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Saturday, June 30, 2012

Pension Funds as Owners and Investors: A Voice for Working Families

Pension Funds as Owners and Investors: A Voice for Working Families


Washington, D.C., June 27, 2012 — The Securities and Exchange Commission today filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.

In a separate, settled action, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.

The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favored certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.

“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Clients and market participants alike were victimized as Falcone unscrupulously used fund assets to pay his personal taxes, manipulated the market for certain bonds, favored some clients at the expense of others, and violated trading rules intended to prohibit manipulative short sales.”

The SEC filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson, and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.

In particular, the SEC alleges that: Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;

Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”

Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and

Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.

“Not only are hedge fund managers expected to be savvy investors, they are supposed to serve the interests of their clients. Here, in addition to raiding a fund for personal benefit and cutting secret deals with favored investors, Falcone then lied to investors about what he had done,” said Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement.

Describing the illegal short squeeze, Gerald W. Hodgkins, Associate Director of the SEC’s Division of Enforcement said, “After he took control of an entire issue of high-yield bonds, Falcone kept buying with an eye toward rigging the market and punishing short sellers to settle a score. In the process, Falcone hijacked the market for the bonds and illegally manipulated their price and availability. The Division will continue to police the bond market to make sure it operates as an efficient market, free of the corrosive effects of manipulators such as Falcone.”

Misappropriation Scheme
In the misappropriation scheme, the SEC alleges that Falcone unlawfully used fund assets to pay his personal taxes. In 2009 Falcone owed federal and state authorities $113.2 million in taxes. Declining to pursue other financing options, such as pledging his personal assets as collateral for a bank loan, Falcone elected instead to take a $113.2 million loan from the Harbinger Capital Partners Special Situations Fund, L.P. – the same fund from which Harbinger had earlier suspended investors from redeeming.

Falcone authorized the transfer of fund assets to himself in a transaction that Jenson helped structure. Falcone and Harbinger never sought or obtained consent from investors prior to using the fund's assets to benefit Falcone.

As part of the misappropriation scheme, the SEC alleges that Falcone and Harbinger, aided by Jenson, made several material misrepresentations and omissions in seeking legal advice regarding the loan and in subsequent communications with investors, including, among other things:
the financing alternatives available to Falcone; the circumstances that led to Falcone’s need for the loan; the ability of the Special Situations Fund to furnish the loan, without disadvantaging investors;

the terms and conditions of the loan, including the interest rate charged and the amount of collateral posted by Falcone; and the role of Harbinger’s outside legal counsel in vetting the transaction.
The SEC also alleges that Falcone and Harbinger delayed disclosing the loan for approximately five months because of their concern that disclosure of Falcone’s financial condition might have a negative impact on investor withdrawals and on Falcone’s ability to attract more investments for other Harbinger funds. Falcone repaid the loan in 2011, after the Commission commenced its investigation.

Market Manipulation / Illegal Short Squeeze
In a separate civil action, the SEC alleges that from 2006 through early 2008 Falcone and two Harbinger investment management entities manipulated the market in a series of distressed high-yield bonds issued by MAAX Holdings Inc. In this fraudulent scheme, Falcone and the Harbinger entities allegedly orchestrated an illegal “short squeeze” – a market manipulation scheme in which an investor constricts the supply of a security, through large purchases or other means, with the intent of forcing settlement from short sellers at arbitrary and inflated prices.

The SEC’s complaint alleges that at Falcone’s direction, Harbinger purchased a large position in the MAAX bonds during April and June of 2006. After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge. In September 2006, Falcone directed the Harbinger-managed funds to buy every available bond in the market, often purchasing the bonds from short sellers. Ultimately, Falcone raised the funds’ stake to approximately 13 percent more than the available supply of the MAAX bonds.

At one point, Harbinger had purchased 22 million more bonds than MAAX had ever issued. Contemporaneously with these purchases, Falcone locked up the MAAX bonds the Harbinger funds had purchased in a custodial account at a bank in Georgia to prevent his brokers from lending out the bonds to sellers seeking to deliver the bonds to purchasers after short sales.

Having seized control of the supply of the MAAX bonds, Falcone then demanded that the Wall Street firm and its customers settle their outstanding MAAX short sales, not disclosing that it would be virtually impossible to find bonds available for delivery. The Wall Street firm bid daily for the bonds, which quickly doubled in price. Then, Falcone engaged in a series of transactions with certain short sellers at arbitrary, inflated prices, while at the same time valuing the funds’ holdings on his books at a small fraction of the prices he charged the covering short sellers.

Preferential Redemption Scheme
In its action alleging misappropriation, the SEC also alleges that in a further breach of Falcone and Harbinger’s fiduciary duties to their clients, Falcone and Harbinger engaged in unlawful preferential redemptions for the benefit of certain favored investors.

