REPORT OF INVESTIGATION - Project on Government Oversight

Transcription

This document is subject to the provisions of the Privacy Act of 1974, and may require redaction
before disclosure to third parties. No redaction has been performed by the Office of Inspector
General. Recipients of this •report should not disseminate or copy it without the Inspector General's
approval.
REPORT OF INVESTIGATION
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OFFICE OF INSPECTOR GENERAL
Case No. 01G-485
No. Misconduct Found at Denver Regional Office
Introduction and Summary of Results of Investigation
On April 16, 2008, the Securities and Exchange Commission ("SEC" or
"Commission") Office of Inspector General ("OIG") opened an inyestigation into
allegations by shareholders of the company Universal Express, Inc. ("Universal
Express"/stock symbol "USXP") that the SEC's Denver Regional Office ("DRO")
engaged in misconduct in their inyestigation and prosecution of Uniyersal Express.
Specifically, Universal Express shareholders made the following allegations: (1) then
(b)(7)(C)
r in the
Diyision of Enforcement ("Enforcement"), perjured himself in a letter to Senator Bill
Nelson about the Universal Express investigation; (2) DRO Enforcement attorneys
committed perjury to the Court by objecting to Universal Express's late request for a jury
trial after allegedly agreeing Universal Express was entitled to a jury trial; (3) the Courtappointed Uniyersal Express Receiyer had a conflict of interest; and (4) the SEC's lawsuit
against Universal Express was filed in retaliation for its filing suit against the SEC. 1
Our investigation did not substantiate the allegations of misconduct at the DRO for
the following reasons.
Scone of Investigation
The OIG obtained and reviewed hundreds of emails and documents submitted by
the "Concerned USXP Shareholders Group" and other individuals related to Universal
(b)(7)(C)
Express. In addition, we took on-the-record testimony
of then
(b)(7)(C)
and current
We interviewed by
telephone current (b)(7)(c)
current (b)(7)(C)
(b)(7)(C)
and staff attorney (b)(7)(c)
We also interviewed by telephone
The OIG has received hundreds of emails related to the Universal Express matter. Many of those
emails are from a group of individuals who call themselves the "Concerned USXP Shareholders
Group" who made the allegations we investigated here. The crux of the remainder of their claims
involve allegations of naked short selling against Universal Express. Other entails came from
individuals who strongly disagree with the shareholders about the Universal Express case and the role
of naked short selling in it. The OIG has reviewed and responded to all those emails In addition, we
conducted both this investigation of the discrete allegations of misconduct on the part of SEC
employees that are within the OIG's jurisdiction, and issued a separate audit report entitled, "Practices
Related to Naked Short Selling Complaints and Referrals," Report No. 450 on March 18, 2009, which
is available on the SEC OIG's website at http://www.sec-oig.gov .
General. Recipients of this report should not disseminate or copy it without the Inspector General's
approval.
several of the Universal Express shareholders and interestedparties, including: (1)
(2) (b)(7)(C)
1 (3) former (b)(7)(C)
03)7P
and (4) (b)(7)(C)
The OIG
attempted to take on-the-record testimony of (b)(7)(C) but he was unable to make time
(b)(7)(C)
available to us. We did have numerous conversations with o
n the telephone.
(b)(7)(C)
The OIG also interviewed
who has emailed the OIG often about
Universal Express-related matters.
Background
(b)(7)(C)
I.
Allegations by Universal Express Shareholders and the Universal Express
Lawsuits
Uniyersal Express, Inc. was a public company whose securities were traded in the
over-the-counter market and filed periodic reports with the SEC. According to Universal
Express officers, in January 1998, Universal Express noticed a substantial increase in the
daily sales volume of Universal Express trading and deduced that such a volume of sales
could only arise from naked short selling of the company's common stock. Exhibit 1.
Uniyersal Express had authorized and issued 3 million shares of the company's common
stock, but during a three week period 70 million shares were traded in the open market.
Id. Subsequently, Universal Express filed suit against certain defendants claiming they
were victims of naked short selling, and won judgments. IdSpecifically, Universal Express received two judgments in the Eleventh Judicial
Circuit of Florida in Miami-Dade County from two separate trials against two different
groups of defendants. Id. Universal Express filed suit against a company called Select
Capital Adyisors, Inc- ("Select Capital"), with which they had entered into an inyestment
banking agreement. Id. In the first case, there was a default judgment on liability and the
issue of damages went to a jury. Id. Universal Express received a judgment against
Select Capital and others in the amount of $389 million in July 2001 for fraud and deceit
related to naked short selling. Id. The second trial, in which the defendants were without
counsel, resulted in a judgment for Universal Express in the amount of $137 million
related to short selling. IdUniversal Express argues because of this "war" against naked short selling the
SEC began a series of harassing actions, including issuing several subpoenas requiring
the production of documents, designed to preoccupy Universal Express's officers. Id.
II.
Naked Short Selling
The practice of short selling "involves a sale of a security that the seller does not own
or a sale which is consummated by the delivery of a security borrowed by, or for the account
of, the seller." 2 A short seller believes that the price of the stock will fall, or is seeking to
2
Amendments to Regulation SHO, Interim final temporary rule, Release No. 34-58773, October 14,
2008 at 5-
2
approval.
hedge against potential price volatility in securities he or she owns. 3 If the price of the stock
falls, the short seller buys back the stock at a lower price and makes a profit. 4 If the stock price
rises, however, the short seller will incur a loss. 5 In the typical short sale transaction, the seller
borrows stock from his or her brokerage firm and delivers the borrowed shares to the buyer
within the standard settlement period (currently three business days). 6
A "naked short sale" occurs when "the seller does not borrow securities in time to
make delivery to the buyer within the standard three-day settlement period." 7 "As a
result, the seller fails to deliver securities to the buyer when delivery is due (known as a
`failure to deliver' or lail')." 8 Failures to deliver may result from either short or long
sales. 9 In addition, failures to deliver may be caused by legitimate reasons, such as
human or mechanical errors or processing delays. 19 A fail may also result from naked
short selling - e.g., where a market maker who sells short thinly traded illiquid stock in
response to customer demand encounters difficulty in obtaining securities at the time for
delivery."
The majority of trades in the United States are cleared and settled through systems
administered by clearing agencies, which are registered with the SEC. The DTCC is the
Depository Trust & Clearing Corporation, which is a holding company consisting of five
clearing corporations and one depository, including the NSCC. See
http://www.dtcc.com. NSCC is the National Securities Clearing Corporation which
clears and settles the majority of equity securities trades conducted on the exchanges and
in the oyer-the-counter markets. Id.
3
4
5
Division of Market Regulation: Key Points About Regulation SHO, April 11, 2005,
http://www.sec.gov/spotlight/kevregshoissues.htm, at 1.
Id.
Id.
