the Republic of Sudan. However, in an attempt to overcome Court’s holding that the prior law interfered with Federal government’s authority over foreign affairs, the new bill has added certain qualifications, which, by way of example, exclude companies that “transact business in the Sudan under the law, license or permit of the United States.” Given the magnitude of the Constitutional hurdles identified by the court in National Foreign Trade Council, it remains to be seen whether the 2007 version will withstand judicial scrutiny. As of the date hereof, the bill had not yet been sent to the governor’s desk because both houses remain in session.

Another bill that passed both houses in May of 2007 and is awaiting the governor’s signature would create an exemption from the investment limitations in the Credit Union Act for credit unions investing to fund an employee benefit plan.

Administrative Actions

In October 2006, the Illinois Attorney General and Secretary of State filed a complaint against an individual who allegedly targeted members of African-American churches with a pyramid scheme, in violation of Sections 12.A and 12.D of the Illinois Securities Act of 1953. The accused, allegedly convinced a large number of people to pool their money for investment without having registered the securities offered in compliance with the Securities Act. This administrative action has been set for a public hearing on August 14, 2007, to determine whether the defendant will be barred from selling securities in Illinois.

INDIANA


INDIANA STATE LIAISON REPORT

INDIANA


IOWA


IOWA STATE LIAISON REPORT

MEMORANDUM TO: Committee on State Regulation of Securities FROM: Katherine Manghillis DATE: June 21, 2007 RE: Iowa Liaison Report This is the Iowa Liaison Report as of June 21, 2007, to the Committee on State Regulation of Securities. This memorandum provides a status report on legislative, regulatory and enforcement activities with respect to the Iowa Uniform Securities Act. The Iowa Uniform Securities Act is administered by the Iowa Insurance Division, Securities & Regulated Industries Bureau.

IOWA SECURITIES ACT AND REGULATIONS

There have been no changes to the Iowa Uniform Securities Act since 2005 when Iowa adopted the Uniform Securities Act of 2002. However, Chapter 50 of the Iowa Administrative Code has undergone a complete review and rewriting. The currently existing Chapter 50 of the Iowa Administrative Code is being rescinded, and a new Chapter 50 is being adopted.

The rules were proposed in a Notice of Intended Action published in the Iowa Administrative Bulletin on April 11, 2007. A public hearing on the proposed rules was held on May 15, 2007. In addition, written comments were received on the proposed rules. Based on the review of the written comments, some changes were made to the proposed rules. On June 20, 2007 the rules were published in the Iowa Administrative Bulletin. The new rules become effective on July 25, 2007.

The new chapter is divided into divisions that cover the following topics: Division I – Definitions and Administration; Division II – Registration of Broker-Dealers and Agents; Division III – Registration of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers; Division IV – Exemptions; Division V – Registration of Securities; Division VI – Exemptions; Division VII – Fraud and Other Prohibited Conduct; and Division VIII – Viatical Settlement Investment Contracts.

This status report highlights some of the changes, and is not intended to be an all inclusive report of the new and/or amended rules. Please go to

KATHERINE G. MANGHILLIS 614/462-1087

FAX – 614/ 228-4846 E-MAIL: [email protected]

IOWA


http://www.legis.state.ia.us/Rules/Current/Bulletin/IAB070620.pdf to view the rules in their entirety.

Division I – Definitions and Administration Definitions. The following terms are now defined: Act, Administrator, CCH NASAA Reports, CRD, CSRU, FDIC, ADV, ADV-H, ADV-W, Form BD, Form BDW, Form ICP, Form D, Form F-7, Form F-9, Form F-10, Form NF, Form S-1, Form SB-2, Form U-1, Form U-2A, Form U-4, Form U-5, Form U-6, Form U-7, Form USR-1, Gift, IARD, Immediate Family, Investment Contract, Loan, NASAA, NASD, NASDAQ, NCUA, NSMIA, NYSE, OTC, SAI, SEC, and SOIF.

Investment Contract is defined as follows: (1) any investment in a common enterprise with the expectation of profit to be delivered through the essential managerial efforts of someone other than the investor; (i) “common enterprise” means an enterprise in which fortunes of the investor are tied to the efficacy of the efforts and successes of those seeking the investment or of a third party; (ii) “profit” includes income or a return on the investment, including a fixed rate of return, dividends or other periodic payments, or the increased value of the investment; or (2) any investment by which an offeree furnishes initial value to an offerer, and a portion of this initial value is subject to the risks of the enterprise, and the furnishing of the initial value is induced by the offerer’s promises or representations which give rise to a reasonable understanding that a valuable benefit of some kind over and above the initial value will accrue to the offeree as a result of the operation of the enterprise, and the offeree does not exercise practical and actual control over the managerial decisions of the enterprise. Rule 50.1(502).

Rule 50.3(502) Interpretative opinions or no-action letters. Interested persons can submit a written request for an interpretative opinion. The written request shall include the factual situation involved, a citation to the applicable part of the rule or statute, and the question sought to be answered. For a filing fee of $100, interested persons may be provided with the no-action determination issued under the rule.

Division II – Registration of Broker-Dealers and Agents Rule 50.10(8) Succession and Change in Registration. In cases of organizational change, including change in the state of incorporation or form of organization, involving a material change in financial condition or management, a broker-dealer is required to file a new application for registration with the broker-dealer fee and the fees for all Iowa registered agents.

A broker-dealer need only file an amendment to Form BD for either: (1) an organizational change that does not involve a material change in the broker-dealer’s financial condition or management; or (2) a name change. Rule 50.16 (1) Dishonest, unethical practices. Under the new rule the list of unethical practices includes “boiler-room” operations of high-pressure tactics to promote speculative offerings or “hot issues” through an intensive telephone campaign of unsolicited calls to persons not known or not having an account with the broker-dealer, to persuade those persons to make hasty decisions irrespective of the purchaser’s investment needs and objections. Rule 50.16 (502)(bb). Rule 50.16(2) Dishonest or unethical practices by an agent. Under the new rule the list includes (1) the solicitation or acceptance of a gift, either directly or indirectly, from an unrelated customer that aggregately exceeds Two Hundred Fifty Dollars ($250) in a calendar year; and (2)

http://www.legis.state.ia.us/Rules/Current/Bulletin/IAB070620.pdf

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the solicitation and acceptance of being named as a beneficiary, executor, or trustee in a will or trust of an unrelated customer.

Division III - Registration of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers Rule 50.38(2) Dishonest or unethical practices. The list for unethical practices for investment advisers now includes prohibited advertisements. Investment advisers and investment adviser representatives are prohibited from using any advertisement that does one of the following:

Refers to any testimonial of any kind concerning the investment adviser or investment adviser representative or concerning any advice, analysis, report, or other service rendered by such investment adviser or investment adviser representative.

Refers to past specific recommendations of the investment adviser or investment adviser representative that were or would have been profitable to any person, except that an investment adviser or investment adviser representative may furnish or offer to furnish a list of all recommendations made by the investment adviser or investment adviser representative within the immediately preceding period of not less than one year if the advertisement or list also includes both of the following:

The name of each security recommended, the date and nature of each recommendation, the market price at the time, the price at which the recommendation was to be acted upon, and the most recently available market price for each such security.

A legend on the first page in prominent print or type that states that the reader should not assume that recommendations made in the future will be profitable or will equal the performance of the securities in the list.

Represents that any graph, chart, formula, or other device being offered can in and of itself be used to determine which securities to buy or sell, or when to buy or sell them, or which represents, directly or indirectly, that any graph, chart, formula or other device being offered will assist in making that person’s own business decisions as to which securities to buy or sell, or when to buy or sell them, without prominently disclosing in such advertisements the limitations thereof and the difficulties with respect to use of any graph, chart, formula or device.

Represents that any report, analysis, or other services will be furnished for free or without charge, unless such report, analysis or other service actually is or will be furnished entirely free and without any direct or indirect condition or obligation.

Represents that the administrator has approved any advertisement. Contains any untrue statement of material fact, or any statement that is

otherwise false or misleading. Investment Advisers – Custody of Client Funds, Rule 50.39(1). Investment advisers who take custody of their clients’ funds or securities will have committed an unlawful and fraudulent, deceptive or manipulative act, practice or course of business unless: (1) the investment adviser promptly notifies the administrator in writing using Form ADV that the investment adviser has or may have custody; (2) the investment adviser has the clients’ funds and securities maintained

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by a qualified custodian in separate accounts for each client and the investment adviser notifies each client in writing of the qualified custodian’s name, address and the manner in which the funds or securities are maintained when the account is opened and following any changes to the information; (3) account statements must be sent no less than quarterly. Note that the statement requirements vary depending on whether the statements are sent by the investment adviser or by the qualified custodian.

Rule 50.40(1) - Financial requirement for investment adviser with custody of client funds or securities. The investment adviser must maintain a minimum net worth of $35,000. The minimum net worth requirement does not apply to investment advisers who have custody solely due to either a direct fee deduction or to advising pooled investment vehicles provided that the investment adviser is in compliance with the safekeeping requirements of Rule 50.39(1) and the record keeping requirements in 191-50.42(502).

Investment advisers with discretionary authority over, but not custody of, clients’ funds or securities must maintain a minimum net worth of $10,000. Rule 50.40(2). Investment advisers registered or required to register in Iowa who accept prepayment of advisory fees of over $500 from a client six months or more in advance of providing services shall maintain a positive net worth at all times. Rule 50.40(3).

Division VI – Exemptions Rule 50.81(1) - Notice filings for Rule 506 offerings. Under rule 50.81(1) an issuer offering a security that is a covered security pursuant to §18(b)(4)(D) of the Securities Act of 1933 shall submit no later than 15 days after the first sale of such federal covered security in Iowa: (a) a notice on Form D, including the Appendix; a consent to service of process on Form U-2; and a $100 filing fee. The new rule adds a $250 fee for any late filing.

Repealed Rules The following rules are repealed effective July 25, 2007: Annual reports filed by issuers with the Administrator (to reduce regulatory requirements); Agent exclusion ( see Iowa Uniform Securities Act (“Act”) under agent exemptions at §502.402(2)(c)); Institutional buyer exemption (A new definition and exemption are now in the Act at §502.102(11) and §502.202 (13)); National securities exchange exemption (covered by NSMIA and SEC rulemaking); definition of Offer (See Act at §502.202(17)); rankings of direct participation programs (no longer used); manual or electronically available exemption (now in the Act at §202.202(2)); transition schedule for conversion to CRD/IARD (no longer needed); and world class issuer exemption (see Act at §502.202(5)).

ENFORCEMENT ACTIVITY

Since the last report there were numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters.

The new Rules are effective July 25, 2007. I encourage committee members to review the rule in its entirety http://www.legis.state.ia.us/Rules/Current/Bulletin/IAB070620.pdf. If any Committee member has a question or comment about these matters, please do not hesitate to contact me at 614-462-2700.

http://www.legis.state.ia.us/Rules/Current/Bulletin/IAB070620.pdf

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Respectfully submitted, /s/ Katherine G. Manghillis Katherine G. Manghillis

cc: Mr. Shane Hansen State Liaisons Subcommittee Co-chair Warner Norcross & Judd LLP Fifth Third Center, 8th Floor 111 Lyon Street, N.W. Grand Rapids, MI 49503 [email protected] Ms. Ellen Lieberman Chair, Committee on State Regulation of Securities Debevoise & Plimpton LLP 919 Third Avenue New York, NY 10022 [email protected]



LOUISIANA


LOUISIANA STATE LIAISON REPORT

Carl C. Hanemann

Direct Dial 504-582-8156 Direct Fax 504-589-8156 [email protected]

June 15, 2007

[email protected] Ms. Ellen Lieberman Chair, Committee on State Regulation of Securities

Re: June 2007 Louisiana State Liaison Report

Dear Ellen:

This letter is the Louisiana State Liaison Report as of June 15, 2007 to the Committee on State Regulation of Securities. It reports on developments occurring for the most part since January 1, 2006, including legislative changes to the Louisiana Securities Law, La. R.S. 51:701-51:724 (the “LSL”), judicial and administrative activity under the LSL and other related matters of interest.

Commissioner of Securities

The Commissioner of Securities under the Louisiana Securities Law is Mr. John P. Ducrest, who holds that office by virtue of being Louisiana’s Commissioner of Financial Institutions. The chief administrator of the LSL is the Deputy Commissioner of Securities, Ms. Rhonda Reeves. Ms. Reeves succeeded Mr. Harry Stansbury to that position after he had held the job for 27 years.

The Commissioner of Securities now operates entirely out of its Baton Rouge office, the

address of which is: Commissioner of Securities

8660 United Plaza Blvd, 2nd Floor Baton Rouge, LA 70809

Ms. Reeves advises that the 2006 amendments to the LSL, which are summarized below,

were proposed by her office mainly to bring the statute more in line with NSMIA, to clean up typographical errors and cross references, and to give her office authority to issue civil monetary penalties, without which her office had little enforcement power. The amendments also give the Commissioner express authority to issue rules, orders and no-action letters and interpretations. To date, no proceedings for civil money penalties have been brought under the new provisions. Ms. Reeves says her office is open to the concept of supporting adoption of the Uniform



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Securities Act in Louisiana, but is unlikely to do so until more states have adopted it. No new rules or regulations under the LSL are currently under consideration. Amendments to the Louisiana Securities Law

In the Regular Session of the 2006 Louisiana Legislature, a series of changes were made to the LSL by Act Nos. 361, 464, 541, 543 and 544. The following are the more significant changes made by these acts to the indicated sections of the LSL.

• Changes to LSL §703(D)(1). (Investment advisers) o A new requirement is added for investment adviser representatives to pass a

written exam in order for their employers to have their registration as investment advisers approved or renewed.

o The form and content of the examination is to be determined by rule of the Commissioner.

o There are exceptions to the examination requirement for individuals who possess certificates designated by rule of the Commissioner, and for individuals employed investment advisers that are registered with the SEC. The Commissioner may by rule exempt current investment adviser representatives from the examination requirement for up to two years.

o A rule adopted by the Commissioner under these amendments became effective January 1, 2007. See “Administrative Developments,” below.

• Change to LSL §708(3). (Exempt securities)

o Securities issued by “limited function financial institutions” were removed from the list of securities that are exempt from the registration requirements of LSL §705.

• Changes to LSL §710(A). (Commissioner of securities; powers of commissioner)

o When the governor declares an emergency, the Commissioner is given “any power necessary to perform his duties” and “to prevent or terminate any emergency relative to the registration of issuers, dealers, salesmen, investment advisers, and securities, or any other matters regulated under this Part.”

o Apart from emergency, the Commissioner is given express authority to make and amend rules, forms, compliance, and orders, as necessary to carry out the provisions of the LSL.

o The Commissioner is authorized § To issue no action letters, and interpretive opinions.

• Oral or informal opinions or representations as to the status of filings provided by the Commissioner’s staff are not considered binding on the Commissioner “unless accurately and promptly confirmed in writing by the party requesting such oral or informal opinion or representation.”

§ To publish orders and promulgate rules.

• New LSL §710.1. (Commissioner of securities; power to assess civil monetary penalties)

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o Grants the Commissioner the power, after notice and hearing, to issue civil monetary penalties of up to $5,000 plus costs against any issuer, broker-dealer, agent, investment adviser, investment adviser representative or any other person who violates the LSL.

• New LSL §710.2. (Public records; confidentiality)

o Provides that all registration statements, applications, Central Registration Depository filings, Investment Adviser Registration Depository filings and other filings made with the Commissioner are public records.

o Excluded from the public records status are: § Examination reports and records obtained in connection with examination

reports. § Records that contain trade secrets or confidential information if the filing

party “has asserted a claim of confidentiality or privilege that is authorized by law, upon concurrence by the commissioner.”

§ Records not required to be submitted and that are submitted on condition of confidential treatment, with the concurrence of the Commissioner.

§ Nonpublic records received from a federal, state or foreign securities regulatory authority or SRO.

§ Any birth date, social security number, residential address or residential telephone number.

• Change to LSL §724 (Fees and expenses)

o Provides that all fees and expenses payable under the LSL and rules thereunder are payable immediately (presumably upon filing) and are non-refundable.

Administrative Developments

During 2006 the Office of Financial Institutions adopted a rule entitled “Investment Adviser Registration Procedure.” The rule became effective January 1, 2007.

Under the rule investment adviser firms applying for registration or for renewal of

registration under LSL Section 703(D) must provide the Commissioner with proof that each of its adviser representatives has either (i) successfully passed the Uniform Investment Adviser Law Examination (Series 65) or (ii) successfully passed the General Securities Representative Examination (Series 7) and the Uniform Combined State Law Examination (Series 66). A waiver of the examination requirements is provided for any individual who holds a professional certification from any of certain specified institutions or “such other professional certifications as the commissioner may approve upon written request from an applicant for registration.” Adviser representatives subject to the rule must complete continuing education or recertification requirements.

A grandfather provision is included for representatives of an investment adviser firm

registered on the effective date of the rule, who need not satisfy the examination and certification requirements for two years. The rule does not apply to representatives employed by “Federal Covered Advisers”; that is, adviser firms registered under Section 203 of the Investment Advisers Act of 1940.

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Judicial Decisions

Southeast Wireless Network, Inc. v. U.S. Telemetry Corp., ____ So. 2d _____, 2007 WL 1108919 (La. 2007).

