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This is a photo of the National Register of Historic Places listing with reference number 7000063

Friday, September 30, 2011

SEC ANNOUNCES FINAL JUDGMENT IN AOL TIME WARNER MISSTATEMENT OF REVENUES CASE

The following excerpt is from the SEC website: September 29, 2011 “The U.S. Securities and Exchange Commission today announced that, on September 6, 2011, the United States District Court for the Southern District of New York entered a settled final judgment against J. Michael Kelly, the former Chief Financial Officer of AOL Time Warner Inc. and that on July 19, 2010, the district court entered a settled final judgment against Joseph A. Ripp, the former Chief Financial Officer of the AOL Division of AOL Time Warner, in SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, Civil Action No. 08 CV 4612 (CM)(GWG) (S.D.N.Y. filed May 19, 2008). The final judgments resolve the Commission’s case against Kelly and Ripp. The Commission’s complaint alleges that, from at least mid-2000 to mid-2002, AOL Time Warner overstated the company’s online advertising revenue with a series of round-trip transactions. The complaint further alleges that the defendants participated in this effort and that their actions contributed to this overstatement. Online advertising revenue was a key measure by which analysts and investors evaluated the company. Without admitting or denying the allegations in the complaint, Kelly consented to entry of a final judgment permanently enjoining him from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 and ordering him to pay disgorgement of $200,000 and a civil penalty of $60,000. Without admitting or denying the allegations in the complaint, Ripp consented to the entry of a final judgment permanently enjoining him from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and ordering him to pay disgorgement of $130,000 and a civil penalty of $20,000. Steven E. Rindner and Mark Wovsaniker remain as defendants in the Commission’s action.”

SEC ISSUES RISK ALERT WARNING IN REGARDS TO TRAIDING IN SUB-ACCOUNTS

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 29, 2011 — The staff of the Securities and Exchange Commission today issued a Risk Alert warning of significant concerns regarding trading through sub-accounts, and offered suggestions to help securities industry firms address those risks. Money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage are all potential risks associated with the master/sub-account trading model, according to the alert. Customers who open master accounts with a registered broker-dealer usually subdivide it for use by individual traders or groups of traders. In some instances, the sub-accounts may be divided to such an extent that the master account customer and the firm where the account is held might not know the identity of the traders in the sub-accounts. “Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity, or in an attempt to avoid or minimize regulatory obligations and oversight,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, whose national examination staff issued the alert. The alert includes suggestions for broker-dealers to address concerns arising from trading in sub-accounts and to comply with the SEC’s Market Access Rule, which requires broker-dealers to have controls and procedures to limit risks associated with offering market access to customers, including those with master/sub-accounts. “When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” Mr. di Florio said. Possible approaches include: Obtaining and maintaining the names of all traders authorized to trade in each master account, including all sub-account traders; verifying the identities of all such traders, using fingerprints if appropriate, background checks and interviews; and periodically checking the names of all such traders through criminal and other databases. Monitoring trading patterns in both the master account and sub-accounts for indications of insider trading, market manipulation, or other suspicious activity. Physically securing information of customer or client systems and technology. Establishing requirements that validate the trader’s identity. Logging and tracking incidents of attempted hacking or other unauthorized penetration-of-system by outside parties. Determining that traders who have access to the broker-dealer’s trading system and technology have received training in areas relevant to their activity, including market trading rules. Regularly reviewing the effectiveness of all controls and procedures around sub-account due diligence and monitoring. Creating written descriptions of all controls and procedures for sub-account due diligence and monitoring, including the frequency of reviews, the identity of those responsible for conducting such reviews, and a description of the review process.”

SEC ALLEGES RBC CAPITAL MARKETS LLC SOLD INADEQUATE INVESTMENTS WITHOUT FULL DISCLOSURES

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission today charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments. According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments. RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund. Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. “RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Kenneth R. Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “RBC Capital did not provide these school districts with full and accurate information regarding the risks of these complex structured products. We are pleased that today’s settlement will result in a significant recovery by the school districts.” According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors. The SEC’s order finds that the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments. RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser. RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million. The SEC’s investigation was conducted jointly by the Enforcement Division’s Municipal Securities and Public Pensions Unit led by Elaine Greenberg and Mark R. Zehner and Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Kevin Guerrero, Keshia W. Ellis and Ivonia K. Slade in Washington D.C. and Jeffrey A. Shank and Anne C. McKinley along with litigation counsel Steven C. Seeger and Robert M. Moye in the Chicago Regional Office. The broker-dealer examinations team of Marianne E. Neidhart, Scott M. Kalish, George J. Jacobus and Daniel R. Gregus of the Chicago Regional Office provided assistance with the investigation. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.”

Thursday, September 29, 2011

SHOULD FIRMS BE BANNED FROM DESIGNING A TRANSACTION TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”. This speech is an excerpt from the SEC website: September 19, 2011 Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure. In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2 The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts. In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”

Wednesday, September 28, 2011

SEC ALLEGES PAYDAY LOAN OWNER USED INVESTOR MONEY FOR CARS, GAMBLING AND HOME IMPROVEMENTS

The following excerpt is from the SEC website: September 22, 2011 “The Securities and Exchange Commission today charged the owner of a Spokane-Wash.-based payday loan business with conducting a massive Ponzi scheme and stealing investor money to fund her home improvement projects, gambling jaunts to Las Vegas, and purchases of a Corvette and a Mercedes. The SEC alleges that Doris E. Nelson of Colbert, Wash., defrauded investors in her company - the Little Loan Shoppe - by misrepresenting the profitability and safety of their investments and giving them the false impression that their money was being used to grow her business. In truth, Nelson used the vast majority of new investor money to repay principal and purported returns to earlier investors. She misappropriated millions of dollars in investor funds for her personal use. According to the SEC's complaint filed in federal district court in Spokane, Nelson raised approximately $135 million between 1999 and 2008 from at least 650 investors in the United States, Canada, and Mexico. Nelson falsely told investors that Little Loan Shoppe was financially sound. In written promissory notes, Nelson promised investors annual returns of 40 to 60 percent that she claimed would be paid through Little Loan Shoppe's profits. She also told investors that their money was safe because she had insurance or a separate account to pay investors back. However, Little Loan Shoppe was not profitable, investor money was not safe, and Nelson misappropriated the money to run her Ponzi scheme. The SEC further alleges that in mid-2008 as the scheme was nearing collapse, Nelson made a last-ditch effort to attract more investment money by announcing a "window to invest" and falsely telling investors that Little Loan Shoppe had "defied financial gravity" in the declining economy. Investors responded by investing millions of dollars in 2008 before the scheme finally collapsed in 2009. Payments to investors ceased and Little Loan Shoppe was forced into bankruptcy. In its federal court action, the SEC alleges Nelson violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and monetary penalties.”

Tuesday, September 27, 2011

KARA N. BROCKMEYER NAMED CHIEFOF FCPA UNIT FORCUSED ON ANTI-BRIBERY PARTS OF FEDERAL SECURITIES LAWS

The following is an excerpt from the SEC website: "Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission’s Division of Enforcement announced today that Kara Novaco Brockmeyer has been named Chief of its national specialized Foreign Corrupt Practices Act Unit that focuses on violations of the anti-bribery provisions of the federal securities laws. Ms. Brockmeyer has been serving as an Assistant Director in the Enforcement Division and supervising a number of complex investigations involving violations of the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. companies from bribing foreign officials to obtain government contracts and other business. Ms. Brockmeyer spearheaded the SEC’s investigation of Halliburton Co., KBR Inc., Technip S.A., and ENI S.p.A. for FCPA violations resulting from a decades-long bribery scheme in Nigeria. The SEC’s actions in this matter together with the Department of Justice resulted in the recovery of $1.2 billion of ill-gotten gains and criminal penalties. In addition to her significant FCPA experience, Ms. Brockmeyer has served as the co-head of the Division’s Cross Border Working Group, a proactive risk-based initiative focusing on U.S. companies with substantial foreign operations. Ms. Brockmeyer’s efforts on the Cross Border Working Group have resulted in several recent significant enforcement actions, including the Commission’s first stop orders for post-effective registration statements due to the resignation of the companies’ independent auditor. “Kara’s creativity and perseverance is reflected in her outstanding efforts and results over the years in fulfilling the Commission’s mission of investor protection,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Enforcement of the FCPA remains a high priority for the Division, and adding Kara’s talent to the exceptional ability and dedication of the members of the Foreign Corrupt Practices Act Unit will further enhance our anti-corruption program.” Ms. Brockmeyer said, “I am looking forward to the privilege of leading the Foreign Corrupt Practices Act Unit and its dedicated and talented staff.” Ms. Brockmeyer is filling the position previously held by Cheryl Scarboro, who left the agency in June after serving as the first chief of the unit. Ms. Brockmeyer joined the SEC in 2000 following several years in private practice. She started supervising investigations in 2002 and was promoted to Assistant Director in 2005. In addition to FCPA investigations, Ms. Brockmeyer has substantial experience supervising matters involving financial fraud, insider trading, market manipulation, and violations by regulated entities. Ms. Brockmeyer received her law degree magna cum laude from the University of Michigan Law School and her undergraduate degree cum laude from Williams College."