6
Investors must generally complete or settle their security transactions within three business days
(known at T+3 or "trade date plus three days"). "T+3 means that when a trade occurs, the
participants to the trade deliver and pay for the security at a clearing agency three business days
after the trade is executed." Amendments to Regulation SHO, Final rule, Release No. 34-58775,
October 14, 2008, at 2 n.4. Commission Rule 15c6-1, 17 C.F.R. § 240.15c6-1, prohibits brokerdealers from effecting or entering into contracts for the purchase or sale of securities that provides
for payment of fluids and delivery of securities later than three business days after the date of the
contract, unless otherwise expressly agreed to by the parties at the time of the transaction. Id.
7
Division of Market Regulation: Key Points About Regulation RIO, April 11, 2005, at 2 (footnote
omitted).
8
Division of Market Regulation: Key Points About Regulation SHO, April 11, 2005, at 2 (footnote
omitted).
9
10
11
Id.
Id.
Id.
3
approval.
Naked short selling is not necessarily a violation of the federal securities laws or
the Commission's rules. 12 Nonetheless, the SEC's Division of Trading and Markets
("Trading and Markets') has recognized that abusive naked short selling can have
negative effects on the market, as fraudsters may use naked short selling to engage in
illegal market manipulation, e.g., by selling stock short and failing to deliver shares at the
time of settlement with the purpose of driving down the stock price. t 3 According to
Trading and Markets, such manipulative activity would violate yarious securities laws
and regulations, including Rule 10b-5 promulgated under the Securities Exchange Act of
1934. 14
The Commission has repeatedly recognized that naked short selling can depress
stock prices and may have harmful effects on the market. For example, in initially
proposing its short sale regulation, Regulation SHO, the Commission specifically stated:
Naked short selling can haye a number of negative effects on the market,
particularly when the fails to deliver persist for an extended period of time
and result in a significantly large unfilled deliyery obligation at the
clearing agency where trades are settled. At times, the amount of fails to
deliyer may be greater than the total public float. In effect the naked short
seller unilaterally conyerts a securities contract (which should settle in
three days after the trade date) into an undated futures-type contract,
which the buyer might not have agreed to or that would have been priced
differently. The seller's failure to deliver securities may also adversely
affect certain rights of the buyer, such as the right to vote. More
significantly, naked short sellers enjoy greater leverage than if they were
required to borrow securities and deliver within a reasonable time period,
and they may use this additional leyerage to engage in trading activities
that deliberately depress the price of a security- ' 5
The Commission adopted regulation SHO "to update short sale regulation in light
of the numerous market developments since short sale regulation was first adopted in
1938." 16 Regulation SHO became effective on September 7, 2004, and compliance with
the regulation began on January 3, 2005. 17 Regulation SHO established a new regulatory
12
13
Id.
Id. at 7-8.
14
Id. at 8. See 17 C.F.R. § 240.10b-5. In addition, the Commission has recently adopted a naked short
selling antifraud rule, Rule 10b-21, 17 C.F.R. § 240.10b-21.
15
Short Sales, Proposed Rule, Release No. 34-48709, October 29, 2003, at 6-7.
16
Division of Market Regulation: Key Points About Regulation SHO, April 11, 2005, at 2. See Short
Sales, Final rule; Interpretation, Release No. 34-50103, July 28,2004.
17
Division of Market Regulation: Responses to Frequently Asked Questions Concerning Regulation
SHO, at 1.
4
approval.
framework governing the short selling of securities, including naked short selling- 18
Among other things, Regulation SHO established "uniform locate and delivery
requirements in order to address problems associated with failures to deliver, including
potentially abusive 'naked' short selling . .," and created uniform marking requirements
for sales of equity securities. 19
On October 14, 2008, the SEC issued additional amendments to Regulation SHO
in the form of an interim final temporary rule addressed at abusive naked short selling.
See 17 C.F.R. Part 242.204T. The Commission noted that it was issuing this rule to
"address potentially abusive 'naked' short selling by requiring that securities be
purchased or borrowed to close out any fail to deliver position in an equity security by no
later than the beginning of regular trading hours on the settlement date following the date
on which the fail to deliyer position occurred." 29 Id.
Investigative Background Findings
I.
The Investigation of Universal Express
A.
The SEC Files a Complaint Against Universal Express
On April 30, 2003, the SEC receiyed an email from a "concerned citizen," who
said he had neyer held a position in Universal Express and asked the SEC to investigate
the "promotional actiyities of an otcbb [Over-the-Counter Bulletin Board] stock called
Universal Express (USXP)." 21 Exhibit 3. The email complained that Uniyersal Express
". . . has been on a massive promotional campaign while diluting their stock for
discounted PIPE funding." Id. That email was forwarded from the SEC's Office of .
Investor Education and Assistance to the DRO on May 15, 2003. Id. The email was then
forwarded within the DRO on May 19, 2003 to current Assistant Regional Director Mary
Brady and staff attorney Hugh Beck. Id. Seyeral days later, on May 27, 2003, those
same DRO attorneys opened a matter under inquiry ("mur) into Uniyersal Express,
according to an internal SEC database. Exhibit 4. Another April 9, 2003 investor
complaint about Universal Express was cited as the source of the case in the DRO's
Action Memorandum in this matter. Exhibit 5. A formal investigation was instituted by
the DRO on July 18, 2003. Exhibit 4. A Formal Order was issued in this matter on
18
19
Id. at 2.
Id.
20
For more information on naked short selling, see the OIG's audit report entitled, "Practices Related to
Naked Short Selling Complaints and Referrals," available at http://www.sec-oig.gov .
21
One of the issues some of the Universal Express shareholders asked the OIG to determine was which
SEC official ordered the "full court press" of Universal Express and its officers. We determined that it
was the team of DRO attorneys who were working on the Universal Express investigation who opened
the inquiry, and it was ultimately the full Commission who agreed to file a complaint aeainst
Universal Express and its officers. We note that (b)(7) did not begin as 1 (b ) ( 7 )(c)
December 2006. Transcript of Testimony of (b)(7)(c)
(hereinafter 1(b)(7)( Tr."), May 20, 2008,
attached hereto as Exhibit 2, at 6.
5
approval.
August 5, 2003. Exhibit 6. In accordance with the Formal Order, the DRO issued
investigative subpoenas to Universal. Express seeking certain documents. Id.
B.
Universal Express Sues the SEC
In response to those subpoenas, Universal Express filed a lawsuit against the SEC
on March 2, 2004 in the United States District Court for the Southern District of Florida
for constitutional torts, civil conspiracy, and aiding and abetting intentional interference
with business relations, all related to the SEC's failure to take action against naked short
sellers. Exhibit 1. Universal Express was seeking compensatory damages and
declaratory and injunctive relief. Id. According to the Commission's Action
Memorandum, Uniyersal Express filed suit against the SEC after Universal Express
counsel notified DRO attorneys that Universal Express CEO Richard Altomare
("Altomare") and its General Counsel Chris Gunderson ("Gunderson") would not comply
with the subpoenas requiring them to testify on March 15 and 17, 2004, in connection
with the DRO investigation. Exhibit 5.
