Scone of Investigation

The OIG obtained and reviewed hundreds of emails and documents submitted bythe "Concerned USXP Shareholders Group" and other individuals related to Universal Express. In addition, we took on-the-record testimony of then and current (b)(7)(C)We interviewed by telephone current (b)(7)(c)current(b)(7)(C) and staff attorney (b)(7)(c) We also interviewed by telephone

(b)(7)(C)

(b)(7)(C)

This document is subject to the provisions of the Privacy Act of 1974, and may require redactionbefore disclosure to third parties. No redaction has been performed by the Office of InspectorGeneral. Recipients of this •report should not disseminate or copy it without the Inspector General'sapproval.

REPORT OF INVESTIGATION

UNITED STATES SECURITIES AND EXCHANGECOMMISSION 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 intoallegations by shareholders of the company Universal Express, Inc. ("UniversalExpress"/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 theDiyision of Enforcement ("Enforcement"), perjured himself in a letter to Senator BillNelson about the Universal Express investigation; (2) DRO Enforcement attorneyscommitted perjury to the Court by objecting to Universal Express's late request for a jurytrial after allegedly agreeing Universal Express was entitled to a jury trial; (3) the Court-appointed Uniyersal Express Receiyer had a conflict of interest; and (4) the SEC's lawsuitagainst 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 forthe following reasons.

The OIG has received hundreds of emails related to the Universal Express matter. Many of thoseemails are from a group of individuals who call themselves the "Concerned USXP ShareholdersGroup" who made the allegations we investigated here. The crux of the remainder of their claimsinvolve allegations of naked short selling against Universal Express. Other entails came fromindividuals who strongly disagree with the shareholders about the Universal Express case and the roleof naked short selling in it. The OIG has reviewed and responded to all those emails In addition, weconducted both this investigation of the discrete allegations of misconduct on the part of SECemployees that are within the OIG's jurisdiction, and issued a separate audit report entitled, "PracticesRelated to Naked Short Selling Complaints and Referrals," Report No. 450 on March 18, 2009, whichis available on the SEC OIG's website at http://www.sec-oig.gov .

This document is subject to the provisions of the Privacy Act of 1974, and may require redactionbefore disclosure to third parties. No redaction has been performed by the Office of InspectorGeneral. Recipients of this report should not disseminate or copy it without the Inspector General'sapproval.

attempted to take on-the-record testimony of (b)(7)(C) but he was unable to make timeavailable to us. We did have numerous conversations with (b)(7)(C)on the telephone.The OIG also interviewed (b)(7)(C) who has emailed the OIG often aboutUniversal Express-related matters.

Background

I. Allegations by Universal Express Shareholders and the Universal ExpressLawsuits

Uniyersal Express, Inc. was a public company whose securities were traded in theover-the-counter market and filed periodic reports with the SEC. According to UniversalExpress officers, in January 1998, Universal Express noticed a substantial increase in thedaily sales volume of Universal Express trading and deduced that such a volume of salescould 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 commonstock, 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 theywere victims of naked short selling, and won judgments. Id-

Specifically, Universal Express received two judgments in the Eleventh JudicialCircuit of Florida in Miami-Dade County from two separate trials against two differentgroups of defendants. Id. Universal Express filed suit against a company called SelectCapital Adyisors, Inc- ("Select Capital"), with which they had entered into an inyestmentbanking agreement. Id. In the first case, there was a default judgment on liability and theissue of damages went to a jury. Id. Universal Express received a judgment againstSelect Capital and others in the amount of $389 million in July 2001 for fraud and deceitrelated to naked short selling. Id. The second trial, in which the defendants were withoutcounsel, resulted in a judgment for Universal Express in the amount of $137 millionrelated to short selling. Id-

Universal Express argues because of this "war" against naked short selling theSEC began a series of harassing actions, including issuing several subpoenas requiringthe 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 ownor a sale which is consummated by the delivery of a security borrowed by, or for the accountof, 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-

several of the Universal Express shareholders and interested parties, including: (1)(b)(7)(C) (2) (b)(7)(C) 1 (3) former (b)(7)(C)

03)7P and (4) (b)(7)(C) The OIG

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hedge against potential price volatility in securities he or she owns. 3 If the price of the stockfalls, the short seller buys back the stock at a lower price and makes a profit.4 If the stock pricerises, however, the short seller will incur a loss. 5 In the typical short sale transaction, the sellerborrows stock from his or her brokerage firm and delivers the borrowed shares to the buyerwithin the standard settlement period (currently three business days). 6

A "naked short sale" occurs when "the seller does not borrow securities in time tomake delivery to the buyer within the standard three-day settlement period." 7 "As aresult, 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 longsales.9 In addition, failures to deliver may be caused by legitimate reasons, such ashuman or mechanical errors or processing delays. 19 A fail may also result from nakedshort selling - e.g., where a market maker who sells short thinly traded illiquid stock inresponse to customer demand encounters difficulty in obtaining securities at the time fordelivery."

The majority of trades in the United States are cleared and settled through systemsadministered by clearing agencies, which are registered with the SEC. The DTCC is theDepository Trust & Clearing Corporation, which is a holding company consisting of fiveclearing corporations and one depository, including the NSCC. Seehttp://www.dtcc.com. NSCC is the National Securities Clearing Corporation whichclears and settles the majority of equity securities trades conducted on the exchanges andin the oyer-the-counter markets. Id.