In 2009, while soliciting required investor approval to restrict withdrawals from another Harbinger fund, Falcone and Harbinger secretly exempted certain large investors that Falcone deemed to be strategically important from soon-to-be imposed liquidity restrictions – provided those investors voted to approve restrictions that would temporarily stabilize the decline in Harbinger’s assets under management.

Ultimately, pursuant to these ‘vote buying’ agreements, Falcone and Harbinger allegedly permitted these investors who were connected to certain favored institutional investors to withdraw a total of approximately $169 million. Harbinger concealed these quid pro quo arrangements from the independent directors and from fund investors.

Other Illegal Trading by Harbinger
In a separate administrative and cease-and-desist proceeding, the SEC found that between April and June 2009, Harbinger violated Rule 105 of Regulation M of the Securities Exchange Act of 1934 (Exchange Act). Rule 105 is an anti-manipulation rule that prohibits short selling securities during a restricted period and then purchasing the same securities in a public offering.

The Commission’s Order censures Harbinger and requires the firm to cease and desist from committing or causing any violations of Rule 105 now or in the future. Harbinger will pay disgorgement in the amount of $857,950, prejudgment interest in the amount of $91,838, and a civil monetary penalty in the amount of $428,975. Harbinger consented to the issuance of the Order without admitting or denying any of the Commission’s findings.

Settlement with Harbert Management Company
In a separate complaint also filed in U.S. District Court for the Southern District of New York, the SEC filed a settled civil action against Harbert and two related investment entities – HMC-New York Inc. and HMC Investors, LLC – for their role in the illegal short squeeze described above.

The SEC alleges in its complaint against Harbert that during the entire period of the short squeeze, Defendants Harbert, HMC-NY and HMC Investors, directly or indirectly, possessed the power to control Falcone and the investment managers through which he operated. HMC-NY and HMC Investors, two entities controlled by Harbert, served as the managing members of two limited liability companies that acted as the general partners of the funds advised by Falcone.

Harbert and its affiliates also provided hedge fund administrative, legal, compliance, risk assessment and other services to the funds. In these capacities, Harbert, HMC-NY and HMC Investors knew of Falcone’s trades in the MAAX bonds, but failed to take appropriate steps to address Falcone’s manipulative conduct. The SEC charged the Harbert defendants as controlling persons pursuant to Section 20(a) of the Exchange Act, alleging that they are jointly and severally liable for Falcone’s and the Harbinger investment managers’ violations of the antifraud provisions of the Exchange Act.

Without admitting or denying the allegations of the complaint, Defendants Harbert, HMC-NY and HMC Investors have agreed to pay a civil penalty in the amount of $1 million. The Harbert defendants also have consented to the entry of a judgment enjoining them from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The proposed settlement with Harbert is subject to approval by the court.

In the pending federal court actions concerning the first three fraudulent schemes described above, the Commission seeks a variety of sanctions and relief including injunctions against Falcone and Harbinger from violations of the anti-fraud provisions of the Securities Act of 1933, the Exchange Act, and the Investment Advisers Act of 1940.

In addition, the Commission seeks to enjoin Harbinger and Falcone from controlling any person who violates the anti-fraud provisions of the Exchange Act. As for monetary relief, the Commission seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Falcone and Harbinger. The Commission further seeks to prohibit Falcone from serving as an officer and director of any public company. Against Jenson, the Commission seeks to enjoin Jenson from aiding and abetting future violations of the anti-fraud provisions of the Exchange Act and Advisers Act and seeks to obtain monetary penalties.

The SEC’s investigation was a coordinated effort between teams from the SEC’s headquarters and the New York Regional Office, including Conway T. Dodge, Jr., Robert C. Besse, Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting. Messrs. Joseph, Salzberg, and Fitzpatrick are members of the Enforcement Division’s Asset Management Unit. Mr. Stoelting and David Gottesman will lead the SEC’s litigation team.

Friday, June 29, 2012


Washington, D.C., June 29, 2012 – The Securities and Exchange Commission today charged Peter Madoff, the brother of Bernie Madoff, with committing fraud, making false statements to regulators, and falsifying books and records in order to create the false appearance of a functioning compliance program over Madoff’s fraudulent investment advisory operations.

The SEC alleges that Peter Madoff, who served as Chief Compliance Officer and Senior Managing Director at Bernard L. Madoff Investment Securities LLC (BMIS) from 1969 to December 2008, created stacks of compliance documents setting out supposedly robust policies and procedures over BMIS’s investment advisory operations. However, Peter Madoff created these compliance manuals, written supervisory procedures, reports of annual compliance reviews, and compliance certifications to merely paper the file. No policies and procedures were ever implemented, and none of the reviews were actually performed even though Peter Madoff represented that he personally completed the reviews.

The U.S. Attorney’s Office for the Southern District of New York today announced parallel criminal charges against Peter Madoff.