On March 30, 2005, the Court issued a ten-page order dismissing Universal
Express's claims for damages with prejudice and dismissing all of Universal Express's
other claims without prejudice. Exhibit 7. The Court found that the SEC is immune from
suit, and that it had not waived sovereign immunity. Id. As noted by the Court, the crux
of Universal Express's complaint was that the SEC initiated an investigation against it,
and issued subpoenas, to harass and retaliate against Uniyersal Express for haying
criticized the SEC's policy on naked short selling. Id.
C.
The SEC's Lawsuit Against Universal Express
On March 24, 2004, the SEC filed a civil injunctive action against Uniyersal
Express, Altomare, Gunderson, and four other defendants, involyed in the illegal
distribution of Universal Express common stock to the public. Exhibit 8. The
Commission alleged Universal Express engaged in the unregistered sale of over 500
million shares of Universal Express common stock between April 2001 and March 2004
for which no exemption from registration was available. Id.
The Commission alleged in its Complaint that Universal Express, Altomare, and
Gunderson distributed stock through the four other defendants who were purportedly
consultants to the company. Id. According to the Complaint, those defendants paid
Universal Express in excess of $9.1 million for the stock, then resold the shares to the
public for a quick risk-free profit, and then used the proceeds to finance their subsequent
share purchases in the ongoing scheme to distribute the shares into the public market. Id.
Furthermore, the SEC alleged that while these issuances weighed on Universal Express's
stock price, Altomare issued a series of false press releases from May 2002 until April
2003 announcing funding commitments of $885 million and thereafter made other false
statements in interviews, press releases and filings with the SEC. Id. In addition, the
SEC alleged that following the illegal sales to the four defendants, Altomare diverted a
substantial portion of the proceeds to family members and personal accounts. Id. The
6
General. Recipients of this report should-not disseminate or copy it without the Inspector General's
approval.
SEC sought a temporary restraining order and an order for accounting against Universal
Express as well as injunctive relief against all defendants.
http://wwvv.sec.goy/litigation/complaints/comp18636.htm.
D.
The District Court's Rulings
On February 21, 2007, United States District Court for the Southern District of
New York Judge Gerald E. Lynch granted the SEC's motion for summary judgment in
part. SEC v. Universal Express, et al, 475 F. Supp. 2d 412 (February 21, 2007) (attached
hereto as Exhibit 9). Judge Lynch found that Altomare and Gunderson caused hundreds
of millions of shares to be offered and sold without registration and issued press releases
containing misleading statements about financing commitments. Id. Judge Lynch
granted a permanent injunction against Uniyersal Express, Altomare and Gunderson and
ordered disgorgement of over $9 million from Universal Express, over $1.4 million from
Altomare, and more than $360,000 from Gunderson. Id. Judge Lynch also barred
Altomare from serving as an officer or director of a public company. Id.
On March 8, 2007, Judge Lynch issued a final judgment in favor of the SEC
against Universal Express in the amount of $21,906,483, against Altomare in the amount
of $3,121,123, and against Gunderson in the amount of $794,711, and also denied
Universal Express's motion for reconsideration of the partial summary judgment. See
Exhibit 10. On June. 1, 2007, Universal Express, Altomare and Gunderson filed an
appeal of the summary judgment against them with the United States Court of Appeals
for the Second Circuit. Id. On April 18, 2008, the Court granted the SEC's motion for
contempt against Altomare for failing to comply with the March 8, 2007 Order. SEC vUniversal Express, et al, 546 F. Supp. 2d 132 (April 18, 2008). Altomare was therefore
incarcerated- Id. Altomare was released from jail on July 23, 2008 after it was
determined by the Court that he lacked the resources to pay the Court's judgment.
Exhibit 11.
The appeal was decided by the United States Court of Appeals for the Second
Circuit against Universal Express on November 13, 2008 in a Summary Order. Exhibit
12. On February 11, 2009, Universal Express filed a petition for writ of certiorari in the
United States Supreme Court for review of the Second Circuit's order. Exhibit 13.
E.
The Court-Appointed Receiver
On June 21, 2007, the SEC filed a motion to appoint a Receiver for Universal
Express- See Exhibits 10 & 14- On June 29, 2007, the SEC filed a motion for contempt
against Universal Express, Altomare and Gunderson because Altomare did not resign as
the CEO and Gunderson directed Universal Express to offer and sell an additional 20
billion shares of Universal Express stock from January through June 30, 2007. See
Exhibit 14.
On September 4, 2007, the Court, after considering potential candidates provided
by the SEC, appointed Jane W. Moscowitz ("Moscowitz") as the Receiver for Universal
7
approval.
Express to take custody, control and possession of the property and to collect and
conserve the assets of the company. Exhibit 14. Moscowitz issued her first report to the
Court on September 28, 2007, as well as a motion to authorize the sale of Universal
Express. Exhibit 15. In that report, the Receiyer stated that her preliminary evaluation of
the assets and liabilities of Universal Express is that "none of the operations is
profitable." Id.
At the end of that first report, the Receiver informed the Court that she had
received emails from Universal Express shareholders asking her about the status of their
investments. Id. The Receiver noted that most of those emails dealt with naked short
selling and claimed that there was a conspiracy by the SEC and the Court to retaliate
against Universal Express for its reyelations about naked short selling. Id. The Receiver
stated, "I have not dealt with any issues regarding the purchase or sale of shares, as this is
outside the scope of the acts the Court has asked of me." Id.
The Receiver issued a second report in November 2007, which discussed the $700
million judgments Uniyersal Express had obtained in Florida state courts in 2001 and
2003. Exhibit 16. The Receiver noted. that Universal Express's claim that these
judgments were "substantially collectable" seemed incorrect. Id. The Receiyer went on
to discuss the history of those cases, and noted that the defendants defaulted and
presented no defense to the charges. Id. Further, the Receiver stated that Altomare and
Gunderson testified, without cross examination, about the damages to Uniyersal Express
but Universal Express offered no documentary eyidence or expert proof of naked short
selling of Universal Express stock. Id.
The Receiyer issued a third report on July 1 , 2008, which coyered the period
from November 2007 through June 2008. Exhibit 17. The report identified steps taken
by the Receiver to locate company assets, and again discussed the two Florida state court
judgments. Id. Specifically, the Receiver noted that she had engaged former Uniyersal
Express counsel Arthur Tifford, to continue his collection efforts in those judgments. Id.