3 Division of Market Regulation: Key Points About Regulation SHO, April 11, 2005,http://www.sec.gov/spotlight/kevregshoissues.htm, at 1.

4 Id.

5 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, theparticipants to the trade deliver and pay for the security at a clearing agency three business daysafter 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 broker-dealers from effecting or entering into contracts for the purchase or sale of securities that providesfor payment of fluids and delivery of securities later than three business days after the date of thecontract, 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 (footnoteomitted).

8 Division of Market Regulation: Key Points About Regulation SHO, April 11, 2005, at 2 (footnoteomitted).

9 Id.

10 Id.

11 Id.

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Naked short selling is not necessarily a violation of the federal securities laws orthe Commission's rules. 12 Nonetheless, the SEC's Division of Trading and Markets("Trading and Markets') has recognized that abusive naked short selling can havenegative effects on the market, as fraudsters may use naked short selling to engage inillegal market manipulation, e.g., by selling stock short and failing to deliver shares at thetime of settlement with the purpose of driving down the stock price. t 3 According toTrading and Markets, such manipulative activity would violate yarious securities lawsand regulations, including Rule 10b-5 promulgated under the Securities Exchange Act of1934. 14

The Commission has repeatedly recognized that naked short selling can depressstock prices and may have harmful effects on the market. For example, in initiallyproposing 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 timeand result in a significantly large unfilled deliyery obligation at theclearing agency where trades are settled. At times, the amount of fails todeliyer may be greater than the total public float. In effect the naked shortseller unilaterally conyerts a securities contract (which should settle inthree days after the trade date) into an undated futures-type contract,which the buyer might not have agreed to or that would have been priceddifferently. The seller's failure to deliver securities may also adverselyaffect certain rights of the buyer, such as the right to vote. Moresignificantly, naked short sellers enjoy greater leverage than if they wererequired to borrow securities and deliver within a reasonable time period,and they may use this additional leyerage to engage in trading activitiesthat deliberately depress the price of a security- ' 5

The Commission adopted regulation SHO "to update short sale regulation in lightof the numerous market developments since short sale regulation was first adopted in1938." 16 Regulation SHO became effective on September 7, 2004, and compliance withthe regulation began on January 3, 2005. 17 Regulation SHO established a new regulatory

12 Id.

13 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 shortselling 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 ShortSales, Final rule; Interpretation, Release No. 34-50103, July 28,2004.

17 Division of Market Regulation: Responses to Frequently Asked Questions Concerning RegulationSHO, at 1.

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framework governing the short selling of securities, including naked short selling- 18

Among other things, Regulation SHO established "uniform locate and deliveryrequirements in order to address problems associated with failures to deliver, includingpotentially abusive 'naked' short selling . .," and created uniform marking requirementsfor sales of equity securities. 19

On October 14, 2008, the SEC issued additional amendments to Regulation SHOin 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 bepurchased or borrowed to close out any fail to deliver position in an equity security by nolater than the beginning of regular trading hours on the settlement date following the dateon 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," whosaid he had neyer held a position in Universal Express and asked the SEC to investigatethe "promotional actiyities of an otcbb [Over-the-Counter Bulletin Board] stock calledUniversal Express (USXP)." 21 Exhibit 3. The email complained that Uniyersal Express". . . has been on a massive promotional campaign while diluting their stock fordiscounted 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 thenforwarded within the DRO on May 19, 2003 to current Assistant Regional Director MaryBrady and staff attorney Hugh Beck. Id. Seyeral days later, on May 27, 2003, thosesame DRO attorneys opened a matter under inquiry ("mur) into Uniyersal Express,according to an internal SEC database. Exhibit 4. Another April 9, 2003 investorcomplaint about Universal Express was cited as the source of the case in the DRO'sAction Memorandum in this matter. Exhibit 5. A formal investigation was instituted bythe DRO on July 18, 2003. Exhibit 4. A Formal Order was issued in this matter on

Id. at 2.

Id.

For more information on naked short selling, see the OIG's audit report entitled, "Practices Related toNaked Short Selling Complaints and Referrals," available at http://www.sec-oig.gov .

One of the issues some of the Universal Express shareholders asked the OIG to determine was whichSEC official ordered the "full court press" of Universal Express and its officers. We determined that itwas the team of DRO attorneys who were working on the Universal Express investigation who openedthe 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.

18

19

20

21

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August 5, 2003. Exhibit 6. In accordance with the Formal Order, the DRO issuedinvestigative 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 SECon March 2, 2004 in the United States District Court for the Southern District of Floridafor constitutional torts, civil conspiracy, and aiding and abetting intentional interferencewith business relations, all related to the SEC's failure to take action against naked shortsellers. Exhibit 1. Universal Express was seeking compensatory damages anddeclaratory and injunctive relief. Id. According to the Commission's ActionMemorandum, Uniyersal Express filed suit against the SEC after Universal Expresscounsel notified DRO attorneys that Universal Express CEO Richard Altomare("Altomare") and its General Counsel Chris Gunderson ("Gunderson") would not complywith the subpoenas requiring them to testify on March 15 and 17, 2004, in connectionwith the DRO investigation. Exhibit 5.

