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SECURITIES & EXCHANGE COMM. v. BEAR

September 2, 2005.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
BEAR, STEARNS & CO. INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JACK BENJAMIN GRUBMAN, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. J.P. MORGAN SECURITIES INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LEHMAN BROTHERS, INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. U.S. BANCORP PIPER JAFFRAY, INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. UBS WARBURG LLC, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GOLDMAN, SACHS & CO., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CITIGROUP GLOBAL MARKETS, INC., F/K/A SALOMON SMITH BARNEY INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CREDIT SUISSE FIRST BOSTON LLC, F/K/A CREDIT SUISSE FIRST BOSTON CORPORATION, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. HENRY McKELVEY BLODGET, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MORGAN STANLEY & CO. INCORPORATED, Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DEUTSCHE BANK SECURITIES INC., Defendant. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. THOMAS WEISEL PARTNERS LLC, Defendant.



The opinion of the court was delivered by: WILLIAM PAULEY, District Judge

ORDER REGARDING INVESTOR EDUCATION PLAN

On October 31, 2003, this Court approved and entered the Final Judgments in these related actions resolving the SEC's complaints against ten major investment banks and two individuals concerning equity research analyst practices in the late 1990s. At that time, this Court entered an Order Regarding Investor Education for each of the seven investment bank defendants contributing investor education funds ("Investor Education Orders"). Section B of the Investor Education Orders required the SEC to propose an Investor Education Plan for the Court's consideration and approval. The SEC submitted its plan on February 13, 2004. The Court approved that plan by Order dated March 25, 2004.

On September 24, 2004, this Court approved and entered a Final Judgment resolving the SEC's complaint against Deutsche Bank concerning equity research analyst practices. That Final Judgment required Deutsche Bank to contribute investor education funds pursuant to the plan approved by the Court on March 25, 2004.

  By application dated May 4, 2005, the SEC proposed a new investor education plan that would dissolve the Investor Education entity ("Investor Education Entity") established pursuant to this Court's March 25, 2004 Order, and fulfill the investor education objectives of the Final Judgments by charting a different course. In its May 4, 2005 plan, the SEC proposed distributing the investor education funds on deposit at the Federal Reserve Bank of New York to the NASD Investor Education Foundation ("NASD Foundation").

  On June 9, 2005, this Court conducted a hearing to consider the merits of the SEC's new investor education plan. Prior to the hearing, this Court received submissions objecting to the SEC's proposal. Having considered the SEC's motion as well as the submissions of interested parties and the presentations of counsel, this Court grants the SEC's application on the following terms.

  This Order supersedes the Court's Investor Education Orders dated October 31, 2003 and modifies the Deutsche Bank Final Judgment dated September 24, 2004. The Investor Education Plan approved by the March 25, 2004 Order is rescinded.

  A. Dissolution Of Investor Education Entity

  1. The Investor Education Entity established pursuant to this Court's March 25, 2004 Order is directed to take all necessary steps to wind down its affairs and terminate its corporate existence.

  2. Within thirty days of entry of this Order, the Investor Education Entity shall file with the Court an application for payment of reasonable and necessary fees, costs, and expenses incurred by the entity. The application may include legal fees, costs and expenses associated with the termination of the Investor Education Entity. At least fifteen days before making such application to the Court, the Investor Education Entity shall submit the application to the SEC, and the SEC shall advise the Court whether it has any objection. Upon approval of any such application by the Court, the Court by an implementing order will authorize the payment of the approved fees and expenses.

  3. All notices, reports, and other information required to be submitted to the SEC under this Order shall be sent to the attention of Susan F. Wyderko, SEC, Office of Investor Education and Assistance, 100 F. Street, N.E., Washington, D.C., 20549.

  4. The income tax reporting requirements relating to the investor education funds on deposit at the Federal Reserve Bank of New York ("FRBNY Investor Education Accounts") shall be the responsibility of Damasco & Associates, which is appointed the Interim Tax Administrator of the FRBNY Investor Education Accounts pursuant to the terms set forth in Section F of this Order. After the funds are transferred to the NASD Foundation, any tax reporting requirements relating to any income earned on such funds shall be the sole responsibility of the NASD Foundation for the period during which the NASD Foundation administers the funds.

  5. Monies in the FRBNY Investor Education Accounts are intended to be "qualified settlement funds" pursuant to Section 468B(g) of the Internal Revenue Code and regulations thereunder. Monies in the FRBNY Investor Education Accounts may be used to pay any taxes on income earned by such accounts. The expenses referred to in ¶ A.2 of this Order shall be obligations of and shall be paid from the qualified settlement funds and not the Investor Education Entity.

  6. The resignations of the Investor Education Entity's board members and officers Charles D. Ellis, George G. Daly, Sheila C. Bair, Joseph L. Dionne, Carol J. Loomis, Lionel L. Nowell, III, Rebecca W. Rimel, and Jay Vivian will be effective upon the receipt by the entity of a Certificate of Dissolution issued by the State of Delaware. Counsel for the entity shall provide a copy of the Certificate of Dissolution to the Court and the SEC.