In this suit an investor made claims under the LSL against a Louisiana-based corporation and its directors. The Louisiana Supreme Court held that Louisiana courts can constitutionally exercise personal jurisdiction over a director even though he was not a resident of Louisiana and his activities in Louisiana were only in his official capacity as a director of the corporation. The court noted that the director attended a meeting with the plaintiff investor at which other directors made misrepresentations to the plaintiff as to the viability of the corporation that were not contradicted by the director in question.

Adams v. Securities America, Inc., 2006 WL 2631863 (U.S.D.C. E.D. La., 2006).

In this case involving claims by plant workers under the LSL and Louisiana tort law for alleged mishandling of their retirement plan by defendants, the federal district court upheld an arbitrator’s award in the amount of $22 million, including $11.6 million in compensatory damages, $3.5 million punitive damages and $5.1 of attorneys’ fees and costs, applying the standard that an arbitrator’s award should be upheld in the absence of manifest disregard of the law. The arbitration in this case was held under the parties’ agreement to arbitrate and the arbitration rules of the NASD.

The court upheld the punitive damages award despite plaintiffs’ arguments that punitive damages are prohibited by Louisiana law and that the arbitrators did not, as required by Louisiana law, make individual findings as to each plaintiff’s entitlement to punitive damages and instead awarded to all plaintiffs punitive damages in the amount of a fixed percentage of their compensatory damages. The court rejected these arguments, finding that punitive damages, even if not authorized by Louisiana law, can be based on “the inherent powers conferred on the panel in the arbitration agreement and the NASD rules.” The court also found that plaintiffs’ similar grievances justified a uniform percentage punitive damages award.

The court held the attorneys’ fee award was authorized by Section 714 of the LSL and a provision of the Louisiana Civil Code and found that the amount of the fee was reasonable in light of the contingent nature of the lawyers’ fees with their clients and the amount of work they had done in the case.

The court also rejected claims of bias and partiality on the part of the arbitrators, finding that one arbitrator’s statements of opinion and frustration over the course of a 90-day hearing do not constitute “evident partiality.”

Ponthier v. Manalla, 951 So. 2d 1242 (La.App. 5th Cir. 2007).

This case grew out of the same Ponzi scheme conducted by ETS Pay Phones, Inc. and described in SEC v. Edwards, 540 US 389 (2004), in which the United States Supreme Court held that a sale and lease-back of pay telephones was an investment contract and therefore a security under the 1933 and 1934 Acts. The Louisiana court of appeals in this case held that

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defendant, an insurance agent who was not registered as a broker dealer and participated in the sale to the plaintiffs of pay telephone investment contracts, was not liable to plaintiffs under either Louisiana law as to negligent misrepresentation or under Section 712(A)(2) of the LSL (the Louisiana equivalent to Section 12(2) of the 1933 Act), which makes it unlawful for a person to sell a security by means of a material untruth or omission if the buyer did not know of the untruth or omission and if the seller “in the exercise of reasonable care could not have known of the untruth or omission.” The court was persuaded that the defendant, who together with his family had invested heavily in the pay telephone investment contracts, had done reasonable due diligence and that plaintiffs had offered no proof that defendant knew that any statements he made to them were untrue.

Sincerely, Carl C. Hanemann

CCH/sms-p cc: Ms. Rhonda Reeves, Deputy Commissioner of Securities Mr. Don Rett, Co-Chair, State Liaisons Subcommittee Mr. Shane Hansen, Co-Chair, State Liaisons Subcommittee

MAINE


MAINE STATE LIAISON REPORT

January 22, 2007

Prepared by:

Wayne E. Tumlin, Esq. Lynne D. Houle, Esq. BERNSTEIN SHUR

100 Middle Street, West Tower P.O. Box 9729

Portland, Maine 04104-5029 (207) 774-1200

[email protected] [email protected]

This report summarizes the material revisions to Maine’s corporate and securities laws and regulations that were effected in 2006. Amendments to Maine’s Securities Laws Only one amendment was enacted in 2006 to the Maine Uniform Securities Act (32 M.R.S.A. §§16101-16702) (the “MUSA”). Section 16601(7) establishes the “Securities Investor Education and Training Fund” to provide investor education programs developed and implemented by the Maine Office of Securities. The new education and training fund will be financed through grants, donations, payments designated for such purpose in consent orders or consent agreements resulting from multistate investigations or joint investigations with the Securities and Exchange Commission or by court orders or court judgments to be credited to the fund. The MUSA is based on the Uniform Securities Act developed by the National Conference of Commissioners on Uniform State Laws. It is important to note that the MUSA deviates from the model Uniform Securities Act in certain aspects. For example, under the MUSA, a notice filing for federal covered securities under Section 18(b)(4)(D) of the federal Securities Act of 1933, as amended, may be made between 16 and 30 days after the first sale in Maine and is effective so long as the notice filer pays a late filing fee, but a notice filing made after 30 days is not effective. The text of the MUSA can be found at: http://janus.state.me.us/legis/statutes/32/title32ch135.pdf. Additionally, the Maine Office of Securities has amended its rules to implement the MUSA. The text of the amended rules can be found at: http://www.maine.gov/pfr/sec/sec_proprules.htm. Amendments to the Maine Business Corporation Act (13-C M.R.S.A. §§ 101-1702) No substantive amendments were made to the Maine Business Corporation Act during 2006.



http://janus.state.me.us/legis/statutes/32/title32ch135.pdf

http://www.maine.gov/pfr/sec/sec_proprules.htm

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Enforcement Activities The Maine Office of Securities has not made available information concerning its 2006 enforcement activities, although the Office has indicated that such information should be available in March, 2007.

MAINE


ABA SECURITIES REPORT – MAINE

June 21, 2007

Prepared by:

Wayne E. Tumlin, Esq. Lynne D. Houle, Esq. BERNSTEIN SHUR

100 Middle Street, West Tower P.O. Box 9729

Portland, Maine 04104-5029 (207) 774-1200

[email protected] [email protected]

This report summarizes the material revisions to Maine’s corporate and securities laws and regulations that were effected in 2006 and through June 15, 2007. Amendments to Maine’s Securities Laws Only one amendment was enacted in 2006 to the Maine Uniform Securities Act (32 M.R.S.A. §§16101-16702) (the “MUSA”). Section 16601(7) establishes the “Securities Investor Education and Training Fund” to provide investor education programs developed and implemented by the Maine Office of Securities. The new education and training fund will be financed through grants, donations, payments designated for such purpose in consent orders or consent agreements resulting from multistate investigations or joint investigations with the Securities and Exchange Commission or by court orders or court judgments to be credited to the fund. Several technical and substantive amendments to the MUSA were adopted in March, 2007. The technical changes include updating references to federal laws incorporated in the MUSA, while the substantive amendments provide, among others, that registration exemptions available for limited private offerings under the MUSA will apply to sales of securities in the state made “by or on behalf of” an issuer. Several sections of the MUSA governing disciplinary actions were amended to eliminate their application to parties related to or controlled by a broker-dealer or investment advisor applying for a license in Maine, although the statutory grounds for discipline for such applicants were expanded to include parties related to or controlled by such applicants. The MUSA is based on the Uniform Securities Act developed by the National Conference of Commissioners on Uniform State Laws. The text of the MUSA can be found at: http://janus.state.me.us/legis/statutes/32/title32ch135.pdf. The text of the Maine Office of Securities’ rules implementing the MUSA can be found at: http://www.maine.gov/pfr/securities/laws_rules.htm.



http://janus.state.me.us/legis/statutes/32/title32ch135.pdf

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

MAINE


Amendments to the Maine Business Corporation Act (13-C M.R.S.A. §§ 101-1702) An amendment to the Maine Business Corporation Act (the “MBCA”) was enacted on June 6, 2007 and will take effect during September, 2007 This bill amends the MBCA to reflect changes made by the American Bar Association to the Model Business Corporation Act, on which the MBCA is based. The bill also makes other changes to the Maine Business Corporation Act, including:

1. Adding definitions of “expenses,” “public corporation” and “qualified director;” 2. Allowing the delivery by a corporation of one copy of a notice, the articles of incorporation or bylaws to be delivered to a common address occupied by more than one shareholder and still satisfy the requirements that all shareholders receive the notice, articles or bylaws. A shareholder can opt out of this arrangement by providing written notice to the corporation; 3. Allowing, with the prior consent of shareholders, the inclusion in the articles of incorporation of a provision that allows action to be taken regarding the corporation without a meeting or notice to the shareholders; and 4. Changing the class or series of shares held by a shareholder for the purpose of limiting the appraisal rights of that shareholder.

Enforcement Activities During 2006, the Maine Office of Securities opened 76 enforcement cases and closed 73 enforcement cases. The Office had 36 cases open as of year end. The Office collected $233,973 in restitution and $537,635 in fines and penalties. The Office (i) resolved one civil matter through a consent judgment, (ii) closed one criminal prosecution resulting in a guilty plea and a five-year sentence with half of that time suspended and (iii) addressed 23 administrative matters by issuing nine orders and entering into 14 consent agreements. In these civil and administrative matters, 48 persons were sanctioned for violations of the MUSA. Further, the Office conducted 35 on-site examinations of investment adviser and broker-dealer offices.

MASSACHUSETTS


MASSACHUSETTS

MEMORANDUM Michael M. Jurasic (617) 951-7754 [email protected]

DATE: August 29, 2007

TO: Committee on State Regulation of Securities

FROM: Michael M. Jurasic

SUBJECT: Massachusetts Liaison Report

Ladies and Gentlemen: This is the Massachusetts Liaison Report as of August 29, 2007, to the Committee on State Regulation of Securities. This letter provides a status report on legislative, regulatory, and enforcement activities with respect to the Massachusetts Uniform Securities Act, as amended (the "Act"), and other matters of related interest. The Act is administered by the Secretary of the Commonwealth (the "Secretary"), William Francis Galvin, who through the Massachusetts Securities Division (the "Division"), enforces the Act and the regulations promulgated thereunder. The Secretary appoints a Securities Director who supervises the day-to-day activities of the staff of the Division.

Massachusetts Uniform Securities Act and Regulations Senior Financial Designation

The Secretary recently adopted regulations restricting the use of designations or credentials that state or imply that a broker-dealer or an investment adviser has special expertise in addressing the financial needs of senior investors. The term "senior investor" is defined to include a person 65 years of age or older. The provision is intended to protect senior investors from misleading designations and predation by broker-dealers and reflects the growing concern by NASAA and other states regarding the marketing of financial services to senior investors. The new regulations prohibit broker-dealers and investment advisers from adopting designations that indicate or imply special certification or training in advising or servicing senior investors, unless such credential or professional designation has been accredited by a recognized accreditation

ROPES & GRAY LLP

ONE INTERNATIONAL PLACE BOSTON, MA 02110-2624 617-951-7000 F 617-951-7050

BOSTON NEW YORK SAN FRANCISCO WASHINGTON, DC


MASSACHUSETTS


agency. To date, the Secretary has recognized two accreditation organizations: The American National Standards Institute (ANSI) and The National Commission for Certifying Agencies. The regulations also provide guidelines for determining whether certain designations/titles used constitute a purported credential or professional designation indicating or implying special certification or training in advising or servicing senior advisers and provide grace periods to help ease the transition to the new requirements. It is anticipated that NASAA and other states will use the Massachusetts rule as a model for their own proposed rules.

Submission of ADV Part II via IARD System

On April 23, 2007, the IARD began accepting Part II of the Form ADV (including Schedule F). All Massachusetts registered investment advisers must file Form ADV Part II electronically with the division, via IARD, no later than September 1, 2007. Also, as part of the usual post-registration requirements, all subsequent amendments and annual updates to Form ADV Part II must likewise be filed electronically.

Enforcement Activity

In addition to numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters, the Division brought the following enforcement proceedings:

Bulldog Investors

On January 31, 2007, the Massachusetts Securities Division filed an administrative complaint against Phillip Goldstein (the same Phillip Goldstein who brought the action striking the SEC's so-called "hedge fund rules") and certain of his Bulldog Investors entities. The complaint alleged that Bulldog Investors failed to ensure that the offer or sale of securities in the Commonwealth were properly registered or exempted in accordance with Section 301 of the Act. According to the complaint, Goldstein maintained an interactive website that granted potential investors unrestricted access to general advertising and offering materials, and as such constituted a unrestricted, non-exempt, public offering of securities in Massachusetts. Essentially, the Division is alleging a violation of Securities and Exchange Commission Rule 502(c) of Regulation D (prohibition on general solicitation or general advertising), which thereby caused the offerings to not only violate a significant condition under Rule 508 of Regulation D, but also to fail to satisfy a principal condition (prohibition on general solicitation or general advertising) of the Massachusetts Section 402(b)(9) private placement exemption. This action is noteworthy because the Division is challenging a purported Rule 506 of Regulation D offering on the basis of a failure to comply with the technical requirements of Regulation D.

In his Answer to the complaint, filed on February 21, 2007, Goldstein generally and specifically denied all allegations of wrongdoing and asserted Free Speech and Due Process protections, lack of jurisdiction on the part of the Division, and other affirmative defenses. The Division moved for Summary Decision on March 1, 2007.

Ameriprise Financial Services, Inc.

On December 11, 2006, Ameriprise Financial Services, Inc. ("Ameriprise"), and the Division agreed on a settlement concluding an inquiry into a security lapse at Ameriprise, whereby a

MASSACHUSETTS


laptop containing, among other things, personal and financial information of thousands of Massachusetts residents was stolen. Ameriprise, which had recovered the laptop and verified that no sensitive information had been accessed, agreed (1) to retain an independent consultant to review its security policies and procedures and submit findings and recommendations to which Ameriprise will be required to adhere; (2) to cover the costs of the Division's inquiry into Ameriprise's security lapse; and (3) to adhere to certain security practices for 24 months following the verification that the recommendations have been implemented.

UBS Securities, LLC

On June 27, 2007, the Massachusetts Securities Division filed an administrative complaint against UBS Securities, LLC ("UBS") with dishonest and unethical business activities and failure to supervise employees in connection with UBS' "hedge fund hotel" operations. UBS rents office space to hedge funds in Boston and provides them with staff, consultants and other perks. The Division alleges that the hedge funds leasing space are in return providing UBS with trading business at higher commission than normal, in violation of the soft dollar rules. The Division also alleges that the perks provided by UBS violated FINRA's rule on gift and gratuities – in addition to below-market rent, it gave hedge fund clients low interest personal loans, tickets to sporting events and other entertainment events, and other gratuities to induce the hedge funds to stay and generate additional business for UBS' prime brokerage operations. UBS would withdraw no longer support those hedge funds that do not generate sufficient revenue for UBS. According to the Division, these activities potentially harmed the pension funds, university endowments, charitable foundations, and other investors that sank money into the hedge funds because the hedge funds were in essence paying larger brokerage commissions to get the low rent and other perks.

* * * If any Committee member has a question about these matters or other matters involving Massachusetts law, please do not hesitate to contact me at 617.951.7754.

Michael M. Jurasic cc: Mr. Donald A. Rett, Subcommittee Co-chair 1660 Metropolitan Circle Tallahassee FL 32308

MICHIGAN


MICHIGAN STATE LIAISON REPORT

SHANE HANSEN 616.752.2145 FAX 616.222.2145 [email protected]

MEMORANDUM

TO: Committee on State Regulation of Securities Liaisons and Enforcement Subcommittees FROM: Shane B. Hansen Kate Hickner-Cruz DATE: June 20, 2007 RE: Michigan Liaison Report and Enforcement Actions Through June 1, 2007 Ladies and Gentlemen: This is the Michigan Liaison Report as of June 1, 2007, to the Committee on State Regulation of Securities. This letter provides a status report since our last report as of June 30, 2006 on legislative, regulatory, and enforcement activities with respect to the Michigan Uniform Securities Act, as amended (“Michigan Securities Act” or “MUSA”)), and other matters of related interest. The Michigan Securities Act is administered by the Office of Financial and Insurance Services (“OFIS”). OFIS also administers the Michigan Insurance Code of 1956, as amended (“Michigan Insurance Code”), and the Michigan Banking Code of 1999, as amended.

Michigan Securities Act and Regulations

There have been no amendments to the Michigan Securities Act nor any changes to the rules promulgated under the Act since the June, 2006 report. It is anticipated that the Uniform Securities Act of 2002 is expected to be reintroduced in the current legislative session. There have been no noteworthy cases under the MUSA reported since the last report.

Michigan Investment Adviser Custody Prohibition – Private Equity Funds

Section 102(h) of the Michigan Securities Act provides that “[u]nless the administrator by rule or order permits taking or having custody, it is unlawful for any investment adviser not registered as a broker-dealer to take or have custody of any securities or funds of any client.” Upon request, the OFIS Securities Division may consider issuing an order that would find that it is not a violation of the Michigan Securities Act for an investment adviser registered or required to be registered under the Act to have custody of its client funds or securities if the investment adviser implements certain safekeeping policies and procedures designed to protect the client’s assets from being lost, misused, misappropriated. If granted, the order is expected to conform to

MICHIGAN


modern custodial practices and would require an adviser to maintain those assets with a broker-dealer, bank, or other qualified custodian in a manner similar to Rule 206(4)-2 promulgated by the Securities and Exchange Commission (“SEC”). This custody issue (as well as a general prohibition against performance-based compensation) have been of particular concern to private equity fund managers located in Michigan because under the MUSA there is no statutory exemption from state investment adviser registration for an adviser having a Michigan office and one or more Michigan clients (such as a fund) if the adviser is not, in fact, registered as such with the SEC under the federal Investment Advisers Act of 1940.