In addition, the Receiver stated, "Numerous Universal Express shareholders have sent
repeated communications alleging that Universal Express was the victim of naked, and
therefore, illegal short selling-" Id- According to the Receiver, these shareholders claim
that the decline in Universal Express's stock value is attributable solely to naked short
selling, not to the dilution caused by the issuance of over 20 billion shares of its stock or
to the fact that Universal Express was never profitable or to the press releases issued by
Universal' Express announcing financing that never materialized. Id. at 11.
The Receiver wrote that given the intense interest in the issue of naked short
selling in relation to Universal Express, she engaged a consultant who had experience as
a compliance officer in the securities industry to investigate the allegations of naked short
selling. Id. According to the Receiver, given their limited resources, the consultant could
not determine whether the episodes of "high volumes of short sales" were illegal. Id.
The Receiver noted that even if they had determined there was naked short selling of
Universal Express shares of stock, she would not havelad a cause of action against them
8
approval.
and any cause of action against naked short sellers "has always been held by the
shareholders." Id. at 12-13.
II.
The "Concerned USXP Shareholders Group" Views and Opposing Views
As noted above, the OIG has received hundreds of emails regarding Universal
Express. Many of those emails are from several individuals who call themselves the
"Concerned USXP Shareholders Group." Those individuals include (b)(7)(C)
(b)(7)(C)
and "Bud" Burrell. Burrell maintains blogs on the website,
http://www.thesanitycheck.com , which states that the site is about the "market reform
movement," described as a "loose affiliation of shareholder advocates, websites, attorney,
market pundits, shareholders and investors who are concerned about manipulative
practices in the U.S. stock markets." It further states that the primary focus is on naked
short selling and failing to deliyer, which they describe as a "practice that many belieye
poses a systematic crisis to the market system."
Other emails about Universal Express have come from individuals who hold
conflicting views of the case and of whether naked short selling is inyolyed or affects the
Uniyersal Express case- One of those individuals is (b)(7)(C)
who sent the OIG
several emails about Universal Express. (b)(7)(C)
told us in a telephone interview that she
belieyes naked short selling is a legitimate problem and that she thinks there is a lack of
(b)(7)(c)
policing and enforcement of Regulation SHO. Exhibit 18. According
to
between 2003 and 2005, before Regulation SHO became effective, it was fairly easy to
sell short without verification- Id. She belieyes this was being done primarily in Canada.
Id. (b)(7)(C) informed us that some issuers thought they were being targeted by naked
short sellers. Id. She does not believe naked short selling is as big a problem currently,
and said this is an indication that the system is working- Id. The OIG asked (b)(7)(c) if
she knew anyone else who might be able to shed light on the Universal Express matter,
she indicated she did not know anyone who lost money in Universal Express. Id.
(b)(7)(c)
further stated that she could not offer any comments on the specific allegations
we are investigating because she was not very familiar with Universal Express. Id.
.
M. Congressional Correspondence from the "Concerned USXP Shareholders
Group"
A.
(b)(7)(c)
First Letter to Senator Nelson
On November 9, 2007, Senator Bill Nelson of Florida wrote to the SEC and
enclosed correspondence he had received from (b)(7)(C)
Exhibit 19.
Senator Nelson attached an October 17, 2007 letter from (b)(7)(C) to Judge Lynch
about Universal Express. Id- Senator Nelson asked the SEC for a review and response to
the issues raised fill (b)(7)(c) j's letter to Judge Lynch. Id. (b)(7)(C)
indicated
he was writing on behalf of several concerned shareholders of Universal Express. Id.
In that letter, (b)(7)(C)
(1) urged the Court-appointed Receiver to keep the
company active fora period of time in order to collect any forthcoming judgments that
9
approval.
were due and from "any potential benefit of short covering in this equity from the
`alleged' naked shorts over the next month or so, when the full effects of the recently
revoked 'Grandfather Clause' come into play;" (2) asked the SEC to open its books as to
whether there was rampant short selling in Universal Express stock; and (3) identified a
conflict of interest of the Court-appointed Receiver that should prevent her from serving
as the Universal Express Receiver. Id. Specifically, (b)(7)(C)
alleged that the
Receiver had a conflict of interest because her prior conduct showed she would act to
"bury the evidence of manipulation at Universal Express." Id. Her prior conduct,
according to the letter, was that she had defended Harry Leopold in a case entitled
Eagletech Communications v. Bryn Mawr. Id. According to (b)(7)(c)
's letter, that
case involyed payments to Mr. Leopold from Mafia-connected racketeers and various
business entities engaging in severe naked shorting of several bulletin board companiesId.
B.
The DRO Response to Senator Nelson
On December 13, 2007,1 16)(7)(c)
responded to Senator
Nelson's November 9, 2007, letter anc•request with a four-page letter and attachments.
Exhibit 20 (excluding attachments, which are separate Exhibits to this report). In that
letter,(b)( 7)(C) outlined the Commission's actions against Uniyersal Express and responded
to the three issues raised by (b)(7)(c)Id. As to the first issue, (b)(7)(0) stated that
the Receiver had reported that it is unlikely that Universal Express will receive any
benefit from the two judgments it received in Florida state court related to naked shorting
of its stock. Id. As to the company being kept alive to receive any potential benefit of
short coyering in this e• uity from the alleged naked shorts when the grandfather clause
went into effect, (b)(7)(c) stated that Uniyersal Express failed to produce any evidence to
support its claims o n. ed short selling against Universal Express and noted that the
SEC filed a declaration with its Complaint against Universal Express which showed that
the total number of shares sold short was a very small percentage of the total shares
outstanding. Id.
As to the second issue, (b)(7)(c) stated that the SEC cannot open its books about
materials gathered during its investigation because they are confidential. Id. In addition,
(b)(7) noted that the Commission had filed public information which demonstrates that
there was no significant short selling of Uniyersal Express stock. Id. As to the final
(b)(7)(C)
issue, 1:'r•)\(7) pointed out that d
id.not identify the confMict of interest with
the Receiver, and the DRO was not aware of, any relationship between Mr. Leopold and
Universal Express which would create a confMict of interest. IdC.
(b)(7)(C)
's Reply to the DRO Response
On January 22, 2008 (WM(c)
wrote again to Senator Nelson in response
to (b)(7) js December 13, 2007 letter. Exhibit 21. In that letter, (b)(7)(c)
stated
tha i (b)(7)
's
response was "entirely unsatisfactory" and full of inaccuracies "and possibly
(CI
statements made by a government official Constituting outright perjury-" Id. ((b)(7)(c)
(b)( 7 )(C)
also attached an email by (b)(7)(C)about Universal Express and naked
10
approval.
(b) (7)(c)
short selling, among other things, and offered to have "a foremost industry expert
in the abstract field of 'naked shorting'," meet with Senator Nelson to explain naked
short selling as well as the statements made by (b)(7)(C) that "could constitute perjury to
your esteemed office." Id.