KNOWN PURCHASERS WHO MADE CERTAIN TRADES HAVE HAD THEIR ASSETS FROZEN

UThe following excerpt is from the SEC website: “On September 16, 2011, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Global Industries, Ltd. (the “Unknown Purchasers”). The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the September 12, 2011 public announcement that Technip SA (“Technip”), a French company, and Global Industries, Ltd. (“Global”) had entered into an agreement pursuant to which Technip would offer to acquire all of the outstanding common stock of Global for $8.00 per share, a 55% premium over the closing price of Global common stock on the trading day preceding the public announcement. The Commission’s complaint alleges that the Unknown Purchasers engaged in insider trading, thereby violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil money penalties. The Commission’s complaint alleges that on September 8 and 9, 2011, the Unknown Purchasers bought a total of 685,840 shares of Global common stock through an omnibus account in the name of Raiffeisen Bank International AG Vienna, Austria, at Brown Brothers Harriman & Co., at share prices ranging from $5.14 to $5.39. These purchases accounted for 8.6% and 11.9%, respectively, of the total volume of Global trading on each of those days. The closing price for Global common stock on September 9 was $5.15 per share. On the next trading day, September 12, before the U.S. markets opened, the public announcement of the Global buy-out was made. Following the public announcement, Global shares opened at $7.77. The Unknown Purchasers sold all 685,840 shares of Global on September 12 at prices ranging from $7.77 to $7.80 per share, realizing a profit of approximately $1,726,809. The U.S. District Court for the Southern District of New York issued a Temporary Restraining Order freezing the assets relating to the trading; requiring the Unknown Purchasers to identify themselves, imposing an expedited discovery schedule, and prohibiting the defendants from destroying documents. The Commission acknowledges the Office of Fraud Detection and Market Intelligence of the Financial Industry Regulatory Authority (“FINRA”) for its assistance in this investigation.”

SEC ALLEGES A QUANTITATIVE FUND MANAGER CONCEALED A COMPUTER ERROR THAT COST INVESTORS $217 MILLION

The following excerpt is from the SEC website: Washington, D.C., Sept. 22, 2011 — The Securities and Exchange Commission today charged the co-founder of institutional money manager AXA Rosenberg with securities fraud for concealing a significant error in the computer code of the quantitative investment model that he developed and provided to the firm's entities for use in managing client assets. According to the SEC's order instituting administrative proceedings against Barr M. Rosenberg, he learned of the error in June 2009 but directed others to keep quiet about it and not fix it immediately. Rosenberg denied the existence of any significant errors in the model during an October 2009 board meeting discussion about its performance. AXA Rosenberg disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination. The error was not disclosed to clients until April 2010, causing them $217 million in losses. Rosenberg has agreed to settle the SEC's charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar. The SEC previously charged AXA Rosenberg and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty. "Rosenberg chose concealment over candor, and in doing so selfishly served his interests over those of his clients," said Robert Khuzami, Director of the SEC's Division of Enforcement. Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement, added, "Investors in quant funds trust their advisers to develop, maintain and operate the quant models that drive a fund's performance. Rosenberg betrayed investors when he failed to disclose the material coding error." According to the SEC's order, Rosenberg created the model, oversaw research projects to improve and enhance it, and exercised significant authority throughout the AXA Rosenberg organization. The material error in the model's computer code disabled one of its key components for managing risk and affected the model's ability to perform as expected. Clients raised concerns about this underperformance, and Rosenberg knew about and discussed these concerns with others at AXA Rosenberg. But instead of disclosing and correcting the error immediately, Rosenberg directed others to conceal the error and declined to fix the error. The SEC's order found that due to Rosenberg's misconduct, AXA Rosenberg and its affiliated investment advisers misrepresented to clients that the model's underperformance was attributable to factors other than the error, and inaccurately stated that the model was controlling risk correctly. Rosenberg's instructions to delay fixing the error caused additional client losses. In its order, the SEC found that Rosenberg willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Sections 206(1) and 206(2). Without admitting or denying the SEC's findings, Rosenberg consented to the entry of an SEC order that requires him to cease and desist from committing or causing any violations and any future violations of these provisions; orders him to pay the $2.5 million penalty; and bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from serving as an officer, director or employee of a mutual fund.”

Monday, September 26, 2011

THREE TAKEN TO COURT OVER ALLEGEDLY SELLING FAKE SECURITIES AND RUNNING FAKE TRADING PROGRAMS

The following is an excerpt from the SEC website: “On September 19, 2011, the Securities and Exchange Commission filed an enforcement action in federal court in Massachusetts against Diane Glatfelter of Billerica, Massachusetts, Robert Rice of Tallahassee, Florida, and Robert Anderson of Madison, Indiana, charging each of them with participating in fraudulent schemes involving the promotion and sale of fictitious financial instruments and trading programs. The Commission also charged two entities controlled by Glatfelter and Rice, K2 Unlimited, Inc. and 211 Ventures, LLC, in connection with the scheme. The Commission's Complaint alleges that beginning in 2007, Glatfelter and Rice, through K2 Unlimited and 211 Ventures, offered fraudulent venture capital financing, which was purportedly to be raised through the use of "bank guarantees." According to the Commission's Complaint, Glatfelter, Rice and 211 Ventures also offered direct investments involving fictitious securities and trading programs, promising sky-high returns with guarantees against loss. In fact, the Commission alleges that the bank guarantees were non-existent fictional instruments and that the defendants defrauded investors of at least $1.8 million. The Commission's Complaint also alleges that in early 2009, Glatfelter became associated with Anderson and the two began to offer fraudulent investments to investors, also based in part on the use of various fictitious financial instruments. The Commission's Complaint alleges that Glatfelter and Anderson offered these fraudulent investments through an entity called E-Trust Clearing House, KB. The Commission alleges that Glatfelter and Anderson caused at least $425,000 in investor losses through the E-Trust scheme. The Commission's Complaint alleges that Glatfelter, Rice, Anderson, K2 Unlimited and 211 Ventures violated various anti-fraud, broker-dealer and securities registration provisions of the federal securities laws. Specifically, the complaint alleges that Glatfelter, Rice, Anderson and 211 Ventures violated Sections 5(a) and 5(c) of the Securities Act of 1933; that all defendants violated Section 17(a) of the Securities Act; that all defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; that Glatfelter and Rice aided and abetted K2 Unlimited and 211 Ventures' violations of Section 10(b) and Rule 10b-5 thereunder; and that Glatfelter, Rice and K2 Unlimited violated Section 15(a) of the Exchange Act. The Commission seeks permanent injunctions, disgorgement and prejudgment interest, and civil penalties against each defendant, and a bar prohibiting Glatfelter from serving as an officer or director of a public company. The Commission's Complaint alleges that the defendants in this matter purported to offer investment using the so-called "bank guarantees," stand-by letters of credit, or mid-term notes, among others. The Complaint alleges these instruments are fictitious and are not legitimate investments.”

Sunday, September 25, 2011

MAN PLEADS GUILTY TO POORLY MADE, NON-DISCLOSED HIGH RISK INVESTMENTS IN HIS INVESTMENT CLUB

The following excerpt is from the Department of Justice website: Thursday, September 22, 2011 Investment Club Manager Pleads Guilty to $40 Million Fraud WASHINGTON – Alan James Watson, 46, of Clinton Township, Mich., pleaded guilty today to fraudulently soliciting and accepting $40 million from more than 750 members of his investment club and losing nearly all of it through non-disclosed, high-risk investments. Victims were located in Virginia and nationwide. The guilty plea was announced by Assistant Attorney General Lanny A. Breuer of the Criminal Division, U.S. Attorney Neil H. MacBride for the Eastern District of Virginia and James W. McJunkin, Assistant Director in Charge (ADIC) of the FBI’s Washington Field Office. Watson pleaded guilty before U.S. District Judge Gerald Bruce Lee in the Eastern District of Virginia to one count of wire fraud. He faces a maximum penalty of 20 years in prison when he is sentenced on Dec. 9, 2011. “Without the consent of his clients, Mr. Watson gambled away investors’ funds on risky ventures that led to millions of dollars in losses,” said Assistant Attorney General Breuer. “He used his investment club to cheat people who trusted him out of their savings. The Justice Department will continue to be aggressive in our pursuit of financial fraudsters – whether they are on Wall Street or Main Street.” “A.J. Watson took huge risks with others’ money and lost big,” said U.S. Attorney MacBride. “He covered up his massive losses through lies and deceit to members of his investment club, many of whom would never have joined his club and have now lost everything.” “More than 750 unwitting victims thought they had done their homework and calculated their investment wisely; instead, they were met with false documentation that yielded no return on their investment,” said FBI ADIC McJunkin. “Schemes like this are why the FBI investigates white collar crimes, determined to protect potential victims.” According to a statement of facts filed with his plea agreement, Watson created an investment club in 2004 and served as the club’s chief executive officer. From 2006 to 2009, Watson received almost $40 million from investors. Watson purported that the money would be invested through an equities-trading system developed by an expert consultant, Company A, with a promised return on investment of 10 percent per month. In reality, Watson admitted that only $6 million of the $40 million was ever invested in Company A, while the remaining $34 million was secretly invested in miscellaneous, high-risk ventures without the consent of investment club members. These high-risk investments resulted in a near complete loss of the $34 million. According to court documents, despite the losses for the investors, Watson continued to create false monthly account statements showing net gains from their investments. In addition, Watson included “bonus” items on the account statements that appeared as trading profits, the result of a Ponzi scheme he orchestrated to use new investor funds to pay off earlier investors. In March of 2009, Watson ceased investing in Company A and re-deposited those funds in separate unauthorized ventures. In 2010, nearly a year after he had fully withdrawn finances from Company A, Watson informed investment club members that he had not invested their money as promised, and that none of the reported returns had ever materialized. This resulted in a combined $40 million loss for investment club members. The Commodity Futures Trading Commission (CFTC) has filed a related civil case in the Eastern District of Michigan. This case was investigated by the FBI’s Washington Field Office, the CFTC and the Securities and Exchange Commission. The department thanks these agencies for their substantial assistance in this matter. Trial Attorney Kevin B. Muhlendorf of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Mark D. Lytle are prosecuting the case on behalf of the United States. The investigation has been coordinated by the Virginia Financial and Securities Fraud Task Force, an unprecedented partnership between criminal investigators and civil regulators to investigate and prosecute complex financial fraud cases in the nation and in Virginia. The task force is an investigative arm of the President’s Financial Fraud Enforcement Task Force, an interagency national task force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.”

