The following excerpt is from the SEC website:
"Speech by SEC Staff:
Carlo V. di Florio
Director, Office of Compliance Inspections and Examinations1
NSCP National Meeting
October 17, 2011
Thank you for inviting me to speak at this event. The work you all do is incredibly important, and we appreciate and respect your critical contributions to investor protection and market integrity. Today I would like to address two related topics that are growing in importance: the heightened role of ethics in an effective regulatory compliance program, and the role of both ethics and compliance in enterprise risk management. The views that I express here today are of course my own and do not necessarily reflect the views of the Commission or of my colleagues on the staff of the Commission.
In the course of discussing these two topics, I would like to explore with you the following propositions:
Ethics is fundamental to the securities laws, and I believe ethical culture objectives should be central to an effective regulatory compliance program.
Leading standards have recognized the centrality of ethics and have explicitly integrated ethics into the elements of effective compliance and enterprise risk management.
Organizations are making meaningful changes to embraced this trend and implement leading practices to make their regulatory compliance and risk management programs more effective.
Ethics and the Federal Securities Laws
The debate about how law and ethics relate to each other traces all the way back to Plato and Aristotle. I am not the Director of the Office of Legal Philosophy, so I won’t try to contribute to the received wisdom of the ages on this enormous topic,2 except to say that for my purposes today, the question really boils down to staying true both the spirit and the letter of the law.
Framed this way, ethics is a topic of enormous significance to anyone whose job it is to seek to promote compliance with the federal securities laws. At their core, the federal securities laws were intended by Congress to be an exercise in applied ethics. As the Supreme Court stated almost five decades ago,
[a] fundamental purpose, common to [the federal securities]… statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry…. “It requires but little appreciation . . . of what happened in this country during the 1920's and 1930's to realize how essential it is that the highest ethical standards prevail” in every facet of the securities industry.3
Of course, what has happened through the financial crisis I believe is yet another reminder of the fundamental need for stronger ethics, risk management and regulatory compliance practices to prevail. Congress has responded once again, as it did after the Great Depression, with landmark legislation to raise the standards of business ethics in the banking and securities industries.
The manner in which the federal securities laws are illuminated by ethical principles was well illustrated by the Study on Investment Advisers and Broker-Dealers that the Commission staff submitted to Congress earlier this year pursuant to Section 913 of the Dodd-Frank Act (“913 Study”).4 As described in the 913 study, in some circumstances the relationship is explicit, such as the requirement that each investment adviser that is registered with the Commission or required to be registered with the Commission must also adopt a written code of ethics. These ethical codes must at a minimum address, among other things, a minimum standard of conduct for all supervised persons reflective of the adviser’s and its supervised persons’ fiduciary obligations.5
In other circumstances, an entire body of rules is based implicitly on ethical precepts. This is the case with the rules adopted and enforced by FINRA and other self-regulatory organizations, which “are grounded in concepts of ethics, professionalism, fair dealing, and just and equitable principles of trade,” giving the SROs authority to reach conduct that may not rise to the level of fraud.6 This has empowered FINRA and other SROs to, for example, not require proof of scienter to establish a suitability obligation, ,7 to develop rules and guidance on fair prices, commissions and mark-ups that takes into account that what may be “fair” (or reasonable) in one transaction could be “unfair” (or unreasonable) in another,8 and to require broker-dealers to engage in fair and balanced communications with the public, disclose conflicts of interest, and to undertake a number of other duties.9 In addition to approving rules grounded on these ethical precepts, the Commission has also sustained various FINRA disciplinary actions utilizing FINRA’s authority to enforce “just and equitable principles of trade,” even where the underlying activity did not involve securities, such as actions involving insurance , tax shelters, signature forgery, credit card fraud, fraudulent expense account reimbursement, etc.10
Other ethical precepts are derived from the antifraud provisions of the federal securities laws. The “shingle” theory, for example, holds that by virtue of engaging in the brokerage business a broker-dealer implicitly represents to those with whom it transacts business that it will deal fairly with them. When a broker-dealer takes actions that are not fair to its customer, these must be disclosed to avoid making the implied representation of fairness not misleading. A number of duties and conduct regulations have been articulated by the Commission or by courts based on the shingle theory.11
Another source by which ethical concepts are transposed onto the federal securities laws is the concept of fiduciary duty. The Supreme Court has construed Section 206(1) and (2) of the Investment Advisers Act as establishing a federal fiduciary standard governing the conduct of advisers.12 This imposes on investment advisers “the affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation to ‘employ reasonable care to avoid misleading’” clients and prospective clients. As the 913 Study stated,
Fundamental to the federal fiduciary standard are the duties of loyalty and care. The duty of loyalty requires an adviser to serve the best interests of its clients, which includes an obligation not to subordinate the clients’ interests to its own. An adviser’s duty of care requires it to “make a reasonable investigation to determine that it is not basing its recommendations on materially inaccurate or incomplete information.”13
While broker-dealers are generally not subject to a fiduciary duty under the federal securities laws, courts have imposed such a duty under certain circumstances, such as where a broker-dealer exercises discretion or control over customer assets, or has a relationship of trust and confidence with its customer.14 The 913 Study, of course, explores the principle of a uniform fiduciary standard.
Concepts such as fair dealing, good faith and suitability are dynamic and continue to arise in new contexts. For example, the Business Conduct Standards for Securities-Based Swap Dealers (SBSDs”) and Major Security-Based Swap Participants (“MSBSPs”), required by Title VII of the Dodd-Frank Act and put out for comment last summer, include proposed elements such as
a requirement that communications with counterparties are made in a fair and balanced manner based on principles of fair dealing and good faith;
an obligation to disclosure to a counterparty material information about the security-based swap, such as material risks, characteristics, incentives and conflicts of interest; and
a determination by SBSDs that any recommendations that they make regarding security-based swaps are suitable for their counterparties.
Of course the Business Conduct Standards have not been finalized, but the requirements of Title VII requiring promulgation of these rules, as well as the content of the rules as proposed, illustrate that ethical concepts continue to be a touchstone for both Congress and the Commission in developing and interpreting the federal securities laws.
The Relationship Between Ethics and Enterprise Management.
Ethics is not important merely because the federal securities laws are grounded on ethical principles. Good ethics is also good business. Treating customers fairly and honestly helps build a firm’s reputation and brand, while attracting the best employees and business partners. Conversely, creating the impression that ethical behavior is not important to a firm is incredibly damaging to its reputation and business prospects. This, of course, holds true equally for individuals, and there are plenty of enforcement cases that tell the story of highly talented and successful individuals who were punished because they violated their ethical and compliance responsibilities.
Another way of saying this is that a corporate culture that reinforces ethical behavior is a key component of effectively managing risk across the enterprise. As the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) put it, in articulating its well-established standards of Internal Control and Enterprise Risk Management:
An entity’s strategy and objectives and the way they are implemented are based on preferences, value judgments, and management styles. Management’s integrity and commitment to ethical values influence these preferences and judgments, which are translated into standards of behavior. Because an entity’s good reputation is so valuable, the standards of behavior must go beyond mere compliance with the law. Managers of well-run enterprises increasingly have accepted the view that ethics pays and ethical behavior is good business.15
In the wake of the financial crisis, enterprise risk management is a rapidly evolving discipline that places ethical values at the heart of good governance, enterprise risk management and compliance. For example, organizations such as COSO, the Ethics Resource Center (ERC), the Open Compliance and Ethics Guidelines (OCEG) and the Ethics & Compliance Officer Association (ECOA) have developed detailed guidance, from the board room to business units and key risk, control and compliance departments, on implementation of effective enterprise risk management systems. Industry and sector specific guidance has flowed from these general standards. As COS notes, integrity and ethical values are the pillars of an effective compliance culture.
The effectiveness of enterprise risk management cannot rise above the integrity and ethical values of the people who create, administer, and monitor entity activities. Integrity and ethical values are essential elements of an entity’s internal environment, affecting the design, administration, and monitoring of other enterprise risk management components.16
Nowhere should this be more true than in financial services firms today, which depend for their existence on public trust and confidence to a unique degree. Expectations are rising around the world for a stronger culture of ethical behavior at financial services firms of all types and sizes. As the Basle Committee on Banking Supervision recently stated:
A demonstrated corporate culture that supports and provides appropriate norms and incentives for professional and responsible behaviour is an essential foundation of good governance. In this regard, the board should take the lead in establishing the “tone at the top” and in setting professional standards and corporate values that promote integrity for itself, senior management and other employees.17
As the standards for ethical behavior continue to evolve, your firms’ key stakeholders – shareholders, clients and employees will increasingly expect you to meet or exceed those standards.