On March 30, 2005, the Court issued a ten-page order dismissing UniversalExpress's claims for damages with prejudice and dismissing all of Universal Express'sother claims without prejudice. Exhibit 7. The Court found that the SEC is immune fromsuit, and that it had not waived sovereign immunity. Id. As noted by the Court, the cruxof Universal Express's complaint was that the SEC initiated an investigation against it,and issued subpoenas, to harass and retaliate against Uniyersal Express for hayingcriticized 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 UniyersalExpress, Altomare, Gunderson, and four other defendants, involyed in the illegaldistribution of Universal Express common stock to the public. Exhibit 8. TheCommission alleged Universal Express engaged in the unregistered sale of over 500million shares of Universal Express common stock between April 2001 and March 2004for which no exemption from registration was available. Id.

The Commission alleged in its Complaint that Universal Express, Altomare, andGunderson distributed stock through the four other defendants who were purportedlyconsultants to the company. Id. According to the Complaint, those defendants paidUniversal Express in excess of $9.1 million for the stock, then resold the shares to thepublic for a quick risk-free profit, and then used the proceeds to finance their subsequentshare 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'sstock price, Altomare issued a series of false press releases from May 2002 until April2003 announcing funding commitments of $885 million and thereafter made other falsestatements in interviews, press releases and filings with the SEC. Id. In addition, theSEC alleged that following the illegal sales to the four defendants, Altomare diverted asubstantial portion of the proceeds to family members and personal accounts. Id. The

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SEC sought a temporary restraining order and an order for accounting against UniversalExpress 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 ofNew York Judge Gerald E. Lynch granted the SEC's motion for summary judgment inpart. SEC v. Universal Express, et al, 475 F. Supp. 2d 412 (February 21, 2007) (attachedhereto as Exhibit 9). Judge Lynch found that Altomare and Gunderson caused hundredsof millions of shares to be offered and sold without registration and issued press releasescontaining misleading statements about financing commitments. Id. Judge Lynchgranted a permanent injunction against Uniyersal Express, Altomare and Gunderson andordered disgorgement of over $9 million from Universal Express, over $1.4 million fromAltomare, and more than $360,000 from Gunderson. Id. Judge Lynch also barredAltomare 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 SECagainst Universal Express in the amount of $21,906,483, against Altomare in the amountof $3,121,123, and against Gunderson in the amount of $794,711, and also deniedUniversal Express's motion for reconsideration of the partial summary judgment. SeeExhibit 10. On June. 1, 2007, Universal Express, Altomare and Gunderson filed anappeal of the summary judgment against them with the United States Court of Appealsfor the Second Circuit. Id. On April 18, 2008, the Court granted the SEC's motion forcontempt against Altomare for failing to comply with the March 8, 2007 Order. SEC v-Universal Express, et al, 546 F. Supp. 2d 132 (April 18, 2008). Altomare was thereforeincarcerated- Id. Altomare was released from jail on July 23, 2008 after it wasdetermined 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 SecondCircuit against Universal Express on November 13, 2008 in a Summary Order. Exhibit12. On February 11, 2009, Universal Express filed a petition for writ of certiorari in theUnited 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 UniversalExpress- See Exhibits 10 & 14- On June 29, 2007, the SEC filed a motion for contemptagainst Universal Express, Altomare and Gunderson because Altomare did not resign asthe CEO and Gunderson directed Universal Express to offer and sell an additional 20billion shares of Universal Express stock from January through June 30, 2007. SeeExhibit 14.

On September 4, 2007, the Court, after considering potential candidates providedby the SEC, appointed Jane W. Moscowitz ("Moscowitz") as the Receiver for Universal

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Express to take custody, control and possession of the property and to collect andconserve the assets of the company. Exhibit 14. Moscowitz issued her first report to theCourt on September 28, 2007, as well as a motion to authorize the sale of UniversalExpress. Exhibit 15. In that report, the Receiyer stated that her preliminary evaluation ofthe assets and liabilities of Universal Express is that "none of the operations isprofitable." Id.

At the end of that first report, the Receiver informed the Court that she hadreceived emails from Universal Express shareholders asking her about the status of theirinvestments. Id. The Receiver noted that most of those emails dealt with naked shortselling and claimed that there was a conspiracy by the SEC and the Court to retaliateagainst Universal Express for its reyelations about naked short selling. Id. The Receiverstated, "I have not dealt with any issues regarding the purchase or sale of shares, as this isoutside the scope of the acts the Court has asked of me." Id.

The Receiver issued a second report in November 2007, which discussed the $700million judgments Uniyersal Express had obtained in Florida state courts in 2001 and2003. Exhibit 16. The Receiver noted. that Universal Express's claim that thesejudgments were "substantially collectable" seemed incorrect. Id. The Receiyer went onto discuss the history of those cases, and noted that the defendants defaulted andpresented no defense to the charges. Id. Further, the Receiver stated that Altomare andGunderson testified, without cross examination, about the damages to Uniyersal Expressbut Universal Express offered no documentary eyidence or expert proof of naked shortselling of Universal Express stock. Id.