ALLEGED FAKE TAX CREDITS IN LANDFILL METHANE

The following is from the Department of Justice website: Thursday, September 15, 2011 Texas Federal Court Bars Two Men from Promoting Alleged Tax Scam Involving Fictitious Methane at Landfills Customers of Pair Allegedly Claimed at Least $2.6 Million of False Tax Credits “WASHINGTON - A federal court in Beaumont, Texas, has permanently barred two men from promoting an alleged tax fraud scheme involving bogus tax credits for the production of methane gas from landfills, the Justice Department announced today. Ronald Fontenot and Anthony Burrell consented to the civil injunction order against them without admitting wrongdoing. The order was signed by Judge Marcia A. Crone of the U.S. District Court for the Eastern District of Texas. According to the government complaint , which was originally filed in Florida, the scheme involved bogus federal income tax credits available to producers of fuel from non-conventional sources. The government suit alleges that George Calvert and Gregory Guido of Florida, both previously enjoined and criminally convicted as a result of their involvement, concocted the scheme and promoted it through tax preparers like Fontenot and Burrell, who acted as sub-promoters to individual customers. The 32 defendants named in the civil injunction lawsuit allegedly helped customers claim more than $30 million in tax credits for the production and sale of fuel from landfill gas facilities that either did not exist or belonged to others. According to the complaint, Fontenot, of Lake Charles, La., and Burrell, of Livingston, Tex., are allegedly responsible for preparing federal income tax returns for customers that claimed at least $2.6 million in false tax credits.”

Saturday, September 24, 2011

FORMER GALLEON TRADER SETTLES CHARGES WITH SEC

The following is an excerpt from the SEC Website: July 20, 2011 SEC v. Michael Cardillo, Civil Action No. 11-CV-0549 (S.D.N.Y.) (RJS) Former Galleon Trader Michael Cardillo Settles SEC Insider Trading Charges The Securities and Exchange Commission announced today that on July 18, 2011, the Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York entered a judgment against Michael Cardillo in SEC v. Michael Cardillo, 11-CV-0549, an insider trading case the SEC filed on January 26, 2011. The SEC charged Cardillo, who was a trader at the hedge fund investment adviser Galleon Management, LP during the relevant time period, with using inside information to trade ahead of the September 2007 announced acquisition of 3Com Corp. and the November 2007 announced acquisition of Axcan Pharma Inc. In its complaint, the SEC alleged that Arthur Cutillo and Brien Santarlas, two former attorneys with the international law firm of Ropes & Gray LLP, misappropriated from their law firm material, nonpublic information concerning the acquisitions of 3Com and Axcan, and tipped the inside information, through another attorney, to Zvi Goffer, a former proprietary trader at Schottenfeld Group LLC, in exchange for kickbacks. The SEC further alleged that Goffer tipped information about these acquisitions to Craig Drimal, a trader who worked out of the offices of Galleon, who tipped the information to Cardillo. As alleged in the complaint, Cardillo then traded in the securities of 3Com and Axcan on behalf of a Galleon hedge fund. To settle the SEC’s charges, Cardillo consented to the entry of a judgment that: (i) permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders him to pay disgorgement of $58,520 plus $9,523 in prejudgment interest, and a civil penalty of $29,260. In a related SEC administrative proceeding, Cardillo consented to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. Cardillo previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case, United States v. Michael Cardillo, 11-CR-0078 (S.D.N.Y.), and is awaiting sentencing.

Friday, September 23, 2011

SEC FILES COMPLAINTS AGAINST FORMER WESTCAP SECURITIES, INC., PRINCIPALS

The following is an excerpt from the SEC website: September 23, 2011 “The Securities and Exchange Commission today filed two separate complaints against the three former principals of Westcap Securities, Inc., a now-defunct broker-dealer – namely Thomas Rubin (“Rubin”), Westcap’s then Chief Executive Officer, Christopher Scott (“Scott”), Westcap’s then Chief Compliance Officer, and Jeff Greeney, Westcap’s then Chief Financial Officer, and their related entities. The Commission alleges that Rubin and Scott committed securities fraud by, among other things, engaging in market manipulation in a broader manipulative scheme, and also, through their respective related entities, BGLR Enterprises, LLC and E-Info Solutions, LLC, violated the registration provisions of Section 5(a) and (c) of the Securities Act of 1933 (“Securities Act”) by selling stock in unlawful unregistered offerings. The Commission separately alleged that Greeney, through his related entity, Big Baller Media Group, LLC, violated the registration provisions by selling stock in unlawful unregistered offerings. The Commission alleges that Rubin and Scott, in violation of Section 17(a) of the Securities Act Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder, participated in a broader market manipulation ring that involved bringing companies public through reverse mergers; using Westcap to raise funds for the newly-created companies through purported private placements; and manipulating the public markets for those newly-created public companies, which allowed Rubin and Scott, through their related entities, to sell their holdings of these companies at artificially inflated prices for total proceeds exceeding $1.5 million. In particular, the Commission alleges that Rubin engaged in various manipulative activities including coordinated and matched trading activity, and that Scott similarly engaged in a number of manipulative activities including assuming trading authority and control over multiple accounts to conduct coordinated trading activity. In one email, Rubin complained to another scheme participant that he, not Rubin, should conduct the manipulative trading by writing, “my job is to bring in all the money and yours [is] to cover the bid,” which referred to entering buy orders to keep the stock price at an artificially inflated level. Scott, in an email to Rubin and another scheme participant, explained that he engaged in manipulation to keep an issuer’s stock price at a certain range - a range that he believed was needed to facilitate Westcap’s concurrent private placement involving that issuer. The Commission seeks injunctions, penny stock bars, disgorgement, and penalties from Rubin and Scott (and their related entities, BGLR Enterprises and E-Info Solutions), in addition to an officer and director bar against Scott because he was an officer of one of the microcap issuers. With respect to Greeney, the Commission alleges that he, through his related entity, sold shares in unregistered offerings of two of the microcap issuers for unlawful profits of approximately $330,000, in violation of the registration provisions of the Securities Act. Greeney and his related entity, Big Baller Media Group, have offered to settle the Commission’s allegations by consenting, without admitting or denying the allegations, to an injunction against future violations of Securities Act Sections 5(a) and 5(c), to be barred from participating in an offering of penny stock for a period of three years, and to pay disgorgement and penalties in amounts to be determined by the Court. The offer of settlement by Greeney and Big Baller Media Group are subject to the Court’s approval. Greeney has also offered to settle a yet-to-be instituted administrative proceeding against him, in which Greeney would consent, if the Court enters an injunction against him, to an order barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with the right to reapply for admission after three years.”

INSIDER TRADER CHARGED IN ACQUISITIONS OF MILLENNIUM PHARMACEUTICALS INC. AND SEPRACOR INC.

INSIDER TRADING: GETTING BY WITH A LITTLE HELP FROM YOUR FRIEND The following is an excerpt from the SEC website: “Washington, D.C., Sept. 15, 2011 — The Securities and Exchange Commission today charged a former global consulting firm executive and his friend who once worked on Wall Street with insider trading on confidential information about impending takeovers of two biotechnology companies. The SEC alleges that Scott Allen learned confidential information in advance of the acquisitions of Millennium Pharmaceuticals Inc. and Sepracor Inc. through his work at a global consulting firm that was advising the acquiring Japanese companies as they made cash tender offers. Allen allegedly tipped his longtime friend John Michael Bennett, an independent filmmaker who had previously worked at a Wall Street investment bank, as each acquisition took shape. On the basis of the nonpublic information, Bennett purchased thousands of dollars in call options in the companies and also tipped his business partner at the independent film company they co-own. The insider trading by Bennett and his tippee generated more than $2.6 million in illicit profits. Allen received cash from Bennett in exchange for the tips. In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced the unsealing of criminal charges against Allen and Bennett. "Allen sold his clients' secret information to a dear friend for easy cash, thinking they wouldn't get caught," said George S. Canellos, Director of the SEC's New York Regional Office. "We will continue pursue every angle of investigation to uncover and punish this type of betrayal of trust." According to the SEC's complaint filed in federal court in Manhattan, Allen and Bennett have been close friends for more than 15 years. Their scheme allegedly began in February 2008 as Allen first learned about the Millennium transaction through his work at the consulting firm, where he is no longer employed. Allen communicated with Bennett about the Millennium and Sepracor transactions through either phone calls or in-person meetings, some of which are tracked through their simultaneous use of Metrocards at subway stations in New York City and ATM withdrawals of cash made by Bennett prior to those meetings. The SEC alleges that Allen first obtained nonpublic information about the Millennium transaction in mid-February 2008 when his firm began advising Japan-based Takeda Pharmaceutical Company during its negotiations with Millennium. Allen tipped Bennett with inside information concerning Takeda's impending cash tender offer to acquire Millennium's shares. For instance, after Allen received an evening e-mail on February 27 from a Takeda representative stating that the contemplated offer was for "23, potentially 24 per share," he called Bennett just minutes later and then twice again that evening. Bennett then called his business partner. More calls took place the following day, and then on February 29 and continuing up until the week prior to the April 10 public announcement of the acquisition, Bennett and his business partner began amassing Millennium call options. The price of Millennium shares increased more than 48 percent after the public announcement, and beginning that afternoon Bennett and his business partner sold their entire positions of Millennium call options for ill-gotten gains of more than $602,000 and $1.12 million respectively. According to the SEC's complaint, Allen later was participating in his employer's due diligence work in May 2009 for Japanese firm Dainippon Sumitomo Pharma Co. Ltd. (DSP) in connection with its impending acquisition of Sepracor. Allen again tipped Bennett with inside information about the upcoming transaction. In the months leading up to the September 3 public announcement that DSP had agreed to acquire Sepracor through a cash tender offer, Bennett purchased thousands of dollars worth of call options in Sepracor and again tipped his business partner who did the same. Following the public announcement, Sepracor's stock price rose more than 26 percent. Both Bennett and his business partner then liquidated their Sepracor holdings for ill-gotten profits of more than $516,000 and $388,000 respectively. The SEC's complaint names Bennett's wife as a relief defendant for the purposes of seeking disgorgement of unlawful profits in brokerage accounts that Bennett held jointly with her. The SEC's complaint charges Scott Allen and John Michael Bennett with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder. The complaint seeks a final judgment permanently enjoining the defendants from future violations of these provisions of the federal securities laws and ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties. The SEC's investigation was conducted by Charles D. Riely and Amelia A. Cottrell of the SEC's Market Abuse Unit in New York and Layla Mayer of the SEC's New York Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, Federal Bureau of Investigation, and Options Regulatory Surveillance Authority. The SEC's investigation is continuing.”