In my first speech here at the SEC outlined ten elements I believe make an effective compliance and ethics program. These elements reflect the compliance, ethics and risk management standards and guidance noted above. They also reflect the U.S. Federal Sentencing Guidelines (FSG), which were revised in 2004 to explicitly integrate ethics into the elements of an effective compliance and ethics program that would be considered as mitigating factors in determining criminal sentences for corporations. These elements include:
Governance. This includes the board of directors and senior management setting a tone at the top and providing compliance and ethics programs with the necessary resources, independence, standing, and authority to be effective. NEP staff have begun meeting with directors, CEOs, and senior management teams to better understand risk and assess the tone at the top that is shaping the culture of compliance, ethics and risk management.
Culture and values. This includes leadership promoting integrity and ethical values in decision-making across the organization and requiring accountability.
Incentives and rewards. This includes incorporating integrity and ethical values into performance management systems and compensation so the right behaviors are encouraged and rewarded, while inappropriate behaviors are firmly addressed.
Risk management. This includes ensuring effective processes to identify, assess, mitigate and manage compliance and ethics risk across the organization.
Policies and procedures. This includes establishing, maintaining and updating policies and procedures that are tailored to your business, your risks, your regulatory requirements and the conflicts of interest in your business model.
Communication and training. This includes training that is tailored to your specific business, risk and regulatory requirements, and which is roles-based so that each critical partner in the compliance process understands their roles and responsibilities.
Monitoring and reporting. This includes monitoring, testing and surveillance functions that assess the health of the system and report critical issues to management and the board.
Escalation, investigation and discipline. This includes ensuring there are processes where employees can raise concerns confidentially and anonymously, without fear of retaliation, and that matters are effectively investigated and resolved with fair and consistent discipline.
Issues management. This includes ensuring that root cause analysis is done with respect to issues that are identified so effective remediation can occur in a timely manner.
An on-going improvement process. This includes ensuring the organization is proactively keeping pace with developments and leading practices as part of a commitment to a culture of ongoing improvement.
In addition to the effective practices above, the NEP has also seen firms that have focused on enhancing regulatory compliance programs through effective integration of ethics principles and practices. These include renaming the function and titles to incorporate ethics explicitly; elevating the dialogue with senior management and the board; implementing core values and business principles to guide ethical decision-making; integrating ethics into key leadership communications; and introducing surveys and other mechanisms to monitor the health of the culture and identify emerging risks and issues.
The Relationship of Compliance and Ethics with Enterprise Risk Management.
We can expand the discussion above beyond compliance and ethics to address enterprise risk management and risk governance more broadly. These same program elements, and ethics considerations, are equally critical, but the scope of risks expands beyond regulatory risk to also include market, credit and operational risk, among others. The roles and responsibilities also expand to include risk management, finance, internal audit and other key risk and control functions. Whether we’re talking about compliance and ethics or we’re talking about ERM, it is important to clarify fundamental roles and responsibilities across the organization. .
The business is the first line of defense responsible for taking, managing and supervising risk effectively and in accordance with the risk appetite and tolerances set by the board and senior management of the whole organization.
Key support functions, such as compliance and ethics or risk management, are the second line of defense. They need to have adequate resources, independence, standing and authority to implement effective programs and objectively monitor and escalate risk issues.
Internal Audit is the third line of defense and is responsible for providing independent verification and assurance that controls are in place and operating effectively.
Senior management is responsible for reinforcing the tone at the top, driving a culture of compliance and ethics and ensuring effective implementation of enterprise risk management in key business processes, including strategic planning, capital allocation, performance management and compensation incentives.
The board of directors (if one exists in the organization) is responsible for setting the tone at the top, overseeing management and ensuring risk management, regulatory, compliance and ethics obligations are met.
While compliance and ethics officers play a key role in supporting effective ERM, risk managers in areas such as investment risk, market risk, credit risk, operational risk, funding risk and liquidity risk also play an important role. As noted above, the board, senior management, other risk and control functions, the business units and internal audit also play a critical role in ERM. As ERM matures as a discipline, it is critical that these key functions work together in an integrated coordinated manner that supports more effective ERM. Understanding and managing the inter-relationship between various risks is a central tenet of effective ERM. One needs only reflect on the financial crisis to understand how the aggregation and inter-relationship of risks across various risk categories and market participants created the perfect storm. ERM provides a more systemic risk analysis framework to proactively identify, assess and manage risk in today’s market environment.
As I discussed earlier, there is an ethical component to many of the federal securities laws. When NEP staff examines, for example, an investment adviser’s adherence to its fiduciary obligations, or a broker-dealer’s effective development, maintenance and testing of its compliance program, our examiners are looking at how well firms are meeting both the letter and spirit of these obligations. In addition, our examiners certainly examine specific requirements for ethical processes, such as business conduct standards.
There is another way in which the ethical environment within a firm matters to us. As you know, our examination program has greatly increased its emphasis on risk-based examinations. How we perceive a registrant’s culture of compliance and ethics informs our view of the risks posed by particular entities. In this regard we have begun meeting boards of directors, CEOs and senior management to share perspectives on the key risks facing the firm, how those risks are being managed and the effectiveness of key risk management, compliance, ethics and control functions. It provides us an opportunity to emphasize the critical importance of compliance, ethics, risk management and other key control functions, and our expectation that these functions have sufficient resources, independence, standing and authority to be effective in their roles. These dialogues also provide us an opportunity to assess the tone at the top that is shaping the culture of compliance, ethics and risk management in the firm. If we believe that a firm tolerates a nonchalant attitude toward compliance, ethics and risk management, we will factor that into our analysis of which registrants to examine, what issues to focus on, and how deep to go in executing our examinations.
Finally, I would end by sharing with you that we are also embracing these leading practices. We recently created our own program around compliance and ethics. For the first time, we have a dedicated team focused on strengthening and monitoring how effectively we adhere to our own examination standards. We are in the process of finalizing our first Exam Manual, which we set forth all of our key policies and standards in one manual. We have also established a senior management committee with oversight responsibility for compliance, ethics and internal control. On the risk management front, we are also making good progress. We have recruited individuals with expertise and established a senior management oversight committee here as well. In short, we are also committing ourselves to a culture of ongoing improvement and leading practices.
Thank you for inviting me to speak here today. I hope that my remarks, both about ethics and compliance as well as our priorities for the first months of our new fiscal year, will be helpful to you and help you to perform your critical compliance functions more effectively. I invite your feedback, whether regarding the points that I made, or the points that you think I missed. I now invite your questions.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private statements by its employees.
2 For a deeper plunge into the relationship between law and ethics, a classic exchange on this subject can be found in Positivism and the Separation of Law and Morals, H.L.A. Hart, 71 Harvard L. Rev. 529 (1958) and Positivism and Fidelity to Law: A Reply to Professor Hart, L.L. Fuller, 71 Harvard L. Rev. 630 (1958).
3 SEC v. Investment Research Bureau, Inc., 375 U.S. 180, 186-87 (1963), quoting Silver v. New York Stock Exchange, 373 U.S. 341,366 (1963).
4 Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform Act (January 2011) at 62 (available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf) (“913 Study”).
5 Advisers Act Section 204A, and Advisers Act Rule 204A-1.
6 913 Study at 51.
8 Id. at 66.
9 Id. at 52.
10 Id. at 52-53 and cases cited therein.
11 Id. at 51, citing Guide to Broker-Dealer Registration (April 2008), available at http://www.sec.gov/divisions/marketreg/bdguide.htm.
12 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963); 913 Study at 21.
13 Id. at 22 (quoting Concept Release on the U.S. Proxy System, Investment Advisers Act Release No. 3052 (July 14, 2010) at 119.
14 Id. at 54 and cases cited therein.
15 Enterprise Risk Management- Integrated Framework, Committee of Sponsoring Organizations of the Treadway Commission (September 2004) at 29.
16 Id. at 29-30.
17 Basel Committee on Banking Supervision, Principles for Enhancing Corporate Governance (October 2010) at 8.
The following is an excerpt from the FDIC website:
“All American Bank, Des Plaines, Illinois, was closed today by the Illinois Department of Financial and Professional Regulation – Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with International Bank of Chicago, Chicago, Illinois, to assume all of the deposits of All American Bank.
The sole branch of All American Bank will reopen during normal business hours as a branch of International Bank of Chicago. Depositors of All American Bank will automatically become depositors of International Bank of Chicago. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of All American Bank should continue to use their existing branch until they receive notice from International Bank of Chicago that it has completed systems changes to allow other International Bank of Chicago branches to process their accounts as well.
This evening and over the weekend, depositors of All American Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of June 30, 2011, All American Bank had approximately $37.8 million in total assets and $33.4 million in total deposits. In addition to assuming all of the deposits, International Bank of Chicago agreed to purchase essentially all of the failed bank's assets.