“Peter Madoff helped Bernie Madoff create the image of a functioning compliance program purportedly overseen by sophisticated financial professionals,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Tragically, the image was merely an illusion supported by Peter’s sham paperwork and false filings for which he was rewarded with tens of millions of dollars in stolen investor funds.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Bernie Madoff realized in late 2008 that his decades-long scheme was on the verge of collapse. He told Peter Madoff that he could not pay billions of dollars of investor redemption requests and wanted to distribute remaining investor money to family, friends, and favored employees before the scheme collapsed. Peter Madoff then helped choose which family, friends and employees to pay, and rushed to withdraw $200,000 from BMIS’s bank account for himself before the fraud’s final downfall.

The SEC alleges that in addition to creating false compliance materials, Peter Madoff created false broker-dealer and investment advisor registration applications filed by BMIS. He also failed to implement and review required policies and procedures, and falsified the firm’s books and records. Peter Madoff was richly rewarded for his misconduct, pocketing tens of millions of dollars through salary and bonuses, fake trades, sham loans, and direct, undocumented transfers of investor funds to himself from the bank account that BMIS used to perpetrate the Ponzi scheme.

The SEC’s complaint against Peter Madoff alleges that by engaging in this conduct, he violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 207 of the Investment Advisers Act of 1940; and aided and abetted violations of Sections 15(b)(1), 15(c) and 17(a) of the Exchange Act and Rules 10b-3, 15b3-1 and 17a-3 thereunder, and Sections 204, 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rules 204-2 and 206(4)-7 thereunder.
The SEC’s investigation was conducted by Aaron P. Arnzen and Kristine M. Zaleskas of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their coordination and assistance. The SEC’s investigation is continuing.


June 25, 2012
Court Approves SEC Settlements with Two Former Bear Stearns Hedge Fund Portfolio Managers; SEC Bars Managers from Regulated Industries
The U.S. District Court for the Eastern District of New York approved Securities and Exchange Commission settlements with two former Bear Stearns Asset Management portfolio managers on June 18, 2012, bringing to a close the SEC’s civil litigation against the managers. The court ordered Ralph R. Cioffi and Matthew M. Tannin, who co-managed the Bear Stearns High-Grade Structured Credit Strategies Fund and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund, to pay a total of $1.05 million in disgorgement and civil penalties and enjoined them from federal securities law violations. As part of the settlement, the Commission today issued orders instituting administrative proceedings that bar Cioffi and Tannin from industries regulated by the SEC for periods of three years and two years, respectively.

The SEC’s complaint, filed June 19, 2008, alleged that the Bear Stearns funds collapsed in June 2007 after taking highly leveraged positions in structured securities based largely on subprime mortgage-backed securities. Cioffi was the senior portfolio manager, and Tannin was a portfolio manager and the chief operating officer for the funds. According to the complaint, Cioffi and Tannin misrepresented the extent to which the funds had invested in securities backed by subprime mortgages and, during an April 2007 investor conference call, Cioffi misrepresented the level of investor redemption requests. The complaint also alleged that Cioffi did not tell investors about his own April 2007 redemption of a portion of his personal investment in the Enhanced Leverage Fund used to invest in a third fund for which he acted as portfolio manager. The complaint further alleged that Tannin misrepresented that he was going to add to his personal investment in the Enhanced Leverage Fund and that he misrepresented the funds’ prospects during the April 2007 investor call.

Cioffi and Tannin settled the SEC’s charges, without admitting or denying the allegations in the complaint, and consented to the entry of district court judgments that permanently enjoin them from violating Section 17(a)(2) of the Securities Act of 1933, which prohibits untrue statements related to the offer or sale of securities. The judgments also ordered Cioffi to pay $700,000 in disgorgement and a $100,000 civil penalty, and ordered Tannin to pay $200,000 in disgorgement and a $50,000 civil penalty. Cioffi and Tannin further consented to issuance of the Commission orders, which bar them from associating with any investment adviser, broker-dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, for three years as to Cioffi and two years as to Tannin. The Commission issued its orders in administrative proceedings instituted after the district court entered the injunctions.

Thursday, June 28, 2012


Washington, D.C., June 26, 2012 — The Securities and Exchange Commission today charged Tai Nguyen, the owner of the California-based equity research firm Insight Research, with insider trading. The charges stem from the SEC’s ongoing investigation of insider trading involving so-called “expert networks” that provide specialized information to investment firms.

The SEC alleges that from 2006 through 2009, Nguyen frequently traded in the securities of Abaxis, Inc. based on inside information he received from a close relative employed at Abaxis. Nguyen repeatedly traded for himself in advance of the company’s quarterly earnings announcements while in possession of key data in those announcements, reaping tens of thousands of dollars in illicit profits. Nguyen also passed that same information to hedge fund clients of Insight Research, who used the inside information to make millions of dollars in profits from trading Abaxis securities.

“Nguyen claimed expertise in researching and analyzing technology companies, but his special edge was his willingness to break the law,” said Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit. “Like many other so-called ‘experts’ who trafficked in inside information, Nguyen now finds himself the subject of an enforcement action.”