Thursday, September 22, 2011

MONEY MANAGING SCHEME GETS JUDGED

The following is an excerpt from the SEC website: “The Securities and Exchange Commission announced that on September 14, 2011, the Honorable Lawrence E. Kahn, United States District Court Judge for the Northern District of New York, entered a default judgment against Defendants Christopher W. Bass, Swiss Capital Harbor-USA, LLC, Swiss Capital Harbor Fund A Partners, L.P., Swiss Capital Harbor Fund B Partners, L.P. and Swiss Capital Harbor Fund C Partners, L.P. (collectively, the "Defendants"). The default judgment permanently enjoins the Defendants from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The default judgment also grants leave to the SEC to file for disgorgement, prejudgment interest, and civil monetary penalties against the Defendants following sentencing in the pending criminal case against Bass, U.S. v. Christopher Bass, 10-cr-166 (N.D.N.Y) (LEK). On May 24, 2010, the SEC filed its complaint against the Defendants alleging that from at least January 2007 through at least June 2009, the Defendants conducted a Ponzi scheme, through which they fraudulently obtained approximately $5.9 million from over 400 investors. Bass told prospective investors that he would pool their money to be invested in various enterprises by European money managers. Bass claimed that these managers historically had generated monthly returns ranging from 2.8 % to 6 %. According to the SEC's complaint, Bass's representations were false, and Bass did not invest investors' money as claimed. Instead, Defendants used most of the funds to pay Bass's personal expenses, to pay Defendants' corporate operating expenses, and to satisfy certain investors' redemption requests. The SEC acknowledges the assistance of the United States Attorney's Office for the Northern District of New York.”

Wednesday, September 21, 2011

SEC COMPLAINT ALLEGES FRAUDULENT AND UNREGISTERED OFFERINGS

The following excerpt is from the SEC website: September 15, 2011 The Securities and Exchange Commission announced the filing of a complaint in federal district court against James O’Reilly (O’Reilly), James P. McAluney (McAluney), and Martin Cutler (Cutler) (collectively, “Defendants”). The complaint alleges that O’Reilly, McAluney, and Cutler were the managers and control persons involved in a series of fraudulent and unregistered offerings in Shale Synergy, LLC (Shale), Shale Synergy II, LLC (Shale II), and Ranch Rock Properties, LLC (Ranch Rock). The Complaint alleges that from at least December 2007 until July 2009, Defendants solicited funds from investors through a series of Rule 506 Regulation D offerings of membership interests in Shale, Shale II and Ranch Rock. The Defendants raised approximately $16 million from about 130 investors. The companies were to generate returns of from 7.5% to 9% a quarter from investments in oil and gas interests purchased by Shale, Shale II and Ranch Rock. However, instead of purchasing oil & gas assets, approximately $13 million of the funds raised from investors were transferred to Joseph S. Blimline (Blimline) and various Blimline-controlled entities. Throughout Defendants’ solicitations, Blimline acted as a secret partner. Defendants never disclosed Blimline’s involvement and control, or his past securities disciplinary action to investors. According to the Commission’s complaint filed in U.S. District Court for the Eastern District of Texas, the Defendants falsely represented to investors that Shale would acquire the promissory notes issued by two Blimline entities and acquire substantially all of the entities’ underlying assets. The Complaint alleges that, the defendants failed to disclose that investor funds of Shale, Shale II, and Ranch Rock would be commingled to pay expenses, and that Blimline would be making all investment decision. The Complaint further alleges that although Shale failed to make its December 2008 investor distributions, the Defendants continued to solicit investors for Shale II and Ranch Rock without disclosing the financial difficulties at Shale. The Commission’s complaint seeks to enjoin the defendants from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and civil penalties.”

CHARGES OF INSIDER TRADING BY POLYCOM, INC., FORMER EXECUTIVE ARE SETTLED

September 21, 2011 “The Securities and Exchange Commission announced today that, on September 19, 2011, the Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York entered a consent judgment against Defendant Sunil Bhalla in SEC v. Feinblatt, 11-CV-0170, the last remaining defendant in an insider trading case the SEC filed on January 10, 2011. The Complaint alleged that Bhalla, then a senior executive at Polycom, Inc. (“Polycom”) tipped Roomy Khan, an individual investor, to material, nonpublic information concerning Polycom’s financial performance and anticipated financial performance. The Complaint alleged that Khan traded on the information, and passed it on to certain other defendants in the case, who then traded on the basis of the Polycom inside information and other inside information given to them by Khan, reaping illicit trading profits, in the aggregate, of more than $15 million. The illicit trading profits resulting from Bhalla’s Polycom tip to Khan alleged in the complaint totaled approximately $2.5 million. To settle the SEC’s charges, Bhalla consented to the entry of a judgment that: (i) permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; (ii) orders him to pay a civil penalty of $85,000; and (iii) bars him from serving as an officer or director of a public company for 5 years from the date of the entry of the judgment.”

BOSS AT SEC SPEECH ON CONFLICTS OF INTERESTS IN ASSET BACKED SECURITIES BUSINESS

The following is an excerpt from the SEC website: by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. September 19, 2011 Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on Sept. 19, 2011. “The Commission today will consider whether to propose a rule related to conflicts of interest in the structuring and offering of asset backed securities. It stems from Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule is designed to ensure that those who create and sell asset-backed securities cannot profit by betting against those same securities at the expense of those who buy them. At the same time, the rule is not intended to interfere with traditional securitization practices in which loans are originated, packaged into asset-backed securities, and offered to investors in different structures. In drafting the proposed rule, the staff considered several different types of conflicts that could occur with securitizations. For instance, a firm might package an asset-backed security, sell that security to an investor, and then subsequently short the security to potentially profit as the investor incurs a loss. Or a firm might allow a third party to help assemble an asset-backed security in a way that creates an opportunity for the third party to short the security and reap a profit. The staff’s proposal addresses potential conflicts like these. Consistent with the Dodd-Frank Act, the proposed rule would prohibit entities that create and distribute asset-backed securities from engaging in any transaction that would involve or result in a material conflict of interest with someone investing in the security. It would also apply to the entities’ affiliates and subsidiaries. The rule also would provide exceptions for risk-mitigating hedging activities, as well as activity consistent with liquidity commitments and bona fide market-making. As many already know, throughout our Dodd-Frank rule-writing process, we have welcomed public comments even before we propose a rule – and today’s proposal has benefited from that input. Nevertheless, we continue to seek public comment regarding all aspects of this proposal. Among other things, we seek comment on the practical implications of the proposal for the markets, whether it achieves its stated objectives and on whether disclosure of a conflict should have any impact on the proposal. The SEC has made significant progress in writing rules required by Dodd-Frank. Of the nearly 100 mandatory rulemaking provisions, the SEC has now proposed or adopted rules for about three-quarters of them. And today’s proposal is just one of several rulemaking efforts aimed at addressing issues associated with asset-backed securities. For instance, the Commission has adopted rules that require asset-backed security issuers to provide disclosures on the use of representations and warranties in the market for asset-backed securities. We also have adopted rules that require issuers to conduct a review of the assets underlying those securities and disclose the nature of such review with respect to registered asset-backed offerings. Together with other agencies, the SEC also has proposed rules that generally require the sponsor of asset-backed securities to retain no less than five percent of the credit risk of the underlying assets. And in July, the Commission re-proposed some of the rules that we initially proposed pre-Dodd-Frank that related to the shelf registration of asset-backed securities. I want to also note another initiative under the Dodd-Frank Act commonly referred to as the “Volcker Rule.” This rulemaking, which we anticipate proposing along with other financial regulatory agencies in the near future, will prohibit proprietary trading at certain financial entities affiliated with banks. Like Section 621, the Volcker Rule generally would permit risk mitigating hedging activities and market making. As such, we are also asking for comment regarding the interplay of the exceptions in today’s proposed rule with the similar exceptions that we expect to discuss in the Volcker Rule proposal. Before I turn to the staff to provide a detailed discussion about the Division’s recommendation, I would like to thank Robert Cook, Jamie Brigagliano, Nathaniel Stankard, Catherine McGuire, Gregg Berman, Jack Habert, Josephine Tao, Liz Sandoe, Anthony Kelly, and Barry O’Connell for their long hours and hard work devoted to preparing the recommendation before us. I also would like to thank their colleagues. In the Division of Corporation Finance: Paula Dubberly, Katherine Hsu, and David Beaning. From the Division of Enforcement: Jason Anthony and Jeffrey Leasure. In the Office of the General Counsel: Meredith Mitchell, David Blass, Paula Jenson, Janice Mitnick, and Bryant Morris. In the Division of Risk, Strategy, and Financial Innovation: Jennifer Marrietta-Westberg, Eric Carr, Stas Nikolova, and Chuck Dale.”

Tuesday, September 20, 2011

FINAL JUDGMENT ENTERED AGAINST FRAUDSTERS

The following is an excerpt from the SEC website: “The Securities and Exchange Commission announced today that the United States District Court for the District of Utah entered a final judgment, dated September 16, 2011, against Erin O’Malley, f/k/a Erin O. Mowen. Ms. O’Malley is the former spouse of convicted felon and securities law recidivist, Jeffrey L. Mowen. On May 4, 2011, Mowen pled guilty to committing wire fraud in a related criminal action, United States of America v. Mowen, Case No. 2:09-cr-00098-DB (D. Utah). In pleading guilty, Mowen acknowledged operating a Ponzi scheme from around October 2006 to around October 2008, wherein he received over $18 million from investors for use in a purported foreign currency trading program. The SEC Complaint alleges that the investor funds provided to Mowen were raised by Thomas Fry and the other defendants, Fry’s promoters, from the unregistered offer and sale of high-yield promissory notes to over 150 investors in several states. Mowen acknowledged in his guilty plea that, rather than using investor funds for their intended purpose, he used the money for his personal benefit, misappropriating over $8 million. According to the SEC’s Complaint, Mowen transferred approximately $650,000 of the misappropriated funds to his then wife, relief defendant Erin O’Malley. The SEC sought the return of those funds in its complaint from Ms. O’Malley, whom it alleged had no bona fide right to the funds. The SEC did not allege that Ms. O’Malley personally committed any securities law violation. Ms. O’Malley did not respond to the SEC’s allegations and the court therefore ordered the default judgment against her, ordering her to disgorge $654,101 in funds that the SEC had shown, through bank records, Mowen had transferred to her. The SEC’s action is continuing against Mowen, Fry, and Fry’s promoters“.