Customers with questions about today's transaction should call the FDIC toll-free at 1-800-350-2746. The phone number will be operational this evening until 9:00 p.m., Central Daylight Time (CDT); on Saturday from 9:00 a.m. to 6:00 p.m., CDT; on Sunday from noon to 6:00 p.m., CDT; on Monday from 8:00 a.m. to 8:00 p.m., CDT; and thereafter from 9:00 a.m. to 5:00 p.m., CDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/allamerican.html.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $6.5 million. Compared to other alternatives, International Bank of Chicago's acquisition was the least costly resolution for the FDIC's DIF. All American Bank is the 85th FDIC-insured institution to fail in the nation this year, and the ninth in Illinois. The last FDIC-insured institution closed in the state was Country Bank, Aledo, on October 14, 2011.”
The following is an excerpt from the SEC website:
“Washington, D.C., Oct. 26, 2011 – The Securities and Exchange Commission today charged a pair of purported money managers with orchestrating an illegal “free-riding” scheme of selling stocks before they paid for them and netting $600,000 in illicit profits.
The SEC alleges that Florida residents Scott Kupersmith and Frederick Chelly portrayed themselves to broker-dealers as money managers for hedge funds or private investors, and they opened brokerage accounts in the names of purported investment funds they created. Kupersmith and Chelly then engaged in illegal free-riding by interchangeably buying and selling the same quantity of the same stock in different accounts – frequently on the same day – with the intention of profiting on swings up or down in the stock price. Unbeknownst to broker-dealers, Kupersmith and Chelly did not have sufficient securities or cash on hand to cover the trades, and they instead used proceeds from stock sales in one brokerage account to pay for the purchase of the same stock in another brokerage account.
The SEC alleges that when trades were profitable, Kupersmith and Chelly took the profits. But when the trades threatened to result in substantial losses, Kupersmith and Chelly failed to cover their sales and left broker-dealers to settle the trades at a significant loss. In total, their brokers suffered more than $2 million in losing trades.
“Kupersmith and Chelly engaged in a classic ‘heads I win, tails you lose’ scheme to trade risk-free at the expense of broker-dealers,” said George S. Canellos, Director of the SEC’s New York Regional Office. “The SEC is firmly committed to pursuing individuals who fraudulently game the system thinking that they will never be caught.”
According to the SEC’s complaint filed in U.S. District Court in New Jersey, Kupersmith and Chelly traded through a special type of cash account that broker-dealers offer to customers with the understanding that the customer has sufficient securities and cash held with a third-party custodial bank to cover the trades that the customer makes in the account. Kupersmith and Chelly never disclosed to broker-dealers that they were instead using proceeds from sales of shares in one brokerage account to pay for their purchase in another brokerage account. Kupersmith and Chelly also used offshore accounts to facilitate their trading activity.
According to the SEC’s complaint, the free-riding scheme occurred in 2009 and 2010, and unraveled when Kupersmith and Chelly failed to deliver shares to settle long sales in various brokerage accounts.
The SEC’s complaint charges Kupersmith and Chelly with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-21 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.
In parallel actions, the U.S. Attorney’s Office for the District of New Jersey and the Manhattan District Attorney’s Office today announced the unsealing of criminal charges against Kupersmith.
The SEC’s investigation was conducted by Stephanie D. Shuler, Vincenzo A. DeLeo, and Peter Lamore of the SEC’s New York Regional Office. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, and Manhattan District Attorney’s Office.
The SEC’s investigation is continuing.”
The above free-riding activity looks like it might be fraud however, it is easy to make a mistake and get a free-ride notice from your broker or the Federal Reserve. When you are suffering significant losses on a stock that is headed into oblivion it makes it hard not to hit the sell button without doing the proper calculations to make sure the stock has been paid for. Of course opening up a margin account or using only settled funds are two easy ways to avoid being accused of violating free ride restrictions."
The following excerpt is from the SEC website:
“On October 18, 2011, the Securities and Exchange Commission (“Commission”) filed a complaint in United States District Court in Riverside, California against Copeland Wealth Management, A Financial Advisory Corporation (“CWM”), Copeland Wealth Management, A Real Estate Corporation (“Copeland Realty”), and Charles P. Copeland (“Charles Copeland”) for fraud and breach of fiduciary duty. As an investment adviser registered with the Commission, CWM manages approximately $125 million in assets under management. The assets under management are primarily mutual funds and real estate funds. Copeland Realty, an unregistered investment adviser, is the general partner for 21 limited partnerships primarily invested in real estate. Charles Copeland, a certified public accountant, is the founder, co-owner and officer of both CWM and Copeland Realty.
The Commission alleges that from 2003 through May 31, 2011, Charles Copeland, CWM, and Copeland Realty raised over $62 million from over 100 investors, including many of Charles Copeland’s accounting clients, by selling interests in limited partnerships operated by CWM and Copeland Realty. According to the Commission’s complaint, throughout the offer and sale of the limited partnerships, Charles Copeland, CWM, and Copeland Realty made material misrepresentations and omissions regarding: (1) the use of investor funds, (2) conflicts of interest, (3) guaranteed returns, (4) the unauthorized trading of put options, and (5) the payment of undisclosed real estate commissions and other related compensation.
Without admitting or denying the Commission’s allegations, Charles Copeland, CWM, and Copeland Realty agreed to the entry of an order permanently enjoining them from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The defendants also agreed to an order appointing a receiver over CWM and Copeland Realty and prohibiting the destruction of documents. Disgorgement plus prejudgment interest and civil penalties are to be determined at a later date.”
The following excerpt is from the SEC website:
October 18, 2011
“The Securities and Exchange Commission announced today that on October 14, 2011, the U.S. District Court for the Northern District of Texas entered a judgment against Jason Wynn, of Plano, Texas, and two companies under his control – Wynn Holdings LLC and Wynn Industries LLC. The Commission’s amended complaint alleged that Wynn and his companies violated the antifraud and registration provisions of the federal securities laws through a scheme to pump and dump the stock of four issuers: Beverage Creations, Inc., My Vintage Baby, Inc., ConnectAJet.com, Inc. and Alchemy Creative, Inc.
The Commission alleged that Jason Wynn and his companies (1) purchased tens of millions of shares directly from the issuers for pennies per share, (2) touted the stock to investors through a nationwide marketing campaign, and (3) immediately dumped their shares into the public market at grossly inflated prices when no registration statement was filed or in effect. Wynn created artificial demand for the stocks through various ad campaigns, emails and misleading promotional mailers. While the promotional mailers disclosed that the Wynn companies received the stock being touted, they did not disclose that Wynn and his companies intended to sell that stock into the artificially inflated market created by the promotions.
The judgment permanently enjoins Wynn, Wynn Holdings, LLC and Wynn Industries, LLC from violating Section 5 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgment also bars Wynn and his companies from participating in any penny stock offerings and provides that they will be ordered to pay disgorgement and civil penalties determined by the district court at a later date. Wynn and his companies consented to the entry of the judgment without admitting or denying the allegations in the Commission’s amended complaint.
Previously, on January 3, 2011, the district court entered a judgment against stock promoter Carlton Fleming and certain entities under his control – Regus Investment Group LLC and Thomas Wade Investments, LLC. The Commission’s case against the remaining defendants – Ryan Reynolds and companies under his control – is pending. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.”
The following excerpt is from the SEC website:
“On October 26, 2011, the Securities and Exchange Commission charged former McKinsey & Co. global head Rajat K. Gupta with insider trading for illegally tipping convicted hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam after first charging him with insider trading in October 2009.
According to the SEC’s complaint filed in federal court in Manhattan, Gupta illegally tipped Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and P&G as well as an impending $5 billion investment in Goldman by Berkshire Hathaway at the height of the financial crisis. Rajaratnam, the founder of Galleon Management who was recently convicted of multiple counts of insider trading in other securities stemming from unrelated insider trading schemes, allegedly caused various Galleon funds to trade based on Gupta’s inside information, generating illicit profits or loss avoidance of more than $23 million.
The SEC’s complaint alleges that Gupta provided his friend and business associate Rajaratnam with confidential information learned during board calls and in other communications and meetings relating to his official duties as a director of Goldman and P&G. Rajaratnam used the inside information to trade on behalf of certain Galleon funds, or shared the information with others at his firm who caused other Galleon funds to trade on it ahead of public announcements by the firms. During this period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with him.
According to the SEC’s complaint, Gupta while serving as a Goldman board member tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Based on this inside information, Rajaratnam arranged for Galleon funds to purchase more than 215,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $800,000.
The SEC also alleges that Gupta tipped Rajaratnam to inside information about Goldman’s positive financial results for the second quarter of 2008. There was a flurry of calls between Gupta and Rajaratnam on the evening of June 10, 2008, after Gupta learned from Goldman CEO Lloyd Blankfein of the firm’s quarterly earnings results, which were significantly better than analyst consensus estimates. The following morning, minutes after the markets opened, Rajaratnam caused Galleon funds to start purchasing Goldman securities including 7,350 out-of-the-money Goldman call options and 350,000 Goldman shares. Rajaratnam liquidated these positions on or around June 17 – the date when Goldman announced its quarterly earnings – generating illicit profits of more than $18.5 million for the Galleon funds.