The Receiyer issued a third report on July 1 , 2008, which coyered the periodfrom November 2007 through June 2008. Exhibit 17. The report identified steps takenby the Receiver to locate company assets, and again discussed the two Florida state courtjudgments. Id. Specifically, the Receiver noted that she had engaged former UniyersalExpress counsel Arthur Tifford, to continue his collection efforts in those judgments. Id.In addition, the Receiver stated, "Numerous Universal Express shareholders have sentrepeated communications alleging that Universal Express was the victim of naked, andtherefore, illegal short selling-" Id- According to the Receiver, these shareholders claimthat the decline in Universal Express's stock value is attributable solely to naked shortselling, not to the dilution caused by the issuance of over 20 billion shares of its stock orto the fact that Universal Express was never profitable or to the press releases issued byUniversal' Express announcing financing that never materialized. Id. at 11.

The Receiver wrote that given the intense interest in the issue of naked shortselling in relation to Universal Express, she engaged a consultant who had experience asa compliance officer in the securities industry to investigate the allegations of naked shortselling. Id. According to the Receiver, given their limited resources, the consultant couldnot 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 ofUniversal Express shares of stock, she would not havelad a cause of action against them

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and any cause of action against naked short sellers "has always been held by theshareholders." 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 UniversalExpress. Many of those emails are from several individuals who call themselves the

(b)(7)(C)"Concerned USXP Shareholders Group." Those individuals include

and "Bud" Burrell. Burrell maintains blogs on the website,http://www.thesanitycheck.com , which states that the site is about the "market reformmovement," described as a "loose affiliation of shareholder advocates, websites, attorney,market pundits, shareholders and investors who are concerned about manipulativepractices in the U.S. stock markets." It further states that the primary focus is on nakedshort selling and failing to deliyer, which they describe as a "practice that many belieyeposes a systematic crisis to the market system."

Other emails about Universal Express have come from individuals who holdconflicting views of the case and of whether naked short selling is inyolyed . or affects theUniyersal Express case- One of those individuals is (b)(7)(C) who sent the OIGseveral emails about Universal Express. (b)(7)(C) told us in a telephone interview that shebelieyes naked short selling is a legitimate problem and that she thinks there is a lack ofpolicing and enforcement of Regulation SHO. Exhibit 18. According to (b)(7)(c)

between 2003 and 2005, before Regulation SHO became effective, it was fairly easy tosell 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 nakedshort 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) ifshe 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.

further stated that she could not offer any comments on the specific allegationswe are investigating because she was not very familiar with Universal Express. Id.

M. Congressional Correspondence from the "Concerned USXP ShareholdersGroup"

(b)(7)(C)

(b)(7)(c)

A.(b)(7)(c)

First Letter to Senator Nelson

On November 9, 2007, Senator Bill Nelson of Florida wrote to the SEC andenclosed correspondence he had received from (b)(7)(C) Exhibit 19.Senator Nelson attached an October 17, 2007 letter from (b)(7)(C) to Judge Lynchabout Universal Express. Id- Senator Nelson asked the SEC for a review and response tothe issues raised fill (b)(7)(c) j's letter to Judge Lynch. Id. (b)(7)(C) indicatedhe 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 thecompany active fora period of time in order to collect any forthcoming judgments that

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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 recentlyrevoked 'Grandfather Clause' come into play;" (2) asked the SEC to open its books as towhether there was rampant short selling in Universal Express stock; and (3) identified aconflict of interest of the Court-appointed Receiver that should prevent her from servingas the Universal Express Receiver. Id. Specifically, (b)(7)(C) alleged that theReceiver 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 entitledEagletech Communications v. Bryn Mawr. Id. According to (b)(7)(c) 's letter, thatcase involyed payments to Mr. Leopold from Mafia-connected racketeers and variousbusiness entities engaging in severe naked shorting of several bulletin board companies-Id.

B. The DRO Response to Senator Nelson

On December 13, 2007,116)(7)(c) responded to SenatorNelson'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 thatletter,(b)( 7)(C) outlined the Commission's actions against Uniyersal Express and respondedto the three issues raised by (b)(7)(c) Id. As to the first issue, (b)(7)(0) stated thatthe Receiver had reported that it is unlikely that Universal Express will receive anybenefit from the two judgments it received in Florida state court related to naked shortingof its stock. Id. As to the company being kept alive to receive any potential benefit ofshort coyering in this e• uity from the alleged naked shorts when the grandfather clausewent into effect, (b)(7)(c) stated that Uniyersal Express failed to produce any evidence tosupport its claims o n. ed short selling against Universal Express and noted that theSEC filed a declaration with its Complaint against Universal Express which showed thatthe total number of shares sold short was a very small percentage of the total sharesoutstanding. Id.

