SEC Investigations into Navistar, ETFs while Investment Advisors fined $21.5 million

The SEC has been busy this week with a few different news items breaking. It issued a Wells Notice to trucking company Navistar, settled charges against Taberna Capital Management for $21.5 Million, while starting its investigation into the ETF debacle and Rule 48 that may have caused the recent 1000+ point market crash on open.

Navistar Wells Notices

Navistar manufactures commercial trucks, diesel engines, school buses and chassis for motor homes, among other things. The company was previously involved in a settlement with the SEC over alleged accounting fraud from 2001 to 2005. The company was accused of overstating its pre-tax income by $137 million.

The SEC has now issued two Wells notices to the company. Wells notices, for those not familiar with them, are an announcement to the company that the SEC has concluded its investigation and is recommending an enforcement action. However, it doesn’t mean that the SEC will necessarily take action.

The precise scope of the investigation in this case is still a bit obscure as different media outlets are reporting the investigations into different violations of the law. Among the various investigations reported are:

– false or misleading statements during its quest to get EPA approval of its new engines.
– disclosures related to Chairman and CEO Daniel Ustian’s retirement in August 2012.
– potential violations of the 2010 settlement agreement.

The DOJ is also investigating Navistar on behalf of the EPA for selling engines in 2010 that did not meet EPA standards. The company claims the engines were made in 2009 and did not need to meet higher standards.

Taberna Capital Settlement

The SEC reached a settlement with Taberna concerning the diversion of client funds in a case concerning allegations that they fraudulently retained fees from collateralized debt obligations. The investment advisory firm did not disclose the conflict of interest related to the funds and their retention was not disclosed or permitted by the governing documents, according to the SEC.

Conflicts of interest and fee disclosures to investors have been a bit of a hot topic lately, with the Department of Labor considering imposing a fiduciary standard on ERISA advisors and the SEC looking into the fees and disclosures of hedge funds. This case appears to be along a similar vein.

ETFs and Rule 48

SEC Commissioner Dan Gallagher also confirmed that the SEC will look into exchange traded funds and the operation of Rule 48 in light of the panicked opening in the market last week. Rule 48 has been blamed for exacerbating the “flash crash” in ETFs last week as the market opened down on Monday. It’s unclear that there was any misconduct occurring but as the CFTC enforcement action in the 2010 flash crash shows, the securities regulators will go after market manipulation when it leads to disruption in the normal operation of trading.

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