The SEC’s complaint further alleges that Gupta tipped Rajaratnam with confidential information that Gupta learned during an Oct. 23, 2008, board posting call about Goldman’s impending negative financial results for the fourth quarter of 2008. Mere seconds after the board call ended, Gupta tipped Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 150,000 shares. In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman to earn $2.50 per share, he heard the prior day from a Goldman board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on inside information provided by Gupta, the Galleon funds avoided losses of more than $3.6 million.
The SEC’s complaint additionally alleges that Gupta illegally disclosed to Rajaratnam inside information about P&G’s financial results for the quarter ending December 2008. Gupta participated in a telephonic meeting of P&G’s Audit Committee at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s quarterly earnings the next day. A draft of the earnings release, which had been mailed to Gupta and the other committee members two days before the meeting, indicated that P&G’s expected organic sales would be less than previously publicly predicted. Gupta called Rajaratnam in the early afternoon on January 29, and Rajaratnam shortly afterwards informed another participant in the insider trading scheme that he had learned from a contact on P&G’s board that the company’s organic sales growth would be lower than expected. Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000.
The SEC’s complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge on a joint and several basis their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The complaint also seeks to permanently prohibit Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser.
The SEC previously instituted an administrative proceeding against Gupta for the conduct alleged in today’s enforcement action, but later dismissed those proceedings while reserving the right to file an action against Gupta in federal court.
The SEC previously charged Rajaratnam and others in the widespread insider trading investigation centering on Galleon, the multi-billion dollar New York hedge fund complex founded and controlled by Rajaratnam.
The SEC has now charged 29 defendants in its Galleon-related enforcement actions, which have alleged widespread and repeated insider trading at numerous hedge funds, including Galleon, and by other professional traders and corporate insiders in the securities of more than 15 companies. The insider trading generated illicit profits totaling more than $90 million.”.
The following excerpt is from the SEC website:
“The Securities and Exchange Commission announced today that on October 17, 2011, the Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York entered final judgments against Arthur J. Cutillo and Jason C. Goldfarb in SEC v. Cutillo et al., 09-CV-9208, an insider trading case the Commission filed on November 5, 2009. The Commission charged Cutillo and Goldfarb, practicing attorneys at the time of their illicit conduct, with violations of antifraud provisions of the federal securities laws. The Commission alleged that Cutillo misappropriated from his law firm, Ropes & Gray LLP, material, nonpublic information concerning upcoming corporate acquisitions, including the 2007 announced acquisitions of 3Com Corp. and Axcan Pharma Inc. The Commission further alleged that Cutillo, through his friend Goldfarb, tipped the information to Zvi Goffer, a former proprietary trader at the broker-dealer Schottenfeld Group, LLC., in exchange for kickbacks. As alleged in the complaint, Zvi Goffer traded on this inside information and had numerous downstream tippees who also traded on the information, including other Wall Street traders and hedge funds.
To settle the Commission’s charges, Cutillo and Goldfarb each consented to the entry of a final judgment that: (i) permanently enjoins each from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders each to pay disgorgement of $32,500, plus $4,204 in prejudgment interest. In related administrative proceedings, the Commission suspended Cutillo and Goldfarb from appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice.
Cutillo and Goldfarb each previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud in related criminal cases, United States v. Arthur Cutillo, 10-CR-0056 and United States v. Jason Goldfarb, 10-CR-0056 (S.D.N.Y.). Cutillo was sentenced to a 30 month prison term and ordered to pay a criminal forfeiture of $378,608. Goldfarb was sentenced to a three year prison term and ordered to pay a $32,500 fine and criminal forfeiture of $1,103,131“.
The following excerpt is from the SEC website:
“Washington, D.C., Oct. 18, 2011 – The Securities and Exchange Commission today announced that it has obtained an emergency court order to freeze the assets of a Texas resident and his company charged with falsely telling investors he was using their money to buy and restructure pools of non-performing home mortgages in the wake of the housing market’s decline.
The SEC alleges that James G. “Jay” Temme and Stewardship Fund LP raised at least $35 million since 2008 from various investor groups. To lure those investors, Temme developed relationships with people and entities who “vouched” for Temme, including an investment adviser representative with a major investment bank’s private wealth management group and a Texas-based public company that provides mortgage restructuring services. Investors and their advisers, including the bank representative, were told by Temme that he was using the investors’ money to purchase “tapes” of non-performing mortgages from mortgage lenders at a discount and then paying returns based on principal and interest payments he collected from the homeowners, or based on the resale of the mortgages or underlying properties. In several instances, however, Temme was claiming to own mortgages he had never acquired or purporting to transfer the same pool of mortgages to multiple sets of investors. To carry out his scheme, Temme created false documents, made unauthorized financial transactions, and used new investor funds to pay off earlier investors.
“Temme took advantage of investors who believed their investments were helping homeowners restructure their mortgages,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “In many instances, it appears Temme was just pocketing the investments and using the proceeds for his own illicit purposes.”
According to the SEC’s complaint unsealed by the judge today in federal court in the Eastern District of Texas, Temme has been the subject of at least one state court asset freeze and various private lawsuits by different investor groups. However, rather than stopping his scheme, Temme ignored the asset freezes, opened new bank accounts, and raised money from new investors to settle suits filed by earlier investors.
The SEC’s complaint charges, among other things, that the defendants violated the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In addition to emergency and interim relief that has been obtained, the SEC seeks a preliminary injunction and a final judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.
The case is assigned to U.S. District Judge Michael H. Schneider. The court has scheduled a hearing on the Commission’s motions to appoint a receiver and for a preliminary injunction for Thursday, Oct. 27, 2011, at 2 p.m. CT before U.S. Magistrate Judge Amos L. Mazzant at the U.S. Courthouse in Sherman, Texas.
Jonathan Scott, Michael Jackman and Ty Martinez of the Fort Worth Regional Office are conducting the SEC’s investigation, and trial attorney David Reece will lead the litigation. The SEC’s investigation is continuing.”
The following excerpt is from the SEC website:
“On October 18, 2011, the Securities and Exchange Commission charged Thomas L. Kivisto of Tulsa, Oklahoma with misleading investors in SemGroup Energy Partners, L.P. (“SGLP”) about risks they faced from energy trading he was conducting at SGLP’s parent and largest customer, SemGroup, L.P. (“SemGroup”). Kivisto has agreed to settle these charges by consenting to injunctive relief, paying a $225,000 civil penalty and forfeiting rights to SGLP limited partnership units recently valued at approximately $1.1 million.
The Commission’s complaint, filed in United States District Court in Tulsa, alleges that Kivisto should have known that certain SGLP public filings he signed misled investors about the reliability of SGLP’s revenue stream and the risks SGLP faced from Kivisto’s energy trading. According to the complaint, SemGroup provided up to 89% of SGLP’s revenues and thus was critical to SGLP’s profitability. The SEC alleges that SGLP’s filings assured investors that this revenue stream was “stable and predictable” and protected from volatility in oil prices. The SEC contends, however, that Kivisto’s energy trading increasingly drained SemGroup’s credit facilities and other liquidity sources, jeopardizing its ability to fulfill its commitments to SGLP. Investors were never warned of these risks, according to the SEC.
The SEC alleges that these risks came to a head in July 2008, when SemGroup’s lenders cancelled the credit facility and SemGroup filed bankruptcy. After these events, the price of SGLP’s publicly traded limited partnership units declined more than 60%.
Privately held SemGroup, based in Tulsa, bought, transported and sold petroleum products. It also traded crude oil and related commodities and derivatives. Kivisto, who helped found the company and served as its CEO and president until its bankruptcy, managed SemGroup’s crude oil trading activities.
SGLP (now known as Blueknight Energy Partners, L.P.) went public in July 2007. SGLP primarily owned midstream oil and gas assets such as pipelines and storage facilities. Kivisto served as a director of SGLP’s general partner from its initial public offering until he resigned in July 2008. The Commission alleges that Kivisto signed certain misleading filings SGLP made with the SEC, including registration statements SGLP filed in July 2007 and February 2008 and its annual report on Form 10-K filed in March 2008.
Without admitting or denying the Commission’s allegations, Kivisto offered to settle by consenting to entry of a final judgment permanently enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act of 1933, ordering him to pay a $225,000 civil penalty, and requiring him to forfeit all claims to 150,000 SGLP units awarded under the company’s long term incentive plan.”