Undertakings in Connection with Rule 506 Exemptions

On March 6, 2007, the OFIS Commissioner (the “Commissioner”) issued Bulletin 2007-03-SEC. The Bulletin provides that, as a result of the National Securities Market Improvement Act of 1996 (“NSMIA”), and regardless of the language of Rule 803.7(7)(c)(ii) of the Michigan Uniform Limited Offering Exemption, Michigan will not require issuers relying on the Rule 506 exemption to provide an undertaking to furnish the Commissioner, upon written request, information furnished by the issuer to offerees. This is because the SEC does not require issuers making Rule 506 offerings to provide such an undertaking. The Bulletin, in part, supersedes former Release No. 97-2-S. The new bulletin can be found at: http://www.michigan.gov/cis/0,1607,7-154-10555_12900_13381---,00.html

New Annuity Suitability Requirements

Michigan recently adopted new annuity suitability requirements as part of its insurance laws.3 In Michigan, a variable insurance product is regulated only as insurance under the Michigan Insurance Code. It is not within the definition of a security under the Michigan Securities Act.

In general and unless an exception applies, the new annuity suitability requirements apply to any recommendation by an insurance producer, or an insurer if there is no insurance producer involved, to an individual consumer to purchase or exchange an annuity that results in that recommended action. The requirements apply with respect to any annuity that is individually solicited, regardless of whether the annuity is classified as an individual or a group annuity and regardless of whether the annuity is fixed or variable. The new requirements apply regardless of the customer’s age (as initially proposed, it would have been limited to seniors). Generally, the new law requires an insurance producer, or an insurer if there is no insurance producer involved, to have a reasonable basis for its belief that an annuity recommendation is suitable for the consumer. In addition, the recommendation itself must be reasonable under all the circumstances known to the insurance producer, or the insurer, at the time of the recommendation. Prior to the recommended annuity purchase or exchange, the insurance producer or insurer needs to make a reasonable effort to obtain certain information from the consumer. In addition, insurers and insurance producers need to adopt a system of supervision to reasonably ensure compliance with the new suitability requirements. The new law also imposes related recordkeeping requirements.

3 Pub. Act 2006, No. 399 (codified at §MCL 500.4151-4165 as part of the Michigan Insurance Code of 1956).

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

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It is important to note that those Michigan insurers and insurance producers that comply with NASD Rule 2310 regarding suitability automatically satisfy the new Michigan suitability requirements for the recommendation of variable annuities and, presumably, a system of supervision meeting NASD standards would also satisfy these new requirements under the Michigan Insurance Code.

Change in Policy Regarding Pre-Dispute Arbitration Provisions

In the past, OFIS had an informal policy of prohibiting mandatory pre-dispute arbitration provisions in investment advisers’ client service contracts. OFIS no longer follows this policy and will allow these provisions.


In addition to numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters, OFIS brought the following enforcement proceedings since the last report:

v Target Oil & Gas Corporation, Michael Smith, Christopher Smith, and Linda Smith-Niemi, Enforcement Case No. 06-3956, July 6, 2006. The Commissioner ordered the respondents to cease and desist from violating the Michigan Securities Act by offering or selling unregistered securities and from offering or selling securities without disclosing material information. The respondents sold unregistered securities, interests in oil and gas ventures, without making the required filings with Michigan as required under the Act. Respondents also failed to provide investors with any financial, management, or operational information about Target Oil & Gas Corporation.

v Redstone Energy Corporation, Jay Merkle, Eric Merkle, Craig Massey, Sharon Stickel, Enforcement Case No. 05-3500, July 21, 2006. The Commissioner ordered respondents to immediately cease and desist from violations of the Michigan Securities Act. In addition, the Commissioner revoked certain exemptions under the Act and the respondents’ rights to engage in such exempt transactions in the future unless they register under the Act. The Commissioner also required respondents to make rescission offers to investors and that each respondent pay a $1,000 civil penalty. Respondents offered and sold securities while providing insufficient financial, management, and operational information with respect to Redstone Energy Corporation (“Redstone”) to investors. Redstone described itself as a company in the developmental stage seeking to acquire domestic income-producing oil, gas, and mineral leases. See related case below.

v Jordan River Resources, Inc., Eric Merkle, Jay Merkle, Joseph Blimline, Sharon Stickel, Enforcement Case No. 05-3497, July 21, 2006. The Commissioner ordered Jordan River Resources, Inc. (“Jordan River”) and the other respondents to cease and desist from violating the Michigan Securities Act. The Commissioner also revoked the respondents’ exemptions under the Act and the respondents’ rights to engage in such exempt transactions in the future unless they register under the Act. Furthermore, the Commissioner required respondents to make rescission offers to investors and that each respondent pay a $1,000 civil penalty. Jordan River operated from the same location as Redstone (described above). The respondents offered and sold unregistered, non-exempt securities. Respondents filed a Regulation D, Rule 506 Notice Filing with Michigan but

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then sold the offering to over 35 non-accredited investors within a 12 month period, which exceeded the maximum number of investors allowed under federal Regulation D, 506.

v Phoenix Rising Associates and Calvin J. Cremer, Enforcement Case No. 05-3498, August 4, 2006. The Commissioner ordered the respondents to cease and desist from transacting business in Michigan as a broker-dealer, securities agent, or investment adviser without being registered under the Michigan Securities Act and from the offer or sale of securities in Michigan. Respondent contacted a Missouri resident by phone and that resident made several investments in excess of $1,000 with respondents. Neither re-spondents nor the “Secret Cash Formula” non-exempt security that they offered were registered as required under the Act.

v Matthews Consultants and J. Lamar Matthews, Enforcement Case No. 06-4015, September 18, 2006. In this Consent Order and Stipulation, the Commissioner required that respondents to cease and desist from violating the Michigan Securities Act, required Mr. Matthews to pay a $1,750 civil fine, and required the respondents to pay a total of $9,350.00 to investors as a disgorgement of the respondents’ agent compensation. Neither respondents nor the securities that they offered to investors were registered as required under the Act. Furthermore, the respondents behaved fraudulently and did not provide investors with the informational disclosures required by the Act.

v Robert J. Murphy d/b/a Cyber Investment Management, Enforcement Case No. 06-4223, October 20, 2006. In this Consent Order and Stipulation, the Commissioner required respondent to cease and desist from operating in a manner that violates the Michigan Securities Act, to immediately complete and forward the Registered Investment Advisers’ Annual Questionnaire (the “OFIS Questionnaire”) required by Michigan, and to pay a $1,000 market conduct fee. Respondent failed to timely respond to the Commissioner’s February 9, 2006 OFIS Questionnaire in violation of the Act.

v EnTerra Energy, LLC and David G. Rose, Enforcement Case No. 05-3501, December 8, 2006. The Commissioner ordered the respondents to immediately cease and desist from transacting business in Michigan as a broker-dealer or agent without being registered under the Michigan Securities Act and from offering or selling unregistered securities. Respondents sold unregistered non-exempt securities, which were limited partnership interests, to Michigan residents as a broker-dealer or an agent in absence of registrations in violation of the Act. Furthermore, respondents omitted material information investors would find necessary to make an informed investment decision. At the time of the Order, at least eight other states had issued Orders against the respondents, or companies controlled by the respondents.

v Robert Smart and Smart Planning Company, Enforcement Case No. 06-4914, December 18, 2006. The Commissioner ordered the respondents to cease and desist from violating the Michigan Securities Act and imposed a $2,000 civil fine on each respondent. In exchange for capital investments, respondents offered fraudulent promissory notes to Michigan investors. In fact, one investor received a letter from Mr. Smart stating “The note programs you have participated in were my creation and are

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worthless.” Respondents were not registered agents, investment advisers or broker-dealers in Michigan. The securities were not registered or exempt from registration as required under the Act. Furthermore, the respondents failed to provide the necessary informational disclosures to investors.

v Patrick McKnight; Ronald Luther Bess; Robert Matthew Manardo; P.M. Associates; Senior Security Benefits Association; and Phoenix, Inc., April 2, 2007. OFIS took the unusual step of issuing a consumer alert stating that in 2006 OFIS had previously issued a cease and desist order against McKnight and related parties for selling unregistered securities but had recently learned of additional sales in violation of the C&D order. Respondent was believed to be selling a program in which investors purchased point-of-sale credit card machines, leased them out to another party, and received an income stream from the lease.

v In the Matter of Jet Energy 2004-3, LLC; Energy Resources Management Company, LLC; Thomas W. Tucker; William W. Deneau; and John V. Miller, Jr.; Enforcement Case No. 06-4949; and In the Matter of Jet Energy 2004-1, LLC; Energy Resources Management Company, LLC; Thomas W. Tucker, William W. Deneau, and John V. Miller, Jr.; Enforcement Case No. 06-4962, April 16, 2007. The respondents offered and sold interests in these limited liability companies formed to invest in various oil and natural gas wells. OFIS issued cease and desist orders with respect to the offer and sale of unregistered securities in violation of Section 301 of the MUSA. The Defendants failed to establish the basis for their claims of a registration exemption under Section 402(b)((9)(D)(2) of the MUSA and Michigan Rules 803.5 and 803.2 in that certain investors did not qualify for the claimed exemption and did not receive the required disclosure document to perfect this transactional exemption. A rescission offer was ordered and civil fines of $1,000 each were imposed on the individual respondents.

* * * If any Committee member has a question about these matters or other matters involving Michigan law, please do not hesitate to contact me at 616-752-2145 or my partner, Hugh H. Makens, at 616-752-2117.

Shane B. Hansen Kathryn Hickner-Cruz cc: Mr. Donald A. Rett, Subcommittee Co-chair 1660 Metropolitan Circle Tallahassee FL 32308

Mr. Hugh H. Makens, Partner Warner Norcross & Judd LLP Fifth Third Center, 8th Floor 111 Lyon Street, N.W. Grand Rapids, MI 49503

MICHIGAN


MEMORANDUM TO: Committee on State Regulation of Securities Liaisons and Enforcement Subcommittees FROM: Shane B. Hansen Kate Hickner-Cruz DATE: August 31, 2007 RE: Michigan Liaison Report and Enforcement Actions Update Through August 31, 2007 Ladies and Gentlemen: This is the Michigan Liaison Report updated as of August 31, 2007, to the Committee on State Regulation of Securities. This letter provides a status report since our last report as of June 30, 2007 with respect to the Michigan Uniform Securities Act, as amended (“Michigan Securities Act” or “MUSA”)), and other matters of related interest.

Michigan Securities Act and Regulations

A bill to enact the Uniform Securities Act of 2002 has been reintroduced in the current legislative session, substantially in the form as introduced in a prior legislative session. As the Office of Financial and Insurance Services (“OFIS”) analyzes the bill, it is considering requesting several state-specific changes. The bill can be tracked on the state’s website at: http://www.legislature.mi.gov/(S(rttfgf45fbrgatb2my31mn45))/mileg.aspx?page=getobject&objectname=2007-HB-5008&queryid=19399528

Shane B. Hansen

http://www.legislature.mi.gov/(S(rttfgf45fbrgatb2my31mn45))/mileg.aspx?page=getobject&objectname=2007-HB

MINNESOTA


MINNESOTA

STATE LIAISON REPORT

MEMORANDUM TO: Committee on State Regulation of Securities FROM: Katherine Manghillis DATE: June 21, 2007 RE: Minnesota Liaison Report This is the Minnesota Liaison Report as of June 21, 2007, to the Committee on State Regulation of Securities. This memorandum provides a status report on legislative, regulatory and enforcement activities with respect to the Minnesota Uniform Securities Act. The Minnesota Uniform Securities Act is administered by the Minnesota Department of Commerce, Division of Securities.

MINNESOTA SECURITIES ACT AND REGULATIONS

In 2006, the Minnesota State Legislature repealed the existing scheme of securities regulation in Minnesota Statutes §§80A.01-31, and replaced it with an amended version of the Uniform Securities Act of 2002. The new act is codified at Minn. Stat. §§80A.40-90 and will become effective on August 1, 2007. The Minnesota Statutes relating to the Regulation of Securities are available online at http://ros.leg.mn/bin/getpub.php?pubtype=STAT_CHAP&year=2006&section=80A.

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

KATHERINE G. MANGHILLIS 614/462-1087

FAX – 614/ 228-4846 E-MAIL: [email protected]

http://ros.leg.mn/bin/getpub.php?pubtype=STAT_CHAP&year=2006&section=80A

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of rules governing the regulation of securities, Minnesota Rules, 2875.0110-9970. As of June 21, 2007, no proposed rules have been published.

ENFORCEMENT ACTIVITY

Since the last report there were numerous cease and desist orders and settlement agreements regarding licensing violations and similar matters.

RECENT CASES

In Signature Bank v. Marshall Bank, 2006 Minn. App. Unpub. LEXIS 1159, the question presented to the Minnesota Court of Appeals was whether a participation agreement is a security. The facts in the case are as follows: In early 2004, Marshall Bank proposed that Signature Bank participate in a loan to two companies, Lancers, LLC, and Agenzia Sports, Inc. The total amount of the loan was $2,560,000, of which Signature Bank would provide $500,000. Id. at *2. Patrick Forciea, allegedly controlled both companies, and intended to use the funds to acquire one minor-league hockey team and to refinance debts relating to another. Marshall Bank required personal guarantees for the loan from two individuals characterized as Forciea’s wealthy business partners, and Forciea provided the guarantees. Id. Signature Bank entered into a “participation certificate and agreement” (participation agreement) with Marshall Bank on March 24, 2004. Marshall Bank disbursed the loan proceeds to Forciea. In May 2004, it was discovered that Forciea had made significant misrepresentations. Id. The loan went into default and Marshall Bank sought to collect on the loan and recovered more than $1 million, some of which was paid to Signature Bank and some of which was reserved for future legal expenses. Id. Signature Bank filed a complaint against Marshall Bank in December 2004, alleging, among other things, negligent misrepresentation through violation of the Minnesota Regulation of Securities Act, Minn. Stat. §§80A.01-.31 (2004).

First, the Court noted that it is clear from the language of the Minnesota Regulation of Securities Act that the statute only applies to the offer, sale, or purchase of a security. Id. at *14.

The “four-strong resemblance factors” are: (1) the motivation that would prompt a reasonable buyer and seller to enter into the transaction; (2) the plan of distribution of the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument, thereby rendering application of the securities laws unnecessary. Banco Espanol de Credito v. Sec. Pac. Nat’l Bank, 973 F.2d 51, 55 (2nd Cir. 1992). Applying this test, the Court concluded that the participation agreement was not a security. * * *

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If any Committee member has a question or comment about these matters, please do not hesitate to contact me at 614-462-1087.

Respectfully submitted, /s/ Katherine G. Manghillis Katherine G. Manghillis

Cc: Mr. Shane Hansen State Liaisons Subcommittee Co-chair Warner Norcross & Judd LLP Fifth Third Center, 8th Floor 111 Lyon Street, N.W. Grand Rapids, MI 49503 [email protected] Ms. Ellen Lieberman Chair, Committee on State Regulation of Securities DEBEVOISE & Plimpton LLP 919 Third Avenue New York, NY 10022 [email protected]



MISSISSIPPI


MISSISSIPPI STATE LIAISON REPORT

Personnel Changes Secretary of State Eric Clark decided not to run for re-election to a fourth term in 2007. As a result, his office staff will be in transition until the newly elected Secretary of State takes office in January, 2008. The departures from the Business Regulation and Enforcement Division have already begun. Assistant Secretary of State and three term NASAA Board Member, Jim Nelson, resigned in June to take a position in the private sector. Nathan Thomas, Senior Attorney, and Bill Wilkerson, Division Director of Operations (Registration) also resigned in June. Senior Attorney Tanya Webber has been named to handle the division's legal (enforcement) matters and Mike Huggs, Senior Examiner, has been named to supervise the registration functions of the Division. USA The Mississippi Legislature continues to await a majority of states adopting the USA before it takes up the matter. Other Regulatory or Statutory Changes The Division is planning to adopt rules on Investment Advisor Representative conduct, but the adoption of those rules may be delayed by the staff transitions. No statutory changes are contemplated for the 2008 Legislative Session. Enforcement Activity For the past year, the Division has focused on the so-called Senior Seminars, conducting investigations and monitoring these events in MS. Several enforcement actions have been brought against unregistered persons offering investment advice, actions involving the use of meaningless senior designations, and actions involving misleading and dishonest sales practices in the course of the senior seminars. The Division is also reviewing the Form D, Rule 506 filings to ensure compliance with the MS Securities Act and rules and regulations, specifically examining the timeliness of those filings. Jackson 2150593v.1

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MISSISSIPPI There have been no material developments since the last report. Daniel G. Hise Butler, Snow, O'Mara, Stevens & Cannada, PLLC 210 East Capitol Street, 17th Floor (39201) Post Office Box 22567 Jackson, MS 39225-2567

MONTANA


MONTANA STATE LIAISON REPORT

January 2007 Update

MONTANA 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. For additional information, visit the Montana State Auditor’s Office’s Web site at: www.discoveringmontana.com.4 I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in the Area of Securities: The last regular session of the Montana State Legislature adjourned on April 21, 2005. No changes were made to Montana’s Security Act. There was a Special Session in December 2005, which dealt primarily with school funding and made no changes to Montana’s Security Act. The Montana State Legislature reconvened on January 3, 2007. There is one bill relating to securities and securities regulation which will be introduced during the 2007 Legislative Session: a. House Bill 256: Revisions to Montana Real Estate Laws. The Primary sponsor of the bill is Representative Lake. This would revise the real estate laws to provide regulation of tenancies in common by revising the definitions in the securities, real estate and timeshare laws. If passed there will be an immediate effective date. The bill would amend Sections 30-10-103, 37-51-102 and 37-53-102 of the Montana Code.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: There does not appear to have been any court or administrative decisions in the areas of corporate or securities law addressing novel questions of law or changing prior interpretations of law in 2006. Additionally, Ms. Lynne Egan, a Senior Securities Analyst and Examiner at the Montana State Auditor’s Office, confirmed that there were no court decisions of interest in 2006 relating to securities and securities regulation.