Monday, September 19, 2011

SEC FILES INJUNCTION AGAINST INVESTMENT SOLICITOR IN DEAF COMMUNITY

The following excerpt is from the SEC website: “On September 9, 2011, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Eastern District of Texas against Jody Dunn (Dunn). The complaint alleges that, over a three-year period, Dunn, who is deaf, solicited investments from others in the deaf community for Imperia Invest IBC (Imperia). The Commission previously charged Imperia with securities fraud and obtained an emergency court order to freeze its assets. According to the complaint, Dunn solicited more than $3.45 million as part of Imperia’s investment scheme from several thousand deaf investors. Dunn failed to tell investors that he was using a portion of their funds to pay his mortgage, car loans, car insurance and a variety of other personal expenses. Dunn sent the remaining amounts to Imperia’s offshore bank accounts in Costa Rica, Panama, the British Virgin Islands, Cyprus and New Zealand. Investors have never been paid any interest after giving their money to Dunn to invest, nor were their funds ever invested. Even after the Commission charged Imperia and issued an investor alert about the scheme, Dunn continued to reassure investors that Imperia was legitimate and they would be paid. The Commission alleges that Dunn did not attempt to verify whether Imperia was actually investing the money as promised. He also failed to verify whether Imperia was licensed to sell securities in any state, whether any registration statements relating to the offers or sales of Imperia securities were filed with the Commission, or whether Imperia was registered with the Commission in any capacity. The Commission’s complaint charges Dunn with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder. The Commission also seeks civil penalties and disgorgement against Dunn.”

Sunday, September 18, 2011

MILLIONS MISAPPROPRIATED IN PONZI SCHEME

The following is from the SEC website: “The Securities and Exchange Commission announced today that the United States District Court for the District of Utah entered a final judgment, dated September 16, 2011, against Erin O’Malley, f/k/a Erin O. Mowen. Ms. O’Malley is the former spouse of convicted felon and securities law recidivist, Jeffrey L. Mowen. On May 4, 2011, Mowen pled guilty to committing wire fraud in a related criminal action, United States of America v. Mowen, Case No. 2:09-cr-00098-DB (D. Utah). In pleading guilty, Mowen acknowledged operating a Ponzi scheme from around October 2006 to around October 2008, wherein he received over $18 million from investors for use in a purported foreign currency trading program. The SEC Complaint alleges that the investor funds provided to Mowen were raised by Thomas Fry and the other defendants, Fry’s promoters, from the unregistered offer and sale of high-yield promissory notes to over 150 investors in several states. Mowen acknowledged in his guilty plea that, rather than using investor funds for their intended purpose, he used the money for his personal benefit, misappropriating over $8 million. According to the SEC’s Complaint, Mowen transferred approximately $650,000 of the misappropriated funds to his then wife, relief defendant Erin O’Malley. The SEC sought the return of those funds in its complaint from Ms. O’Malley, whom it alleged had no bona fide right to the funds. The SEC did not allege that Ms. O’Malley personally committed any securities law violation. Ms. O’Malley did not respond to the SEC’s allegations and the court therefore ordered the default judgment against her, ordering her to disgorge $654,101 in funds that the SEC had shown, through bank records, Mowen had transferred to her. The SEC’s action is continuing against Mowen, Fry, and Fry’s promoters.”

A FORENCY CURRNCY SCAM PONZIED MORE INVESTORS

The following is from the SEC Website: September 16, 2011 The Securities and Exchange Commission announced today that the United States District Court for the District of Utah entered a final judgment, dated September 16, 2011, against Erin O’Malley, f/k/a Erin O. Mowen. Ms. O’Malley is the former spouse of convicted felon and securities law recidivist, Jeffrey L. Mowen. On May 4, 2011, Mowen pled guilty to committing wire fraud in a related criminal action, United States of America v. Mowen, Case No. 2:09-cr-00098-DB (D. Utah). In pleading guilty, Mowen acknowledged operating a Ponzi scheme from around October 2006 to around October 2008, wherein he received over $18 million from investors for use in a purported foreign currency trading program. The SEC Complaint alleges that the investor funds provided to Mowen were raised by Thomas Fry and the other defendants, Fry’s promoters, from the unregistered offer and sale of high-yield promissory notes to over 150 investors in several states. Mowen acknowledged in his guilty plea that, rather than using investor funds for their intended purpose, he used the money for his personal benefit, misappropriating over $8 million. According to the SEC’s Complaint, Mowen transferred approximately $650,000 of the misappropriated funds to his then wife, relief defendant Erin O’Malley. The SEC sought the return of those funds in its complaint from Ms. O’Malley, whom it alleged had no bona fide right to the funds. The SEC did not allege that Ms. O’Malley personally committed any securities law violation. Ms. O’Malley did not respond to the SEC’s allegations and the court therefore ordered the default judgment against her, ordering her to disgorge $654,101 in funds that the SEC had shown, through bank records, Mowen had transferred to her. The SEC’s action is continuing against Mowen, Fry, and Fry’s promoters."