The following excerpt is from the SEC website:
“On October 18, 2011, the Securities and Exchange Commission filed a settled civil injunctive action against Long Term-Short Term Inc., d/b/a BetterTrades, and Freddie Rick, the Company's co-founder and president. Without admitting or denying the allegations in the complaint, the defendants consented to judgments enjoining them from violating the antifraud provisions of the federal securities laws. The Company and Rick also agreed to pay, respectively, civil penalties of $750,000 and $150,000, and agreed to continue enforcing internal compliance guidelines designed to prevent future violations. BetterTrades sells products designed to teach how to trade options, including seminars, workshops and software that facilitates options trading. The Commission's complaint alleges that from at least 2007 and continuing through at least 2008, certain BetterTrades instructors falsely claimed to be highly successful options traders using the strategies taught by BetterTrades. In marketing materials, the defendants also claimed that certain Company instructors were successful, active traders. The complaint alleges that the defendants acted recklessly in making these claims without verifying their accuracy, despite red flags that the claims were false. The complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5.
The complaint also alleges that certain Company marketing materials claimed that Rick became wealthy through his options trading. According to the complaint, the Company knew or was reckless in not knowing that Rick's wealth came primarily from Company operations. The complaint also alleges that Rick allowed infomercials to air that incorrectly implied that his wealth came from trading.
In determining to accept the defendants' settlement offers, the SEC took into account the defendants' voluntary remediation efforts. The Company retained counsel to review how it promoted and sold its classes, products and services, and it adopted policies that set forth standards of behavior expected from instructors, including mandatory instructor training on Company policies and interpretive guidelines, collection of instructor trading records, and vetting of any instructor claims of trading success against trading records. The Company also instituted policies and detailed guidelines regarding, among other things, review and revision of marketing materials, and required student claims of trading success to be vetted against trading records. The Company also took disciplinary actions against instructors who failed to adhere to Company policies.
The Commission's settlements with the defendants are subject to the approval of the U.S. District Court for the Eastern District of Virginia.”
The following excerpt is from the SEC website:
“Washington, D.C., Oct. 24, 2011 – The Securities and Exchange Commission today charged multinational banking conglomerate Banco Espirito Santo S.A. (BES) with violations of the broker-dealer and investment adviser registration provisions and the securities transaction registration provisions of the federal securities laws.
The SEC's enforcement action finds that Lisbon, Portugal-based BES offered brokerage services and investment advice between 2004 and 2009 to approximately 3,800 U.S.-resident customers and clients who were primarily Portuguese immigrants. However, during this time, BES was not registered with the SEC as a broker-dealer or investment adviser, and it offered and sold securities to its U.S. customers and clients without the intermediation of a registered broker-dealer. None of these securities transactions was registered and many of the securities offerings did not qualify for an exemption from registration.
BES agreed to settle the SEC's charges and pay nearly $7 million in disgorgement, prejudgment interest and penalties. In determining to accept BES's offer to settle, the SEC considered remedial acts promptly undertaken by BES and its cooperation with SEC staff.
"The registration provisions are core safeguards of the integrity of our securities markets and the financial institutions that act as gatekeepers of those markets," said George S. Canellos, Director of the SEC's New York Regional Office. "BES brazenly ignored those provisions over the course of many years by acting as an investment adviser and broker-dealer without registration and by offering and selling securities to members of the U.S. public without any of the disclosures required by the law."
Sanjay Wadhwa, Associate Director of the SEC's New York Regional Office, added, "Foreign entities seeking to provide financial or securities-related services in the U.S. must familiarize themselves with the statutory and regulatory framework in this arena. A failure to do so, as was the case here, can be a costly misstep."
The SEC's order instituting administrative proceedings against BES describes the various ways that the bank offered and sold securities and provided brokerage and advisory services to its U.S. customers and clients. BES used its Portugal-based Departmento de Marketing de Comunicacao & Estudo do Consumidor (Department of Marketing, Communications, and Consumer Research) to mail U.S. residents marketing materials. A customer service call center operated by a third party and located in Portugal (known as the ES Contact Center) employed individuals who were dedicated to servicing BES's U.S. customers and offered such U.S. customers various financial products. BES also used a state-licensed money transmission service named Espirito Santo e commercial Lisbona Inc. with offices in Connecticut, New Jersey, and Rhode Island. BES also had U.S.-dedicated International Private Banking relationship managers who visited the U.S. approximately twice a year to meet with clients and serviced U.S. clients from Portugal.
The SEC's order finds that by acting as an unregistered broker-dealer and investment adviser to U.S. customers and clients, BES willfully violated Section 15(a) of the Securities Exchange Act of 1934, and Section 203(a) of the Investment Advisers Act of 1940. According to the SEC's order, BES also willfully violated Sections 5(a) and 5(c) of the Securities Act of 1933 by offering and selling securities in the U.S. without registration and without an applicable exemption from registration.
Without admitting or denying the SEC's findings, BES has agreed to cease and desist from committing or causing any violations of Sections 5(a) and 5(c) of the Securities Act, Section 15(a) of the Exchange Act, and Section 203(a) of the Advisers Act, and to pay nearly $7 million in disgorgement, prejudgment interest and penalties. BES also has agreed to an undertaking that requires it to pay a certain minimum rate of interest to its U.S. customers and clients on securities purchased through BES, and to make whole each of its U.S. customers and clients for any realized or unrealized losses with respect to any securities purchased through BES.
The SEC's investigation was conducted by Amelia A. Cottrell, John C. Lehmann, and Charles D. Riely of the SEC's New York Regional Office. The office's broker-dealer examination team of Robert A. Sollazzo, Ellen N. Hersh, Ashok Ginde, and Jennifer A. Grumbrecht provided assistance with the investigation.”
The following excerpt is from the SEC website:
“Washington, D.C., Oct. 18, 2011 – The Securities and Exchange Commission today charged the co-founder of a Tulsa-based energy company with misleading investors in one of its subsidiaries about liquidity risks they faced from his energy trading.
According to the SEC’s complaint filed in federal court in Tulsa, Thomas L. Kivisto was CEO and president of SemGroup L.P., which bought, transported and sold petroleum products and traded crude oil and related commodities and derivatives. Kivisto managed these trading activities. Meanwhile, Kivisto also was a director of SemGroup’s subsidiary, SemGroup Energy Partners L.P. (SGLP), which owns midstream oil and gas assets such as pipelines and storage facilities. SGLP issues publicly-traded limited partnership units, and Kivisto signed certain corporate filings that SGLP made with the SEC, including registration statements and its annual report.
The SEC alleges that SGLP’s filings assured investors that its revenue stream from SemGroup, which was its largest customer, was “stable and predictable” and protected from volatility in oil prices. However, unbeknownst to investors, Kivisto’s energy trading was increasingly draining SemGroup’s credit facilities and other liquidity sources and jeopardizing the company’s ability to fulfill its commitments to SGLP. Investors were never warned of these risks, which came to a head in July 2008 when SemGroup’s lenders cancelled the credit facility and the company filed for bankruptcy. The price of SGLP’s limited partnership units subsequently declined more than 60 percent.
“Investors have a right to know the risks that could imperil their investment,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Kivisto should have known that the SGLP filings he signed did not warn investors about the risks created by his energy trading, and investors were blindsided when those risks came to fruition.”
The SEC alleges that Kivisto should have known that certain SGLP public filings that he signed were misleading investors about the reliability of SGLP’s revenue stream and the risks that SGLP faced from Kivisto’s energy trading. SemGroup provided up to 89 percent of SGLP’s revenues and thus was critical to SGLP’s profitability. SGLP is now known as Blueknight Energy Partners L.P.
Kivisto agreed to settle the SEC’s charges without admitting or denying the allegations by paying a $225,000 penalty and forfeiting his rights to SGLP limited partnership units currently worth more than $1.1 million that were awarded to him under SGLP’s long-term incentive plan. He also consented to entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933.”
The following excerpt is from the CFTC website:
“Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) obtained federal court consent orders resolving its remaining claims against defendants Ray M. White and CRW Management LP (CRW) and relief defendants Christopher R. White and Hurricane Motorsports, LLC, all of Mansfield, Texas.
The claims arose from a CFTC complaint filed on March 4, 2009, in the U.S. District Court for the Northern District of Texas, charging the defendants with operating a multi-million dollar off-exchange foreign currency Ponzi scheme (see CFTC Press Release 5626-09, March 5, 2009). The relief defendants were named in the lawsuit because they received funds as a result of the defendants’ fraudulent conduct and had no legitimate entitlement to those funds.
One consent order, entered on October 5, 2011, requires defendants jointly and severally to pay $9,548,365 in disgorgement and requires Ray White to pay a $9,548,365 civil monetary penalty.
