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August 2, 2006, Alert No. 1,423.
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SEC Sues Operator of Online Tout and Trade Scheme

7/31. The Securities and Exchange Commission (SEC) filed a civil complaint [PDF] in U.S. District Court (CDCal) against Nicholas A. Czuczko alleging violation of federal securities laws in connection with his trading of stocks that he recommended in his web site titled "Stockster", which is still located at the URL www dot thestockster dot com.

The complaint alleges that "Czuczko netted large profits by buying shares of the stocks prior to his recommendations on the Stockster site and then quickly selling the shares into the rising market that the site created. The Stockster site, which claimed to be the website of an "independent research company," did not disclose that Czuczko intended to sell his shares once the price increased. Furthermore, the site did not inform Internet visitors when Czuczko actually began to sell his shares. From the site's inception in the mid-December 2005, Czuczko made more than $2.7 million by selling the Stockster site's recommended stocks."

The complaint also alleges that he recommended that investors purchase stock in a company in which he held the majority of the stock, and failed to disclose to the SEC his associated sales.

The complaint also alleges that "Czuczko paid for a sustained Internet advertising campaign to promote the Stockster website", including web site ads in, The, and The Wall Street Journal Online, and search query response ads in Google and Yahoo. The complaint states that he spent about $1.15 Million on advertising.

The complaint states that the Stockster web site included a notice that stated that "Officers, directors, and employees of The Stockster or the financial analysts mentioned, and members of their families may hold a position [] and may, from time to time, trade in these securities for their own accounts." But, the complaint adds, Czuczko never disclosed his intent to sell.

The SEC's complaint also states that "To avoid public association with the Stockster website, Czuczko registered for the domain name through a service that shielded his name from publicly accessible registration information."

See also, related story in this issue titled "House Subcommittee Holds Hearing on Access to WHOIS Database".

The complaint pleads securities fraud in violation of Section 10b and Rule 10b5, securities fraud in violation of Section 17, and failure to file notices of stock transactions.

See also, SEC release. This case is SEC v. Nicholas Czuczko, U.S. District Court for the Central District of California, D.C. No. CV 06-4792 GAF.

House Subcommittee Holds Hearing on Access to WHOIS Database

7/18. The House Financial Services Committee's (HFSC) Subcommittee on Financial Institutions held a hearing titled "Hearing entitled "ICANN and the Whois Database: Providing Access to Protect Consumers from Phishing".

The Internet Corporation for Assigned Names and Numbers (ICANN) is considering proposals to limit access to the WHOIS database of domain name registration information. The database is currently publicly available online. However, many registrants, particularly those who engage in online fraud, spamming, and intellectual property theft, register with false information.

Rep. Spencer Bachus (R-AL), the Chairman of this Subcommittee, used this hearing to make clear his position that the WHOIS database should remain publicly accessible.

Representatives of the Department of Commerce's (DOC) National Telecommunications and Information Administration (NTIA) and Federal Trade Commission (FTC) took different positions. The NTIA supports maintaining public access. The FTC supports law enforcement access, and public access to information on commercial web sites, but not personal web sites.

John Kneuer, acting head of the NTIA, explained in his prepared testimony [4 pages in PDF] the origin of the present debate. He wrote that the "ICANN's Generic Names Supporting Organization (GNSO) has initiated a policy development process, which among other things, seeks to define the purpose of WHOIS data in the following contexts: ICANN’s mission and core values; laws protecting individual privacy; laws specifically addressing WHOIS; and the changing nature of registered name holders. In April 2006, the GNSO Council voted in favor of a new definition of the purpose of WHOIS data that is to ``resolve issues related to the configuration of the records associated with the domain name within a DNS nameserver.´´"

He wrote that "This definition is considered by many, including the U.S. Government, to reflect a narrow, technical definition. The United States public and private sectors are working within the ICANN process to address this problem." He added that "a narrow, technical definition of the purpose of WHOIS data would hinder continued access to the WHOIS database for a range of legitimate uses."