CFTC COMMISSIONER SCOTT O’MALIA ON PROPOSED IMPLEMENTATION OF DODD-FRANK RULEMAKINGS

The following is from an open meeting of the CFTC and is an excerpt from the CFTC website: September 8, 2011 “Waking Up to Reality” “Mr. Chairman, I would like to begin by thanking you for scheduling this hearing to discuss the important issue of implementation of our Dodd-Frank rulemakings. I would also like to thank the team responsible for preparing the two proposals before us. I understand that these proposals aim to provide greater certainty to the market as to when the Commission will impose the clearing and trading mandates, as well as when the Commission will require compliance with certain documentation and margining rules. I am grateful that the Commission has attempted to provide more certainty. However, I fear that the market will find that these proposals raise more questions than they answer. These proposals fail to facilitate a transition to the new regulatory regime in the orderly manner that the market – as well as the Commission – desires. Implementation: What We Don’t Know Rather than defining what we know, these proposals emphasize what we don’t know about the implementation plan. I would just like to highlight six areas where more guidance is necessary so that market participants could have begun to allocate resources appropriately. First, the proposal for the clearing and trading mandates may not apply in certain situations. The proposal states, “When issuing a mandatory clearing determination, the Commission would set an effective date by which all market participants would have to comply. In other words, the proposed compliance schedules would be used only when the Commission believes phasing is necessary based on the considerations outlined in this release.” Therefore, despite the proposal, market participants would need to look at each individual mandatory clearing determination to ascertain whether the specified phasing would apply. To date, neither the Commission nor staff has issued any guidance on the substantive criteria that will be used to make mandatory clearing determinations, including any criteria relating to when such determinations would become effective. Second, neither proposal provides market participants with beginning nor end dates. For example, the proposal for the clearing and trading mandates appropriately states that the Commission must finalize no less than five rulemakings before it can trigger the specified compliance phasing schedule. Those rulemakings include: (i) entity definitions; (ii) the end-user exception; (iii) the protection of cleared swaps customer contracts and collateral; (iv) core principles for designated contract markets; and (v) core principles for swap execution facilities. The proposal provides no insight as to when the Commission anticipates finalizing these rulemakings. Third, these proposals only address a handful of the requirements that market participants will need to comply with when the Commission finalizes all of the Dodd-Frank rulemakings. For example, the proposal relating to documentation and margining acknowledges that, in addition to the rulemakings that the compliance schedule addresses, swap dealers and major swap participants would need to comply with “rules proposed under Section 4s(e) (capital requirements), Section 4s(f) (reporting and recordkeeping), Section 4s(g) (daily trading records), Section 4s(h) (business conduct standards), Section 4s(j) (duties, including trading, risk management, disclosure of information, conflicts of interest, and antitrust considerations), and Section 4s(k) (designation of a chief compliance officer).” Although long, this list includes only the entity-specific rulemakings. It does not include more market-wide obligations such as mandatory clearing and trading. The Commission should have proposed a comprehensive schedule detailing: (i) for each registered entity, compliance dates for each of its entity-specific obligations under Dodd-Frank; and (ii) for each market-wide obligation, the entities affected (whether registered or unregistered), along with appropriate compliance dates. Instead, we again choose to leave the market to review the effective date sections of each final rulemaking in a vacuum. If the Commission is making this choice because the Commission itself is still not clear on how all of its proposals will work in concert together, and how the industry might be able to comply with such proposals, then we have not taken the important step of truly understanding the costs and benefits of our mosaic of rules. Fourth, these proposals do not make it clear why the Commission has decided to phase implementation on 90, 180, and 270-day timeframes. Several participants in the May 4, 2011, implementation roundtable sought longer timeframes to accommodate, among other things, documentation requirements. For example, the Managed Futures Association proposed a 120, 210, 270 day tiered implementation approach. The proposals fail to accommodate these comments, and does not justify why or estimate the cost of the Commission’s approach. Fifth, the proposals incorporate an incomplete and inadequate cost-benefit analysis. The proposals boldly and oddly characterize themselves as relief from time frames in other proposals or in determinations that the Commission has not yet made. I reiterate: the Commission should have proposed a comprehensive schedule that would have complemented and informed existing proposals and provided structure to future determinations. The Commission should then have analyzed the costs and benefits of the comprehensive schedule, including appropriate quantification. With respect to market-wide obligations, such as the clearing and trading mandate, we know that the technology investments required for implementation will be massive. New clearing and trading entities, as well as data repositories, all need to be connected to each other and to firms. In developing back office systems alone the TABBGroup estimated that the industry would spend in 2011 over $3.4 billion globally and $1 billion in the United States. With respect to entity-specific obligations, firms will have to make large investments in new software to manage new margin requirements, price aggregation systems and risk management systems. Knowing when and how the markets are required to deploy these systems is vital to the success of implementing the new market structure required under the Dodd-Frank Act. When billions of dollars are at stake you simply do not rely on guesses and estimates based on vague conditions. Unfortunately, the proposals do not mention technology requirements and the costs required to execute the strategies. Finally, on a substantive note, this rule discusses issues such as what is meant by “made available to trade.” It is clear that the Commission has yet to communicate what this standard means. Instead of signaling that we need to address this issue, the Commission is silent. Similarly, instead of making it clear that the Commission will publish guidance on how mandatory clearing determinations will be made, it is still unclear how that process will work. The rule proposals also fail to ask some important questions, like how the Commission’s proposed implementation requirements will affect entities and transactions located outside of the United States. Implementation: The Reality These proposals do accomplish one thing. They force us to wake to reality and recognize that the earliest the Commission can complete the last of the triggering rules is the end of the first quarter of 2012. As I previously mentioned, those rules must be finalized before the Commission can begin phasing in compliance. The realities of this schedule will push the clearing and trading mandate to approximately the third quarter of 2012, or just before the G-20 commitment to implement clearing. We cannot continue to pretend, as we did when the Commission published its Effective Date Order, that all of the Dodd-Frank rulemakings will be in place by December 31, 2011, and that the Commission will be able to thoughtfully consider final rulemakings at the untenable pace that would be necessary to meet that arbitrary deadline. I want to be clear. I support completing final rulemakings in a reasonable time frame. I believe that the timely implementation of such rulemakings is important. I am mindful, though, that it is not the Commission, but industry, that will do the real work of making the regulatory jargon and Federal Register pages that constitute our final rulemakings a functioning reality. If we want to promote timely implementation, we need to tell the industry when it will be expected to do what, so that in turn, it can make the costly investments in technology and staff that will be necessary to implement what are very complex requirements. International Coordination and Extraterritoriality Now, I would like to turn to another item on the agenda that is not a Dodd-Frank rulemaking, but that illustrates certain themes that the Commission has not addressed in a cohesive manner, either in the final rulemakings that it has adopted, the proposals before us today, or other proposals that it is in the process of finalizing. That item is the report by the International Organization of Securities Commissions (IOSCO) on Principles for the Regulation and Supervision of Commodity Derivatives Markets. The themes that I would like to focus on are international coordination and extraterritoriality. First, on international coordination, it is becoming increasingly clear that the schedule for financial reform is converging among the G-20 nations. It is less clear that the substantive policies underlying financial reform is experiencing the same convergence. That fact may have competitive implications that the Commission has yet to examine fully. The IOSCO Principles illustrates some of the tensions surrounding international coordination that we have seen, and will continue to see, with respect to Dodd-Frank rulemaking. For example, while each IOSCO member supports the organization’s general principles, each member may have widely different interpretations of exactly what regulations would accord with such principles. For example, the IOSCO Principle on Intervention Powers in the Market states that IOSCO members should have “position management powers,” including powers to set both: (i) traditional position accountability limits; and (ii) ex ante position limits. However, the Principle acknowledges that different IOSCO members may place different emphases on the two powers and that ex ante position limits may be most useful in the delivery month. As we know, the Commission has set forth its position limits proposal. Regulators in other jurisdictions may set forth dramatically different proposals and still comport with the IOSCO Principle. How the Commission plans to manage international regulatory arbitrage, and how the Commission intends to enforce that plan, remains to be seen. I predict that this theme will run through many of our upcoming rulemakings, including those pertaining to core principles for derivatives clearing organizations. Second, on extraterritoriality, in order for the Commission to coordinate internationally other regulators should ideally have an understanding of the manner in which the Commission perceives the boundaries of its jurisdiction, even if those regulators do not agree. To date, the Commission has produced nothing to afford other regulators, not to mention market participants, such understanding. Uncertainty delays crucial international dialogue on financial reform. I would urge the Commission to make its thoughts on extraterritoriality known sooner rather than later. I would also strongly urge the Commission to take a more comprehensive approach towards extraterritoriality, and an approach that is coordinated with the Securities and Exchange Commission (SEC), than it has chosen to take with respect to the proposals on compliance before us today. Finally, a word on technology. To comport with the IOSCO Principles, the Commission needs to invest more than the minimum in technology. Only by investing more can we achieve the goals of real-time surveillance. Having “position management powers” means very little if the Commission lacks the tools to exercise those powers. Therefore, I am going to close by urging the Commission, as I have done many times in the past, to focus on improving its technological capabilities. Thank you, Mr. Chairman.”

Saturday, September 17, 2011

SEC ANNOUNCED A FINAL JUDGMENT WAS ENTERED AGAINST FORMER CEO OF BROOKE CAPITAL CORPORATION

The following is an excerpt from the SEC website: “The Securities and Exchange Commission announced today that the United States District Court for the District of Kansas entered a judgment, dated September 8, 2011, against Kyle L. Garst, the former chief executive officer of Kansas-based Brooke Capital Corporation (“Brooke Capital”). Brooke Capital was an insurance agency franchisor and a subsidiary of Brooke Corporation, a Kansas company founded by Robert Orr. Garst, without admitting or denying the Commission’s allegations, consented to a judgment enjoining him from future violations of the federal securities laws. According to the SEC’s Complaint, in SEC filings signed by Garst, Brooke Capital’s former management inflated the number of reported insurance agency franchise locations by including failed and abandoned locations in totals set forth in SEC filings for year-end 2007 and the first quarter of 2008. The Complaint also alleges that Brooke Capital’s former management, among other things, concealed the nature and extent of Brooke Capital’s financial assistance to its franchisees, which included making franchise loan payments on behalf of struggling franchisees, and failed to disclose the company’s dire liquidity and financial condition. Specifically, the judgment enjoins Garst from violating Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder, and from aiding and abetting violations Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. In addition to the injunction, the judgment bars Garst from serving as an officer or director of a public company and imposes a $130,000 civil penalty.”

CFTC ANNOUNCED FEDERAL COURT FREEZES ASSETS OF ALLEGED COMMODITY SCHEME FRAUDSTERS

September 9, 2011 The following is an excerpt from the CFTC website: “Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that a federal court in Charlotte, N.C., entered an emergency order freezing assets held by defendants Toby D. Hunter of Waxhaw, N.C., and his companies, Prestige Capital Advisors, LLC (Prestige) and D2W Capital Management, LLC (D2W) of Charlotte, N.C. The court’s order, entered by Judge Max O. Cogburn, Jr., also prohibits the destruction of books and records and grants the CFTC immediate access to such documents. The judge ordered Hunter to appear in court on October 3, 2011, for a preliminary injunction hearing. The order arises out of a CFTC civil complaint filed on September 6, 2011, in the U.S. District Court for the Western District of North Carolina, Charlotte Division. The CFTC’s complaint alleges that, since April 2008, Hunter, Prestige, and D2W fraudulently solicited and accepted funds from the general public to trade pooled investments in commodity futures, options on commodity futures and managed forex accounts. As a result of defendants’ allegedly fraudulent solicitation, at least six individuals invested $4.65 million with the Prestige Multi-Strategy Fund, LP, a pool established by Hunter and Prestige. In addition, the defendants solicited and received $2.36 million in connection with forex trading accounts managed by D2W. Defendants also allegedly misrepresented the profitability of their trading programs by posting false purported returns on a website called BarclayHedge. The complaint further alleges that defendants misappropriated some of the Prestige investors’ funds and issued false account statements to investors in both schemes in order to perpetuate defendants’ fraud. In its continuing litigation, the CFTC seeks a return of ill-gotten gains, restitution to defrauded customers, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws. The CFTC appreciates the assistance of the National Futures Association and the United Kingdom’s Financial Services Authority.”

Friday, September 16, 2011

SEATTLE BROKER CHARGED BY SEC WITH FRAUD

The following excerpt is from the SEC website: September 8, 2011 “The Securities and Exchange Commission today charged a Seattle-area securities broker with fraud, and seeks an order from the federal court in Seattle to freeze the broker’s assets. The SEC alleges that Richard A. Finger, Jr. of Bellevue, Wash., and his brokerage firm Black Diamond Securities LLC lost millions of dollars for customers in a matter of months through risky, undisclosed options trading and excessive, concealed commissions. Finger opened the firm in February and began managing nearly $5 million in assets, mainly for friends and family members. The SEC alleges that Finger concealed his misconduct from customers by providing them with doctored account statements inflating their account balances and understating his commission charges. Unbeknownst to his customers, Finger allegedly embarked on a high-frequency, high-risk options trading strategy that lost nearly $2 million over the following months. At the same time, Black Diamond charged customers more than $2 million in commissions, and Finger diverted some funds to his personal bank account to support a lifestyle that included a $2 million home and luxury vehicles. The SEC’s complaint, filed in federal district court for the Western District of Washington, charges Finger and Black Diamond with violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and charges Black Diamond with violating Section 15(c)(1)(A) of the Exchange Act and Finger with aiding and abetting violations of Section 15(c)(1)(A). The SEC seeks permanent injunctions, an accounting, an asset freeze, disgorgement with prejudgment interest, and civil monetary penalties.”