III. Developments Relating to NSMIA: The February and June 2005 Updates reported that due to recent amendments to Section 103(20) of Chapter 10 of Title 30, Montana Statutes Annotated, Montana is now fully compliant with the provisions and exceptions of NSMIA. The June 2006 Update reported that these amendments now exclude individuals selling covered securities under Rule 506 of the Securities Act of 1933

4 The information contained in the foregoing paragraph was obtained on 01/22/07 at http://sao.mt.gov/securities/secintro.asp.

http://www.discoveringmontana.com

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

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from the definition of “salesperson.” On January 22, 2007, Lynne Egan, a Senior Securities Analyst and Examiner at the Montana State Auditor’s Office, confirmed that Montana is fully compliant with the provisions and exceptions of NSMIA.

IV. Significant Development in the Division’s Enforcement of Regulation Activities: 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 January 11, 2007: Morrison Warns Against Slippery Oil Deals. Although oil prices have fallen since reaching an all-time high this summer, fraudulent oil and gas deals remain a favorite ploy of con-artists nationwide, according to State Auditor John Morrison, Montana’s Securities Commissioner. “Securities investments offering profit participation in oil and gas ventures can be legitimate for those who understand and can afford the risk,” said Morrison. “But too often we are seeing doubtful and even outright fraudulent energy deals aggressively promoted to the public.”

Skyrocketing prices of oil and natural gas in recent years have made a variety of traditional and alternative energy projects attractive to investors, Morrison said. Most of these investments are highly risky and not appropriate for smaller investors. And even where the underlying project is legitimate, any revenues realized can be absorbed by high sales commissions paid to the promoter and dubious “expenses” skimmed off by the managing partner. Businesses raising money by soliciting investors must comply with Montana’s securities laws. Scam artists tend to target individual victims and make an unsolicited contact, usually with a phone call, offering a “great” business opportunity.

The State Auditor’s Office, along with its membership organization, the North American Securities Administrators Association (“NASAA”), has issued an alert to investors who may be considering oil and gas opportunities. Because these investments scams tend to be interstate in nature, NASAA has coordinated a group of representatives from state securities agencies to share information on oil and gas investment schemes. Over the past two years, state securities regulators have opened more than 260 cases involving oil and gas-related schemes and have issued 122 cease and desist orders against promoters.

Morrison said most oil and gas fraud victims don’t realize they have been swindled until after the money is gone. “As in any investment, we ask that investors investigate before they invest and call our office,” Morrison said. “An investor should do three things before buying into any limited partnership in energy or any other industry. You need to independently research the

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background of the promoters, get a clear explanation of the deal in writing, and carefully read all the fine print before investing.”

Morrison noted that 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,” Morrison said.

b. Press Release January 8, 2007: Auditor Morrison’s Office Alleges Unregistered Securities and Securities Fraud Against Roundup Couple. The Montana State Auditor’s office has filed a Notice of Proposed Agency Disciplinary Action against Roundup residents Gordon and Ann Walters, Havre businessman, Calvin Statelen, Turner businessman, Danny Kegel, and two Nevada corporations, Cascade Exploration, Inc. and Cascade Water Holdings, Inc., alleging the Walters, Statelen and Kegel committed securities fraud when they made material omissions and misrepresentations regarding the two companies and engaged in acts, practices and courses of business that were fraudulent when offering and selling the securities. Additionally, the Auditor’s office alleged the Walters, Statelen and Kegel were not registered to sell securities when they offered and sold shares in the Nevada corporations to at least 66 investors and that those shares represented unregistered securities. Gordon Walters is separately charged with fraud violations relating to his offering and selling securities that appear to be backed by the federal Small Business Administration.

“Fraud is a serious matter and deceptive business people need to know that Montana has zero tolerance for fraudulent dealings,” said Morrison. “Before making any investment, Montanans are urged to check with the State Auditor’s Office to confirm that the investment does not violate Montana law.”

The allegations indicate Cascade Exploration and Cascade Water Holdings’ securities were never registered with the Montana Securities Department, were never listed on any stock exchange and that investors received little or no information about the companies before they invested. Cascade Exploration claims to be a mineral exploration company and Cascade Water Holdings produces energized water for consumption. The Auditor’s office’s allegations indicate investors were provided false information about the company’s consultants, including fabricated resumes, investors were provided “surety bonds,” bonds which could only be issued and guaranteed by the U.S. Small Business Administration and investors were not told the securities were not properly registered, as required by law. The companies claim to have only raised $308,745 from investors, however, the Auditor’s office’s allegations indicates this figure is substantially understated. The Walters, Statelen and Kegel could be required to pay restitution, including 10% interest to each of the investors, as well as a fine of $5,000 for each alleged violation of the Montana Securities Act.

c. Press Release December 7, 2006: Montana State Auditor Obtains $4.5 Million for Victims of Davison Ponzi Scheme. Montana State Auditor John Morrison and UBS Financial Services (formerly PaineWebber) have entered into an historic settlement that provides more than $4.5 million in restitution to the victims identified in the Auditor’s action against former gubernatorial candidate, Patrick Davison. It is believed to be the state’s largest Ponzi scheme settlement.

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This settlement allows the victims of this Ponzi scheme to recover millions of dollars they lost,” said Morrison. “Our securities staff did a terrific job here and UBS really stepped up to the plate.” In an effort to be responsive to the Montanans affected by these activities and to the communities in which UBS does business, the firm has offered to pay nine victims just over $4.5 million in restitution. UBS agreed to pay this restitution amount despite the fact that some of the victimization occurred after Davison left the financial services firm’s employment and UBS has reached back at least five years beyond Montana’s statute of limitations for these types of cases. The Auditor did not charge UBS with any wrongdoing regarding Davison’s activities. “Ponzi schemes work on the ‘rob Peter to pay Paul’ principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses,” said Morrison. “Because in the end there is generally no money, the later investors become the victims and typically get nothing back. But for UBS coming forward, these victims would have no chance of recovering their losses.”

In August of this year, the Auditor’s Securities Department filed a Notice of Proposed Agency Disciplinary Action and a Temporary Cease and Desist Order against Billings businessman, Patrick Davison. The Department originally alleged Davison committed securities fraud against two Montana families for a total loss to the families in excess of $1.2 million. Subsequently, the Department filed an Amended Notice of Proposed Agency Disciplinary Action against Davison, alleging six additional complainants were defrauded by Davison so he could promote and conduct an illegal Ponzi scheme. Davison was ultimately charged with defrauding nine complainants by selling them bogus investments. The allegations stated that Davison sold these fraudulent investments, putting the investment moneys into accounts he owned or controlled outside of UBS. The investments Davison created included an investment in a non-existent St. Labre Indian School Trust; fake investments in the Billings Catholic Schools; fake investments in the Mayfair 2/Big Sky Gold Rush Raffle Event; fake Promissory Notes secured by non-existing collateral; a fake investment in coal leases; and fake investments in an entity entitled Foundation Assistance Group, purported by Davison to support the Montana University System.

The Securities Department is charged by statute with protecting investors, as well as the securities industry. However, the Department does not have authority to prosecute criminal actions. The Department has the responsibility to refer the criminal aspects of any case to an agency with authority to prosecute criminal cases. In this case, the Department referred its investigation for criminal prosecution to the FBI in Billings. Meanwhile, the Department worked diligently with UBS to uncover the extent of the wrong-doing and to reach a logical conclusion that provided justice for the victims. “It is highly unusual that a victim of a Ponzi scheme ever receives any money back from the scam,” said Morrison. “Thanks to the efforts of the securities staff of the State Auditor’s Office, as well as the cooperative spirit of UBS, victims will get back money they lost.”

d. Press Release November 29, 2006: Morrison Warns of Scams Targeting Montanans with Fraudulent Unclaimed Prize Awards. Scammers are looking for your good money in exchange for their bad check. Montana State Auditor John Morrison issued a warning today about a fraudulent unclaimed prize award scam targeting Montanans. The warning comes after the State Auditor’s Office received

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several consumer inquiries about letters that were sent to Montanans from the so-called Borealis Investments, Inc. These letters are being sent to individuals alleging they are winners of a “North America Prize Pool” held last month. “Helping Montanans protect their hard-earned savings is a job I take seriously,” said Morrison. “We know that the best kind of law enforcement is to prevent the crime in the first place which is why we are constantly working to get the word out about the latest scams targeting the state. Helping Montanans steer clear of con-artists is one of the most effective ways of helping them to protect their hard-earned cash.”

Montanans are receiving letters from an individual claiming to be a financial director for Borealis Investments (a non-existent company), located in Antigo, Wisconsin. The letters include a very realistic, but fake check in the amount of $3,044 drawn on a bogus Citizens State Bank account in Clara City, Minnesota. The letter instructs recipients to call a toll-free phone number in order to receive assistance in obtaining their $750,000 cash prize. The Department has investigated this matter and discovered it is a scam. The perpetrator hopes individuals will deposit the check into their personal bank account, as instructed, and then send a cashier’s check or a money order to the scam artist. Montanans who participate in this scam will not only not win any money, they will lose the money they send because the check they deposit is worthless. The Department contacted the Citizens State Bank to determine if the check enclosed with the letter was legitimate. Citizens State Bank, and their rebate processor Financial Services Management Corp. informed the Department that the account number listed on the check did not exist. “Unfortunately these scams are quite prevalent. They are called check overpayment scams or fake check scams and they come in many different guises, including prize notifications,” said Morrison. “If someone you don’t know wants to give you a check but wants you to wire some of the money back, beware—it’s a scam that could cost you thousands of dollars. Basically, scammers are looking for your good money in exchange for their bad check.”

Morrison urges Montanans to check out the legitimacy of any offering before sending off their hard-earned cash. Contact the Securities Department of the Montana State Auditor’s Office to verify licensing of individuals and registration of investment offerings.

V. New Developments in Corporation, Partnership and Association Law: The regular session of the Montana State Legislature adjourned on April 21, 2005. There was a Special Session in December 2005; however, it dealt primarily with school funding. The Montana State Legislature reconvened on January 3, 2007. As of January 22, 2007 there were eight introduced bills and 17 unintroduced bills relating to Corporation, Partnership and Association law. As reported in the June 2006 Update, the following bills relating to Montana general corporate law were enacted by the Montana State Legislature:

a. House Bill No.179: Revise One-Stop Licensing Program and Clarify Initial Requirement for Business Name. Sponsored by Representative Lake, this bill requires the Small Business Licensing Coordination Center to inform each business enterprise applying for a business license that the business enterprise must obtain a business name from the secretary of state before any other state license application may be processed. Additionally, this bill eliminates the requirement that the Secretary of State participate in the Montana Small Business

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Licensing Coordination Program and be on the Board of Review. This bill was signed by the Governor on April 28, 2005 and became effective on October 1, 2005. b. House Bill No.180: Revise Certain Business Filing Procedures. Sponsored by Representative Lake, this bill revises certain procedures for filing applications with the Secretary of State regarding: (i) the name of certain corporations, limited liability companies and partnerships; (ii) the elimination of requirements that duplicate copies of applications, certificates and registrations with respect to these same entities be filed with the Secretary of State; (iii) the specific requirements for registration of a foreign limited partnership; and (iv) the repeal of Part 1207 of Chapter 1 of Title 35, Montana Code Annotated. This bill was signed by the Governor on March 24, 2005 and became effective on October 1, 2005.

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MONTANA UPDATE (as of August 31, 2007) 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.5 I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in the Area of Securities: 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. The Montana State Legislature will next reconvene on January 3, 2009. There is one bill relating to securities and securities regulation which will be introduced during the 2007 Legislative Session:

a. House Bill 256: Revisions to Montana Real Estate Laws. The Primary sponsor of the bill is Representative Lake. This would revise the real estate laws to provide regulation of tenancies in common by revising the definitions in the securities, real estate and timeshare laws. If passed there will be an immediate effective date. The bill would amend Sections 30-10-103, 37-51-102 and 37-53-102 of the Montana Code. This bill passed the Montana House of Representatives but died in the Montana Senate.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: There does not appear to have been any court or administrative decisions 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.

III. Developments Relating to NSMIA: The February and June 2005 Updates reported that due to recent amendments to Section 103(20) of Chapter 10 of Title 30, Montana Statutes Annotated, Montana is now fully compliant with the provisions and exceptions of NSMIA. The June 2006 Update reported that these amendments now exclude individuals selling covered securities under Rule 506 of the Securities Act of 1933 from the definition of “salesperson.” On August 27, 2007, 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.

5 The information contained in the foregoing paragraph was obtained on 01/22/07 at http://sao.mt.gov/securities/secintro.asp.

http://www.sao.mt.gov

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

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IV. Significant Development in the Division’s Enforcement of Regulation Activities: 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 August 21, 2007: Morrison Takes Legal Action Against Concord Equity Alleging Securities Fraud.

Cease And Desist, Disciplinary Action Ordered Against New Jersey Securities Firm Montana State Auditor John Morrison filed a Cease and Desist order and a disciplinary action against Concord Equity Group, LLC and Concord Equity Group Advisors (Concord Equity) alleging these companies committed securities fraud by omitting material facts their customers needed to make informed decisions regarding mutual fund purchases. Additional allegations include fraud for placing their customers into fee based accounts that were unsuitable and failure to reasonably supervise their employee, Leo Lapito.

“It’s simply intolerable when a firm allows its agents to charge excessive fees or omit key

information.” Morrison said. “We take our job of protecting Montana investors very seriously. Any firm or person charged with engaging in fraud will be held to the highest standards of the law.” As early as September 2003, Concord Equity customers were sold mutual funds in Class B and C shares, which the Auditor’s office alleges resulted in denying the customers opportunity for breakpoint advantages as well as subjecting them to higher expenses associated with those classes. The allegations also accuse the companies of placing customers in over-diversified mutual fund portfolios with the same result. The companies also charged customers excessive fees by charging both a commission and an advisory account fee according to the Auditor’s allegations. “Brokerage firms operating in Montana need to make sure they put their clients first -- not their bottom line,” said Morrison. Former Concord Equity employee, Leo Lapito was the salesperson for the customers who are the focus of the Auditor’s complaint. Lapito has moved to a new brokerage firm and has fully cooperated with the Auditor in uncovering the evidence that led to the filing of the disciplinary action. Because many important cases have begun with a tip from the public, Morrison encourages Montana residents who may have information about insurance or securities fraud to contact the Investigations Division of the Montana State Auditor’s Office at 1-800-332-6148.

b. Press Release dated July 3, 2007: Don’t Get Scammed – Learn How to Protect

Yourself.

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Campaign For Wise and Safe Investing Offers Free Investment Education Seminars to help Montana consumers protect themselves from investment fraud and scams, the Montana State Auditor’s Office is teaming up with AARP and the Investor Protection Trust to launch the statewide Campaign for Wise and Safe Investing. As part of the campaign, the public is invited to attend free, two-hour seminars in Missoula, Stevensville and Hamilton. Experts in wise and safe investing will help consumers learn how to better prepare for their financial futures, while avoiding some of the most common investment scams. “Our fight against fraud never stops,” said State Auditor John Morrison. “Each year, con artists plot new ways to cheat people out of their hard-earned savings, often just by repackaging the same old tried-and-true scams. We know that the best kind of law enforcement is to prevent the crime in the first place. And that’s what the Campaign For Wise and Safe Investing is all about – giving Montanans the tools that they need to protect themselves from fraud. People will learn about the top ten questions to ask before putting money down on any investment. People will also learn how to pinpoint the tricks and tactics used by crooks and scam artists. Specific topics for discussion include:

• Investment Scams • Pyramid Schemes • Ponzi Schemes • Gifting Schemes • Affinity Fraud • Unregistered Securities • Mining/Precious Metals • Promissory Notes • Theft in Brokerage Accounts

c. Press Release dated June 1, 2007: Morrison Charges Agent, Firm with

Securities Fraud.