The SEC has charged 23 defendants in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms. The insider trading alleged by the SEC has yielded illicit gains of more than $117 million, chiefly in shares of technology companies, including Apple, Dell, Fairchild Semiconductor, and Marvell Technology.

According to the SEC’s complaint, filed in federal court in Manhattan, Nguyen regularly obtained material nonpublic information about Abaxis Inc.’s quarterly earnings — including revenues, gross profit margins and earnings per share — from a relative who worked in Abaxis’s finance department. Nguyen used the information to trade Abaxis securities in his own account and reaped approximately $145,000 in illicit trading profits from 2006 through 2009.

In addition to trading in his own account, the SEC alleges that Nguyen passed the inside information to New York-based Barai Capital Management and Boston-based Sonar Capital Management, both of which were clients of Nguyen’s firm, Insight Research. The two hedge fund managers — who collectively were paying Insight Research tens of thousands of dollars each month — traded Abaxis securities based on the inside information that Nguyen provided and reaped more than $7.2 million in illicit gains for their hedge funds.

The SEC’s complaint charges Nguyen with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him to disgorge his ill-gotten gains, with interest, and pay financial penalties, and permanently barring him from future violations.

The SEC’s investigation is continuing. Daniel Marcus and Joseph Sansone, members of the SEC’s Market Abuse Unit in New York, conducted the investigation, along with Matthew Watkins, Neil Hendelman, Diego Brucculeri, and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.

Wednesday, June 27, 2012


Statement Regarding CFTC Charges Against Barclays PLC, Barclays Bank PLC and Barclays Capital Inc.
Chairman Gary Gensler
June 27, 2012
Washington, DC – Commodity Futures Trading Commission Chairman Gary Gensler today issued the following statement:

“People taking out small business loans, student loans and mortgages, as well as big companies involved in complex transactions, all rely on the honesty of benchmark rates like LIBOR for the cost of their borrowings. Banks must not attempt to influence LIBOR or other indices based upon concerns about their reputation or the profitability of their trading positions.

“The CFTC regulates futures and swaps transactions that are regularly priced based on benchmark rates like LIBOR, Euribor and other indices. The CFTC has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these indices are free of manipulative conduct and false information.

“I commend the Division of Enforcement staff for their hard work on this case.”
Last Updated: June 27, 2012


CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates.
The Order finds that Barclays attempted to manipulate interest rates and made related false reports to benefit its derivatives trading positions. The Order also finds that Barclays made false LIBOR reports at the direction of members of senior management to protect its reputation during the global financial crisis.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order today filing and settling charges against Barclays PLC, Barclays Bank PLC (Barclays Bank) and Barclays Capital Inc.(Barclays Capital) (collectively Barclays or the Bank). The Order finds that Barclays attempted to manipulate and made false reports concerning two global benchmark interest rates, LIBOR and Euribor, on numerous occasions and sometimes on a daily basis over a four-year period, commencing as early as 2005.

According to the Order, Barclays, through its traders and employees responsible for determining the Bank’s LIBOR and Euribor submissions (submitters), attempted to manipulate and made false reports concerning both benchmark interest rates to benefit the Bank’s derivatives trading positions by either increasing its profits or minimizing its losses. This conduct occurred regularly and was pervasive. In addition, the attempts to manipulate included Barclays’ traders asking other banks to assist in manipulating Euribor, as well as Barclays aiding attempts by other banks to manipulate U.S. Dollar LIBOR and Euribor.

The Order also finds that throughout the global financial crisis in late August 2007 through early 2009, as a result of instructions from Barclays’ senior management, the Bank routinely made artificially low LIBOR submissions to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.
The CFTC Order requires Barclays to pay a $200 million civil monetary penalty, cease and desist from further violations as charged, and take specified steps, such as making the determinations of benchmark submissions transaction-focused (as set forth in the Order), to ensure the integrity and reliability of its LIBOR and Euribor submissions and improve related internal controls.

“The American public and our markets rely upon the integrity of benchmark interest rates like LIBOR and Euribor because they form the basis for hundreds of trillions of dollars of transactions and affect nearly every corner of the global economy,” said David Meister, the CFTC’s Director of Enforcement. “Banks that contribute information to those benchmarks must do so honestly. When a bank acts in its own self-interest by attempting to manipulate these rates for profit, or by submitting false reports that result from senior management orders to lower submissions to guard the bank’s reputation, the integrity of benchmark interest rates is undermined. The CFTC launched this investigation to protect the markets and the public from such illegal conduct, and today’s action demonstrates that we will bring the full force of our authority to bear as we carry out that mission.”
LIBOR and Euribor

LIBOR – the London Interbank Offered Rate – is among the most important benchmark interest rates in the world’s economy, and is a key rate in the United States. LIBOR is based on rate submissions from a relatively small and select panel of major banks, including Barclays, and is calculated and published daily for several different currencies by the British Banker’s Association (BBA). Each panel bank’s submission is also made public, and the market can therefore see each bank’s independent assessment of its own borrowing costs. LIBOR is supposed to reflect the cost of borrowing unsecured funds in the London interbank market.