Thursday, September 15, 2011

SEC FILES COURT COMPLAINT ALLEGING FRAUD AGAINST 3 MANAGERS

The following is an excerpt from the SEC website: “The Securities and Exchange Commission announced the filing of a complaint in federal district court against James O’Reilly (O’Reilly), James P. McAluney (McAluney), and Martin Cutler (Cutler) (collectively, “Defendants”). The complaint alleges that O’Reilly, McAluney, and Cutler were the managers and control persons involved in a series of fraudulent and unregistered offerings in Shale Synergy, LLC (Shale), Shale Synergy II, LLC (Shale II), and Ranch Rock Properties, LLC (Ranch Rock). The Complaint alleges that from at least December 2007 until July 2009, Defendants solicited funds from investors through a series of Rule 506 Regulation D offerings of membership interests in Shale, Shale II and Ranch Rock. The Defendants raised approximately $16 million from about 130 investors. The companies were to generate returns of from 7.5% to 9% a quarter from investments in oil and gas interests purchased by Shale, Shale II and Ranch Rock. However, instead of purchasing oil & gas assets, approximately $13 million of the funds raised from investors were transferred to Joseph S. Blimline (Blimline) and various Blimline-controlled entities. Throughout Defendants’ solicitations, Blimline acted as a secret partner. Defendants never disclosed Blimline’s involvement and control, or his past securities disciplinary action to investors. According to the Commission’s complaint filed in U.S. District Court for the Eastern District of Texas, the Defendants falsely represented to investors that Shale would acquire the promissory notes issued by two Blimline entities and acquire substantially all of the entities’ underlying assets. The Complaint alleges that, the defendants failed to disclose that investor funds of Shale, Shale II, and Ranch Rock would be commingled to pay expenses, and that Blimline would be making all investment decision. The Complaint further alleges that although Shale failed to make its December 2008 investor distributions, the Defendants continued to solicit investors for Shale II and Ranch Rock without disclosing the financial difficulties at Shale. The Commission’s complaint seeks to enjoin the defendants from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and civil penalties.”

SEC ALLEGES TEXAS MAN TARGETED DEAF INVESTORS IN FRAUD SCHEME

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 9, 2011 — The Securities and Exchange Commission has charged a Corinth, Texas man with securities fraud for soliciting more than $3.45 million from several thousand deaf investors in an investment scheme that the SEC halted last year. The SEC previously charged Imperia Invest IBC with securities fraud and obtained an emergency court order to freeze the investment company’s assets. In a complaint filed late yesterday, the SEC alleges that Dunn, who is deaf, solicited investments for Imperia over a three-year period from others in the deaf community, promising them he would invest in Imperia on their behalf. What Dunn did not tell investors is that he was misappropriating a portion of their funds to pay his mortgage, car payments, car insurance, and a variety of other personal expenses. Dunn sent the remaining amounts to Imperia’s offshore bank accounts. While Imperia guaranteed returns of 1.2 percent per day on these investments, investors have never been paid any interest after giving their money to Dunn to invest. Even after the SEC charged Imperia and issued an investor alert about the scheme, Dunn continued to reassure investors that Imperia was legitimate and they would be paid. “Dunn was aware that Imperia lost investor money and was not accurately crediting investor accounts, yet he continued to send investor money to Imperia without disclosing to investors what was happening,” said Kenneth D. Israel, Director of the SEC’s Salt Lake Regional Office. “To further take advantage of others in the deaf community, Dunn was siphoning off about 10 percent of the money he collected from investors to pay his own bills before sending the rest of money into the Imperia quagmire.” According to the SEC’s complaint filed in federal court in Plano, Texas, Imperia purported to invest in Traded Endowment Policies (TEP), which is the British term for viatical settlements that involve the sale of an insurance policy by the policy owner before the policy matures. The TEP investments offered by Imperia were investment contracts in which investors were required to invest at least $50, which purportedly allowed the customer to obtain an $80,000 loan from an unnamed foreign bank that would be used to purchase a TEP. Imperia then claimed to trade the TEPs and pay a guaranteed return to the investor of 1.2 percent per day. The SEC alleges that Dunn misrepresented to investors that he would help them invest with Imperia to purchase TEPs. No investor funds were used to purchase TEPs. Dunn also represented to investors that he had met and knew the individuals behind Imperia. However, Dunn had never actually met anyone affiliated with Imperia. According to the SEC’s complaint, Imperia also required that investors purchase a Visa debit card to access their investment proceeds. Imperia charged customers a fee to purchase the Visa debit card ranging from $145 to $450. Visa had not authorized Imperia to use its name or trademarks and sent Imperia a cease-and-desist letter instructing it to halt unauthorized use of the Visa name and logo. Nonetheless, Dunn solicited and collected investor money for these purported Visa debit card purchases. According to the SEC’s complaint, Dunn’s investors transferred funds to him via money orders that he then cashed and deposited into accounts he controlled. From there, he forwarded funds to Imperia. Dunn initially sent money to Paypal-like accounts in Costa Rica, Panama and the British Virgin Islands, but later wired it directly to bank accounts with no apparent link to Imperia in such various other countries as Cyprus and New Zealand. The SEC alleges that Dunn did not attempt to verify whether Imperia was actually investing the money as promised. He also failed to verify whether Imperia was licensed to sell securities in any state, whether any registration statements relating to the offers or sales of Imperia securities were filed with the SEC, or whether Imperia was registered with the SEC in any capacity. The SEC alleges that Dunn violated Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder. This matter was investigated by Jennifer Moore and Scott Frost of the SEC’s Salt Lake Regional Office and the litigation will be led by Daniel Wadley. The SEC appreciates the assistance of the State of Maine Office of Securities, the Securities Commission of the Bahamas, the Vanuatu Financial Services Commission, and the Cyprus Securities and Exchange Commission.”