An earlier consent order of permanent injunction, entered by the court on October 1, 2009, resolved liability against defendants and permanently barred defendants from engaging in any commodity-related activity and from registering with the CFTC in any capacity. This earlier consent order found that, from at least November 2006 through at least November 2008, defendants solicited more than $11.9 million from approximately 411 customers for the purported purpose of trading forex. To carry out their scheme, defendants informed customers and prospective customers that, because of CRW’s purported success in trading forex, it would be able to and, in fact, purportedly did generate tremendous returns for customers, ranging between approximately five and eight percent a week (or an annual rate of return between 260 and 416 percent), according to the order. However, CRW never traded forex, and Ray White lost money in his limited forex trading, operated a Ponzi scheme, and misappropriated millions of dollars of customer funds, the order found.
Another consent order, entered by the court on September 27, 2011, requires relief defendants Christopher White and Hurricane Motorsports to pay more than $380,000 in disgorgement and to give up their rights to funds and other assets (including certain real estate) held by the court-appointed receiver, Timothy A. Mack.
In a related criminal matter, filed in the U.S. District Court for the Northern District of Texas as part of President Barack Obama’s Financial Fraud Enforcement Task Force, Ray White pleaded guilty to one count of commodities fraud and on May 24, 2011, was sentenced to 10 years in federal prison.
The CFTC thanks the Fort Worth Regional Office of the Securities and Exchange Commission for its assistance. “
The following excerpt is from the SEC website:
October 17, 2011
The Securities and Exchange Commission announced that on October 14, 2011, the United States District Court for the Middle District of Florida entered a final judgment against Daniel W. Nodurft permanently restraining and enjoining him from future violation of Section 5 and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”). The Court also ordered Nodurft to pay a civil penalty in the amount of $50,000.
The Commission’s complaint alleged that Nodurft, a resident of Louisiana and the former vice-president and general counsel of Aerokinetic Energy Corporation (“Aerokinetic”), a Sarasota-based company purportedly in the business of developing and marketing alternative power technologies and products, violated the registration and antifraud provisions of the securities laws in connection with Aerokinetic’s fraudulent unregistered securities offering. On July 24, 2008, the U.S. District Court for the Middle District of Florida issued a temporary restraining order against Aerokinetic and its then president, Randolph E. Bridwell in a related case (Securities and Exchange Commission v. Aerokinetic Energy Corporation, Case No. 8:08-cv-1409-T27TGW). On January 19, 2011, the Court entered a final judgment against Aerokinetic and Bridwell imposing disgorgement of ill-gotten proceeds, jointly and severally, in the amount of $555,000, plus prejudgment interest in the amount of $59,571.09. Additionally, Aerokinetic and Bridwell were ordered to pay civil penalties of $250,000 and $130,000, respectively. Aerokinetic’s judgment was upheld on appeal to the Eleventh Circuit Court of Appeals.”
The following excerpt is from an e-mail sent out by the FDIC:
October 21, 2011
“Community Capital Bank, Jonesboro, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with State Bank and Trust Company, Macon, Georgia, to assume all of the deposits of Community Capital Bank.
The two branches of Community Capital Bank will reopen during their normal business hours beginning Saturday as branches of State Bank and Trust Company. Depositors of Community Capital Bank will automatically become depositors of State Bank and Trust Company. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of Community Capital Bank should continue to use their existing branch until they receive notice from State Bank and Trust Company that it has completed systems changes to allow other State Bank and Trust Company branches to process their accounts as well.
This evening and over the weekend, depositors of Community Capital Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of June 30, 2011, Community Capital Bank had approximately $181.2 million in total assets and $166.2 million in total deposits. In addition to assuming all of the deposits of the failed bank, State Bank and Trust Company agreed to purchase essentially all of the assets.
The FDIC and State Bank and Trust Company entered into a loss-share transaction on $141.3 million of Community Capital Bank's assets. State Bank and Trust Company will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.
Customers with questions about today's transaction should call the FDIC toll-free at 1-800-357-7599. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/commcapbk.html.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $62.0 million. Compared to other alternatives, State Bank and Trust Company's acquisition was the least costly resolution for the FDIC's DIF. Community Capital Bank is the 83rd FDIC-insured institution to fail in the nation this year, and the twenty-second in Georgia. The last FDIC-insured institution closed in the state was Decatur First Bank, Decatur, earlier today.”
The following excerpt is from an e-mail sent out by the FDIC:
October 21, 2011
“Decatur First Bank, Decatur, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Fidelity Bank, Atlanta, Georgia, to assume all of the deposits of Decatur First Bank.
The five branches of Decatur First Bank will reopen during their normal business hours beginning Saturday as branches of Fidelity Bank. Depositors of Decatur First Bank will automatically become depositors of Fidelity Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of Decatur First Bank should continue to use their existing branch until they receive notice from Fidelity Bank that it has completed systems changes to allow other Fidelity Bank branches to process their accounts as well.
This evening and over the weekend, depositors of Decatur First Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of June 30, 2011, Decatur First Bank had approximately $191.5 million in total assets and $179.2 million in total deposits. In addition to assuming all of the deposits of the failed bank, Fidelity Bank agreed to purchase essentially all of the assets.
The FDIC and Fidelity Bank entered into a loss-share transaction on $111.5 million of Decatur First Bank's assets. Fidelity Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.
Customers with questions about today's transaction should call the FDIC toll-free at 1-800-430-7974. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/decatur.html.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $32.6 million. Compared to other alternatives, Fidelity Bank's acquisition was the least costly resolution for the FDIC's DIF. Decatur First Bank is the 82nd FDIC-insured institution to fail in the nation this year, and the twenty-first in Georgia. The last FDIC-insured institution closed in the state was Piedmont Community Bank, Gray, on October 14, 2011.”
The following excerpt is from an e-mail sent out by the FDIC:
October 21, 2011
“Old Harbor Bank, Clearwater, Florida, was closed today by the Florida Office of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with 1st United Bank, Boca Raton, Florida, to assume all of the deposits of Old Harbor Bank.
The seven branches of Old Harbor Bank will reopen during their normal business hours beginning Saturday as branches of 1st United Bank. Depositors of Old Harbor Bank will automatically become depositors of 1st United Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of Old Harbor Bank should continue to use their existing branch until they receive notice from 1st United Bank that it has completed systems changes to allow other 1st United Bank branches to process their accounts as well.
This evening and over the weekend, depositors of Old Harbor Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of June 30, 2011, Old Harbor Bank had approximately $215.9 million in total assets and $217.8 million in total deposits. In addition to assuming all of the deposits of the failed bank, 1st United Bank agreed to purchase essentially all of the assets.
The FDIC and 1st United Bank entered into a loss-share transaction on $155.6 million of Old Harbor Bank's assets. 1st United Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.
Customers with questions about today's transaction should call the FDIC toll-free at 1-800-405-1498. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/oldharbor.html.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $39.3 million. Compared to other alternatives, 1st United Bank's acquisition was the least costly resolution for the FDIC's DIF. Old Harbor Bank is the 81st FDIC-insured institution to fail in the nation this year, and the twelfth in Florida. The last FDIC-insured institution closed in the state was The First National Bank of Florida, Milton, on September 9, 2011.”
The following excerpt is from an e-mail sent out by the FDIC:
October 21, 2011
"The Federal Deposit Insurance Corporation (FDIC) today was appointed receiver for Community Banks of Colorado, Greenwood, Colorado, by the Board of Governors of the Federal Reserve System. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank Midwest, National Association, Kansas City, Missouri, to assume all of the deposits of Community Banks of Colorado.
The 40 branches of Community Banks of Colorado will reopen during their normal business hours beginning Saturday as branches of Bank Midwest, National Association. Depositors of Community Banks of Colorado will automatically become depositors of Bank Midwest, National Association. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Customers of Community Banks of Colorado should continue to use their existing branch until they receive notice from Bank Midwest, National Association that it has completed systems changes to allow other Bank Midwest, National Association branches to process their accounts as well.
This evening and over the weekend, depositors of Community Banks of Colorado can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of June 30, 2011, Community Banks of Colorado had approximately $1.38 billion in total assets and $1.33 billion in total deposits. In addition to assuming all of the deposits of the failed bank, Bank Midwest, National Association agreed to purchase essentially all of the assets.
The FDIC and Bank Midwest, National Association entered into a loss-share transaction on $714.2 million of Community Banks of Colorado's assets. Bank Midwest, National Association will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers. For more information on loss share, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html.
Customers with questions about today's transaction should call the FDIC toll-free at 1-800-405-1439. The phone number will be operational this evening until 9:00 p.m., Mountain Daylight Time (MDT); on Saturday from 9:00 a.m. to 6:00 p.m., MDT; on Sunday from noon to 6:00 p.m., MDT; and thereafter from 8:00 a.m. to 8:00 p.m., MDT. Interested parties also can visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/commbanksco.html.
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $224.9 million. Compared to other alternatives, Bank Midwest, National Association's acquisition was the least costly resolution for the FDIC's DIF. Community Banks of Colorado is the 84th FDIC-insured institution to fail in the nation this year, and the sixth in Colorado. The last FDIC-insured institution in the state for which the FDIC was named receiver was Bank of Choice, Greeley, on July 22, 2011."