Euribor, which is calculated in a similar fashion by the European Banking Federation (EBF), is another globally important rate that measures the cost of borrowing in the Economic and Monetary Union of the European Union.

LIBOR impacts enormous volumes of swaps and futures contracts, commercial and personal consumer loans, home mortgages and other transactions. For example, U.S. Dollar LIBOR is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange (CME), which had a traded volume in 2011 with a notional value exceeding $564 trillion. In addition, according to the BBA, swaps with a notional value of approximately $350 trillion and loans amounting to $10 trillion are indexed to LIBOR. Euribor is also used internationally in derivatives contracts. In 2011, over-the-counter interest rate derivatives referenced to Euro rates had a notional value in excess of $220 trillion, according to the Bank for International Settlements. LIBOR and Euribor are relied upon by countless large and small businesses and individuals who trust that the rates are derived from candid and reliable submissions made by each of the banks on the panels.

Barclays’ Unlawful Conduct to Benefit Derivatives Trading Positions
As the Order shows, Barclays, in pursuit of its own self-interest, disregarded the fundamental principle that LIBOR and Euribor are supposed to reflect the costs of borrowing funds in certain markets. Barclays’ traders located at least in New York, London and Tokyo asked Barclays’ submitters to submit particular rates to benefit their derivatives trading positions, such as swaps or futures positions, which were priced on LIBOR and Euribor. Barclays’ traders made these unlawful requests routinely, and sometimes daily, from at least mid-2005 through at least the fall of 2007, and sporadically thereafter into 2009. The Order relates that, for example, one trader stated in an email to a submitter: “We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible.”

In addition, certain Barclays Euro swaps traders, led at the time by a senior trader, coordinated with and aided and abetted traders at other banks in each other’s attempts to manipulate Euribor, even scheming to impact Euribor on key standardized dates when many derivatives contracts are settled or reset.

The traders’ requests were frequently accepted by Barclays’ submitters, who emailed responses such as “always happy to help,” “for you, anything,” or “Done…for you big boy,” resulting in false submissions by Barclays to the BBA and EBF. The traders and submitters also engaged in similar conduct on fewer occasions with respect to Yen and Sterling LIBOR.

Barclays’ Unlawful Conduct at the Direction of Senior Management
The CFTC Order also finds that Barclays, acting at the direction of senior management, engaged in other serious unlawful conduct concerning LIBOR. In late 2007, Barclays was the subject of negative press reports raising questions such as, “So what the hell is happening at Barclays and its Barclays Capital securities unit that is prompting its peers to charge it premium interest in the money market?” Such negative media speculation caused significant concern within Barclays and was discussed among high levels of management within Barclays Bank. As a result, certain senior managers within Barclays instructed the U.S. Dollar LIBOR submitters and their supervisor to lower Barclays’ LIBOR submissions to be closer to the rates submitted by other banks and not so high as to attract media attention.

According to the Order, senior managers even coined the phrase “head above the parapet” to describe high LIBOR submissions relative to other banks. Barclays’ LIBOR submitters were told not to submit at levels where Barclays was “sticking its head above the parapet.” The directive was intended to fend off negative public perceptions about Barclays’ financial condition arising from its high LIBOR submissions relative to the submissions of other panel banks, which Barclays believed were too low given the market conditions.
Despite concerns being raised by the submitters that Barclays and other banks were, for example, “being dishonest by definition” and that they were submitting “patently false” rates, the submitters followed the directive and submitted artificially lower rates. The senior management directive for low U.S. Dollar LIBOR submissions occurred on a regular basis during the global financial crisis from August 2007 through early 2009, and, at limited times, for Yen and Sterling LIBOR during the same period. As the U.S. Dollar senior submitter said in October 2008 to his supervisor at the time, “following on from my conversation with you I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested. I disagree with this approach as you are well aware. I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices.”

Barclays’ Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates
In addition to the $200 million penalty, the CFTC Order requires Barclays to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information and not influenced by conflicts of interest. See pages 31-44 of the CFTC’s Order. Among other things, the Order requires Barclays to:
Make its submissions based on certain specified factors, with Barclays’ transactions being given the greatest weight, subject to certain specified adjustments and considerations;
Implement firewalls to prevent improper communications including between traders and submitters;
Prepare and retain certain documents concerning submissions, and retain relevant communications;
Implement auditing, monitoring and training measures concerning its submissions and related processes;
Make regular reports to the CFTC concerning compliance with the terms of the Order;
Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and Continue to cooperate with the CFTC.

* * * *
The Order recognizes Barclays’ significant cooperation with the CFTC during the investigation of this matter.
In a related matter, as part of an agreement with the Fraud Section of the U.S. Justice Department’s Criminal Division, Barclays agreed to pay a $160 million penalty and to continue to cooperate with the Department. Furthermore, the United Kingdom’s Financial Services Authority (FSA) issued a Final Notice regarding its enforcement action against Barclays Bank PLC, and has imposed a penalty of £59.5 million against the Bank.