Results of the Investigation
I.
We Find the Claims of Perjury or Misstatement by Former Regional
Director in Letter to Senator Nelson to be Unsubstantiated
A.
(b)(7)(C)
's December 13, 2007 Letter
We inyestigated the general allegation that (b)(7)(C) made perjurious statements in
his December 13, 2007, letter to Senator Nelson about the Universal Express matter. 22
As discussed above, ,b)(7) I's letter was a response to Senator Nelson's November 9, 2007
letter and outlined the Commission's actions against Uniyersal Express and responded to
Exhibit 20. As to the first issue, (b)(7)(C) stated
the three issues raised by (b)(7)(c)
that the Receiver had reported that it is unlikely that Universal Express will receive any
benefit from the two judgments it receiyed in the Florida state court related to naked
shorting of its stock. Id. Moreoyer,t),( 7 ) pointed out that the Receiyer reported that not
only were the judgments not "substantially collectible" but that the amounts collected are
not sufficient to coyer the debts of the company. Id.
As to the company being kept aliye to receive any potential benefit of short
coyering in this equity from the alleged naked shorts when the grandfather clause went
into effect, (b)(7)(C) wrote:
.
This statement appears to be based on contentions of Mr. Altomare, the
Company's former chief executiye officer, raised in various press releases that the
shares of Universal Express have been sold short by priyate individuals or entities
who did not own the shares at the time of sale and that as a result the price of
Universal Express' common stock has declined. Id.
(b)(7)(c)
further stated that Universal Express failed to produce any evidence to
support the claims of naked short selling of Universal Express stock and noted that the
SEC filed a declaration with its Complaint against Universal Express which showed that
the total number of shares sold short was 0.067% of the total shares outstanding. Id.
Moreover, (b)(7)(c) noted that additional data obtained by the over-the-counter ("OTC")
website showed that over an eleven month period prior to November 2007, between 0%
and 2.375% of the average daily volume reported short sales of Universal Express stock.
Id.
22
No precise allegation was made as to what statement or statements made by (b)( 7 ) in his December
13, 2007 letter constituted perjury. (b)( 7)(c) referred us to (b)(7) and
or the
specific allegations. (b)( 7 )(C) stated that "everything in the letter is misleading" and referred us to a
statement byl (b)( 7)(C) which described the Universal Express case and the SEC's role in naked
short selling, but did not provide any specifics of alleged perjurious statements by (b)(7)(C)
11
approval.
As to the second issue, that the SEC had not opened its books to show whether
there was rampant naked short selling of Universal Express stock, (b)(7)(C) stated that the
SEC cannot open its books about materials gathered during its investigation because they
are confidential. Id. In addition, (b)(7)(C) noted that the Commission had filed this public
information which demonstrated that there was no significant short selling of Universal
Express stock. Id.
As to the final issue (b)(7)(c) ointed out that as to the allegation of a conflict of
interest with the Receiver, (b)(7)(C) id not identify, and the DRO was not aware
of, any relationship between Mr. Leopold and Universal Express which would create a
conflict of interest- Id.
B.
(b)(7)(C)
's Review of His Letter for Accuracy
(b)(7)(C)
testified that after being accused of perjuring himself in (b)(7)(C)rs
reply to Senator Nelson, he convened a group of his staff to review eyery statement he
made in the Nelson letter to determine whether it was accurate. (b) (7)(c) Tr. at 37.
Specifically, (b)(7)(c) c onvened currentl ( b )(7)( c )
(b)(7)(C)
and staff attorney
(b)(7)(C)
and himself- Id. (b)(7)(C) testified that he wanted to "drill into" the naked short
selling issue since he understood that to be the issue (b)(7)(C)
said was wrong with
his letter. Id. at 38; see also Exhibits 22, 23 & 24. (b)(7)(C) was asked about his
handwritten notes we obtained from him that he took from two se r meetings with
this staff about the Nelson letter. Exhibit 24. One of the things 1 (b "P 'testified that he
had his staff reyiew was the blue sheeting or DTCC documentation to show that there
was no significant short selling of Universal Express in 2003. (b)(7)(C) Tr- at 39-40.
(b)(7)(C)
stated that after their thorough review of the contents of the letter, he was
satisfied that everything in it was accurate. (b)(7)(c) Tr. at 59. (b)(7)(c) Idid acknowledge an
overstatement in the third to last paragraph which indicated, "the total number of shares
sold short was 370,929 or 0.067 percent of the 552,027,232 shares of Universal Express
(b)(7)(C)
outstanding." T
r. at 57; Exhibit 20. According to (b)(7)(C) in their reyiew of the
letter to Senator Nelson they noticed it said "sold short," but that it really was "failures to
deliver." (b)(7)(c) Tr. at 57. t(b)(7)(c)
estified that the Beck declaration filed with the
Complaint stated it accurately and that the number of shares sold short was a subset of the
total failures to deliver, which also includes failures to deliver that were sold long. Id-;
see also Exhibit 24. a(b)(7)(c)
lso testified that they "ran the numbers," had the staff go
behind the numbers, and were satisfied they did not need to change the letter. (b)(7)(c)
at 72-73.
also acknowledged a grammatical error in the second paraff aph o f the
letter. [03)( 7 )(c) Tr- at 55-56- In his edits of the December 13, 2007 letter, (b)(7)(C) wrote
"grammar" next to the second paragraph and added an "and" to the last sentence. Exhibit
23. On the last page of the letter, (b)( 7 )(c) added handwritten notes stating, "370,929 are
the fails to deliver as of 9/30/03. § 64 of Beck decl. [to the SEC's Complaint against
(b)(7)(C)
12
approval.
Universal Express] states this accurate." Id. In the next paragraph, (b)(7)(c) ;wrote
"overbroad" next to the third to`last paragraph- Id. (b)(7)(C) testified he did not recall what
he meant by "overbroad." (b)(7)(C) Ir. at 57. In addition, (b)(7)(c) broke the last sentence of
that paragraph into two separate sentences. Exhibit 23. testified that he did not believe the letter was misleading in any way and
that it was meant to be helpful. (b)(7)(c) Tr. at 81. Specifically, (b)(
(C) 7) testified, "I mean
the goal of that letter and subsequent meetings was to assure that what we said was
accurate and that we hadn't inadvertently omitted anything that would render what we
said misleading." Id.
(b)( 7 )(c)
C.