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 filed an administrative action against former stockbroker Richard Westerman and broker-dealer firm Raymond James Financial Services alleging Westerman committed securities fraud when he churned an IRA owned by a Missoula resident and the company failed to reasonably supervise Westerman. Churning is an abusive sales practice in which unethical securities professionals make unnecessary and excessive trades for the sole purpose of generating commissions. “The only purpose of churning is to generate commissions for the stockbroker,” said Morrison. “Most often, this activity depletes the value of a customer’s investment portfolio which is why churning constitutes securities fraud.” The Notice of Proposed Agency Disciplinary Action and Opportunity for Hearing filed May 31 also alleges Westerman conducted the unlawful trading in the IRA account without the account owner’s authorization or knowledge. The Securities Department also alleges that Westerman violated Montana securities law, when he omitted the material facts that the type of trading strategy used was unsuitable based on Complainant’s net income, net worth, investment objectives, and age. The Raymond James Financial Services firm is also charged with violating Montana securities laws by refusing to provide information requested by the Department. “Just as every investor is different, so too are investments. What

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may be a suitable investment for one investor may not be right for another,” said Morrison. “Securities professionals must know their customers’ financial situation and refrain from making recommendations of securities that they have reason to believe are unsuitable. When securities professionals fail to live up to ethical standards, great harm can be done to individual investors.” The action seeks to require respondents Westerman and Raymond James Financial Services to pay restitution and interest to the Montana Complainant as well as fines of up to $5,000 for each violation of Montana securities code. “If a broker does excessive buying and selling within your investment account, you may end up paying more in commissions than you earn on your investment,” said Morrison. “It’s a good idea to regularly check your financial statements to see what you are earning, what commissions you are paying, and what changes there have been in your account holdings.” Morrison also urged investors to contact the Montana State Auditor’s Office with any questions about an investment product, broker or adviser, before making an investment. “One phone call can save a lot of money and misery,” Morrison noted. The State Auditor’s office can be reached at 1-800- 332-6148.

d. Press Release dated May 15, 2007: State Auditor John Morrison Identifies

Top 10 Traps Facing Investors.

Montana State Auditor John Morrison today released his annual forecast of the Top 10 Traps likely to ensnare investors. “The path to safe investing is littered with traps that are likely to catch unwary investors. It always pays to remember that any investment that sounds too good to be true, usually is,” said Morrison. “Investor traps are usually baited with slick sales pitches promising high returns for little or no risk,” Morrison said, noting that investors also can become trapped by legitimate investment products that are suitable for some investors, but not all. Before making any investment, Morrison urged investors to make sure that both the salesperson and the investment are licensed and registered in their state and that they have been given adequate written information that fully explains the investment. “You should also make sure that any claims made for the investment are realistic and not pie in the sky,” Morrison said. Morrison’s Top 10 Traps for Investors are listed below in alphabetical order. Affinity Fraud: Con artists are increasingly targeting religious, ethnic, cultural and professional groups. Some may be members of the group or pretend to be members in order to gain trust. Con artists often recruit a respected member of a community or religious congregation to promote their schemes by convincing them that a fraudulent investment is legitimate. In many cases, even these leaders become victims of what turns out to be a Ponzi scheme. Remember: Investigate before you invest – no matter who is selling. Foreign Exchange Trading: Foreign exchange (forex) trading can be legitimate for governments and businesses concerned about fluctuations in international currencies, and it can even be appropriate for some individual investors. But the average investor should be wary when it comes to these complex markets. Forex scams attract customers with sophisticated-sounding offers placed in newspaper advertisements, radio promotions, or on Internet sites. Remember: If you don’t understand an investment, don’t invest. Internet Fraud: Scamsters continue to take advantage of technology to lure investors into “pump-and-dump” stock schemes. Be wary of investments being pitched through unsolicited e-mails, instant messages, and phony websites. Remember: The internet can be a con artist’s dream – easy access to you and your money, with no “return address” if the deal goes sour. Investment Seminars: Promoters of unsuitable investments are increasingly seeking potential investors, particularly seniors, by offering seminars, many of them promising a free meal along with “higher returns and little or no risk.”

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Unfortunately, in many of the cases that securities regulators see, it’s just the opposite: high risk and no returns, just disastrous losses. Remember: There’s no such thing as a free lunch. Oil and Gas Scams: Rising oil and natural gas prices have made a variety of traditional and alternative energy projects attractive to investors. Most of these investments are highly risky and not appropriate for smaller investors. Remember: Con artists tend to follow the headlines. Prime Bank Schemes: Often promising high-yield, tax-free returns, promoters of these schemes offer to let the “little guy” in on what they claim are financial instruments from elite overseas banks usually offered only to the world’s wealthiest investors. Prime banks do not exist and the scam artists have no intention of creating a profit for anyone but themselves. Remember: Often the most sophisticated sounding investments are just false promises in fancy garb. Private Securities Offerings: Con artists are turning increasingly to private securities offerings under Rule 506 Regulation D of the Securities Act of 1933 to attract investors without having to go through the full registration process. Although sometimes legitimate, these offerings are often associated with fraud. Remember: Especially with lightly regulated investment offerings, it pays to consult a trusted financial adviser. Real Estate Investment Contracts: Despite the recent decline in property values, investments in real estate long have been viewed as a “sure thing,” one with little downside risk and the potential for substantial returns. Some real estate investments are securities subject to full regulation under the state and federal securities laws, including registration requirements and antifraud rules. Remember: Just because an investment involves real estate – or pay phones or worm farms – it still may be a security, so check with your state securities regulator. Unlicensed Individuals & Unregistered Products: Anyone selling securities or providing investment advice about buying or selling securities must be appropriately licensed. Anyone engaging in these activities without a valid license to do so should be a red alert for investors. Con artists also bypass stringent state registration requirements to pitch viatical settlements, pay telephone and ATM leasing contracts, and other investment contracts with the promise of “limited or no risk” and high returns. Remember: Carefully check out anyone offering to help you buy or sell securities or providing investment advice. Unsuitable Sales: What might be a suitable investment for one investor might not be right for another. Securities professionals must know their customers’ financial situation and refrain from recommending investments that they have reason to believe are unsuitable. For example, variable and equity indexed annuities are often unsuitable for senior citizens because those products are generally long-term investments that limit access to invested funds. But sales agents stand to earn high commissions on these investment products so they don’t always adhere to the suitability standards – with dire consequences for seniors. Remember: Make sure your investments match up with your age, your need for access to money, and your risk tolerance. Morrison strongly advised investors to contact his office with any questions about an investment product, broker or adviser, before making an investment. “The best time to call us is before you part with your hard earned money,” Morrison said. “It only takes one bad and usually uninformed decision to wipe out your savings.” Recognizing that financial education is a powerful weapon in the fight against investment fraud, Morrison launched InvestSmart Montana -- a program to help Montanans and law enforcement learn about investment fraud and white-collar crime. InvestSmart Montana includes an interactive website, a toll-free hotline, a wide array of educational materials and also offers InvestSmart seminars across the state. To request InvestSmart Montana’s informational packet, including the top ten questions to ask before you invest, or to inquire about an investment opportunity please call 1-800-603-6035. Information is also available at www.InvestSmartMT.org.

http://www.InvestSmartMT.org

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e. Press Release dated May 10, 2007: Morrison Orders Shut-Down of Activity by

Mid-America Energy.

Tennessee Oil and Gas Promoters Charged With Securities Law Violation This week Montana State Auditor John Morrison issued a Cease and Desist Order (May

8) against Tennessee based oil and gas development company, Mid-America Energy. Along with ordering Mid-America Energy, Inc. and its officers to stop violating the Montana Securities Act , the State Auditor’s Office alleges Mid-America Energy violated anti-fraud and registration provisions of the Montana Securities Act. A Missoula couple invested approximately $120,000 with this company at the urging of the company’s sales representative, Sy Schaiken. Mid-America’s president, Gary Milby and the operations manager, Clinton Goff are also named as respondents. “The sale of fraudulent oil and gas investments is a recurring problem that gets worse when energy prices are high,” said Morrison. “High oil prices have 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 securities involved are shares of the production payments from oil wells allegedly located in Kentucky. The Securities Department alleges the company and its agents acted fraudulently by promising incredible returns, including a 100% return on investments in 12 months and dividend checks of $3,600 each month. The Montana investors have received nothing for their investment and have been unable to make contact with the company since January of this year. These securities have not been properly registered in Montana and neither the company nor any of its employees are authorized to sell securities in Montana. Several other states have taken action against Mid-America, Milby, Goff and Schaiken for securities violations similar to those alleged by Montana’s Securities Department, including California, Arizona, Alabama, and Pennsylvania. Mr. Milby had a 16th birthday party for his daughter in October of 2006 that has been well publicized, including a feature on MTV’s “My Super Sweet 16” television show. Milby reportedly spent over $100,000 on the party and then bought his 16 year old daughter a BMW as a birthday gift. “Part of the mission of our office is to foster capital formation in Montana and help legitimate businesses comply with Montana law when raising money,” said Morrison. “We are also entrusted with the responsibility of protecting Montana investors from becoming fraud victims.” Scam artists tend to stay away from the “knowledgeable” investor when they are trying to swindle their victims. They also will stay away from advertising, as they are aware that would invite the attention of the Montana Securities Commissioner. They tend to target individual victims and make an unsolicited contact, usually with a phone call, offering a ‘great’ business opportunity. Morrison said that most oil and gas fraud victims don’t realize they have been scammed until after the money is gone. “As with any investment, we ask that Montanans investigate before they invest and call my office.”

f. Press Release dated May 1, 2007: Helena Woman Invests $20,000 and Loses

$300,000.

Morrison takes legal action against Arizona man to end fraudulent investment activity

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Montana State Auditor John Morrison has filed a Cease & Desist order and Notice of Proposed Agency Disciplinary action against Arizona man James Andrews and his company, InvestX. The action alleges Andrews victimized a Helena woman, causing her to lose nearly $300,000 by acting as an unregistered securities salesperson, an unregistered investment adviser and by committing fraudulent acts in her ETrade account.

An investigation by the State Auditor’s Office revealed the alleged victim met Andrews

at a business conference where he befriended her, convinced her he was an investment manager with his own company, InvestX, and persuaded her to let him manage her account at ETrade. Over a three-month period, the victim deposited a total of $20,000 into her E*Trade account and gave Andrews her password so he could make investment decisions on her behalf. As part of the agreement, the woman was to compensate Andrews for his work. “Calling yourself a securities broker or investment manager doesn’t actually make you one,” said Morrison. “I urge investors to investigate brokers and the opportunities they offer. One call to my office to verify the status of a broker’s license or offering can help investors avoid falling victim to financial fraud.” Initially, Andrews executed trades in the victim’s account that resulted in small profits, but beginning in July 2006 Andrews began an investment strategy of buying speculative ‘put and call’ options in her account that resulted in substantial losses. During the first three weeks of July 2006 Andrews purchased 10,571 put and call options in her account using fraudulent funds from five NSF checks totaling $470,000 that he personally deposited to her account. By July 26, 2006 the victim’s account had a negative balance of $278,111.

“Andrews would deposit a bad personal check and then use the money to trade before the bank returned the check,” said Morrison. “The victim didn’t see this coming. She invested $20,000 expecting to make a small profit but instead, ended up owing ETrade over a quarter-million dollars.”

The Securities Division of the State Auditor’s Office worked closely with ETrade in its investigation of the matter. E*Trade was able to track the IP address used to execute each of the options trades and determined the orders came from Andrews’s computer. In addition, E*Trade was able to verify that Andrews changed the contact information on the woman’s account so all correspondence regarding the activity in her account was redirected to Andrews. “With the rise of online investing, some consumers are moving away from traditional financial professionals and entrusting their financial future to friends or family,” Morrison said. “The problem is these individuals aren’t licensed and may not be as ‘money-savvy’ as they claim.” If someone is offering investment advice or services, they need to be properly licensed with the Montana Securities Department and the law requires they make appropriate recommendations based on an investor’s financial situation. To verify the status of a broker’s license or investment offering or to report an unregistered agent or offering, call the State Auditor’s office at 1-800- 332-6148.

g. Press Release dated April 3, 2007: Morrison Warns Montanans to Beware of New Phony Check Scams Targeting State.

Surge of recent fake check activity surfacing in Montana; Swindlers looking for your good money in exchange for their bad check State Auditor John Morrison today issued a warning to Montanans to be on the lookout for new scams targeting the state. People across Montana are

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receiving fake checks in the amount of $3,500 along with award claim notifications instructing them to cash the check and in turn, send a $2,900 payment via Money Gram or Western Union to cover the cost of taxes and insurance. “In recent weeks, we have seen a surge of fake check activity in the state,” said Morrison. “These scams are called check overpayment or fake check scams and they come in many different guises. If someone you don’t know wants to give you a check but wants you to wire some of the money back, beware -- it’s a scam that could cost you thousands of dollars. Basically, scammers are looking for your good money in exchange for their bad check.” In this scam, Montanans are being notified that they won a drawing through a computerized ballot system drawn from a pool of 33,706,009 names based on debit, credit and charge card use during the holiday season. The letters claim to be from either MGD Claims Centre or MPC Midland Payment Centre in Sacramento, California and they inform recipients that they won a lump sum of anywhere from $65,000 to $125,000. Phone numbers listed on the notification letters indicate that the scam is actually being perpetrated out of Canada. The letters include a fake check in the amount of $3,500 drawn on a bogus bank account with Home Federal Bank of Tennessee in Seviverville, Tennessee. The letter instructs the recipient to deposit the check, purchase a $2,900 money order and send the money order back to them. Upon receipt of the $2,900 money order, the Claims Director promises to release the winning prize funds. Although the Home Federal Bank of Tennessee is a legitimate financial institution, the account is bogus. “The checks look absolutely convincing,” said Morrison. “In fact, in this case, the checks are official – but they’re drawn on a bogus bank account. Anyone can order official check blanks online complete with all the security features including the trademarked Padlock symbol which is a certification mark of the Check Payment Systems Association. Those security features are meaningless in these cases.” Under Federal law, banks must make deposited funds available quickly—usually within one to five business days. However, it may take weeks for the forgeries to be discovered. By the time the check bounces, the victims have often accessed their funds, and are therefore liable to repay the bank the money they withdrew against the bad check. When the check or money order bounces, the bank deducts the amount that was originally credited to their accounts. If the funds are insufficient, the bank has no choice but to recover the funds from the victim. “In our ongoing efforts to caution Montanans about these scams, we have posted on our website an example of these fake checks as well as the phony ‘congratulations’ letter notifying victims they won,” said Morrison. “Remember, there is no legitimate reason for someone who is giving you money to ask you to send money back. If a stranger wants to send you a check, insist on a cashier’s check for the exact amount, preferably from a local bank or one with a branch in your area.” In another twist on prize scams, con artists are trying to gain access to people’s banking information in order to gain access to their hard earned cash. Recently, Montanans have received notifications claiming to be from Yellow Pages stating that they have won $50,000 in the Yellow Pages 21st Century Sweepstakes bonanza. Included in the notification is a $2,500 check drawn on a phony account with Fifth Third Bank in Lexington, Kentucky. Scammers are asking people to provide their bank name, routing number and account number in order to claim the prize and receive the funds. “This scam goes one step further. In addition to asking the prize recipient to send good money in exchange for a bad check drawn on a bogus account, scammers are asking them to release their critical bank account information. Montanans need to have their guard up at all times when it comes to their finances,” said Morrison. Montanans that suspect a fake check scam are urged to contact the investigations unit of the State Auditor’s Office at 1-800-332-6148 or the Federal Trade Commission at 1-877-FTC-HELP (1-877-382-4357) or www.ftc.gov. A sample fake check can be viewed at: http://www.sao.mt.gov/fake check.asp.

http://www.ftc.gov

http://www.sao.mt.gov/fake

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h. Press Release dated March 22, 2007: Morrison Announces Settlement in Case

Against Davison.

Montana State Auditor John Morrison announced that earlier this week his office entered into a consent agreement with former Billings businessman, Patrick Phillip Davison, to resolve the outstanding case against Davison originally filed in August of 2006. In the agreement, Davison agreed to pay a $250,000 fine to the State of Montana and is permanently banned from the securities industry. It is believed to be the largest fine ever imposed on an individual in a Montana state securities case. “This fine should send a strong signal that Ponzi schemes and other securities fraud will be firmly punished in Montana,” said Morrison. One of Davison’s former employers, UBS, earlier reached an agreement with Morrison’s office to pay Davison’s clients more than $4.5 million in restitution. The $250,000 fine is imposed on top of the penalties Davison faces in a federal criminal case initiated after Morrison’s office enlisted the U.S. Attorney in the case. Davison’s federal court sentencing, scheduled for June before U.S. district judge Richard Cebull, is expected to include imprisonment, fines and payments to reimburse UBS. Davison will have ten years to pay the state fine, not counting time spent in prison. Because the Auditor’s office is an administrative agency, it must partner with state or federal prosecutors in order to bring criminal cases. The Davison case is one of several cases initiated by Morrison’s office that led to federal criminal convictions. “Our office has developed a great working partnership with the U.S. Attorney’s office,” Morrison said. “We have brought the U.S. Attorney into a number of cases and worked together to achieve federal convictions.” Morrison said that state securities cases leading to federal convictions is a relatively new development. “As far as we know, this really wasn’t done until we struck up this relationship a few years ago,” Morrison added. Morrison said the relationship with federal prosecutors has taken the prosecution of this type of white collar crime to a new level. The Securities Department of the Auditor’s office originally alleged Davison committed securities fraud against two Montana families for a total loss to the families in excess of $1.2 million. Subsequently, the Department filed an Amended Notice of Proposed Agency Disciplinary Action against Patrick Davison, alleging six additional complainants were defrauded by Davison so he could promote and conduct an illegal Ponzi scheme. Davison was ultimately charged with defrauding nine complainants by selling them bogus investments. The allegations stated that Davison sold these fraudulent investments, putting the investment monies into accounts he owned or controlled. The investments Davison created included an investment in a non-existent St. Labre Indian School Trust, fake investments in the Billings Catholic Schools; fake investments in the Mayfair 2/Big Sky Gold Rush Raffle Event; fake Promissory Notes secured by non-existing collateral; a fake investment in coal leases; and fake investments in a bogus entity entitled Foundation Assistance Group, purported by Davison to support the Montana University System. Davison was charged by the U.S. Attorney’s office with two counts of securities fraud and he has entered a guilty plea to those charges. Sentencing is currently set for June 8, 2007, in Billings. Morrison emphasized the importance of citizens reporting unlawful securities activity and being vigilant to avoid becoming a victim. “Nearly all these cases begin when a victim or potential victim calls us and lets us know about the problem,” he explained. “By calling the Auditor’s office when something doesn’t look right, you can protect yourself and protect others at the same time.”