The CFTC thanks the FSA, the U.S. Department of Justice, the Washington Field Office of the Federal Bureau of Investigation and the U.S. Securities and Exchange Commission for their assistance in the CFTC’s investigation.

CFTC Division of Enforcement staff members responsible for this case are Anne M. Termine, Stephen T. Tsai, Maura M. Viehmeyer, Brian G. Mulherin, Gretchen L. Lowe and Vincent A. McGonagle, with assistance from Philip P. Tumminio, Rishi K. Gupta, Russell Battaglia, Jeremy Cusimano, Elizabeth Padgett, Terry Mayo, Jason T. Wright, Aimée Latimer-Zayets, Timothy M. Kirby, Jonathan K. Huth, Susan A. Berkowitz and staff from the Division of Market Oversight and Office of the Chief Economist.


June 25, 2012
The Securities and Exchange Commission (“Commission”) announces that on June 20, 2012, an Order Finding Defendants In Civil Contempt was issued by a judge in the United States District Court for the Northern District of California against defendants Lawrence R. Goldfarb (“Goldfarb”) and Baystar Capital Management, LLC (“Baystar Capital”) in the proceeding entitledSecurities and Exchange Commission v. Lawrence R. Goldfarb, et. al, Case No. C-11-00938-WHA. The Order found that defendants failed to pay disgorgement in compliance with the provisions of a Final Judgment entered against them on March 16, 2011 and furthermore failed to demonstrate that they reasonably attempted to comply with their disgorgement obligations.

Previously, on March 1, 2011, the Commission filed a Complaint against investment advisers Goldfarb and Baystar Capital alleging that they violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 by engaging in a fraudulent scheme with respect to their funds [15 U.S.C. §§ 80b-6(1), (2)]. The Complaint also alleged that Goldfarb and Baystar Capital made material misstatements and omissions, and engaged in a fraudulent scheme, with respect to investors in a pooled investment vehicle in violation of Sections 206(4) and Rule 206(4)-8 of the Advisers Act [15 U.S.C. § 80b-6(4); 17 C.F.R. § 275.206(4)-8]. These violations were based upon allegations that defendants took $12 million in proceeds from an investment under their management and misappropriated those proceeds for their own use, rather than distributing those proceeds to investors.

At the same time that it filed the Complaint, the Commission also filed the written Consents of Goldfarb and of Baystar Capital to the entry of a Final Judgment against them. Without admitting or denying the Complaint’s allegations, defendants agreed, among other things, to pay $12,112,416 in disgorgement and $1,967,371 in prejudgment interest to the court’s registry within 365 days of entry of the Final Judgment. Defendants also agreed to make four progress payments, including a $1.025 million payment due within 180 days of entry of the Final Judgment. Defendants eventually made three progress payments totaling $80,000 in disgorgement, but failed to make the $1.025 million progress payment or the final payment.

In April 2012, the Commission filed an Application with the Court for an order for defendants to show cause why they should not be found in civil contempt of the Final Judgment.

In its Order dated June 20, 2012, the Court found that the defendants were in breach of the Final Judgment by failing to pay the disgorgement amounts ordered. The Court also found that defendants had failed to establish a good faith effort to fulfill their disgorgement obligations because, among other things, they used available funds for large personal expenses such as courtside seats to Golden State Warriors games, charters of aircraft for personal trips, Goldfarb’s mortgage payment and numerous personal vacations, rather than to pay disgorgement.

In the Order, the Court also approved the appointment of a receiver over defendants’ assets and reaffirmed its prior order limiting Goldfarb’s monthly spending.

Tuesday, June 26, 2012


Federal Court in Texas Orders Linda Harris, Chance Harris, CDH Forex Investments, LLC, and CDH Global Holdings, LLC, to Pay over $5.4 Million in Restitution and a Monetary Sanction for Forex Fraud

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order imposing more than $5.4 million in restitution and a civil monetary penalty on defendantsLinda Harris, Chance Harris and their companies, CDH Forex Investments, LLC (CDH Forex) and CDH Global Holdings, LLC (CDH Global), all of Flower Mound, Texas, for fraud in connection with the operation of a commodity pool and managed accounts trading off-exchange foreign currency (forex) contracts.

The default judgment order requires Linda Harris, Chance Harris, CDH Forex, and CDH Global jointly and severally to first pay $1,361,897 to defrauded customers as restitution for their losses and then pay $4,085,691 as a civil monetary penalty. The order also permanently prohibits them from engaging in any commodity- and forex-related activity and from registering with the CFTC.