OIG Review of the
(b)(7)(C)
Letter
- We conducted a thorough review of the (b j(7) letter for accuracy. Specifically,
we reviewed the figures quoted in the letter fro (b)(7)(c) to Senator Nelson which had also
been included in the Hugh Beck declaration attached to the SEC's Complaint filed in the
SEC v. Universal Express, et al. matter- The Beck declaration quoted figures that were
taken from an NSCC report, which was an exhibit to the Complaint. Exhibit 25. The
NSCC report showed that as of September 30, 2003, Uniyersal Express had 370,929 total
shares were failed to be deliyered. Exhibit 26. t(b)(7)(C)
old Senator Nelson that those fails
to deliver were 0.067% of the. total Universal Express shares outstanding as of that date,
which according to the letter and declaration was 552,027,232 shares outstanding.
Exhibit 20.
We confirmed that there were in fact 552,027,232 shares outstanding, according
to a Universal Express filing with the SEC. Exhibit 27. We note that there was no
citation to the report that showed the total outstanding shares in either the Complaint or
declaration or letter to Senator Nelson, but we found that the figure giyen by the DRO
was accurate. We confirmed that the 370,929 shares were in fact shares that were failed
to be delivered. We also confirmed that 370,929 shares failed to be delivered out of the
total outstanding company shares was in fact 0.067%, as stated in the declaration and
letter to Senator Nelson. We also reviewed the remainder of the letter and found that no
statements in the letter were perjurious or misleading.
II.
We Find that the SEC Could Not Have Promised Defendants a Jury Trial as
the Federal Rules of Civil Procedure Require Defendants to Request a Jury
Trial in a Timely Manner
As outlined in an April 28, 2008 email from (b)(7)(C)J to (b)(7)(C) entitled, "Jury
Trial - SEC's Fourfold Perjuries on Jury Trial," (b)(7)(C)
claims that the DRO perjured
itself when: (1) in an April 22, 2004, email about scheduling matters from DRO attorney
Robert Fusfeld 4 to Arthur Tifford ("Tifford"), lead counsel for Universal Express,
Altomare and Gunderson, Fusfeld "agreed with counsel for [Universal Express] to a jury
24
Fusfeld filed a motion to withdraw his appearance in the Universal Express case on June 12, 2006.
Fusfeld is no longer working at the SEC.
13
approval-
trial;" (2) the DRO attorneys "hid their agreement for a jury trial" from Judge Lynch; (3)
there was no ruling from the judge that Universal Express or its officers waived a jury
trial; and (4) there was no ruling from the judge that Universal Express or its officers
were not entitled to a jury trial. Exhibit 28. As discussed below, we find these claims to
be unsubstantiated.
In support of these claims, (b)(7)(C) provided us with the May 14, 2007, brief filed
in support of the defendants' right to a jury trial 2 5 Exhibit 31- In that brief, Tifford
argued that Fusfeld, during a telephone conference call about scheduling in the Universal
Express matter, agreed to include language in the scheduling order that defendants were
entitled to a jury trial on all issues so triable. Id. Tifford stated that Fusfeld reduced their
agreement of a case management plan to writing and sent it by email to all parties. Id.
According to Tifford, he failed to realize that the right to a jury determination was not
outlined in the scheduling plan and he emailed Fusfeld about it. Id. In response, Fusfeld
wrote, ". . . the SEC will not take the position that you haye waived any rights to a 'jury
determination' in either the New York or Florida cases based on your agreement to the
scheduling order in the New York case." Id. at 8On May 29, 2007, the DRO filed a response to defendant's motion for a jury trial.
Exhibit 32. In that response, the DRO noted that because it was seeking penalties,
Universal Express had a right to a jury trial. Id. The response went on to state,
"Howeyer, the Universal Express defendants have waiyed their right to a jury trial by
failing to make a jury demand at the time their answer was filed in the case in February
2006 [Docket #78]." Id. Despite this statement being contrary to Fusfeld's email, the
DRO's response noted that while Fusfeld agreed the SEC would not take the position that
Universal Express had waiyed its right to a jury trial, as a matter of federal procedure,
that agreement in no way did or could absolve counsel for Universal Express to make a
demand for a jury trial as required under Federal Rule of Civil Procedure 38(b). Id.
25 j(b)(7)(c)
provided us with a statement entitled, "Did the SEC Protect USXP Shareholders'
Rights After It Filed Its Lawsuit Against the Company on March 24, 2004? Points to Consider by the
OIG in its Investigation." Exhibit 29. In that statement, (b)(7)(C)stated that a jury trial was
required to determine whether there was massive naked shorting of Universal Express equity, which
he believes is the crux of that case. According tol(b)(7)(c)
I the SEC trial attorneys promised
Universal Express's counsel, Tifford, in writing a trial by jury "regardless of the outcome of the
summary judgment." Id. (b)( 7 )(C) claimed that the SEC should have informed Judge Lynch
about this "agreement" before he issued his order. Id.
(b)(7)(c)
also emailed the Receiver and raised issues about her appointment as a Receiver, as
well as Universal Express not being given a jury trial. In her response, the Receiver noted:
As to the jury trial issue, the point of a summary judgment is that the court has decided that there
are no factual issues that need to be found by a jury. That the parties may have agreed to a jury
trial or not is irrelevant. Such an agreement cannot trump the judge's decision that the case can be
decided summarily. Exhibit 30.
14
approval.
Tifford admitted to his failure to request a jury trial in their June 8, 2007 reply.
Exhibit 33. Tifford stated that he has practiced for more than forty years in the federal
courts, and that:
The responsive pleading filed in this action is probably the first and only pleading
in which I did not include a demand for trial by jury. The omission was a mistake
and oversight
and an inadvertence and excusable neglect (b)(7)(C)
(b)(7)(C)
Id.
Tifford then requested leave to amend the answer or to file a jury trial by demand out of
time. Id.
On August 3, 2007, the Court issued an order denying, without prejudice to
reassert their request if a trial becomes necessary, the Universal Express defendants'
motion for a jury trial as moot, in light of the SEC's motion to dismiss all remaining
claims following the Court's grant of partial summary judgment. Exhibit 34. Therefore,
the Court did not directly state that Universal Express waived their right to a jury trial or
that they were not entitled to a jury trial, but merely noted that the issue was moot and
therefore did not need to be decided. Id.
The Federal Rules of Ciyil Procedure 38(b) provides that a party wishing to have
claims tried by a jury must serve a demand for such jury no later than ten business days
after service of the last pleading concerning the issues the litigant wishes to be tried by
jury. Fed. R. Ciy. P. 38(b). In accordance with this rule, the jury demand must be filed
no later than ten days after service of the answer, or in the case of multiple defendants,
the last answer which addresses issues which all defendants are interested. In this case,
Universal Express filed the last answer in the case on February 8, 2006, making any
demand for a jury trial due on or before February 23, 2006. See Exhibit 10.
The case management plan was filed on March 25, 2005, well before any answer
was filed by Universal Express. See Exhibit 10. Universal Express did not file a brief in
support of their request for a jury trial until May 14, 2007, nearly fifteen months after it
was due. Exhibit 31- Under the Federal Rules, failure to demand a jury trial within ten
days of the answer constitutes a waiver of a right to a jury determination. See Lutz v.