He argued in both his written and oral testimony, and stated that it is the position of the U.S. government, that there should remain public access to the WHOIS database.

TLJ spoke with Kneuer after the hearing. He reiterated that public access is the position of the U.S. government, and enumerated many U.S. government agencies that concur. He did not name the FTC.

Eileen Harrington, Deputy Director of the FTC's Consumer Protection Bureau, testified that a distinction should be made between access to WHOIS data on commercial web sites and personal web sites. She argued that there should only be public access to data on commercial web sites. See, prepared testimony of the FTC [22 pages in PDF].

Harrington did not explain, either in her oral or written testimony, why persons who use web sites to engage in fraudulent commercial activities would not register their URLs as personal web sites.

Rep. Steve Pearce (R-NM) made the point that if a pervert is communicating with his granddaughter via the internet, that is not commercial activity, but he should be able to find out from the Whois database who is contacting his granddaughter.

Both Rep. Bachus and Rep. Pearce argued that dealing with fraud, phishing, theft, and other bad conduct should not be left to government agencies. Consumers must be able to protect themselves, including by obtaining information about those with whom they deal.

Rep. Carolyn Maloney (D-NY) differed. While her main concern at this hearing was the unrelated issue of freezes on credit files, she also asked Harrington if access to the WHOIS database contributes to identify theft, and whether spammers are using it build spam lists.

Rep. Bachus said that access to the Whois database is one of "important rights of consumers". He added that consumers have a right to protect themselves.

Mark Bohannan, General Counsel of the Software and Information Industry Association (SIIA), argued that the WHOIS database should be publicly accessible. He said that the ICANN proposal would prevent the use of the WHOIS database to track down cybersquatters, infringers of intellectual property rights, phishers, and fraud artists. See, prepared testimony [12 pages in PDF].

Marc Rotenberg, Executive Director of the Electronic Privacy Information Center (EPIC), testified in opposition to the current ICANN policy. He argued that the current policy allows spammers and other bad actors to access the WHOIS database. He said that as with state driver licensing regimes, web site registration information should be accessible only to law enforcement. See, prepared testimony [12 pages in PDF].

Catherine A. Allen of the Financial Services Roundtable argued that WHOIS data should be made available to both law enforcement and financial institutions. See, prepared testimony [23 pages in PDF].

Paulson Advocates Free Trade

8/1. Henry Paulson, the new Secretary of the Treasury, gave a speech at the Columbia Business School in New York City. He said that the U.S. economy is strong, but faces several challenges in the long run, including the pursuit of freer trade, control over spending on entitlement programs, energy security, and more even income distribution.

Henry PaulsonPaulson (at right) said that "We also need to expand opportunities for American workers and businesses to compete in the global economy. The goods we export -- from corn to computers -- create high-paying jobs for millions of Americans. And foreign investments in our country are responsible for more than five million U.S. jobs. Simply put, we need to continue working to open markets abroad, and to keep our own markets open."

He said that "As Treasury Secretary I will be a strong advocate for free trade and will encourage other countries to open their markets to American goods, services, and capital. When I travel to Asia early this fall trade will be a top agenda item. The world is a competitive place. And if we are to retain our competitive advantage, we need to welcome competition, and not run away from it."

He continued that "I am very concerned about the anti-trade rhetoric I hear coming from some quarters here and around the world. I have spent my career advising clients on international matters, working in U.S. and foreign capital markets, and investing in countries around the globe -- ranging from developing countries like China, to highly-developed economies, such as those in Japan and Germany. If this experience has taught me anything it is that nations that reform their economies, and open themselves to trade and competition, benefit their own citizens greatly."

He said that "there is a disturbing wave of protectionism", and that some "countries are increasingly viewing market access as something that should apply to someone else's home market and not their own."

Regarding the suspended Doha round of global trade negotiations, he said that "we will continue to try to find a way to move forward with the global negotiations". He added that "we will continue to press for liberalization through important regional and bilateral agreements".