Wednesday, September 14, 2011

CFTC COMMISSIONER CHILTON SPEAKS ABOUT DERIVATIVES

The following speech by CFTC Commissioner Chilton is an excerpt from the CFTC website: September 9, 2011 Expect the Unexpected” Speech of Commissioner Bart Chilton to the Oversight of Derivatives Roundtable, University of Maryland Introduction It’s good to be with you today. Thanks for having me. Thanks especially to Susan Ferris Wyderko, the Executive Director of the Mutual Fund Directors Forum for the kind invitation and to both the Forum and the University of Maryland’s Smith School of Business Center for Financial Policy for their sponsorship of this roundtable. It is fitting that we are having this event in the Ronald Reagan building for two reasons. First, as I think most people know, President Reagan had a great sense of humor. These days in Washington, it seems like we’ve lost our sense of humor. What you may now know is that in this very building on every Friday and Saturday night, there is a performance by a troupe called the Capitol Steps. You don’t need to like politics to enjoy their humor. They are completely bipartisan. They make fun of the President. They make fun of Speaker Boehner. They make fun of Sarah Palin and on and on. So, I encourage you to go to the show. And, if I talk long enough, you can go straight there tonight. The second reason it is appropriate to be in the Reagan building is that we are going to discuss regulations. I’m not sure if I can add much humor, but I’ll try to make it interesting. Reagan and Regulation President Reagan was a big believer that government was too big and that we needed only limited regulation. He said government is not the solution to problems. Government is the problem. What a sound bite: government is the problem. In 1985, President Reagan visited the New York Stock Exchange. He was the first sitting president to do so. Here is what he said when he was there: “Trust the people. This is the one irrefutable lesson of the entire post-war period, contradicting the notion that rigid government controls are essential to economic development. The societies that have achieved the most spectacular, broad-based progress are neither the most tightly controlled, nor the biggest in size, nor the wealthiest in natural resources. No, what unites them all is their willingness to believe in the “magic of the marketplace.” The magic of the marketplace—gosh he had a way with words. Unfortunately, what we have witnessed leading up to the economic meltdown was that government got out of the way and we did see a lot of magic in the marketplace, but not the good kind. What we have seen is a lot of sleight of hand and smoke and mirrors. Where are We and How Did We Get Here? People, and particularly politicians, bashing government isn’t anything new. Governments of all sorts are easy targets. Talking about the evil regulations, that is a good (although shallow) applause line too. By the way, I believe most Americans like a lot of regulations, they just need to be reminded of them. Think food safety, child safety, car and truck and airline safety, and drug testing regulations. I think those are pretty popular regulations that folks would not want to see go away. But, when people talk about the evils of regulation in the financial sector, the first thing I do is a little remedial history. I try to remind them how we got here. How we got into this financial mess that President Obama spoke about last night. Earlier this year, the Financial Crisis Inquiry Commission (FCIC) issued a report, and in it they ask this question: “How did it come to pass that in 2008 our nation was forced to choose between two stark and painful alternatives—either risk the collapse of our financial system and economy, or commit trillions of taxpayer dollars to rescue major corporations and our financial markets, as millions of Americans still lost their jobs, their savings and their homes?” That’s a good question. FCIC concluded that the entire mess never had to take place. They noted widespread failures in financial regulation, excessive risk-taking on Wall Street, policymakers who were ill-prepared for the crisis, and systemic breaches in accountability and ethics at all levels. The bulk of the blame went to regulators and the captains of Wall Street. The high-wire magic of the marketplace deal makers and regulators with a “do not disturb” sign on their door got us into the mess. The deregulated environment had gutted our system of checks and balances, and as a result, we became a system of just checks. Checks to AIG and many checks totaling hundreds of trillions of dollars to the largest banks in the country. That Gordon Gekko greed is good mentality put us in an economic tailspin that we’re still trying to stop. But then, in my opinion, came the good news. Along Comes Financial Reform We now have the most sweeping set of financial reforms in our history—the Dodd-Frank law. It was necessary if we were ever going to protect ourselves again from the kind of financial meltdown that occurred, and now, we regulators are trying to do the right thing as we write all the new rules associated with the law. Now, there are still the naysayers out there. Some of the folks who aren’t so happy want to defund the regulatory reforms by starving financial regulators’ funding. Others want to repeal Dodd-Frank altogether. Some just want to slow it down in the hopes that if they run the clock out, perhaps there will be a political change in Washington. Pretty constantly we hear from the usual suspects, about the big bad government and the big bad regulations and how they stifle innovation and competition and that the level of the earth in the U.S. is actually rising because of the lifted weight of businesses that are leaving in droves for foreign shores. Everybody’s entitled to their own opinion even if it’s contrary to my own. After all, somebody has to be wrong. I’m just kidding—kind of. Expect the Unexpected Oscar Wilde, the flamboyant and quick-witted cultural commenter, had a great quote – “To expect the unexpected shows a thoroughly modern intellect.” (He also said, “I can resist everything but temptation,” but I’m trying to be intellectual here, so let’s go back to the first quote). “To expect the unexpected shows a thoroughly modern intellect.” He made this statement about the “modern intellect” in the late 1800’s, so perhaps his idea of modernity was a bit different from ours. Back then, people rode around in buggies drawn by horses, houses didn’t have electricity, and heck, their idea of indoor plumbing was a bucket. On the other hand, some events occurred in the late 1800s that you might not have expected. For example, it might surprise you to learn that the principles behind fiber optics were first presented to the Royal Society in 1854, when John Tyndal, using a curved stream of water, proved that a light signal could be bent. And building on this concept, in 1880 William Wheeler invented a system of what he called “light pipes,” coated with a highly reflective coating, to send indoor lighting throughout homes from a single light source. As early as 1888, medical doctors in Vienna were using similar technology to illuminate body cavities to perform complicated surgeries, and in 1885, the same types of bent glass rods were used to guide light images in the first attempt at an early television. You all probably know that pasteurization was invented in the 1850s, but did you know that the first plastic was made in 1862? (And we all thought it was relatively new when “The Graduate” came out. Nope—it had been around about 100 years by that time). Typewriters, airbrakes, metal detectors, escalators, contact lenses, radars, dishwashers, washing machines, cash registers, seismographs, rayon and tungsten steel—all invented in the last half of the 19th century. Amazing. Think about what it must have been like to live back then, when the Industrial Revolution was turning the world on its head—and these changes were felt not only by the rich and privileged, but also by average folks. It was just at this time that Wilde made his comment to expect the unexpected—and all of these things were certainly “unexpected”—indicating a modern intellect. I think that must have been an incredibly exciting time and a time when to have a “modern intellect” meant to be open not only to exciting to new inventions, but also—almost by definition—to new ways of thinking. I mean, some of these inventions were probably pretty scary to people. Think about radar, for example, probably considered devilish by some—but to those with a “modern intellect,” with open and inquiring minds that want to know, these new inventions opened up new pathways of thinking and ultimately manifold opportunities for economic growth. My point is—O ye, those of little faith who thought I didn’t have one—my point is this: we’re at a similarly exciting time right now with regard to financial reform regulations. I’m going to invite you to do something similar—to expect the unexpected. Hear me out on a new way of thinking. This is what I want to propose to you today—to “expect the unexpected” with regard to the new regulations on financial market regulatory reform. By the way, this fits exactly into what President Obama was talking about last night with regard to doing only regulations that make sense. Here is the thought: rather than producing overly burdensome rules that stifle innovation (the arguments that President Reagan made in the 1980’s and that you still hear today) or constructing weak rules that compromise consumer protections (the argument from the left), I think this new set of rules will do something absolutely unique. I believe these rules will actually create jobs. They will create new sectors within sectors. They will create new opportunities for economic growth on American soil. Let me explain why. For the first time, we are not writing rules and regulations for an exchange-trading market that is already in existence—like the securities and commodities markets. This new exchange-trading marketplace is being built from the ground up. To be sure, there is a vibrant OTC swaps market in this country, and as I’ve said many times, we don’t want to do anything to hurt legitimate business but at the same time we need to fix what got us into the mess in 2008. We’ve got real, tangible and extremely important reasons to continue to move forward to implement financial reform. Folks who are upside-down on their mortgages will tell you that. But again, let me get back to my original point: why these regulations will be a positive good for the American economy. As I said, this industry, this exchange-trading of swaps, will be built from the ground up. The Dodd-Frank law instituted clearing requirements for swaps—the fundamental provisions to address transparency and systemic risk issues. Along with those statutory dictates are new requirements for “swaps execution facilities”—platforms on which to trade swaps. In addition, there will be “swaps data repositories,” to warehouse swaps data. All of these entities—and the participants—will be registered with the Commission and will require staff to ensure compliance with federal mandates. As this new industry develops, I am fully confident that “better mousetraps” will be developed. People will devise new and innovative—and better—ways of doing business, and we as regulators are going to need to be nimble and responsive to ensure that we accommodate that growth and at the same time protect markets and consumers. All of this is a Herculean task, and all of it takes putting people—lots of people—to work. I have no doubt that these new regulations—instituting new types of clearing, trading, and reporting platforms—will foster a landslide of hiring in the financial sector. In addition, there is another factor to consider, equally important as an economic generator. All of this new trading activity with new regulatory oversight requirements will require the development of new technologies, both in the private and public sectors. And I think the competition here has already begun. We have seen high frequency traders abound in recent years, and we are going to see, I believe, new types of technologies that will be needed, both in the marketplace and by regulators, to effectively do business and oversee the conduct of that business. The “language” of algorithmic trading will become the legal definition of how financial market activity is done, and new technologies will be needed to develop the methods with which we speak to each other. The possibilities for economic growth and competition here are mind-boggling. And I have great faith in the ability of American computer scientists, physicists, logicians, statisticians—inventors of all kinds—to come up with the best, the fastest, the most capable, and the best financial market technologies in the world. On top of all that, Dodd-Frank is kind to the nation’s deficit. The Congressional Budget Office estimates that it will reduce the deficit by $3.2 billion in the next ten years. Can this all be done? I’ve been involved with government for 25 years. Maybe I’m part of the problem, but I don’t think so. I see how government operates and how it can change. Sure, we need to do better and I can tell you we have already made good progress. That’s why we haven’t done the rules by the date Congress told us to do them—by July. We are taking our time and being thoughtful. We are doing them correctly. We are getting them right, and we have already started what I’m talking about. We did two rules last month that will help create economic activity. It can be done. It is being done. When President Obama spoke last night about regulation, he said that, while there are some who advocate simply throwing out all regulation and letting everyone write their own rules, “that’s not who we are.” That’s not what it means to be an American. He noted that yes, we’re strong and self-reliant, and yes, we have an economic engine that has been the envy of the world, but he also correctly stated that there are some things “we can only do together” that we are guided by a belief that we are connected. He noted that, while some are already complaining about his proposal for an American Jobs Act and regulatory reform, and some would like to simply wait it out until the next presidential election in 14 months, there are those who don’t have jobs, who are suffering, who don’t have the luxury of waiting 14 months. That’s why instituting sensible, appropriate regulations, to put people to work and create jobs is so incredibly important, right here, right now. That’s why I’d like you to think differently about our regulations, to expect the unexpected. Just like Wilde’s vision of a modern intellect, in the financial arena I see countless possibilities, innovative horizons, unbounded opportunities that this new and novel marketplace will bring to the American economy and ultimately to the American consumer. And the new regulations framing the market’s existence—and providing needed guidelines and protections—will be the foundation for a new generation of economic growth. So, let’s expect the unexpected. American Idol Let’s shift gears now. I don’t have a great transition here, so I’ll use that old line from Monty Python, when the great comic John Cleese would say, “And now, for something completely different.” American Idol is the most watched television show ever. I told you I didn’t have a good transition—just go with me here. The May 25th American Idol show had 124 million votes, just 5,000 shy of the number of votes cast in the 2008 presidential election. To be fair, for those of you who don’t know about the show, you can vote more than once for the American Idol. Sort of like they joke folks did in Chicago years ago. The point is that whatever American Idol has been doing has worked. You know what hasn’t worked very well recently? Financial ratings agencies. So what’s the difference between rating agencies and American Idol? Let’s contrast and compare a bit, shall we. As you will recall, on August 5th, Standard and Poor’s (S&P) rating agency unexpectedly downgraded the United States from AAA to AA+. Since the early 1900s when ratings began, this was the first time the U.S. wasn’t rated AAA. The downgrade was based upon S&P’s view that Washington politics remain unstable and therefore deficit-reduction measures will not be attainable. Washington—unstable, tell me it ain’t so. I mean, gridlock in Washington is hardly a shocker. I guess we will all have to continue to look at the way Capitol Hill responds to the President’s call to action last evening. However, the S&P decision was also fueled by what they called a $2 trillion calculation error—a $2 trillion calculation error. The direct impact of this ratings downgrade on markets was enormous. The Monday following the release of the rating, the Dow dropped 635 points! I have a problem with that, with a ratings agency being so powerful. Remember, some of these agencies are the ones who got ratings so incredibly wrong in 2008. Not only did they give favorable ratings to firms that ultimately went under during the economic fiasco, they maintained AAA ratings on pools of junk mortgages packaged by Wall Street banks, trading away credible ratings for the bottom line of the ratings agencies. Do we really want to continue to rely upon such agencies? Now, bring in Steven Tyler, the new Idol judge and the flamboyant Aerosmith front man. He provides insightful commentary based upon his music and performance experience. What he says colors contestant performances with a professional texture viewers might not otherwise notice. What he and the other American Idol judges do not do, however, is render the final judgment. Unlike the ratings agencies, the American Idol judges aren’t that powerful. Final determinations are left up to the viewers. Maybe ratings agencies need to get a little more like American Idol. We shouldn’t treat the rating agencies as idols themselves. We shouldn’t have to bow down to them and accept that the fate of our markets will hinge upon their every word. Instead, the rating agencies should provide (like American Idol judges) premium and high-quality information. What they should not do is make final judgments that drastically influence markets. They should be more informative and insightful, but not deterministic. They've become excessively powerful and create a self-fulfilling prophesy about what markets will do. In addition, three agencies comprise 97% of all ratings. Three—talk about too much concentration! There are smaller agencies out there and a little competition would seem to be a very good thing. As a final point, all these agencies should work for consumers, not deal makers. That’s a flawed business model that incentivizes agencies to provide favorable ratings. The American Idol judges don’t get paid by the contestants. We need to change the way the raters operate. You may say, as Tyler sings, “Dream On,” but we have seen the damage the raters can create. We should not simply accept the status quo. Conclusion I want to leave some time for questions, if I haven’t already used all of that. If so, I guess you can go directly to the Capitol Steps. But before I go, I want to reiterate that we need to think more positively about where we are headed. We need to not only look for bad things that could happen, but potentially good things that can happen. Businesses need to be looked at as partners in this effort, and to the extent we can do better in government and do the jobs that we are supposed to be doing, we can make great strides. That’s good for market participants, for business and especially for the consumers who depend on these markets for the price discovery of just about everything they purchase. I know it is a tough challenge, but I am optimistic that we can meet it. So, maintain your sense of humor, and most importantly, expect the unexpected, it will demonstrate your thoroughly modern intellect.”
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