As to the second issue, (b)(7)(c) stated that the SEC cannot open its books aboutmaterials gathered during its investigation because they are confidential. Id. In addition, noted that the Commission had filed public information which demonstrates thatthere was no significant short selling of Uniyersal Express stock. Id. As to the finalissue, 1:'r•)\(7) pointed out that (b)(7)(C)did.not identify the confMict of interest withthe Receiver, and the DRO was not aware of, any relationship between Mr. Leopold andUniversal Express which would create a confMict of interest. Id-

(b)(7)

C. (b)(7)(C) 's Reply to the DRO Response

On January 22, 2008 (WM(c) wrote again to Senator Nelson in responseto (b)(7) js December 13, 2007 letter. Exhibit 21. In that letter, (b)(7)(c) statedtha i (b)(7) 's response was "entirely unsatisfactory" and full of inaccuracies "and possibly(CIstatements made by a government official Constituting outright perjury-" Id. ((b)(7)(c)

also attached an email by (b)(7)(C) about Universal Express and naked(b)(7)(C)

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(7)(c)short selling, among other things, and offered to have

(b)"a foremost industry expert

in the abstract field of 'naked shorting'," meet with Senator Nelson to explain nakedshort selling as well as the statements made by (b)(7)(C) that "could constitute perjury toyour esteemed office." Id.

Results of the Investigation

I. We Find the Claims of Perjury or Misstatement by Former RegionalDirector 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 inhis 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, 2007letter and outlined the Commission's actions against Uniyersal Express and responded tothe three issues raised by (b)(7)(c) Exhibit 20. As to the first issue, (b)(7)(C) statedthat the Receiver had reported that it is unlikely that Universal Express will receive anybenefit from the two judgments it receiyed in the Florida state court related to nakedshorting of its stock. Id. Moreoyer,t),(7) pointed out that the Receiyer reported that notonly were the judgments not "substantially collectible" but that the amounts collected arenot sufficient to coyer the debts of the company. Id.

As to the company being kept aliye to receive any potential benefit of shortcoyering 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, theCompany's former chief executiye officer, raised in various press releases that theshares of Universal Express have been sold short by priyate individuals or entitieswho did not own the shares at the time of sale and that as a result the price ofUniversal Express' common stock has declined. Id.

(b)(7)(c) further stated that Universal Express failed to produce any evidence tosupport the claims of naked short selling of Universal Express stock and noted that theSEC filed a declaration with its Complaint against Universal Express which showed thatthe 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 December13, 2007 letter constituted perjury. (b)(7)(c) referred us to (b)(7) and or thespecific allegations. (b)(7)(C) stated that "everything in the letter is misleading" and referred us to astatement byl (b)(7)(C) which described the Universal Express case and the SEC's role in nakedshort selling, but did not provide any specifics of alleged perjurious statements by (b)(7)(C)

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As to the second issue, that the SEC had not opened its books to show whetherthere was rampant naked short selling of Universal Express stock, (b)(7)(C) stated that theSEC cannot open its books about materials gathered during its investigation because theyare confidential. Id. In addition, (b)(7)(C) noted that the Commission had filed this publicinformation which demonstrated that there was no significant short selling of UniversalExpress stock. Id.

As to the final issue (b)(7)(c) ointed out that as to the allegation of a conflict ofinterest with the Receiver, (b)(7)(C) id not identify, and the DRO was not awareof, any relationship between Mr. Leopold and Universal Express which would create aconflict 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)rsreply to Senator Nelson, he convened a group of his staff to review eyery statement hemade in the Nelson letter to determine whether it was accurate. (b) (7)(c) Tr. at 37. Specifically, (b)(7)(c) convened currentl (b)(7)(c )(b)(7)(C)(b)(7)(C) and himself- Id. (b)(7)(C)

selling issue since he understood that to be the issue (b)(7)(C) said was wrong withhis letter. Id. at 38; see also Exhibits 22, 23 & 24. (b)(7)(C) was asked about hishandwritten notes we obtained from him that he took from two se r meetings withthis staff about the Nelson letter. Exhibit 24. One of the things 1 (b"P 'testified that hehad his staff reyiew was the blue sheeting or DTCC documentation to show that therewas no significant short selling of Universal Express in 2003. (b)(7)(C) Tr- at 39-40.

stated that after their thorough review of the contents of the letter, he wassatisfied that everything in it was accurate. (b)(7)(c) Tr. at 59. (b)(7)(c) Idid acknowledge anoverstatement in the third to last paragraph which indicated, "the total number of sharessold short was 370,929 or 0.067 percent of the 552,027,232 shares of Universal Expressoutstanding." (b)(7)(C)Tr. at 57; Exhibit 20. According to (b)(7)(C) in their reyiew of theletter to Senator Nelson they noticed it said "sold short," but that it really was "failures todeliver." (b)(7)(c) Tr. at 57. (b)(7)(c)testified that the Beck declaration filed with theComplaint stated it accurately and that the number of shares sold short was a subset of thetotal failures to deliver, which also includes failures to deliver that were sold long. Id-;see also Exhibit 24. (b)(7)(c)also testified that they "ran the numbers," had the staff gobehind the numbers, and were satisfied they did not need to change the letter. (b)(7)(c)

at 72-73.