The following excerpt is from the SEC website:
“Washington, D.C., Oct. 21, 2011 – The Securities and Exchange Commission today announced additional charges in its insider trading case against Denver-based traders who traded on confidential information in the securities of Mariner Energy Inc. ahead of the oil and gas company’s $3.9 billion takeover by Apache Corporation in April 2010.
In its initial complaint filed on Aug. 5, 2011, the SEC alleged that Mariner Energy board member H. Clayton Peterson tipped his son with confidential details about Mariner Energy’s upcoming acquisition. Drew Clayton Peterson, who was a managing director at a Denver-based investment adviser, then used the inside information to purchase Mariner Energy stock for himself and others.
An amended complaint filed today adds two more defendants to the case – money manager Drew K. Brownstein who is a longtime friend of Drew Peterson, and the hedge fund advisory firm he controls, Big 5 Asset Management LLC. The SEC alleges that Brownstein traded Mariner Energy securities on the basis of inside information he received from Drew Peterson and reaped illicit profits of more than $5 million combined in his own account, the accounts of his relatives, and the accounts of two hedge funds managed by Big 5.
“This case is further evidence of the pervasive nature of insider trading by hedge funds, and a sobering reminder that such conduct is not limited to the immediate vicinity of Wall Street but is taking place in cities around the country,” said Sanjay Wadhwa, Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit and Associate Director of the New York Regional Office. “The SEC is firmly committed to rooting out this illegal activity wherever it occurs, and those who engage in this conduct should consider the severe consequences they will face when caught.”
According to the SEC’s amended complaint, Drew Peterson repeatedly tipped Brownstein about the impending acquisition of Mariner Energy as he learned the information from his father. Brownstein caused two Big 5 hedge funds – the Lion Global Fund LLLP and the Lion Global Master Fund Ltd. – to purchase large quantities of Mariner Energy stock and call option contracts on the basis of the inside information. This was the first time that the Big 5 hedge funds had ever traded Mariner Energy stock or options. Brownstein also purchased thousands of shares of Mariner Energy stock and call option contracts for the accounts of his relatives and for his personal brokerage account. In the days following the announcement of the deal, Brownstein liquidated the positions he had accumulated in Mariner Energy securities.
The SEC’s amended complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a final judgment permanently enjoining them from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The SEC also seeks to permanently prohibit Clayton Peterson from acting as an officer or director of any publicly registered company.
The SEC’s investigation was conducted by Joseph Sansone, a member of the SEC’s Market Abuse Unit in New York, with assistance from Neil Hendelman of the New York Regional Office and Jay Scoggins, Jeffrey Oraker, Bruce Ketter and Craig Ellis of the Denver Regional Office. The SEC acknowledges the ongoing assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
The SEC’s investigation is continuing“.
The following excerpt is the the Department of Treasury website:
Thank you very much for the invitation to join you this afternoon. It is great to be with a group of fellow CFAs at a fixed-income management conference. The CFA Charter and fixed-income markets have both been important parts of my career, so I feel that I’m back on familiar ground here.
I worked in fixed-income at T. Rowe Price in Baltimore for more than twenty-five years before joining Treasury at the beginning of 2010. This year also marks the 25th anniversary of my CFA Charter. I am proud to be a CFA because I believe this organization plays an important role in educating investment professionals and setting standards for knowledge and ethical conduct in financial markets. I also believe that groups like this are valuable in facilitating communication among industry professionals and policymakers.
During my time at Treasury, I have come to greatly appreciate the importance of open lines of communication with investors, financial institutions, and other stakeholders. As the Assistant Secretary for Financial Markets, I view one of my main roles at Treasury as meeting with investors to follow the markets, and bringing the knowledge and experience I gained during my time as an investor to my current responsibilities for managing federal debt issuance, helping to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, and generally advising the Secretary on financial market developments.
Three years since the financial crisis and just over a year after the passage of the Dodd-Frank Act, this is a good time to take stock of where we are and where we are going. We are focused on implementing the statute in accordance with its requirements. At the same time, we are mindful of the importance of preserving and strengthening the best attributes of the U.S. markets. These include innovation, liquidity, investor protection, efficiency, and transparency.
In the decades before the financial crisis in 2008, the U.S. was among the most desirable places in the world to invest. The reforms we put in place in response to the Great Depression gave investors’ confidence in our financial markets and institutions. Our financial system was not only the envy of the world but also attracted capital from all over the world. Over time, however, the evolution of our financial system gradually eroded the strengths of the Depression-era reforms in the run up to the financial crisis.
The Dodd-Frank Act and other reforms are designed to restore the proper balance between promoting the competitiveness and efficiency of U.S. markets and institutions while making the system safer and more resilient. Striking the right balance will help our markets remain the strongest and most attractive in the world and remain capable of attracting capital from around the globe to help our economy grow steadily in the years to come. Entrepreneurs, innovators, and small businesses must have the opportunity to access the financing that they need to grow and to create jobs for Americans. A key purpose of the financial system is to provide efficient and effective means of transferring capital from savers and investors to entrepreneurs and other businesses that drive economic growth.
In order to make sure that the financial system can serve that critical function in the economy, we are committed to getting the details of reform correct so that markets can function effectively with consistent, transparent rules of the road. And, we are committed to moving as quickly as practical to provide the certainty that markets need.
We will not sacrifice quality for speed, however. While we fully understand the importance and benefits of certainty for investors, we also believe that we need to put the best possible structure in place that will solve the problems we are trying to address without creating unintended side effects. I know that some people have expressed frustration about the pace of implementing financial regulatory reform and the uncertainty that creates. But the risks associated with financial instability and lack of confidence in markets and institutions far outweigh the costs associated with taking the time needed to put the right reforms in place to mitigate those risks.
We have taken a pragmatic approach to timing. Wherever possible we are providing clarity to the public and the markets. But the task we face cannot be achieved overnight. Regulators are writing rules in some of the most complex areas of finance, consolidating authority that was previously spread across multiple agencies, setting up new institutions, and harmonizing with countries around the world. While we want to move quickly, our first priority will always be to get it right.
The current level of coordination between independent regulators is unprecedented and will promote harmonized and simplified regulation, which will reduce costs for the market, promote certainty and support further recovery. In particular, the Financial Stability Oversight Council (or Council), has a mandate to facilitate coordination across agencies. Already, we have worked through the Council to:
produce the Volcker report and coordinate the interagency rulemaking on the Volcker Rule;
coordinate a six-agency proposal on risk retention;
issue a rule on the designation of financial market utilities for enhanced supervision and other requirements; and most recently
re-propose a rule and propose additional guidance on the process for designating nonbank financial companies for enhanced supervision.
Our commitment to sensible regulation is demonstrated by our approach to the $600 trillion derivatives market. Increased transparency and exchange trading will tighten spreads, reduce costs, and increase understanding of risks for market participants. Margin and clearing requirements will not only provide protections for market participants but also prevent losses from spreading more broadly throughout the system and contributing to another crisis. In recent weeks, we have heard from numerous participants in the derivatives markets, including investors and dealers, that Dodd-Frank’s push towards the increased use of clearinghouses for OTC derivatives is already providing an important alternative to bilateral arrangements and helping to mitigate concerns about counterparty credit exposures.
Our work in this area also shows that regulations are not being written just for the sake of increased regulation. Treasury and financial regulators are carefully considering what is most appropriate for each market and not taking a one-size fits all approach. This approach is reflected by the Notice of Proposed Determination Treasury issued in May that would have the practical effect of exempting foreign exchange swaps and forwards from central clearing and exchange-trading requirements. Consistent with the statutory factors, the proposed determination reflects a considered judgment that the unique characteristics and existing oversight of the foreign exchange swaps and forwards market already reflect many of Dodd-Frank’s objectives for derivatives reform - including high levels of transparency and strong settlement practices.
We are also working hard to make sure that other countries put in place regulatory frameworks similar to our own on the key issues where international consistency is essential – such as OTC derivatives. Secretary Geithner has stated publicly and repeatedly his commitment to ensuring international harmonization. In addition to dialogue in international forums like the G-20 and the Financial Stability Board, Treasury and the financial regulatory agencies work every day with our foreign counterparts in Europe and Asia.
The Dodd-Frank Act puts us in a position to lead internationally on reform, set the standards for the rest of the world, and foster a race to the top while working with our counterparts in other countries to ensure international consistency. Substantially delaying reform here in the U.S. would reduce financial stability in our country and around the world. That’s a risk that we cannot take. I expect that most of you share the same experience that I had as an investor and as a fiduciary of clients’ investments – we did not look for the least regulated markets with the lowest transparency, the weakest investor protections, and the greatest risks. We looked for opportunities with expectations of reasonable returns, with appropriate disclosures, and legal and financial protections in place to protect the safety of the investments we made.