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i. Press Release dated March 2, 2007: On ‘Charles Ponzi Day’, Morrison Reminds Montanans to Steer Clear of Ponzi Schemes. Davison Case serves as reminder that Ponzi Schemes are ‘out there’ Montana State Auditor John Morrison today warned Montanans to beware of Ponzi-style investment schemes used by many con artists to swindle investors out of their hard-earned savings. March 3, unofficially known as Charlie Ponzi Day, marks the birthday of the swindler born in 1882 who contrived the scam. “Although the scam is over 80 years old, Montanans today are still lured by con artists using Ponzi schemes to promise double-digit returns on their investments,” said Morrison. “I urge Montanans be wary of investments that sound too good to be true.” Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a favorite among con artists. The premise is simple: promise high returns to investors and use money from new investors to pay previous investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. Con artists typically attribute government intervention as the reason why new investors didn’t get their promised returns. One of the largest Ponzi schemes in Montana history was cracked open last fall by the Securities Division of the Montana State Auditor’s Office. Billings businessman, Patrick Davison was charged with running a Ponzi scheme where he bilked at least nine investors out of approximately $6 million. “The Davison case underscores the importance of investor vigilance. Such Ponzi schemes run by smooth con artists can get far down the road before they collapse,” said Morrison. “The true damage of these kinds of schemes is more than just their financial impact. Ponzi operators encourage consumers to recruit their friends and family members. When it all crumbles, the social fabric is torn in ways that can be very hard to mend.” Montanans should look for specific warning signs of a Ponzi scheme when presented with an investment opportunity. Red flags include: 1) “Guaranteed” double-digit returns, 2) Promises of high yields consistent over a long term, 3) “Risk-free” investments and 4) Salespeople emphasizing the exclusivity of an investment opportunity and the importance of keeping the investment a secret from your friends and family. “Our fight against fraud never stops,” said Morrison. “We know the best kind of law enforcement is where the crime does not find the victim in the first place -- which is why we are constantly working to educate Montanans about schemes, scams and frauds. Ponzi schemes are easy to avoid – simply call my office to check the registration of the investment, and the person or company offering it. Many Ponzi operators are not registered to sell securities, nor is the investment itself registered.” To inquire about an investment opportunity or report an unregistered agent or offering, call the State Auditor’s office at 1-800- 332-6148.

NEW HAMPSHIRE


NEW HAMPSHIRE

2007 REPORT TO THE ABA STATE REGULATION OF SECURITIES COMMITTEE NEW HAMPSHIRE

Richard A. Samuels

McLane, Graf, Raulerson & Middleton, Professional Association

New Hampshire Securities Act Amendments. Amendments to the New Hampshire Securities Act were enacted earlier this year, effective July 1. The more notable changes to the Act are a requirement that issuers who qualify for a frequently used transactional exemption make NSMIA filings in Rule 506 offerings; changes to the definition of broker-dealer branch office and supervisory standards; and definition and regulation of investment advisor solicitor. Rule 506 Offerings and Isolated Sales Exemption. In New Hampshire, the Uniform Securities Act isolated sales exemption takes a different form in that it extends to issuer transactions, limited to 10 during any 12-month period and 25 over the life of the issuer. Those numbers or sales do not include sales covered by other exemptions or Rule 506 sales. The 2007 amendments now require that issuers of Rule 506 covered securities in New Hampshire file Rule 506 NSMIA filings (including the fee), notwithstanding the fact that such sales may qualify as exempt sales pursuant to New Hampshire's isolated sales exemption. Branch Office Definition and Brach Supervision. Broker-dealer branch office is now very broadly defined, with numerous exclusions, including offices for non-sales activities, an agent's primary residence, subject to detailed prohibitions on activities at the residence, and locations used for fewer than 30 business days per year or for effecting no more than 25 transactions per year. The New Hampshire Bureau of Securities Regulation is a division of the office of the New Hampshire Secretary of State. Despite the fact that the Secretary of State has express rulemaking power under the Securities Act, he chooses not to exercise rulemaking powers for constitutional reasons. Like numerous of the periodic amendments that have been enacted over the past few years, provisions that in other states would appear in blue sky rules, are slowly being inserted at the request of the Secretary of State into our statute. New factors that are to be used to determine

NEW HAMPSHIRE


supervisory standards for broker-dealers and investment advisors may be another example of statutory provisions that in other states would be rules. Note that New Hampshire securities rules that are labeled "Atg" rules, which still appear in blue sky compilations and had been promulgated during a short period during which the Securities Act was administered by the Attorney General, have sunset. Investment Advisor Solicitors. The new definition of a solicitor is coordinated with a new exemption from examination requirements, similar to the approach taken in other states. Substantive requirements that apply to solicitors are found in the definition itself (license as an advisor or agent, solely soliciting business, cash fee, and written agreement). Securities Bureau Orders and Enforcement Actions. On October 10, 2006, the Bureau announced a settlement with Dutch insurance institution ING, which is the administrator of the New Hampshire State Employee Deferred Compensation Plan. In a June 2006 cease and desist order, the Bureau alleged failure to produce documents and maintain e-mails, disclose information relative market timing practices, and disclose to plan participants revenue sharing relationships with mutual fund companies. The settlement includes product-disclosure in the marketing and reporting of retirement products by requiring a cover-page summary of all costs associated with each plan ING offers. In conjunction with this new procedure, ING will also pay $2.75 million to more than 5000 participants in the New Hampshire State Deferred Compensation Plan. GRLB01-#1453619-v3-ABA_-_Subcommittee_on_Liaisons_to_the_States_and_NASD_-_Fall_2007_Report_(Word_Format)_(9-21-07).DOC November 26, 2007 5:23:23 PM

NEW JERSEY


HAND DELIVERY 721 ROUTE 202-206

BRIDGEWATER, NJ 08807

NEW JERSEY STATE LIAISON REPORT

NORRIS MCLAUGHLIN & MARCUS, PA

ATTORNEYS AT LAW P.O. BOX 1018

SOMERVILLE, NJ 08876-1018 (908) 722-0700 FAX: (908) 722-0755

www.NMMLAW.COM

NEW YORK OFFICE 875 THIRD AVENUE

18TH FLOOR NEW YORK, NY 10022

November 26, 2007 Ellen Lieberman, Esq. Debevoise & Plimpton LLP 919 Third Avenue New York, N.Y. 10022

Re: Update to the March 13, 2007 Report of the Liaison to the New Jersey Bureau of Securities

Dear Ellen:

The following updates my Report of March 13, 2007 on Blue Sky matters in New Jersey. A. Legislation and Regulations

By letter dated June 4, 2007 from Ellen A. Scanlon of the Securities Subcommittee of the Securities Industry and Financial Markets Association (“SIFMA”), SIFMA requested that the Bureau consider adopting by rule or order three exemptions for secondary market transactions involving well-known foreign issuers. The three requested exemptions are those involving: (i) investment grade securities; (ii) foreign securities deemed marginable under the standards of the Board of Governors of the Federal Reserve System; and (iii) transactions in managed accounts by Federal registered investment advisers which have at least $100 million under management. A copy of that SIFMA request letter (previously distributed to Committee Members by Alan Parness, Esq. of the Cadwalader Firm) is attached for your reference. The Bureau is actively considering the request and expects to meet with SIFMA personnel this month. Thereafter, the Bureau will review its exemptive powers under the New Jersey version of the Uniform Securities Act, N.J.S.A. 49:3-49 et seq. as well as investor protection and other policy concerns to determine an appropriate response to the SIFMA request.

http://www.NMMLAW.COM

NEW JERSEY


B. Litigation My Report of March 13, 2007 erred in describing the restitution order entered against

Thomas Giacomaro, the founder of Wellesley Services LLC, and co-defendants, Anthony Bianco and Keith Moody. The amount of the restitution order against Giacomaro was $70 million not $70,000; and the order against Bianco and Moody was for $73 million not $73,000.

On June 11, 2007 the Bureau issued a Consent Order pursuant to a settlement agreement

with Alex Syznalski a/k/a Alex Goen, Goen Technologies Corporation, Nutramerica Corporation and Vitamerica Corporation. The Consent Order requires defendants to cease and desist from acting as an unregistered broker dealer and from selling unregistered securities. In addition Goen Technologies Corporation and Vitamerica Corporation are required to cease employing unregistered agents to sell securities and from making untrue statements and omitting material facts. Goen Technologies Corporation is required to pay $461,000 in civil penalties on behalf of all defendants. Further defendants are ordered to offer rescission to each purchaser of unregistered securities of Nutramerica or Vitamerica, which the Consent Order states involved hundreds of persons and hundreds of thousands of dollars. The “business” of defendants was conducting weight loss and stop smoking seminars and selling food supplements.

C. Miscellaneous

The Bureau continues to labor under the restrictions resulting from budgetary limitations.

Respectfully Submitted, NORRIS MCLAUGHLIN & MARCUS, P.A. Peter D. Hutcheon PETER D. HUTCHEON PDH/ib

NEW JERSEY


NEW YORK


NEW YORK STATE LIAISON REPORT

F. Lee Liebolt, Jr.

Attorney at Law Suite 2620

420 Lexington Avenue New York, New York 10170

(212) 286-1384

Facsimile E-mail (212) 286-1389 [email protected]

June 26, 2007

Ellen Lieberman, Esq. Chair, ABA Section of Business Law Committee on State Regulation of Securities Debevoise & Plimpton LLP 919 Third Avenue New York, New York 10022

Re: New York State Liaison Report

Dear Ellen: I am pleased to present this report on recent New York State securities law developments for the ABA State Regulation of Securities Committee meeting in San Francisco, California on August 13, 2007, in conjunction with the ABA annual meeting. Diane Gatewood, Chief of Registration at the re-named Investor Protection Bureau, informs me that there are no significant developments with respect to legislation or regulations affecting the Bureau.

The Bureau is monitoring the developments with Governor Spitzer’s New York State Commission to Modernize the Regulation of Financial Services, Ms. Gatewood adds. The chairman of the commission is Eric R. Dinallo, who at one time was the Bureau Chief and is presently the New York State Superintendent of Insurance. According to The New York Times (May 30, 2007), the group will produce a report at the end of June 2008 but will seek to put into effect certain regulatory or statutory changes before then, including potentially establishing a so-called principles-based framework for insurance regulation.


NEW YORK


An editorial appeared in The Wall Street Journal on June 12, 2007, entitled “Repeal the Martin Act,” applauding the creation of the commission by the new Governor, who as Attorney General was known as the “scourge of Wall Street,” and advocating the repeal of the Martin Act “because it is a law that allows a prosecutor to punish, or even ruin, any financial company regardless of evidence or motive.” Attorney General Cuomo responded to the editorial in a letter published in the Journal on June 16, 2007, by saying that “[f]ighting fraud cannot be left to federal authorities alone.”

The Department of Law is challenging the NASD’s expungement policy under Rule

2130, Ms. Gatewood says. The Attorney General is intervening where agents are seeking to clear their records. The Department is arguing that arbitrators do not have the power to order destruction of state records maintained on the CRD. Full disclosure is in the public interest to protect investors.

As mentioned in my liaison report of July 28, 2006, the New York Court of Appeals was

asked by the United States Court of Appeals for the Second Circuit to decide whether a securities industry employer filling out an employee termination notice (Form U-5) required by the NASD has an absolute or qualified protection under state law against a defamation lawsuit based on statements made on the form. On March 29, 2007, in a 4-2 vote, the New York court held that statements on a Form U-5 are subject to an absolute privilege and therefore cannot serve as the basis for a libel claim. See Rosenberg v. MetLife, Inc., 2007 N.Y. Slip Op. 2627, 2007 N.Y. LEXIS 504 (Mar. 29, 2007). Based upon that finding, the Second Circuit affirmed a grant of summary judgment in favor of MetLife in a libel lawsuit brought by a former employee. Declaring that the New York decision is a “significant victory” for securities firms in disputes with their former employees, the author of an article in the New York Law Journal points out that “[u]nless and until a national rule is enacted, the decision will have a significant impact for the securities industry as a whole given that nearly a quarter of the industry’s jobs are located in New York.” Ralph DeSena, “Rosenberg” Is Big Victory for Securities Firms, N.Y.L.J., Apr. 9, 2007, at 4.

In another case certified to it by the Second Circuit, the Court of Appeals, in a 5-2 split,

held that eight promissory notes issued by a corporation to the shareholders of two companies acquired by the issuer, in connection with the renegotiation of the original purchase terms, were “securities” within the meaning of section 8-102(a)(15) of the Uniform Commercial Code. Highland Capital Management LP v. Schneider, N.Y. No. 38 (Apr. 3, 2007). As such, the notes would be exempt from the UCC statute of frauds (which requires that contracts to sell personal property in excess of $5,000 must be in writing), so that an alleged oral agreement by the noteholders to sell seven of the eight notes to a third party at a deep discount would be enforceable if provable. As our colleague Alan Parness points out, the majority decision relies solely on UCC precedent and does not cite federal securities law or Martin Act decisions on the “security” status of the notes in question.

In a continuing saga, the state’s lawsuit against Richard Grasso, former chairman of the

New York Stock Exchange, over his $187.5 million pay package grinds on. On May 8, 2007, the Appellate Division, First Department, in a 3-2 decision, dismissed four of the six claims against Mr. Grasso. People v. Grasso, 401620/04. On May 30, 2007, Attorney General Cuomo asked

NEW YORK


the court to grant him permission to appeal to the Court of Appeals. In papers filed on June 12, 2007, Mr. Grasso’s attorneys argued that the government’s motion rests on a “misstatement” of the Appellate Division’s decision. See N.Y.L.J., June 14, 2007, at 4.

The New York Department of State issued a release notifying filers of documents (such

as the designation for service of process) of new requirements effective April 2, 2007, to facilitate the document scanning process for its recently implemented imaging technology. Such requirements provide that all documents, including backers, be submitted on white paper, be 8-1/2” by 11” in size, be single-sided, and be prepared using black ink only.

Updated fillable pdf forms have been put on the Attorney General’s Web site for broker-

dealer, investment adviser and securities filings. With the elections last November that voted in Eliot Spitzer as Governor while Andrew

Cuomo was elected to take his place as Attorney General, certain personnel changes have taken place at the Department of Law. Eric Corngold, Executive Deputy Attorney General for Economic Justice, is the senior administrator over securities and real estate finance (which have been separated again). The new names are the Investor Protection Bureau and the Real Estate Finance Bureau. The chief of Investor Protection is Matthew Gaul and the deputy is Maria Filipakis. Real Estate Finance is headed by Ken DeMario. Also, while Mr. Cuomo has not said that he will not pursue Mr. Spitzer’s investigations in the financial services industry, his attention in his early months in office has been focused on uncovering the student loan scandal.

I trust that you will find the foregoing report to be helpful. Sincerely,

F. Lee Liebolt, Jr.

NORTH CAROLINA


NORTH CAROLINA STATE LIAISON REPORT

North Carolina

The North Carolina Securities Act (the “Act”) is administered by the Department of the Secretary of State, Securities Division (the “Division”). There have been no recent amendments to the Act or any changes to the rules promulgated under the Act. Also, there have been no significant policy or personnel changes at the Division, but the Division has been active in enforcement matters. For a review of enforcement actions from the past year, see the Report to the Committee on State Regulation of Securities, Enforcement Subcommittee.

Several Division employees hold committee assignments at NASAA. David Massey, Deputy Securities Administrator, chairs the Enforcement Section. Mr. Massey also serves on both the Communications and External Affairs Committees. In addition, four employees of the Securities Division hold positions in the Enforcement, Investment Adviser, and Investor Education Sections.