(b)(7)(C) also acknowledged a grammatical error in the second paraff aph o f theletter. [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. Exhibit23. On the last page of the letter, (b)( 7)(c) added handwritten notes stating, "370,929 arethe fails to deliver as of 9/30/03. § 64 of Beck decl. [to the SEC's Complaint against

and staff attorneytestified that he wanted to "drill into" the naked short

(b)(7)(C)

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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 whathe meant by "overbroad." (b)(7)(C) Ir. at 57. In addition, (b)(7)(c) broke the last sentence ofthat paragraph into two separate sentences. Exhibit 23.

testified that he did not believe the letter was misleading in any way andthat it was meant to be helpful. (b)(7)(c) Tr. at 81. Specifically, (b)((C) 7) testified, "I meanthe goal of that letter and subsequent meetings was to assure that what we said wasaccurate and that we hadn't inadvertently omitted anything that would render what wesaid misleading." Id.

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 alsobeen included in the Hugh Beck declaration attached to the SEC's Complaint filed in theSEC v. Universal Express, et al. matter- The Beck declaration quoted figures that weretaken from an NSCC report, which was an exhibit to the Complaint. Exhibit 25. TheNSCC report showed that as of September 30, 2003, Uniyersal Express had 370,929 totalshares were failed to be deliyered. Exhibit 26. (b)(7)(C)told Senator Nelson that those failsto 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, accordingto a Universal Express filing with the SEC. Exhibit 27. We note that there was nocitation to the report that showed the total outstanding shares in either the Complaint ordeclaration or letter to Senator Nelson, but we found that the figure giyen by the DROwas accurate. We confirmed that the 370,929 shares were in fact shares that were failedto be delivered. We also confirmed that 370,929 shares failed to be delivered out of thetotal outstanding company shares was in fact 0.067%, as stated in the declaration andletter to Senator Nelson. We also reviewed the remainder of the letter and found that nostatements in the letter were perjurious or misleading.

II. We Find that the SEC Could Not Have Promised Defendants a Jury Trial asthe Federal Rules of Civil Procedure Require Defendants to Request a JuryTrial in a Timely Manner

As outlined in an April 28, 2008 email from (b)(7)(C) J to (b)(7)(C) entitled, "JuryTrial - SEC's Fourfold Perjuries on Jury Trial," (b)(7)(C) claims that the DRO perjureditself when: (1) in an April 22, 2004, email about scheduling matters from DRO attorneyRobert 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.

(b)(7)(c)

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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 jurytrial; and (4) there was no ruling from the judge that Universal Express or its officerswere not entitled to a jury trial. Exhibit 28. As discussed below, we find these claims tobe unsubstantiated.

In support of these claims, (b)(7)(C) provided us with the May 14, 2007, brief filedin support of the defendants' right to a jury trial 2 5 Exhibit 31- In that brief, Tiffordargued that Fusfeld, during a telephone conference call about scheduling in the UniversalExpress matter, agreed to include language in the scheduling order that defendants wereentitled to a jury trial on all issues so triable. Id. Tifford stated that Fusfeld reduced theiragreement 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 notoutlined in the scheduling plan and he emailed Fusfeld about it. Id. In response, Fusfeldwrote, ". . . the SEC will not take the position that you haye waived any rights to a 'jurydetermination' in either the New York or Florida cases based on your agreement to thescheduling order in the New York case." Id. at 8-

On 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 byfailing to make a jury demand at the time their answer was filed in the case in February2006 [Docket #78]." Id. Despite this statement being contrary to Fusfeld's email, theDRO's response noted that while Fusfeld agreed the SEC would not take the position thatUniversal 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 ademand 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 theOIG in its Investigation." Exhibit 29. In that statement, (b)(7)(C) stated that a jury trial wasrequired to determine whether there was massive naked shorting of Universal Express equity, whichhe believes is the crux of that case. According tol(b)(7)(c) I the SEC trial attorneys promisedUniversal Express's counsel, Tifford, in writing a trial by jury "regardless of the outcome of thesummary judgment." Id. (b)(7)(C) claimed that the SEC should have informed Judge Lynchabout this "agreement" before he issued his order. Id.

also emailed the Receiver and raised issues about her appointment as a Receiver, aswell 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 thereare no factual issues that need to be found by a jury. That the parties may have agreed to a jurytrial or not is irrelevant. Such an agreement cannot trump the judge's decision that the case can bedecided summarily. Exhibit 30.

(b)(7)(c)

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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 federalcourts, and that:

The responsive pleading filed in this action is probably the first and only pleadingin which I did not include a demand for trial by jury. The omission was a mistakeand 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 oftime. Id.

On August 3, 2007, the Court issued an order denying, without prejudice toreassert 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 remainingclaims 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 orthat they were not entitled to a jury trial, but merely noted that the issue was moot andtherefore did not need to be decided. Id.

