Thursday, November 5, 2009

SEC Charges Value Line with Fraud; CEO Barred

Sounds like Value Line needs to make more political contributions.

The Securities and Exchange Commission yesterday charged New York City-based investment adviser Value Line Inc., its CEO, its former Chief Compliance Officer and its affiliated broker-dealer with defrauding the Value Line family of mutual funds by charging over $24 million in bogus brokerage commissions on mutual fund trades funneled through Value Line's affiliated broker-dealer, Value Line Securities, Inc.

Value Line, its CEO Jean Buttner, its former Chief Compliance Officer David Henigson, and VLS agreed to settle the SEC's charges by consenting, without admitting or denying the Commission's findings, to the entry of a cease-and-desist order that also requires total payments of nearly $45 million in monetary remedies, including civil penalties.

"Value Line misappropriated millions of dollars from the mutual funds they managed by artificially allocating fund trades and then charging the funds for phantom brokerage services," said Robert Khuzami, Director of the SEC's Division of Enforcement.

From 1986 to November 2004, Value Line, while serving as investment adviser to the Value Line funds, directed a portion of the funds' securities trades to VLS through its so-called "commission recapture program." Value Line arranged for one of three unaffiliated brokers to execute, clear and settle the Funds' trades at a discounted commission rate of $.02 to $.01 per share. Instead of passing this discount on to the funds, Value Line had the unaffiliated brokers bill the funds $.0488 per share and then "rebate" $.0288 to $.0388 per share to VLS, according to the SEC. In total, VLS received over $24 million in bogus brokerage commissions from the funds pursuant to this scheme, as VLS did not perform any bona fide brokerage services for the funds on these trades.

Value Line falsely represented to the funds' Independent Directors/Trustees and shareholders that VLS provided bona fide brokerage services for the commissions it received and that VLS otherwise served the best interests of the funds and their shareholders, the SEC said.

An SRC order requires that Value Line pay $24,168,979 in disgorgement, $9,536,786 in prejudgment interest, and a $10 million penalty; Buttner pay a $1 million penalty; and Henigson pay a $250,000 penalty. In addition, Buttner and Henigson are each barred from association with any broker, dealer, investment adviser and investment company; and are prohibited from acting as an officer or director of any public company. Value Line, VLS, Buttner and Henigson further consented to censures and cease-and-desist orders prohibiting them from violating the above provisions of the securities laws.

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