8/2. The story titled "GAO Reports on Federal Government Transition to IPv6" in TLJ Daily E-Mail Alert No. 1,422, August 1, 2006, included an incorrect hyperlink to the GAO report titled "Internet Protocol Version 6: Federal Government in Early Stages of Transition and Key Challenges Remain". See, correct hyperlink [30 pages in PDF].

Washington Tech Calendar
New items are highlighted in red.
Wednesday, August 2

The House will not meet from Monday, July 31, through Tuesday, September 5. The House will next meet at 2:00 PM on Wednesday, September 6. See, Republican Whip Notice.

The Senate will meet at 9:30 AM. It will resume consideration of consideration of HR 5631, the Department of Defense FY 2006 Appropriations bill.

9:45 AM - 12:00 NOON and 2:00 - 3:30 PM. The DC Bar Association will host two events titled "Visits to the U.S. Copyright Office". The price to attend ranges from $15-$25. For more information, call 202-626-3463. See, notice and notice. Location: Copyright Office, Room 401, James Madison Memorial Building, 1st Street & Independence Ave., SE.

Thursday, August 3

8:30 AM - 5:00 PM. The U.S.-China Economic and Security Review Commission will hold a hearing titled "China's Role in the World: Is China a Responsible Stakeholder?". See, notice in the Federal Register, July 20, 2006, Vol. 71, No. 139, at Pages 41316-41317. Location: Room 385, Russell Building, Capitol Hill.

9:30 AM. The Senate Judiciary Committee (SJC) may hold an executive business meeting. The agenda includes consideration of S 2453, the "National Security Surveillance Act of 2006", S 2455, the "Terrorist Surveillance Act of 2006", S 2468, a bill to provide standing for civil actions for declaratory and injunctive relief to persons who refrain from electronic communications through fear of being subject to warrantless electronic surveillance for foreign intelligence purposes, S 3001, the "Foreign Intelligence Surveillance Improvement and Enhancement Act of 2006", S 2831, the "Free Flow of Information Act of 2006", and S 1845, the "Circuit Court of Appeals Restructuring and Modernization Act of 2005". See, notice. The SJC frequently cancels or postpones meetings without notice. The SJC rarely follows its published agenda. All of the above listed items have been on previous agendas, but held over. Press contact: Courtney Boone at 202-224-5225. Location: Room 226, Dirksen Building.

9:30 AM. The Federal Communications Commission (FCC) will hold a meeting. See, agenda [PDF], and story titled "FCC Releases Agenda for August 3 Meeting" in TLJ Daily E-Mail Alert No. 1,420, July 28, 2006. The event will be webcast by the FCC. Location: FCC, 445 12th Street, SW, Room TW-C05 (Commission Meeting Room).

10:00 AM. The Center for Democracy & Technology (CDT) will hold a news briefing on pending bills that would mandate internet filtering and web site labeling. The speakers will be Leslie Harris and John Morris of the CDT. Breakfast will be served. For more information, contact David McGuire at 202-637-9800 x106. The event will also be telecast. The call in number is 800-377-8846; the participant code is 19400583#. Location: CDT, 11th Floor, 1634 I St., NW.

Friday, August 4

8:30 AM - 12:30 PM. The U.S.-China Economic and Security Review Commission will hold a hearing titled "China's Energy Security". See, notice in the Federal Register, July 20, 2006, Vol. 71, No. 139, at Pages 41316-41317. Location: Room 385, Russell Building, Capitol Hill.

Monday, August 7

TENTATIVE. The Senate will not meet from Monday, August 7, through Monday, September 4. See, 2006 Senate calendar.

10:00 AM. The U.S. Court of Appeals (FedCir) will hear oral argument in, Inc. v. Furnace Brook, LLC, a patent case involving personal jurisdiction. Furnace Brook bought a patent at a bankruptcy auction. It did not practice it. It sent cease and desist letters to other companies, alleging infringement, and seeking licensing fees. One recipient,, filed a complaint in U.S. District Court (DUtah) seeking a declaration that it did not infringe the patent. The Federal Circuit has held that sending a cease and desist letter into a state does not give rise to personal jurisdiction over the sender in that state. The District Court dismissed for lack of personal jurisdiction. However, the District Court also held that Furnace Brook is a "patent troll". See, opinion [PDF]. This is App. Ct. No. 2006-1121, and D.C. No. 2:05-CV-00679 PGC. Location: Courtroom 201, 717 Madison Place, NW.

