11.4.2009 The SEC charged New York City-based investment adviser Value Line Inc.; its CEO, Jean Buttner; its former Chief Compliance Officer (CCO), David Henigson; and its affiliated broker-dealer, Value Line Securities, Inc. (VLS), with defrauding the Value Line family of mutual funds by charging more than $24 million in bogus brokerage commissions on mutual fund trades funneled through VLS.
The SEC found that from 1986 to November 2004, Value Line, while serving as investment adviser to the Value Line Funds (the 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, according to the SEC, had the unaffiliated brokers bill the Funds $.0488 per share and then “rebate” $.0288 to $.0388 per share to VLS. In total, VLS received more than $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.
The SEC further found that 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 stated that CEO Buttner directed the “commission recapture program” and monitored its profitability to VLS, and thus to Value Line, by receiving periodic updates from CCO Henigson, who was responsible for implementing the scheme. Buttner and Henigson were involved in structuring and negotiating the recapture arrangement with the unaffiliated rebate brokers. Through its officers, Value Line also made materially misleading statements and omissions about VLS and the recapture program to the Funds and their shareholders in presentations to the Independent Directors/Trustees and in public filings with the SEC.
Value Line, Buttner, Henigson, and VLS agreed to settle the charges by consenting to the entry of a cease-and-desist order that requires total payments of nearly $45 million in monetary remedies, including civil penalties, and imposes industry and officer and director bars.
Click http://www.sec.gov/news/press/2009/2009-234.htm to access the release.