The costs of not taking action are too high. Because of the financial reforms we have already begun to put in place, we are in a much better position today than we were in 2008. Our financial institutions have higher levels and quality of capital. Capital has increased at our largest banks by more than $300 billion since 2008. Our financial institutions are also less leveraged and less reliant on short-term funding. My hope and expectation is that investors’ confidence in the strength of the U.S. markets and in some of these reforms that we have already put in place will give us a comparative advantage and allow us to weather this current storm with far less negative consequences than three years ago. Indeed, the relative performance of the U.S. markets this year suggests we are on the right path.
In the absence of the protections that the Dodd-Frank Act puts in place, our system descended into a crisis that has left deep scars on our nation. Unemployment remains unacceptably high, and weakness in the housing market is a continuing headwind to economic recovery. The large drop in home prices erased trillions of dollars of American families’ wealth and continues to cause hardship for millions of families in this country. Additionally, as fixed-income investors, you are well aware that the financial crisis inflicted an additional toll on our nation’s fiscal situation by forcing the federal government to borrow significant amounts of money to stabilize both financial markets and the economy.
A consequence of the financial crisis was the necessary increase in Treasury debt issuance to finance the rescue measures, such as the Troubled Asset Recovery Program (TARP), and to provide economic stimulus to fight the ensuing recession. Our deficits grew from 1.2 percent of GDP in 2007 to10.2 percent in 2009. While borrowing peaked two years ago, and deficits to GDP measures are coming down, our debt continues to grow while economic growth remains modest. The long term trend is unsustainable. This very public fact led to considerable drama over the summer, and ended with a hard won increase in the debt limit.
As a country we need to make some tough decisions. The Congressional “Super Committee”, a bi-partisan group of House and Senate members was given that assignment this Fall. The balancing act that they must achieve is to secure growth in the short term, while finding spending and revenue measures to secure savings in the long term. To improve our debt-to-GDP ratio, we cannot lose sight of the importance of growing GDP.
Since the mid-2009 the Treasury has focused on extending the average maturity of our debt portfolio from about four years to now over five years, no small feat with total marketable debt outstanding of close to $10 trillion. We have also increased our commitment to issuing Inflation Protected Bonds, based on strong investor interest.
All of this has been accomplished in a very low interest rate environment and with strong participation from both domestic and international investors. Even as our debt has grown, interest expense as a percent of GDP has fallen from 1.7 percent to 1.4 percent over the past three years. But we can’t take this favorable environment for granted. We know that interest rates will eventually rise and that our investors want to know that we have a long-term fiscal plan for bringing deficits down and arresting the growth of debt to GDP.
Another area where the Treasury is deeply invested in policy making is fixing our country’s housing market and the future of housing finance. The housing bubble that burst in 2007-08 left a terrible legacy of mortgage failures for both homeowners and financial institutions. As a result the government currently guarantees over 90% of new loans originated, mainly through the Government Sponsored Enterprises (Fannie Mae and Freddie Mac) and the FHA, a situation that is neither desirable nor sustainable.
In February the Treasury published a white paper which lays out both the principals for reform and three options to consider. Basically we believe that we need to return to private market financing of most mortgage loans, and dramatically lessen the reliance on government support. At the same time we need to make sure that we can provide housing assistance to the most needy with the goal of having a population that is well housed, whether through home ownership or good rental options.
None of these reforms to housing finance can really begin without addressing the legacy problems in the market first. These include high inventories of unsold homes, high loan delinquency and foreclosure rates, and the more than 20% of all mortgage holders who are underwater on their loans, meaning that the appraised value of their house today is less than their mortgage.
We think there is an opportunity to address the backlog of unsold homes by creating a process for moving real estate owned by the government to new private owners, with a particular interest in creating rental options, as we see more demand right now for home rentals than home sales. In August the Federal Housing Finance Agency (FHFA) put out a request for information to solicit the best ideas on how to accomplish this. Within their 30 day comment period they received 4,000 comments. Clearly there is interest here and we look forward to supporting the FHFA as they move ahead.
We also think there is an opportunity to help homeowners who are underwater on their mortgages and therefore unable to refinance into a lower interest rate mortgage. The current level of mortgage interest rates – at or below 4 percent for a 30-year loan – makes this especially timely and important. An existing government program that was introduced in 2009, the Home Affordable Refinance Program (HARP) has seen relatively low take-up due to many obstacles in the refinancing process. The Administration is interested in reviewing all of the barriers to refinancing GSE mortgages to help these homeowners realize savings. While I know that this initiative has generated questions from investors in mortgage-backed securities, we have been clear that the terms of the HARP program have been known to the market since program inception, and should not introduce new issues. The investors in these securities have enjoyed a much longer holding period than historical prepayment levels would have allowed.
The housing crisis has been long and painful and there’s still more work to be done. We think that these two initiatives would help in key areas and allow us to accelerate a recovery in the housing market. With that on track we can move forward with building a stronger housing finance system for the future.
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As I previously mentioned, one of the easiest ways for us to work together and one of the most important parts of my job is simply hearing from people like you. Our door is always open, and our work is significantly improved as a result of the constructive input we receive through the formal rulemaking process, through events like these, and from simply listening to the markets and the public.
This audience is filled with gifted and talented people with a close watch on the financial markets. There are a number of ways that you can be helpful at this time as we rebuild the market infrastructure for the 21st century.
First of all, weigh in. Stakeholders have engaged extensively in the financial reform process so far, and that engagement has significantly improved every study and rule that has been issued. To provide just a couple of examples, we received over 8,000 comments in response to the request that we put out before publishing a study on the Volcker Rule earlier this year. I expect that the proposed regulations that the agencies approved earlier this week will receive substantial additional comments. We welcome that input, view it as an integral part of the process, and firmly believe that the final rule will be improved as a result of the additional information, perspectives, and insights we will receive.
Rulemaking agencies have also re-proprosed or re-opened certain rules for comment where the process would benefit from additional public engagement. The risk-retention rule for the asset backed securities market, a rule that is being coordinated by the Treasury Department, is a good example where the six rulemaking agencies decided to extend the comment period to allow additional time for thoughtful input.
In addition to the rulemaking process, however, there is another important way in which we can work together to improve the financial system. You don’t have to wait for the government to act to implement reforms that could reduce risks, improve returns, and strengthen financial institutions. There are many areas where the private sector could make valuable contributions. A great example of an opportunity for groups like this one would be to develop ideas for alternatives to the use of credit ratings in investment guidelines. As part of the Dodd-Frank Act, federal regulations can no longer refer to or require reliance on the use of credit ratings. The challenge to the private sector is to come up with something to use in their place, not just where federal regulations formerly required them, but for the purposes of your own investment analysis, decisions, and criteria. You are uniquely positioned to provide the best ideas on this topic.
Another area that we are very focused on at the Treasury is improving small businesses’ ability to access capital, in both the equity and fixed-income markets. The President mentioned this in his recent jobs speech, and has proposed exploring ways to address the costs that small and new firms face in complying with disclosure and auditing requirements. While we will continue to aggressively move forward to explore these and other ideas to make it easier for entrepreneurs to raise capital and create jobs, we welcome your input and ideas as well. For example, what could the investment community do to expand research coverage of small companies?
Finally, in the area of debt management, earlier this year we asked our private sector advisors group, the Treasury Borrowing Advisory Committee, to study new instruments we might consider. These include ideas such as floating rate debt and longer-term maturities or even callable debt. Our interest is in developing durable instruments with market demand that help us meet our debt management objectives. We are continuing to work on these ideas and welcome your insights as well in this area.
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I’ve covered a lot of ground here today and in abbreviated form. The message that I would like to leave you with is that we will continue to deliver measures to restore integrity and trust in our financial system to ensure that it can, once again, serve as an engine for economic growth and job creation. A pro-growth, pro-investment financial system allows us to help transform ideas into industries, to finance great companies, unleash the next revolution in technology, make key advancements in science, and create jobs and economic prosperity. This can only be accomplished with a stable financial system that encourages investment and does not expose the country to a cycle of collapses and crisis.
We recognize that there is still a lot left to accomplish, and we look forward to working with you over the coming months to implement financial market reforms in a careful, effective manner. I am confident that, over time, there will be much more clarity about the final rules of the road. We will continue to pursue our work to strengthen the financial system to ensure that businesses and investors have the confidence that they need to put their capital to work.
As the founder of my former firm, Thomas Rowe Price, was famous for saying, “Change is the investor's only certainty.” I have learned during the last two years I have spent in Washington that the same can be said for policymakers as well. Despite our different vantage points, I want to conclude by emphasizing that I think we share a common goal in building strong and competitive markets, creating jobs, and supporting a healthy economy. By continuing to put the right reforms in place, I believe that our financial system will be better positioned to respond well to whatever changes may come.
Thank you very much."