The Federal Rules of Ciyil Procedure 38(b) provides that a party wishing to haveclaims tried by a jury must serve a demand for such jury no later than ten business daysafter service of the last pleading concerning the issues the litigant wishes to be tried byjury. Fed. R. Ciy. P. 38(b). In accordance with this rule, the jury demand must be filedno 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 anydemand 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 answerwas filed by Universal Express. See Exhibit 10. Universal Express did not file a brief insupport of their request for a jury trial until May 14, 2007, nearly fifteen months after itwas due. Exhibit 31- Under the Federal Rules, failure to demand a jury trial within tendays 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 (9th Cir. 2005) (finding failure toinclude general jury trial demand in amended complaint filed almost a year after theanswer resulted in waiver of jury trial). Thus, as a matter of law, the agreement in thecase management plan in no way absolved Universal Express from their duty to make ajury 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 intheir 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

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had not demanded a jury trial." Id. According to (b)(7)(C) this had nothing to do with thepretrial scheduling order, nor did it have anything to do with the DRO moving forsummary judgment in the case. (b)(7)(C) Tr. at 90 & 93. (b)(7)(C)explained that the pretrialorder 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 anyneed 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," noris there evidence the DRO attorneys were trying to "hide their agreement" from JudgeLynch. Moreover, the judge did issue a ruling about Universal Express's right to a jurytrial, frnding the issue moot but dismissing their request to allow them to amend theiranswer without prejudice (meaning if Universal Express had won on appeal they couldhave 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 UniversalExpress was "promised a jury trial" by the SEC, the Federal Rules of Civil Procedure donot permit that and requires defendants to request a jury trial with their answer, whichUniyersal Express defendants admit they failed to do. The "promise to a jury trial" in thecase management plan was simply a statement that, at that point in time, the SEC wouldnot take the position with the Court that Universal Express had waived their right to ajury trial. It did not, and could not under the Federal Rules, absolye Universal Expressfrom the need to demand a jury determination.

III. We Find Universal Express's Claim of an Improper Conflict of Interest onthe Part of the Court-Appointed Receiver to be Unsubstantiated

As noted above, by order dated August 31, 2007, the Court appointed Moscowitzto be the Receiyer for Uniyersal Express "to determine Universal Express's actualfinancial state, to collect and conserve what assets the company has, and to report itsfrndings to the Court-" Exhibit 15. The Universal Express shareholders claim thatMoscowitz 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 priorconduct, according to (b)(7)(c) was that she had defended Harry Leopold in a caseentitled Eagletech Communications v. Bryn Mawr. Id.

According to (b)(7)(c) 's letter, that case involved payments to Mr. Leopoldfrom Mafia-connected racketeers and various business entities engaging in severe nakedshorting of several bulletin board companies. Id. (b)(7)(c) told us that this representationby Moscowitz resulted in her having an "interest in seeing [Universal Express] crushedbecause it makes her case." The Universal Express concerned shareholders also claimthat there were other problems with the appointment of Moscowitz, specifically that theCourt did not hold a hearing about her appointment and that she was not required to posta bond. Exhibit 30. In addition, at least one of the shareholders argued that one of thefirst things Moscowitz did after being appointed Receiver was to find no naked shortselling in relation to Universal Express. Exhibit 35.

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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 tobe eviscerated by the continuing conduct of Universal Express, Altomare andGunderson." Exhibit 14. On September 5, 2007, the Court granted the SEC's motion toappoint a Receiver and appointed Moscowitz. Id. As noted above, the Receiver issuedher 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 objectedto 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 $21million judgment against the company far exceeds the company's assets." Exhibit 14.Moreover, the Court noted that there was no Universal Express officer or directorauthorized to comply with the company's reporting responsibilities with the SEC. Id. at22. In that same Opinion and Order the Court stated, "Altomare and Gunderson cannotuse a decade-old bankruptcy order as an indefinite license to break federal securities lawand commit fraud with impunity." Id. at 23. In that same Opinion and Order, the Courtordered Universal Express, Altomare and Gunderson to appear on October 12, 2007, toshow cause why they should not be held in contempt. Id. at 24.

We interviewed (b)(7)(c) about thealleged conflict of interest on the part of Moscowitz. Exhibit 35. (b)( 7)(c) explained thatEagletech Communications brought an action against Bryn Mawr rn Florida state courtfor manipulation of Eagletech stock and that Leopold, who was represented byMoscowitz, brought two financindeals to the company and that one of those deals wasdone by organized crime. Id. (b)(7)(C) claimed to haye submitted evidence of illegal wiretransfers to the state court. Id. (b)(7)(c) told us that because Moscowitz representedLeopold, she was a "poor choice" to be the Receiver in the Uniyersal Express case. Id.

(b)(7)(C) told us that the first thing Moscowitz did as the Receiver in UniyersalExpress was to deny any naked short selling. Id. He also argued that she should havefiled 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" fromoutsiders about her conflict of interest and that some of the Universal Expressshareholders got his email and seized upon the conflict of interest issue- Id.

Notwithstanding (b)(7)(c) 's assertions, we found that Moskowitz's representationof defendants in a case involving allegations of naked short selling did not constitute perse bias against Universal Express. Moreover, Moskowitz did not make anydeterminations about whether there was any naked short selling against UniversalExpress. While not finding any conflict of interest, the OIG looked further to determinewhether proper procedures were followed by DRO in appointing the Receiver- •

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According to DRO Supervisory Trial Counsel Julie Lutz, the Court requested thatthe SEC submit a list of possible Receivers for Universal Express. Exhibit 36. OnAugust 16, 2007, Lutz submitted the name and curriculum vitae of three individuals whoagreed to be considered for appointment of the Receiver for Universal Express if theCourt granted the SEC's motion to do so. Exhibit 37- Lutz noted that they attempted tofind local candidates and that all three potential Receivers were located in Florida, whereUniversal Express was headquartered. Id. In that submission, the SEC listed Moscowitzand two other attorneys and attached their curriculum vitaes as potential Receivers. Id.The DRO did not recommend a particular Receiver. Exhibit 14. Counsel for UniversalExpress received a copy of that submission, and never objected to the appointment ofMoscowitz. See Exhibit 10.