The order, entered on June 12, 2012, by Senior Judge Royal Furgeson of the U.S. District Court for the Northern District of Texas, stems from a CFTC complaint filed on October 25, 2011, that charged the defendants with fraudulent solicitation, misappropriation, and misrepresentation to pool participants and regulatory organizations in a multi-million dollar forex scheme (see CFTC press release 6127-11, October 25, 2011). The CFTC complaint also charged the defendants with concealing their fraud by issuing false account statements to pool participants regarding the profitability of their investments. Linda Harris, CDH Forex, and CDH Global also were charged with making false statements and submitting falsified bank and account trading statements to the National Futures Association (NFA).

The order finds Linda Harris, Chance Harris, CDH Forex, and CDH Global liable as to all violations alleged in the CFTC’s complaint.

Monday, June 25, 2012


Washington, D.C., June 25, 2012 – The Securities and Exchange Commission today obtained a temporary restraining order and asset freeze against a Utah man and company charged with operating a real estate-based Ponzi scheme that bilked $100 million from investors nationwide.

The SEC’s complaint filed in U.S. District Court for the District of Utah, names Wayne L. Palmer and his firm, National Note of Utah, LC, both of West Jordan, Utah. According to the complaint, Palmer told investors that their money would be used to buy mortgage notes and real estate assets, or to make real estate loans. More than 600 individuals invested, lured by promises of annual returns of 12 percent, the SEC alleged.

“Palmer promised double-digit returns at his real estate seminars, where investors learned the hard way about his lies and deceit,” said Kenneth Israel, Director of the SEC’s Salt Lake City Regional Office.

Palmer told investors that their money would be completely secure and that National Note had a perfect record, having never missed paying principal or interest on its promissory notes. Glossy marketing materials that Palmer provided to some investors showed that National Note returns did not fluctuate and stated that investors were guaranteed payment even if property owners missed payment on mortgage loans that National Note held.

Contrary to Palmer’s claims, National Note used most of the money it took in from new investors to pay earlier investors, making it a classic Ponzi scheme, the SEC alleged. It said that since 2009, National Note would not have been able survive but for the influx of new investor funds, and that its payments to investors all but stopped in October 2011. According to the SEC’s complaint, Palmer reassured investors that the money would be forthcoming, and continued to solicit new investors in National Note without disclosing the fact that it is delinquent in making payments to existing investors.

The SEC’s complaint charges National Note and Palmer with violating the anti-fraud and securities registration provisions of U.S. securities laws. Palmer also faces charges that he operated as an unregistered broker-dealer.

Scott Frost, Paul Feindt, Matthew Himes and Alison Okinaka of the SEC’s Salt Lake Regional Office conducted the investigation; Thomas Melton will lead the litigation.


Thursday, June 21, 2012
Three Former Executives Convicted for Roles in $200 Million Fraud Scheme Involving Fair Financial Company Investors
Three former executives of Fair Financial Company, an Ohio financial services business, were found guilty for their roles in a scheme to defraud approximately 5,000 investors of more than $200 million, Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; Joseph H. Hogsett, U.S. Attorney for the Southern District of Indiana; and Special Agent in Charge Robert Holley of the FBI in Indiana announced today.

Following an eight-day trial, a federal jury in the Southern District of Indiana returned its verdict late yesterday.   Timothy S. Durham, 49, the former chief executive officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud and one count of securities fraud.   James F. Cochran, 56, the former chairman of the board of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and six counts of wire fraud.   Rick D. Snow, 48, the former chief financial officer of Fair, was convicted of one count of conspiracy to commit wire and securities fraud, one count of securities fraud and three counts of wire fraud.

“Mr. Durham and his co-conspirators used lies and deceit as their business model,” said Assistant Attorney General Breuer.   “They duped investors into thinking they were running a legitimate financial services company and misled regulators and others about the health of their failing firm.   But all along, they were lining their pockets with other people’s money.   The jury held them accountable for their crimes, and they each now face the prospect of significant prison time.”

“No matter who you are, no matter how much money you have, no matter how powerful your friends are, no one is above the law,” U.S. Attorney Hogsett said. “The Office of the United States Attorney will not stand idly by and allow a culture of corruption to exist in this community, this state, or this country.   The decision made in this courtroom sends a powerful warning that if you sacrifice the truth in the name of greed, if you steal from another’s American dream to try and make your own, you will be caught.”

“This verdict represents a victory in the pursuit of justice,” said FBI Special Agent in Charge Holley.   “I would like to commend the hard work and dedication of the prosecution team and the FBI investigative team, however, we must remember that the victims of this fraud are still suffering.  I would also like to thank Indiana State Police Superintendent Paul Whitesell for the contributions of his task force officer in this investigation.”

Durham and Cochran purchased Fair, whose headquarters were in Akron, Ohio, in 2002.  According to the evidence presented at trial, between approximately February 2005 through the end of November 2009, Durham, Cochran and Snow executed a scheme to defraud Fair’s investors by making and causing others to make false and misleading statements about Fair’s financial condition and about the manner in which they were using Fair investor money.   The evidence also established that Durham, Cochran and Snow executed the scheme to enrich themselves, to obtain millions of dollars of investors’ funds through false representations and promises, and to conceal from the investing public Fair’s true financial condition and the manner in which Fair was using investor money.