Contact:

Department of the Secretary of State Securities Division PO Box 29622 Raleigh, NC 27626-0622 919-733-3924 Fax: 919-821-0818 http://www.secretary.state.nc.us/sec/ David Massey Deputy Securities Administrator [email protected]

Reporters:

David N. Jonson 919-743-7308 [email protected] F. Daniel (Dan) Bell, III 919-743-7335 [email protected] Kennedy Covington Lobdell & Hickman, LLP 3450 Lassiter at North Hills Avenue, Suite 300 Raleigh, NC 27609

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




NORTH CAROLINA


CERTAIN SUB-ADVISER ARRANGEMENTS BARRED IN NORTH CAROLINA

F. Daniel Bell, III David N. Jonson

Kennedy Covington Lobdell & Hickman, LLP Raleigh, NC

(919) 743-7300 BACKGROUND Investment advisers (“Investment Advisers”) frequently contract with other investment advisers (“Sub-advisers”) for provision of advisory services by the Sub-advisers. These arrangements bring additional expertise and services to the Investment Adviser’s clients and have become more commonplace as investment advisers become increasingly specialized. Where a Sub-adviser provides advice to the Investment Adviser without consideration of particular clients needs, the Investment Adviser would likely be considered the client of the Subadviser. However, where a Sub-adviser tailors its advice to the individual needs of the Investment Adviser’s clients or has direct contact with the clients, then the clients would also become clients of the Sub-adviser. This relationship with the clients brings obligations for the Subadviser to the shared clients such as fiduciary duties, brochure requirements, and so on. More importantly it is this relationship that may be barred in North Carolina. SHOULD YOU HAVE A SUB-ADVISER ARRANGEMENT OR SOLICIT FOR MULTIPLE ADVISERS THEN READ ON. Generally, investment advisers are required to be registered either federally or with the state(s). State laws, unlike federal, also require registration of investment adviser representatives who are the individuals discharging advisory functions on behalf of an investment adviser (“IARs”). Unless the investment adviser is a sole proprietor then the investment adviser can only provide its advisory services through its individual IARs. Under state law an IAR is defined generally as an individual employed by or associated with an investment adviser who performs certain duties on behalf of the investment adviser including advising clients, account management, research, client solicitation and supervision. (Note that this definition is paraphrased and would vary somewhat where the IAR represents a federally registered investment adviser). But, state registration of the IAR will pertain regardless of whether the IAR’s investment adviser is federally or state registered. For federally registered investment advisers, however, only IARs with a “place of business” in the state will be subject to

NORTH CAROLINA


that state’s registration. A critical point here is that an IAR is not an independent operator but by definition represents his or her investment adviser and in turn the investment adviser provides its advisory services through its IARs. Some states prohibit IARs from being registered to represent more than one investment adviser (“dual registration”) regardless of whether the investment adviser is federally or state registered. For example, North Carolina prohibits the dual registration of an IAR unless the activities of the IAR are limited to solicitation of advisory business only or the IAR is representing affiliated investment advisers. THE ISSUE In recent enforcement actions, the North Carolina Securities Division (“Securities Division”) has taken the position that the Sub-adviser’s IARs were also acting as unregistered IARs of the Investment Adviser that contracted for the Subadviser’s services. The Securities Division took this position in these cases even where the contract was between the two registered investment advisers, the Investment Adviser and Sub-adviser, and the fees were paid from the Investment Adviser to the Sub-adviser pursuant to the contract for the services rendered thereunder. In discussing this issue with the staff, and although not apparent from a review of the petitions filed in these cases, it is reported that the Securities Division would not take this position where the Sub-adviser’s services are provided to the Investment Adviser without consideration of particular client needs and without client contact. In light of North Carolina’s statutory prohibition against dual registration, this interpretation would require the IAR to choose which firm to represent, either the Sub-adviser or Investment Adviser, since the IAR cannot register with both unless the Investment Adviser and Sub-adviser are affiliates or the IAR is restricted to solicitation activities only. This position cannot be readily reconciled with the concept that investment advisers are registered to provide advisory services through its IARs without any apparent restriction in the law on who may become a client. The enforcement of the IAR registration requirements in this manner bars what many would consider to be conventional Sub-adviser relationships in North Carolina thereby exposing all parties, the Investment Adviser, the Sub-adviser and the IARs to the risk of enforcement proceedings alleging registration violations by the Securities Division even though all parties are already registered once. The Investment Adviser could be charged for using IARs (those of the Sub-adviser) not registered to represent it and in turn, the IARs for not being registered to represent the Investment Adviser. Furthermore, the Sub-adviser is precluded from performing advisory services under its contract with the Investment Adviser in that it can no longer use its IARs for this purpose. The upshot here is that two registered investment advisers may be precluded from working together to service mutual clients, notwithstanding the fact that the shared clients would be afforded the full protection of the securities laws as clients of both registered investment advisers. In light of these recent cases of the Securities Division it is advisable to review your Sub-adviser relationships.

OHIO


OHIO STATE LIAISON REPORT

OHIO


RHODE ISLAND


RHODE ISLAND STATE LIAISON REPORT

Memorandum

To: Committee on State Regulation of Securities From: John F. Corrigan, Esq. Date: June 21, 2007

Re: Subcommittee on Liaison with Securities Administrators and NASD – Rhode Island Liaison Report through June 21, 2007

Ladies and Gentlemen: This is the Rhode Island Liaison Report to the Committee on State Regulation of Securities. This memo provides a status report on legislative regulatory enforcement activities with respect to the Rhode Island Uniform Securities Act (1990) (the “Act”) and other matters of related interest. The Act is administered by the Department of Business Regulation of the State of Rhode Island, specifically, Maria D’Alessandro, Securities Administrator. Rhode Island Securities Act and Regulations There have been no recent amendments to the Act or any recent changes to the rules promulgated under the Act. The Uniform Securities Act of 2002 has not been the subject of any action in Rhode Island. New or Amended Regulations, Procedures, Policies or Interpretations None. Court or Administrative Decisions Involving Material and Novel Questions of Law None. Unusual or Noteworthy Happenings with Respect to Securities Practice in Rhode Island The Securities Administrator has brought to my attention two enforcement actions against two securities brokers involving fines of $1,000,000 and $800,000 for failure to supervise, etc. This appears to be of particular interest to the Rhode Island Securities Administrator.

RHODE ISLAND


Any State Developments Relating to USA 2002 or NSMIA No developments; although the Securities Administrator has commented that she thinks it will be given a look at some point. Very truly yours, JOHN F. CORRIGAN Rhode Island Liaison

SOUTH CAROLINA


SOUTH CAROLINA STATE LIAISON REPORT

South Carolina

The South Carolina Attorney General's Office, Securities Division (the “Division”) regulates the marketplace for trading in securities in South Carolina. The state Attorney General Henry McMaster serves as the Securities Commissioner and is responsible for the enforcement of the South Carolina Uniform Securities Act (the “Act”). There have been no recent amendments to the Act or any changes to the rules promulgated under the Act. Also, there have been no significant changes in policies or personnel, but the Division has been active in enforcement matters. For a review of enforcement actions from the past year, see the Report to the Committee on State Regulation of Securities, Enforcement Subcommittee.

In Majors v. South Carolina Securities Commission, No. 26317 (S.C. Apr. 23, 2007), the Supreme Court of South Carolina upheld the Division’s February 2004 issuance of a final order against Ned Majors and Tax Lien Agents, Inc. Majors had argued that the investment opportunity was not a security, but the supreme court held that the vertical commonality test was satisfied when the promoter’s fortunes depended on the investor’s gain.

The Securities Division is not currently represented on any NASAA Committee.

Contact:

Office of the Attorney General Securities Division Rembert C. Dennis Office Building Suite 501 1000 Assembly Street Columbia, S.C. 29201 P. O. Box 11549 Columbia, SC 29211-1549 803-734-4731 Fax: 803-734-3767 http://www.scsecurities.org/index.php T. Stephen Lynch Deputy Securities Commissioner [email protected]

Reporters:

F. Daniel (Dan) Bell, III 919-743-7335 [email protected] David N. Jonson 919-743-7308 [email protected] Kennedy Covington Lobdell & Hickman, LLP 3450 Lassiter at North Hills Avenue, Suite 300 Raleigh, NC 27609

http://www.scsecurities.org/index.php




SOUTH DAKOTA


SOUTH DAKOTA STATE LIAISON REPORT

SOUTH DAKOTA


TEXAS


TEXAS STATE LIAISON REPORT

SECORE & WALLER, L.L.P. ATTORNEYS AND COUNSELORS FOUR FOREST PLAZA 12222 MERIT DRIVE, SUITE 1350 DALLAS, TEXAS 75251 (972) 776-0200 TELECOPIER (972) 776-0240 www.secorewaller.com STEPHEN J. LaTORRE [email protected]

September 21, 2007 via e-mail to [email protected] Mr. Don Rett, Esq. 1660 Metropolitan Circle Tallahassee, FL 32308

Texas Liaison Report Dear Mr. Rett:

Please consider this the report of the undersigned as Texas liaison for the ABA Committee on State Securities Regulation. A. Enforcement Actions

Since the last meeting of the Committee, there have been several criminal actions taken by the Texas Securities Board. A detailed description of the proceedings can be found by viewing the agency’s website at www.ssb.state.tx.us/orders. Indictments were obtained against a number of individuals accused of violating the anti-fraud and securities and broker-dealer registration provisions of the Texas Securities Act in connection with a variety of investment frauds. On May 22, 2007, the Securities Commissioner initiated a legal proceeding requesting an Emergency Cease and Desist Order against a Tennessee company, National Foundation of America, and its officers for allegedly misleading investors as to its status as a recognized firm under IRS Code Section 501(c)(3). The firm also allegedly failed to disclose other material facts related to its unregistered investment program.

http://www.secorewaller.com



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

TEXAS


On August 30, 2007, the Travis County District Court ordered the distribution of funds in the amount of $4.7 million to investors who were found by the Court to have been defrauded by David A. Hilburn, Brazos Valley Capital, LLC and other affiliated entities operating in the Houston area. The Securities Commissioner alleged in this lawsuit that Mr. Hilburn was misrepresenting profitability and concealing large losses in Brazos Valley Capital, LLC, an investment firm. The lawsuit also alleged that Mr. Hilburn concealed that he was previously disbarred from the practice of law in the State of Louisiana. The firm operated from 2003 until it was placed in receivership in early 2006 and was marketed primarily investors residing in the Houston area.

To my knowledge, no other civil actions, other than administrative actions, have been

filed by the agency through the Texas Attorney General’s office since the date of my last report. A number of administrative proceedings, initiated by consent and otherwise, can also be found by viewing the agency’s website. Many involve allegations of misconduct by registered persons and entities and resulted in the imposition of monetary sanctions, and in some cases, suspensions.

B. Changes to Regulations Finder rules (§§115.1(a)(9), 115.3(c)(2)(E), and 115.11). Effective September 1, 2006, the Board adopted a series of rules intended to encourage capital formation by creating a limited registration for a person acting as a finder. This new rule gives small businesses an additional legal option in raising capital and assures that finders complying with the rule can legally collect fees for their activities. A finder is defined as:

“an individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with § 115.11 of this title (relating to Activities of a Finder). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.”

The most significant aspect of the new rule is that a finder can receive compensation solely for introducing accredited investors to a company issuing securities and/or introducing an issuer to accredited investors.

TEXAS


An individual who applies for registration as a finder receives a full waiver from the Agency’s usual examination requirements. Finder registration requires the filing of a Form BD (Uniform Application for Broker Dealer Registration), available on the Agency’s website, and payment of a $275 registration fee. Registration is valid for a calendar year and may be renewed annually. A finder is prohibited from participating in negotiating any of the terms of an investment and is not permitted to give advice to the parties regarding the advantages or disadvantages of entering into an investment. This is an example of finder activity:

Mr. A knows Mr. B, an accredited investor, from a preexisting social or business relationship. Mr. A knows that Mr. B is looking for an investment opportunity. Mr. A also knows Mr. C, who has a company in need of investors. After registering as a finder, Mr. A can received a fee from Mr. B and/or from Mr. C’s company for introducing Mr. B to Mr. C. Mr. A can do nothing more than make the introduction, either in person or by providing contact information so that Mr. B and Mr. C can contact each other. Mr. A cannot advise Mr. B on whether Mr. C’s company is a good investment. He can not accept Mr. B’s investment funds or even deliver them to Mr. C. Simply put, Mr. A can only make the introduction, then walk away and let the two parties take it from there.

There are significant differences between Texas’ new finder rules and the SEC’s approach toward finders. I will continue to monitor the Board’s enforcement of these new finder rules and provide any updates in my next report. Amendment to §115.1, Definitions. “Branch office” is defined as “any location where one or more agents of a dealer regularly conduct the business of effecting any transactions in, or inducing or attempting to induce the purchase or sale of, any security, or that is held out as such.” The amendment was made in 2006 to coordinate with the adoption of Form BR, the Uniform Branch Office Form, which is used by all states that register branch offices and by FINRA. The definition and form were developed jointly by NASAA and FINRA.

TEXAS


The branch office definition excludes: (1) any location that is established solely for customer service and/or back office type functions where no sales activities are conducted and that is not held out to the public as a branch office; (2) any location that is the agent’s primary residence, provided that: (a) only one agent, or multiple agents who reside at that location and are

members of the same immediate family, conduct business at the location;

(b) the location is not held out to the public as an office and the agent

does not meet with customers at the location; (c) neither customer funds nor securities are handled at that location; (d) the agent is assigned to a designated branch office, and such

designated branch office is reflected on all business cards, stationery, advertisements, and other communications to the public by such agent;

(e) the agent’s correspondence and communications with the public are

subject to the dealer’s supervision; (f) electronic communications (e.g., e-mail) are made through the

dealer’s electronic system; (g) all orders are entered through the designated branch office or an

electronic system established by the dealer that is reviewable at the branch office;

(h) written supervisory procedures pertaining to supervision of sales

activities conducted at the residence are maintained by the dealer; and

(i) a list of the residence locations are maintained by the dealer; (3) any location, other than a primary residence, that is used for securities business for less than 30 business days in any one calendar year, provided the dealer complies with the provisions of clause (ii)(II) - (VIII) of this subparagraph;

TEXAS


(4) any office of convenience, where agents occasionally and exclusively by appointment meet with customers, which is not held out to the public as an office; (5) any location that is used primarily to engage in non-securities activities and from which the agent(s) effects no more than 25 securities transactions in any one calendar year; provided that any advertisement or sales literature identifying such location also sets forth the address and telephone number of the location from which the agent(s) conducting business at the non-branch locations are directly supervised; (6) the floor of a registered national securities exchange where a dealer conducts a direct access business with public customers; and (7) a temporary location established in response to the implementation of a business continuity plan. Amendment to §116.10, Supervisory Requirements. The supervisory systems requirement for investment advisers was amended in 2006 to clarify that such systems are required to be in writing. The requirements are very general so that a registered person has the flexibility to design and implement a system of a size and nature that is reasonable in relation to the investment adviser’s business operations. The SEC had already required investment advisers to have written supervisory requirements and the states have begun to add the express “written” requirement so that small investment advisers - even sole practitioners -will establish and maintain written supervisory procedures. Supervisory systems must be written and available for immediate inspection by the Board’s examiners in either print or electronic format. This requirement serves two distinct purposes: (1) it provides an examiner with a readily available set of supervisory requirements created and maintained by an investment adviser that the examiner can use to determine the adviser’s and investment adviser representatives’ compliance with supervisory procedures of the adviser, and (2) it provides a management tool for an investment adviser’s use when an investment adviser representative fails to comply with the firm’s supervisory system. Strong supervisory systems place more focus on prevention and detection of violations and make high-level personnel more responsible for implementing and overseeing an investment adviser’s compliance program. Importantly, the amendment requiring written supervisory systems also puts more emphasis on not just having a compliance program, but having an effective compliance program. By having written supervisory procedures, firms have a process to track the development, maintenance and updating of their supervisory systems. The Board’s examiners are very focused on whether firms of all sizes are adequately supervising their employees, investment adviser representatives, and restricted representatives such as solicitors, particularly those in branch offices.

TEXAS


Securities Exempt from Registration. Section 6 of the Act, Exempt Securities, provides exemption from registration for certain securities. Subsection F provides an exemption for securities which at the time of sale have been listed on an exchange named in subsection F. Among the list are securities “designated or approved for designation on notice of issuance on the national market system of the NASDAQ stock market. In 2006, the Board adopted an amendment to §111.2 adding new subsection (f), to define the “national market system of the NASDAQ Stock Market,” as used in the Act, Section 6.F, to include only the NASDAQ Global Select Market, NASDAQ Global Market, and NASDAQ Capital Market.

I will update these events when I next report for purposes of the ABA spring and annual meetings.

Sincerely, /s/ Stephen J. LaTorre

Stephen J. LaTorre SJL:cm

UTAH


UTAH STATE LIAISON REPORT

UTAH


VERMONT


VERMONT STATE LIAISON REPORT

MEMORANDUM TO: Committee on State Regulation of Securities c/o Ellen Lieberman, Esq., Co-Chair (via electronic mail) FROM: William A. Mason, Esq. DATE: June 20, 2007 RE: Subcommittee on Liaison with Securities Administrators and NASD Vermont Liaison Report and Enforcement Actions Through June 20, 2007 Ladies and Gentlemen:

This is the Vermont Liaison Report as of June 20, 2007, to the Committee on State Regulation of Securities. This letter provides a status report since June 30, 2006 on legislative, regulatory, and enforcement activities with respect to the Vermont Uniform Securities Act, as amended (“Vermont Securities Act”), and other matters of related interest.

The Vermont Securities Act is administered by the Securities Division of the Vermont Department of Banking, Insurance, Securities & Health Care Administration (the ”Securities Division”).

Vermont Securities Act and Regulations

The Vermont Securities Act took effect on July 1, 2006. The Vermont Securities Act can be found at Chapter 150 of Title 9 of the Vermont Statutes Annotated. The predecessor Securities Act can be found at Chapter 131 of Title 9 of the Vermont Statutes Annotated (the “Predecessor Act”). The Predecessor Act and the regulations, orders, policy statements and bulletins issued under the Predecessor Act will continue to apply in limited situations, as explained in Section 3 of 2005 Act No. 11.

The Commissioner of the Securities Division has issued Order No. 06-43-S to continue some of the substantive provisions of the regulations, orders, bulletins and policy statements issued under the Predecessor Act, as follows: (i) to the extent such provisions are consistent with the Act; and (ii) to the extent such provisions are relevant to current practices of the Securities Division. The Order is available on the Securities Division’s website.