Glendale Union High School, 403 F.3d 1061, 1066 (9 th Cir. 2005) (finding failure to
include general jury trial demand in amended complaint filed almost a year after the
answer resulted in waiver of jury trial). Thus, as a matter of law, the agreement in the
case management plan in no way absolved Universal Express from their duty to make a
jury demand in their answer, as required by the Federal Rules of Ciyil Procedure- Fed. R.
Civ. P. 38(b).
(b)(7)(c)
who was a trial attorney for twenty-four years at a large law firm before
joining the SEC, testified about the request for a jury trial from Universal Express. (b)(7)(C)
stated that he learned from his staff that Universal Express failed to demand a
trial in
their answer to the Complaint, which he stated is "pretty basic trial practice."
Tr.
at 90.1! )(7)(c) testified further, "And we took the position when the time had run that he
15
approval.
had not demanded a jury trial." Id. According to (b)(7)(C) this had nothing to do with the
pretrial scheduling order, nor did it have anything to do with the DRO moving for
summary judgment in the case. (b)(7)(C) Tr. at 90 & 93. (b)(7)(C)
explained that the pretrial
order is designed to organize the discovery phase. (b)(7)(c) Tr. at 90.
In sum, we find that the granting of summary judgment to the SEC precluded any
need for a jury trial, regardless of whether defendants properly requested one or not
(which they admit they did not). We also find the SEC did not "agree to a jury trial," nor
is there evidence the DRO attorneys were trying to "hide their agreement" from Judge
Lynch. Moreover, the judge did issue a ruling about Universal Express's right to a jury
trial, frnding the issue moot but dismissing their request to allow them to amend their
answer without prejudice (meaning if Universal Express had won on appeal they could
have reasserted their motion to amend their answer and request a jury trial)And finally, although on its face to a non-lawyer it may appear that Universal
Express was "promised a jury trial" by the SEC, the Federal Rules of Civil Procedure do
not permit that and requires defendants to request a jury trial with their answer, which
Uniyersal Express defendants admit they failed to do. The "promise to a jury trial" in the
case management plan was simply a statement that, at that point in time, the SEC would
not take the position with the Court that Universal Express had waived their right to a
jury trial. It did not, and could not under the Federal Rules, absolye Universal Express
from the need to demand a jury determination.
III. We Find Universal Express's Claim of an Improper Conflict of Interest on
the Part of the Court-Appointed Receiver to be Unsubstantiated
As noted above, by order dated August 31, 2007, the Court appointed Moscowitz
to be the Receiyer for Uniyersal Express "to determine Universal Express's actual
financial state, to collect and conserve what assets the company has, and to report its
frndings to the Court-" Exhibit 15. The Universal Express shareholders claim that
Moscowitz had a conflict.of interest because her prior conduct showed she would act to
"bury the evidence of manipulation at Universal Express." Exhibit 19. Her prior
conduct, according to (b)(7)(c)
was that she had defended Harry Leopold in a case
entitled Eagletech Communications v. Bryn Mawr. Id.
According to (b)(7)(c)'s letter, that case involved payments to Mr. Leopold
from Mafia-connected racketeers and various business entities engaging in severe naked
shorting of several bulletin board companies. Id. (b)(7)(c) told us that this representation
by Moscowitz resulted in her having an "interest in seeing [Universal Express] crushed
because it makes her case." The Universal Express concerned shareholders also claim
that there were other problems with the appointment of Moscowitz, specifically that the
Court did not hold a hearing about her appointment and that she was not required to post
a bond. Exhibit 30. In addition, at least one of the shareholders argued that one of the
first things Moscowitz did after being appointed Receiver was to find no naked short
selling in relation to Universal Express. Exhibit 35.
16
approval.
The OIG found that the SEC moved for appointment of a Receiver on June 21,
2007, because the SEC argued that absent receivership, the Court's judgment is "likely to
be eviscerated by the continuing conduct of Universal Express, Altomare and
Gunderson." Exhibit 14. On September 5, 2007, the Court granted the SEC's motion to
appoint a Receiver and appointed Moscowitz. Id. As noted above, the Receiver issued
her first report to the Court on Universal Express on September 28, 2008. Exhibit 15.
According to the Court's docket sheet, none of the Universal Express defendants objected
to the appointment of a Receiver or of Moscowitz. Exhibit 10.
In appointing a Receiver, the Court noted while there was some dispute about the
. amount of total assets ayailable to Universal Express, it was "uncontested that the $21
million judgment against the company far exceeds the company's assets." Exhibit 14.
Moreover, the Court noted that there was no Universal Express officer or director
authorized to comply with the company's reporting responsibilities with the SEC. Id. at
22. In that same Opinion and Order the Court stated, "Altomare and Gunderson cannot
use a decade-old bankruptcy order as an indefinite license to break federal securities law
and commit fraud with impunity." Id. at 23. In that same Opinion and Order, the Court
ordered Universal Express, Altomare and Gunderson to appear on October 12, 2007, to
show cause why they should not be held in contempt. Id. at 24.
We interviewed (b)(7)(c)
about the
alleged conflict of interest on the part of Moscowitz. Exhibit 35. (b)( 7)(c) explained that
Eagletech Communications brought an action against Bryn Mawr rn Florida state court
for manipulation of Eagletech stock and that Leopold, who was represented by
Moscowitz, brought two financindeals to the company and that one of those deals was
done by organized crime. Id. (b)(7)(C) claimed to haye submitted evidence of illegal wire
transfers to the state court. Id. (b)(7)(c) told us that because Moscowitz represented
Leopold, she was a "poor choice" to be the Receiver in the Uniyersal Express case. Id.
told us that the first thing Moscowitz did as the Receiver in Uniyersal
Express was to deny any naked short selling. Id. He also argued that she should have
filed an affidavit saying she had no conflict of interest in the Universal Express matter.
Id- When asked why the Universal Express defendants did not object to Moscowitz's
ointment as a Receiver, (0(7)(C) stated, "You have to wonder about that." Id. at 2.
ent on to ex lain that Universal Express's counsel, Tifford, is friends with
Moscowitz. The • (b)(7)(C) admitted that he was looking at "hearsay evidence" from
outsiders about her conflict of interest and that some of the Universal Express
shareholders got his email and seized upon the conflict of interest issue- Id.
(b)(7)(C)
Notwithstanding (b)(7)(c) 's assertions, we found that Moskowitz's representation
of defendants in a case involving allegations of naked short selling did not constitute per
se bias against Universal Express. Moreover, Moskowitz did not make any
determinations about whether there was any naked short selling against Universal
Express. While not finding any conflict of interest, the OIG looked further to determine
whether proper procedures were followed by DRO in appointing the Receiver- •
17
approval.