Lutz told us that the Division of Enforcement has procedures for therecommendation of Receivers. Exhibit 36. Those procedures are found on the"EnforceNet" internal website and outline the specific steps staff should take wheneversuggesting 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 atleast three qualified individuals make written proposals with their resume and a coverletter outlining their rates and a general description of the steps they would take tocomplete the assignment; and (3) having a three-person committee at the SEC.evaluatethe proposals- Id. Lutz said that the committee of SEC headquarter personnel did reviewthe Uniyersal Express potential Receivers- Exhibit 36. According to Lutz, the Divisionof 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 therecommendation of Receivers in the Uniyersal Express case. Exhibit 38. Moreoyer, itwas the Court who "upon due consideration of potential candidates" selected Moscowitzbe appointed the Receiver in Universal Express. Exhibit 14.

(b)(7)(c) former trial counsel, testified that he recalled reviewing the resumes of thethree potential candidates, including Moscovvitz, and that he found them all to be wellqualified. (b)(7)(C) Tr. at 84- (13)1(7) noted that it was the federal judge who selected andappointed Moscowitz. (b)(7)(c) Tr. at 86- In additionj ( b)(7)(c ) testified that he did not seeany 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 nakedshort selling, and that in one of Moscowitz's reports, she noted that while there were twojury verdicts in favor of Universal Express, the defendants in those cases never showedup in court. (b)(7)(C) Tr. at 87-

As discussed above, Moscowitz initially issued two reports to the Court aboutUniversal Express. Exhibits 15 & 16. In those reports, she stated, "I have not dealt withany issues regarding the purchase or sale of shares, as this is outside the scope of the actsthe Court has asked of me." Id. In her second report, she discussed the two $700 millionjudgments Universal Express had obtained in Florida state courts. Exhibit 15. TheReceiver noted that Universal Express's claim that these judgments were "substantiallycollectable" seemed incorrect. Id. The Receiver went on to discuss the history of thosecases, and noted that the defendants defaulted and presented no defense to the charges.

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Id. Further, the Receiver stated that Altomare and Gunderson testified, without crossexamination, about the damages to Uniyersal Express but Universal Express offered nodocumentary evidence or expert proof of naked short selling of Universal Express. Id.Therefore, until her latest report, other than these few statements related to UniversalExpress, the Receiver had not dealt with naked short selling. See Exhibits 15, 16 & 17-

As 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 toUniversal Express, she engaged a consultant who has experience as a compliance officerin 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 determinewhether the episodes of "high volumes of short sales" were illegal. Id. The Receivernoted that even if they had determined there was naked short selling of Universal Expressshares 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 "hasalways been held by the shareholders." Id. at 13.

In sum, we do not find that the DRO engaged in any misconduct related to theappointment of the Receiyer. We also found no evidence that the DRO failed to followappropriate Enforcement procedure. It was the Court who selected and appointedMoscowitz as the Receiyer. It is also noteworthy that the Universal Express defendantsdid not object to her appointment.

IV. We Find the Claim that the SEC Filed Suit Against Universal Express inRetaliation to be Unsubstantiated

As noted aboye, the "Concerned USXP Shareholders Group" alleges that theSEC's lawsuit against Universal Express was filed in retaliation for its filing suit againstthe SEC. However, as discussed above, the DRO began an investigation into UniversalExpress 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 Orderauthorizing the investigation was issued on August 5, 2003. Exhibit 6. In accordancewith the Formal•Order, the DRO began issuing subpoenas to Universal Express and itsofficers.

On March 2, 2004, several months after the DRO began its investigation ofUniversal Express, the company filed a lawsuit against the SEC in the United StatesDistrict Court for the Southern District of Florida. See Exhibits 1 & 4. UniversalExpress argued that the SEC committed constitutional torts, civil conspiracy, and aidingand abetting intentional interference with business relations, all related to the SEC'sfailure to take action against naked short sellers. Id. According to the Commission'sAction Memorandum, Universal Express filed their Complaint against the SEC afterUniversal Express counsel notified DRO attorneys that Altomare and Gunderson wouldnot comply with the subpoenas requiring them to testify on March 15 and 17, 2004, inconnection with the DRO investigation. Exhibit 5.

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As noted above, the SEC filed its Complaint against Universal Express in theUnited 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 fewweeks after. Universal Express filed suit against the SEC appears suspicious, the evidenceshows the investigation of Universal . Express was well under way by March 2004 whenUniversal Express sued the SEC. See Exhibits 4, 6 & 8. Moreover, there is no concreteevidence that retaliation was a motive in the SEC filing a Complaint, nor evidence thatthe subpoenas were issued to harass.

Conclusion

The evidence failed to show wrongdoing by the DRO as to the specific allegationsmade by the Universal Express shareholders. This report is being provided to theDirector of the Division of Enforcement and Deputy Chief of Staff, Office of theChairman.

(b)(7)(c)

Submitted:

Concur:

Approved: .40rairH. a id Kotz

Date:

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