2:00 - 4:00 PM. The American Enterprise Institute (AEI) will host a discussion of the book titled "Spoiling for a Fight: The Rise of Eliot Spitzer" [Amazon]. The speakers will be Brooke Masters (author), Michael Greve (AEI), and Judge William Pryor (U.S. Court of Appeals for the 11th Circuit). See, notice. Location: 12th floor, 1150 17th St., NW.

The Federal Communications Commission (FCC) will conduct a mock auction for Auction 66. This is the auction of Advance Wireless Services (AWS) licenses in the 1710-1755 MHz and 2110-2155 MHz (AWS-1) bands. See also, notice in the Federal Register, June 2, 2006, Vol. 71, No. 106, at Pages 32089-32091.

Deadline to submit comments to the National Institute of Standards and Technology (NIST) regarding its Draft Special Publication 800-100 [huge Zipped PDF] titled "Information Security Handbook: A Guide for Managers".

Tuesday, August 8

Deadline to submit to the Internal Revenue Service (IRS) outlines of topics to be discussed at the IRS's public hearing on August 29, 2006, regarding its notice of proposed rule making pertaining to the application of 26 U.S.C. § 199, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software. See, notice in the Federal Register, June 1, 2006, Vol. 71, No. 105, at Pages 31128-31129.

Wednesday, August 9

The Federal Communications Commission (FCC) will commence Auction 66. This is the auction of Advance Wireless Services (AWS) licenses in the 1710-1755 MHz and 2110-2155 MHz (AWS-1) bands. See also, notice in the Federal Register, June 2, 2006, Vol. 71, No. 106, at Pages 32089-32091.

Day one of a three day continuing legal education (CLE) seminar hosted by the American Intellectual Property Law Association (AIPLA) titled "Practical Patent Prosecution for New Lawyers". See, notice [PDF]. For more information, call 703-415-0780. Location: Hilton Crystal City, 2399 Jefferson Davis Highway, Arlington, VA.

GAO Reports on Financial Restatements, Sarbanes Oxley, and Section 404

8/1. The Government Accountability Office (GAO) released a report [198 pages in PDF] titled "Financial Restatements: Update of Public Company Trends, Market Impacts, and Regulatory Enforcement Activities".

The report finds that "While the number of public companies announcing financial restatements from 2002 through September 2005 rose from 3.7 percent to 6.8 percent, restatement announcements identified grew about 67 percent over this period."

It concludes that "A variety of factors appear to have contributed to the increased trend in restatements, including increased accountability requirements on the part of company executives; increased focus on ensuring internal controls for financial reporting; increased auditor and regulatory scrutiny (including clarifying guidance); and a general unwillingness on the part of public companies to risk failing to restate, regardless of the significance of the event."

It adds that "Given the new regulatory and oversight structure, and the current operating environment, it is unclear if and when the current trend toward increasing restatements will subside. The number of restatements may continue to increase in the immediate future, as new areas of scrutiny (for example, small public company implementation of the Sarbanes-Oxley Act internal control requirements and hedge accounting rules), by SEC and others, may trigger future restatements similar to the trends experienced after the focus on accounting for leases or income taxes in early 2005. Currently, approximately 60 percent of public companies -- generally smaller public companies -- have yet to fully implement the internal control requirements of the Sarbanes-Oxley Act, which could also impact the number of restatements. In recent years, the larger public companies’ implementation of Section 404 requirements resulted in many companies announcing financial restatements. Alternatively, the number of restatement announcements could subside after the regulatory and firm changes called for in the Sarbanes-Oxley Act have been fully implemented and allowed to play through."

The report includes a chronological listing of financial restatement announcements from July 1, 2002 through September 30, 2005.

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