  B. The Distribution Of The Investor Education Funds

  1. All of the funds in the FRBNY Investor Education Accounts and all future investor education installment payments required of defendants Bear Stearns & Co., Inc., Citigroup Global Markets, Inc., f/k/a/ Salomon Smith Barney, Inc., Goldman, Sachs & Co., J.P. Morgan Securities, Inc., Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Warburg LLC, and Deutsche Bank Securities, Inc. (less the taxes and approved fees, costs, and expenses described in ¶¶ A.2, A.4, and F.1-5 of this Order, and any outstanding amount due for the administrative court registry fee as required under ¶ A.2 of the Final Judgments), shall be distributed to the NASD Foundation by an implementing order of this Court. For the period during which the NASD Foundation administers these funds, the terms of this Order shall apply to the NASD Foundation. These funds, and any interest thereon, shall be maintained by the NASD Foundation in a segregated account (the "NASD Foundation Investor Education Account") to be used exclusively to effectuate the purposes of this Order. The funds in the NASD Foundation Investor Education Account shall be invested in money market funds or securities with maturities of less than six months and backed by the full faith and credit of the U.S. government.

  2. The future investor education installment payments of the defendants identified in ¶ B.1 of this Order, required to be paid annually on or before the month and day of entry of the Final Judgment in each case, shall be made directly to the NASD Foundation. The NASD Foundation shall provide these defendants with payment/wire instructions for deposit to the segregated account referred to in ¶ B.1 (the NASD Foundation Investor Education Account), and defendants shall provide the Court and the SEC with contemporaneous proof of the payments. The NASD Foundation shall keep account records sufficient to document whether each defendant identified in ¶ B.1 of this Order has made timely and complete payments.

  3. The NASD Foundation shall use the funds in the NASD Foundation Investor Education Account to award grants pursuant to the guidelines of its grant program, appended for reference as Exhibit A. The funds in the NASD Foundation Investor Education Account shall be utilized for new or expanded education initiatives. The NASD Foundation Investor Education Account is not intended to replace current NASD funding of the NASD Foundation. At a minimum, such NASD funding should continue in the same proportion as such funding bore to the NASD's overall 2004 budget during the period the NASD Foundation Investor Education Account exists.

  4. As applied to the grantees of grants awarded by the NASD Foundation from the NASD Foundation Investor Education Account, such grants shall not be used:
(A) to benefit, directly or indirectly:
(1) beyond any payments authorized by the Court, any person involved in the review or approval of applications for grants, and any entity that employs such a person;
(2) Defendants, their predecessors, successors, or their subsidiaries, affiliates, present or former officers, directors, or their employees, or those in active concert or participation with them, through subrogation or otherwise;
(3) any person who has been convicted of a crime substantially related to any act or practice, or the types of acts or practices, identified in the Complaints in the captioned actions;
(4) any person who has been enjoined by a court or sanctioned by the Commission or any other regulatory authority for any act or practice, or the types of acts or practices, identified in the Complaints in the captioned actions; or
(5) any person named as a defendant in a pending federal criminal or civil enforcement action for any act or practice, or the types of acts or practices, identified in the Complaints in the captioned actions;
(B) to promote, directly or indirectly, the investment products or services of any single firm or entity; provided, however, that monies from the NASD Foundation Investor Education Account may be directed exclusively to the NASD Foundation for use and disposition in accordance with this Order;
(C) for any unlawful or unethical purpose; or
(D) for any non-educational or non-research purpose.
  5. It is the intention of this Order that the funds in the NASD Foundation Investor Education Account will not be used as a permanent endowment. The NASD Foundation shall use its best efforts to distribute these funds in an expeditious manner, consistent at all times with the terms of this Order, and by no later than ten years from the date of this Order; provided, however, that the NASD Foundation shall have the right to seek the Court's permission to modify this deadline on notice to the SEC.

  6. Members of the NASD Foundation Board of Directors will be selected by NASD, subject to the relevant NASD Foundation By-Laws and the provisions of this Order. The NASD will consult with the SEC about proposed NASD Foundation Board appointments, and agrees to appoint persons acceptable to the SEC. The NASD Foundation By-Laws shall be amended to require that at least a majority of the Board of Directors of the NASD Foundation shall consist of members of the public who are not employed by a securities regulator and who have no material business relationship with the securities industry, provided that a "material business relationship" does not include an educational or research entity that is unaffiliated with the securities industry.

  7. The NASD Foundation may use a portion of the funds in the NASD Foundation Investor Education Account to cover the reasonable and necessary expenses associated with distributing grant awards from the funds in the NASD Foundation Investor Education Account and complying with the terms of this Order.

  8. The NASD Foundation shall provide the SEC with quarterly reports that describe the use of funds in the NASD Foundation Investor Education Account in the preceding quarter as well as NASD Foundation's strategic plan for use of the funds in the upcoming quarter. The SEC shall file a copy of each NASD Foundation quarterly report with this Court. Each report shall, at a minimum, identify both approved and non-approved grant applications since the last quarterly report. In each case, a report will identify the party seeking the grant, describe the intended use of the grant, the grant amount, the project term, and the type of grant (education, research, or combination education/research). The report should detail all expenses incurred in distributing grant awards from the NASD Foundation Investor Education Account. Each report shall also include an accounting of receipts and expenses in reasonable detail. The NASD Foundation shall also provide the SEC with an annual report setting forth the NASD ...


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