According to DRO Supervisory Trial Counsel Julie Lutz, the Court requested that
the SEC submit a list of possible Receivers for Universal Express. Exhibit 36. On
August 16, 2007, Lutz submitted the name and curriculum vitae of three individuals who
agreed to be considered for appointment of the Receiver for Universal Express if the
Court granted the SEC's motion to do so. Exhibit 37- Lutz noted that they attempted to
find local candidates and that all three potential Receivers were located in Florida, where
Universal Express was headquartered. Id. In that submission, the SEC listed Moscowitz
and two other attorneys and attached their curriculum vitaes as potential Receivers. Id.
The DRO did not recommend a particular Receiver. Exhibit 14. Counsel for Universal
Express received a copy of that submission, and never objected to the appointment of
Moscowitz. See Exhibit 10.
Lutz told us that the Division of Enforcement has procedures for the
recommendation of Receivers. Exhibit 36. Those procedures are found on the
"EnforceNet" internal website and outline the specific steps staff should take whenever
suggesting a possible Receiver or agent to any court. Exhibit 38. Those steps include:
(1) determining whether the court wants the SEC to recommend someone; (2) having at
least three qualified individuals make written proposals with their resume and a cover
letter outlining their rates and a general description of the steps they would take to
complete the assignment; and (3) having a three-person committee at the SEC.evaluate
the proposals- Id. Lutz said that the committee of SEC headquarter personnel did review
the Uniyersal Express potential Receivers- Exhibit 36. According to Lutz, the Division
of Enforcement maintains a list of potential Receivers on a local shared computer driye.
Id. It therefore appears that DRO followed the SEC's internal procedures regarding the
recommendation of Receivers in the Uniyersal Express case. Exhibit 38. Moreoyer, it
was the Court who "upon due consideration of potential candidates" selected Moscowitz
be appointed the Receiver in Universal Express. Exhibit 14.
former trial counsel, testified that he recalled reviewing the resumes of the
three potential candidates, including Moscovvitz, and that he found them all to be well
qualified. (b)(7)(C) Tr. at 84- (13)1(7) noted that it was the federal judge who selected and
appointed Moscowitz. (b)(7)(c) Tr. at 86- In additionj ( b )(7)( c ) testified that he did not see
any connection between Leopold and the Universal Express case. (b)(7)(C) Tr. at 87. (b)(7)(c)
further testified that it was not the Receiver's role to determine whether there was naked
short selling, and that in one of Moscowitz's reports, she noted that while there were two
jury verdicts in favor of Universal Express, the defendants in those cases never showed
up in court. (b)(7)(C) Tr. at 87(b)(7)(c)
As discussed above, Moscowitz initially issued two reports to the Court about
Universal Express. Exhibits 15 & 16. In those reports, she stated, "I have not dealt with
any issues regarding the purchase or sale of shares, as this is outside the scope of the acts
the Court has asked of me." Id. In her second report, she discussed the two $700 million
judgments Universal Express had obtained in Florida state courts. Exhibit 15. The
Receiver noted that Universal Express's claim that these judgments were "substantially
collectable" seemed incorrect. Id. The Receiver went on to discuss the history of those
cases, and noted that the defendants defaulted and presented no defense to the charges.
18
approval.
Id. Further, the Receiver stated that Altomare and Gunderson testified, without cross
examination, about the damages to Uniyersal Express but Universal Express offered no
documentary evidence or expert proof of naked short selling of Universal Express. Id.
Therefore, until her latest report, other than these few statements related to Universal
Express, the Receiver had not dealt with naked short selling. See Exhibits 15, 16 & 17As discussed above, however, in the Receiver's third report issued in June 2008,
she wrote that given the intense interest in the issue of naked short selling in relation to
Universal Express, she engaged a consultant who has experience as a compliance officer
in the securities industry to investigate the allegations of naked short selling. Exhibit 17.
According to the report, given their limited resources, the consultant could not determine
whether the episodes of "high volumes of short sales" were illegal. Id. The Receiver
noted that even if they had determined there was naked short selling of Universal Express
shares of stock, she would not have had a cause of action against them. Id. at 12.
Moreover, the Receiver found that any cause of action against naked short sellers "has
always been held by the shareholders." Id. at 13.
In sum, we do not find that the DRO engaged in any misconduct related to the
appointment of the Receiyer. We also found no evidence that the DRO failed to follow
appropriate Enforcement procedure. It was the Court who selected and appointed
Moscowitz as the Receiyer. It is also noteworthy that the Universal Express defendants
did not object to her appointment.
IV. We Find the Claim that the SEC Filed Suit Against Universal Express in
Retaliation to be Unsubstantiated
As noted aboye, the "Concerned USXP Shareholders Group" alleges that the
SEC's lawsuit against Universal Express was filed in retaliation for its filing suit against
the SEC. However, as discussed above, the DRO began an investigation into Universal
Express on May 27, 2003 after receiving an inyestor complaint about Universal Express.
Exhibit 4. The formal investigation was opened on July 18, 2003. Id. A Formal Order
authorizing the investigation was issued on August 5, 2003. Exhibit 6. In accordance
with the Formal•Order, the DRO began issuing subpoenas to Universal Express and its
officers.
On March 2, 2004, several months after the DRO began its investigation of
Universal Express, the company filed a lawsuit against the SEC in the United States
District Court for the Southern District of Florida. See Exhibits 1 & 4. Universal
Express argued that the SEC committed constitutional torts, civil conspiracy, and aiding
and abetting intentional interference with business relations, all related to the SEC's
failure to take action against naked short sellers. Id. According to the Commission's
Action Memorandum, Universal Express filed their Complaint against the SEC after
Universal Express counsel notified DRO attorneys that Altomare and Gunderson would
not comply with the subpoenas requiring them to testify on March 15 and 17, 2004, in
connection with the DRO investigation. Exhibit 5.
19
approval.
As noted above, the SEC filed its Complaint against Universal Express in the
United States District Court for the Southern District of New York on March 24, 2004.
While the timing of the SEC filing its Complaint against Universal Express just a few
weeks after. Universal Express filed suit against the SEC appears suspicious, the evidence
shows the investigation of Universal Express was well under way by March 2004 when
Universal Express sued the SEC. See Exhibits 4, 6 & 8. Moreover, there is no concrete
evidence that retaliation was a motive in the SEC filing a Complaint, nor evidence that
the subpoenas were issued to harass.
.
Conclusion
The evidence failed to show wrongdoing by the DRO as to the specific allegations
made by the Universal Express shareholders. This report is being provided to the
Director of the Division of Enforcement and Deputy Chief of Staff, Office of the
Chairman.
(b)(7)(c)
Submitted:
Concur:
Approved:
Date:
.40rair
H. a id Kotz
20

REPORT OF INVESTIGATION - Project on Government Oversight

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