The Securities Division brought the following enforcement proceedings since June 30, 2006:

VERMONT


v Target Credit Intergiro, Limited, October 17, 2006. The Commissioner ordered the Respondents to cease and desist from violating the Vermont Securities Act by offering or selling unregistered securities and from offering or selling securities without disclosing material information. The Respondents sold unregistered securities, a product which it called “Factoring Fixed Income Offerings”, without making the required filings with Vermont as required under the Vermont Securities Act.

v Mitchell M. Maynard, Dorice A. Maynard, January 16, 2007. The Commissioner issued an Order barring the Respondents from becoming licensed as investment professionals in Vermont for a period of five (5) years, requiring restitution of funds to the defrauded investors and fines to be paid to the Securities Division. Respondents were found to have acted as unlicensed investment advisers and to have defrauded Vermont residents by enticing them to purchase high risk, speculative investments with the promise of exaggerated investment returns.

v Gary Scholze, January 31, 2007. The Commission ordered the Respondents to cease and desist from violating the Vermont Securities Act by soliciting investments in Vermont. Respondent was found to have solicited investments from Vermont residents and to have converted the majority of those investments, along with investments made by investors outside of Vermont, into his personal accounts, for his personal use. The Commissioner also permanently barred Respondent from registration in Vermont as a broker-dealer, investment adviser or investment adviser representative.

* * *

If any Committee member has a question about these matters or other matters involving Vermont law, please do not hesitate to contact me at (802) 658-0220. William A. Mason Gravel and Shea cc: Mr. Donald A. Rett, Subcommittee Co-chair (via electronic mail)

VIRGINIA


VIRGINIA STATE LIAISON REPORT

See Ohio Report as of 3-17-07

WASHINGTON


WASHINGTON STATE LIAISON REPORT

HARRIS, MERICLE & WAKAYAMA

A Professional Limited Liability Company

A T T O R N E Y S A T L A W JOHN L. MERICLE Direct Telephone (425) 742-3985 Direct Fax (425) 742-4676 E-mail: [email protected]

999 THIRD AVENUE, SUITE 3210 SEATTLE, WASHINGTON 98104

FAX (206) 624-8560 (206) 621-1818

Port Townsend Office 213 TAYLOR STREET PORT TOWNSEND, WASHINGTON 98368

FAX (360) 379-9378 (360) 379-9377

MEMORANDUM

TO: ABA STATE REGULATION OF SECURITIES COMMITTEE FROM: JOHN L. MERICLE DATE: JANUARY 24, 2007 RE: WINTER 2007 UPDATE; ABA STATE REGULATION OF SECURITIES

COMMITTEE LIAISON REPORT FOR WASHINGTON STATE Uniform Securities Act of 2003 As mentioned in my last report, The Evergreen State’s version of the Uniform Securities Act of 2003 did not receive final action in the 2006 session of our Legislature. However, it appears that the bill will be reintroduced during the 2007 session. Our Department of Financial Institutions will not sponsor the bill, but hopes to be able to support it in the coming session. In other, related developments: 1. To address concerns raised by local banking industry, minor amendments were made to align the USA bill with the Gramm Leach Bliley Act exceptions for banks acting as broker-dealers. 2. The Washington State Bar Association’s Board of Governors has endorsed passage of the bill. 3. The American Council of Life Insurers (ACLI) has made knows its opposition to the new legislation, primarily over the bill’s treatment of variable annuities as securities. As of this date, the Securities Industry and Financial Markets Association (SIFMA) and ACLI are still opposing Washington’s USA bill as written. Adoption of NASAA MJDS Rules The Division has adopted, effective last December, the NASAA rules for Multi-Jurisdictional Disclosure System registrations, providing for their effectiveness three (3) days after filing, and providing a secondary trading exemption, following the SEC’s declaration of the MJDS offering’s effectiveness, for non-issuer transactions in any class of such an issuer’s securities, whether effected through a broker-dealer or not.


WASHINGTON


HARRIS, MERICLE & WAKAYAMA A Professional Limited Liability Company

A T T O R N E Y S A T L A W JOHN L. MERICLE Direct Telephone (425) 742-3985 Direct Fax (425) 742-4676 E-mail: [email protected]

999 THIRD AVENUE, SUITE 3210 SEATTLE, WASHINGTON 98104

FAX (206) 624-8560 (206) 621-1818

Port Townsend Office 213 TAYLOR STREET PORT TOWNSEND, WASHINGTON 98368

FAX (360) 379-9378 (360) 379-9377

MEMORANDUM

TO: ABA STATE REGULATION OF SECURITIES COMMITTEE FROM: JOHN L. MERICLE DATE: JUNE 20, 2007 RE: SPRING 2007 UPDATE; ABA STATE REGULATION OF SECURITIES

COMMITTEE LIAISON REPORT FOR WASHINGTON STATE Uniform Securities Act of 2003 In what seems to be a developing annual ritual, The Evergreen State’s version of the Uniform Securities Act of 2003 did not receive final action in the 2007 session of our Legislature. However, although the bill’s fate was the same as in the 2006 session, hearings were held on the bill introduced during the 2007 session, but it was not reported out of committee. Although receiving the support of the Washington State Bar Association, the legislation was opposed by the American Council of Life Insurers (ACLI), primarily over the bill’s treatment of variable annuities as securities, and the Securities Industry and Financial Markets Association (SIFMA), on the general ground that the bill is not sufficiently uniform with that of legislation adopted in other states. The future of this legislation in Washington State is unclear at the present time. Solicitation of Comments Regarding Investment Adviser Advertising to Senior Citizens

The Securities Division has issued a “Preproposal Statement of Inquiry” (Form CR-101) soliciting comments on the possible amendment of its rules to regulate the use of professional designations by broker-dealers, investment advisers and their representatives relating to senior citizens. This initiative comes about as the result of the growth in the use of professional designations which state or imply that a person has special expertise, certification, or training in advising or servicing senior citizens, and the Division’s concern that the use of such designations


WASHINGTON


by persons who do not in fact possess special expertise, certification or training may result in the deception of investors.

The Preproposal Statement of Inquiry is available at:

http://www.dfi.wa.gov/sd/rulemaking/pdf/pro_designations_cr101.pdf

Related questions should be directed to Faith Anderson, Esq. by telephone at (360) 725-7825 or by e-mail at [email protected].

http://www.dfi.wa.gov/sd/rulemaking/pdf/pro_designations_cr101.pdf


WEST VIRGINIA


WEST VIRGINIA STATE LIAISON REPORT

See Ohio Report as of 3-17-07

WISCONSIN


WISCONSIN STATE LIAISON REPORT

January 22, 2007 Via Electronic Mail [email protected]

ATTORNEYS AT LAW

VEREX PLAZA 150 EAST GILMAN STREET MADISON, WI 53703-1481 POST OFFICE BOX 1497 MADISON, WI 53701-1497 608.257.5035 TEL 608.258.4258 FAX www.foley.com CLIENT/MATTER NUMBER 999450-0101

Ellen Lieberman, Esq. Debevoise & Plimpton LLP 919 Third Avenue New York, NY 10022

Re: ABA State Liaison Report - Wisconsin

Dear Ms. Lieberman:

The significant events that occurred during 2006 relating to the Wisconsin Uniform Securities Law (Ch. 551 Wisconsin Statutes) and Administrative Rules thereunder consisted of the following matters:

Interest on Free Credit Balances Now Available to Wisconsin Investors.

Up until recently, the definition of “banking” under Wisconsin banking laws created several hurdles to broker-dealers to overcome before direct interest payments could be made to Wisconsin investors in their broker-dealer accounts. As a result, few if any broker-dealers offered this option in Wisconsin. However, the passage of 2005 Wisconsin Act 158 which changed the definition of “banking” in Section 224.02 Wis. Stats. (effective April 5, 2006) allows broker-dealers to calculate and pay interest on uninvested funds in Wisconsin investor accounts in the same manner as they do for investors residing in other states.

Branch Office Notices Now Accepted Electronically.

The Wisconsin Division of Securities announced that all branch office opening, closing and amendment filings would be accepted electronically on the CRD and IARD. However, all branch office renewals would still be processed in paper form as in previous years.

Status of Possible Implementation of the Uniform Securities Act (2002).

Legislation was introduced in the Wisconsin state legislature during the 2006 session to adopt the USA (2002). The “Wisconsin” version of USA (2002) maintains certain provisions under the current law that were unique for purposes of regulating securities activities in Wisconsin, but is

http://www.foley.com

WISCONSIN


otherwise true to the USA (2002) as adopted by the National Conference of Commissioners on Uniform State Laws. The legislation did not receive an up or down vote due to the fact that the Wisconsin banking industry was apparently concerned about provisions regulating securities transactions by banks. Whether recent developments on the federal front regarding the overall issue involving federal broker-dealer regulation and banks will cause a breakthrough on this issue in Wisconsin and in other states where the banking industry has caused a roadblock to implementation of the USA (2002) in such states, remains to be seen. As they say, “stay tuned.”

Very truly yours, Terry D. Nelson

cc: Don Rett (via electronic mail -- [email protected])

mailto:[email protected])

WYOMING


WYOMING STATE LIAISON REPORT

January 2007 Update

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. The Wyoming Secretary of State Securities Division is charged with the oversight of investment sales in the State of Wyoming. Pursuant to the WUSA, the Secretary of State may bring administrative actions against the registrations of persons who violate provisions of such law. The Secretary of State may also refer evidence of criminal wrongdoing to the Wyoming State Attorney General or to county attorneys who may institute criminal proceedings under the WUSA. For additional information, visit the Wyoming Securities Division’s Web site at: http://soswy.state.wy.us/securiti/securiti.htm.6 I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in the Area of Securities Regulation: Tom Cowan, the Director of the Wyoming Securities Division stated on January 22, 2007 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 2006. 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 2006 Budget Session that reconvened on February 13, 2006 and adjourned on March 11, 2006. He also stated that, as of this date, no bills relating to Wyoming securities or securities regulation law have been proposed for the 2007 General Session convened on January 9, 2007.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: Since the February 2005 Update, there have not been any court decisions addressing novel questions of law.

III. Developments Relating to NSMIA: On January 22, 2007, Mr. Cowan affirmed that Wyoming is “100% compliant” with the provisions and exceptions of NSMIA. Mr. Cowan stated that there have not been any new developments with respect to NSMIA in 2006. As of this date, there are no NSMIA-related bills in the pipeline for the 2007 General Session.

6 The information contained in the foregoing paragraph was obtained on 01/24/02 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


IV. Significant Development in the Division’s Enforcement of Regulation Activities: 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 October 11, 2006, an administrative Stipulation for Revocation of Registration and Final Order was entered in the matter of Greg M. Novotny alleging that Mr. Novotny, formerly a registered securities agent with Piper Jaffray in Casper, Wyoming, engaged in unethical practices in the securities industry, and allegedly committed securities fraud. The Order alleges that Novotny told his client that Piper Jaffray offered free tax preparation services. It is also alleged that he caused customer securities and cash positions to be liquidated under the pretense of paying income taxes. Novotny filed no taxes and made no payments on behalf of his client as he indicated. The client money was allegedly used by Mr. Novotny for other purposes. In August 2006, Harry “Hal” Curlett, founder and CEO of a Cody, Wyoming company known as ProDril Services Inc. was sentenced in U.S. District Court for the District of Wyoming to four months in prison for conspiracy to commit sales of unregistered stock. In October 2006, William D. “Dan” Elsom, a former Cody attorney, and David Nall, both of Texas, pleaded guilty to one felony count of conspiracy to sell unregistered ProDril stock and were sentenced to three years supervised probation, and a $2,000 fine. The first four months of supervised probation for each will be spent in home confinement.

The matter was prosecuted by the U.S. Attorney for Wyoming and involved sales of stock which were initially offered under a Federal Regulation D, Rule 506 exemption, but which continued to be sold over the period of many years without regard to the limits imposed by the exemption and without regard to accreditation status of the shareholders in violation of the law. No fraud was alleged. Cowan stated that oil and gas promotions are being offered to investors allegedly without registration and with false statements and omissions of material fact. One such promotion promised to drill and produce coal bed methane wells in Wyoming’s Powder River Basin. The Regulation D, 506 offering, sold through a registered broker-dealer firm, raised nearly $3 million which was not used to drill coal-bed methane wells on the leases described in the offering memoranda.

V. New Developments in Corporation, Partnership and Association Law: The Wyoming State Legislature entered into a General Session on January 11, 2005 and adjourned on March 3, 2005. The Wyoming State Legislature convened for the 2006 Budget Session on February 13, 2006 and adjourned on March 11, 2006. There were no bills relating to corporation, partnership and association law that were passed during the 2006 Budget Session. The 2007 General Session currently has seven bills relating to corporations, partnerships and associations. As reported in the June 2006 Update, there were two separate bills enacted relating to Wyoming general corporate law:

WYOMING


a. Senate File No. SF0052: Business Entities—Electronic Filings. This bill allows business entities that are required to file an annual report and pay an annual license fee to file annual reports electronically with the Wyoming Secretary of State and pay the required fee with a credit card, or by electronic funds transfer. This bill was signed by the Governor on February 24, 2005 and became effective on July 1, 2005. b. House Bill No. HB0016: Corporation—Electronic Meetings. This bill amends Article 701(b) of Chapter 16 of Title 17, Wyoming Statutes, to allow for annual shareholders meetings to be held by means of “remote communication.” This bill provides that a decision to hold an annual meeting of shareholders by remote communication shall be made by the board of directors in its sole discretion. This bill also amends other sections of the Wyoming Statutes, including Articles 704(a), 705(a), 705(e), 706(a), 807(a), 820(b) and 821(a) of Chapter 16 of Title 17, Wyoming Statute, to provide the procedure for such meetings by remote communication. This bill was signed by the Governor on February 18, 2005 and became effective on July 1, 2005.

WYOMING


WYOMING (update as of August 31, 2007) 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. The Wyoming Secretary of State Securities Division is charged with the oversight of investment sales in the State of Wyoming. Pursuant to the WUSA, the Secretary of State may bring administrative actions against the registrations of persons who violate provisions of such law. The Secretary of State may also refer evidence of criminal wrongdoing to the Wyoming State Attorney General or to county attorneys who may institute criminal proceedings under the WUSA. For additional information, visit the Wyoming Securities Division’s Web site at: http://soswy.state.wy.us/securiti/securiti.htm.7 I. New Statutory Amendments, New or Amended Regulations or Administrative Procedures in the Area of Securities Regulation: Tom Cowan, the Director of the Wyoming Securities Division stated on August 28, 2007 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.

II. Court or Administrative Decisions Addressing Novel Questions of Law or Changing Prior Interpretations of Law in Significant Ways: Since the February 2005 Update, there have not been any court decisions addressing novel questions of law.

III. Developments Relating to NSMIA: On August 28, 2007, Mr. Cowan affirmed that Wyoming is “100% compliant” with the provisions and exceptions of NSMIA. Mr. Cowan stated that there have not been any new developments with respect to NSMIA since the January 2007 update. As of this date, there are no NSMIA-related bills in the pipeline for the 2007 General Session.

IV. Significant Development in the Division’s Enforcement of Regulation Activities: 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.

7 The information contained in the foregoing paragraph was obtained on 01/24/02 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


On October 11, 2006, an administrative Stipulation for Revocation of Registration and Final Order was entered in the matter of Greg M. Novotny which alleged that Mr. Novotny, formerly a registered securities agent with Piper Jaffray in Casper, Wyoming, engaged in unethical practices in the securities industry, and allegedly committed securities fraud. The Order also alleged that Novotny told his client that Piper Jaffray offered free tax preparation services. It was also alleged that he caused customer securities and cash positions to be liquidated under the pretense of paying income taxes. Novotny filed no taxes and made no payments on behalf of his client as he indicated. The client money was allegedly used by Mr. Novotny for other purposes. Mr. Novotny was prosecuted by the U.S. Attorney General in Wyoming. Mr. Novotny entered a plea agreement and received thirty-eight months in prison, restitution in the amount of $83,000 and probation upon release from prison. In August 2006, Harry “Hal” Curlett, founder and CEO of a Cody, Wyoming company known as ProDril Services Inc. was sentenced in U.S. District Court for the District of Wyoming to four months in prison for conspiracy to commit sales of unregistered stock. In October 2006, William D. “Dan” Elsom, a former Cody attorney, and David Nall, both of Texas, pleaded guilty to one felony count of conspiracy to sell unregistered ProDril stock and were sentenced to three years supervised probation, and a $2,000 fine. The first four months of supervised probation for each will be spent in home confinement.

The matter was prosecuted by the U.S. Attorney for Wyoming and involved sales of stock which were initially offered under a Federal Regulation D, Rule 506 exemption, but which continued to be sold over the period of many years without regard to the limits imposed by the exemption and without regard to accreditation status of the shareholders in violation of the law. No fraud was alleged. Cowan stated that oil and gas promotions are being offered to investors allegedly without registration and with false statements and omissions of material fact. One such promotion promised to drill and produce coal bed methane wells in Wyoming’s Powder River Basin. The Regulation D, 506 offering, sold through a registered broker-dealer firm, raised nearly $3 million which was not used to drill coal-bed methane wells on the leases described in the offering memoranda.

V. New Developments in Corporation, Partnership and Association Law: 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. The 2007 General Session currently has two bills relating to corporations, partnerships and associations. As reported in the January 2007 Update, there were two separate bills enacted relating to Wyoming general corporate law:

a. House Bill No. HB0009: Corporations Share Certificate Requirements. This act prohibits corporations from issuing shares in bearer for, i.e. a form in which the certificate is payable to the bearer of the certificate without endorsement. The act requires corporations to confirm to any shares outstanding by October 1, 2007.

b. 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

WYOMING


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.

CANADA


CANADA LIAISON REPORT

CANADA


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