When Durham and Cochran purchased Fair in 2002, Fair reported debts to investors from the sale of investment certificates of approximately $37 million and income producing assets in the form of finance receivables of approximately $48 million.   By November 2009, after Durham and Cochran had owned the company for seven years, Fair’s debts to investors from the sale of investment certificates had grown to more than $200 million, while Fair’s income producing assets consisted only of the loans to Durham and Cochran, their associates and the businesses they owned or controlled, which they claimed were worth approximately $240 million, and finance receivables of approximately $24 million.  

After Durham and Cochran acquired Fair, they changed the manner in which the company operated and used its funds.   Rather than using the funds Fair raised from investors primarily for the purpose of purchasing finance receivables, Durham and Cochran caused Fair to extend loans to themselves, their associates and businesses they owned or controlled, which caused a steady and substantial deterioration in Fair’s financial condition.

Durham, Cochran and Snow terminated Fair’s independent accountants who, at various points during 2005 and 2006, told the defendants that many of Fair’s loans were impaired or did not have sufficient collateral.   After firing the accountants, the defendants never released audited financial statements for 2005, and never obtained or released audited financial statements for 2006 through September 2009.   With independent accountants no longer auditing Fair’s financial statements, the defendants were able to conceal from investors Fair’s true financial condition.
The evidence presented at trial established that Durham, Cochran and Snow falsely represented, in registration documents and offering circulars submitted to the State of Ohio Division of Securities and in offering circulars distributed to investors, that the loans on Fair’s books were assets that could support Fair’s sale of investment certificates.   The defendants knew that in reality, the loans were worthless or grossly overvalued; producing little or no cash proceeds; supported by insufficient or non-existent collateral to assure repayment; and in part advances, salaries, bonuses and lines of credit for Durham and Cochran’s personal expenses.

The defendants engaged in a variety of other fraudulent activities to conceal from the Division of Securities and from investors Fair’s true financial health and cash flow problems, including making false and misleading statements to concerned investors who either had not received principal or interest payments on their certificates from Fair or who were worried about Fair’s financial health, and directing employees of Fair not to pay investors who were owed interest or principal payments on their certificates.   Even though Fair’s financial condition had deteriorated and Fair was experiencing severe cash flow problems, Durham and Cochran continued to funnel Fair investor money to themselves for their personal expenses, to their family, friends and acquaintances, and to the struggling businesses that they owned or controlled.

This case was prosecuted by Assistant U.S. Attorneys Winfield D. Ong and NicholasE. Surmacz of the Southern District of Indiana, Trial Attorney Henry P. Van Dyck and Senior Deputy Chief for Litigation Kathleen McGovern of the Fraud Section in the Justice Department’s Criminal Division.  The investigation was led by the FBI in Indianapolis.

Durham, Cochran and Snow each face a maximum of five years in prison for the conspiracy count, 20 years in prison for each wire fraud count and 20 years in prison for the securities fraud count.   Additionally, each defendant could be fined $250,000 for each count of conviction.
This prosecution is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force.  President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources.  The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

Sunday, June 24, 2012


Washington, D.C., June 20, 2012 — The Securities and Exchange Commission has approved a rule that directs national securities exchanges to adopt listing standards for public company boards of directors and compensation advisers.
The new rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires exchange listing standards to address:
The independence of the members on a compensation committee

The committee’s authority to retain compensation advisers

The committee’s consideration of the independence of any compensation advisers and

The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.
Once an exchange’s new listing standards are in effect, a listed company must meet the standards in order for its shares to continue trading on that exchange.
“This rule will help to enhance the board's decision-making process on executive compensation matters, particularly the selection, engagement and oversight of compensation advisers, and will provide more transparency with respect to conflicts of interest of consultants engaged by boards,” said SEC Chairman Mary L. Schapiro.

The SEC also amended its proxy disclosure rules to require new disclosures from companies about their use of compensation consultants and conflicts of interest.

The new rule and rule amendments will take effect 30 days after publication in the Federal Register. No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule. The new listing standards must be approved by the Commission within one year of the new rule becoming effective.

# # #

Listing Standards for Compensation Committees and Compensation Advisers
In 2010, Congress passed the Dodd-Frank Act. Section 952 of the Act addresses the issue of executive compensation by focusing on the compensation committees formed by corporate boards as well as the compensation advisers that these committees retain.
Section 952 requires the SEC to direct the exchanges to adopt certain “listing standards” relating to the independence of the members on a compensation committee, the committee’s authority to retain compensation advisers, and the committee’s responsibility for the appointment, compensation and work of any compensation adviser. Once an exchange’s new listing standards are in effect, a listed company must meet these standards in order for its shares to continue trading on that exchange.

In addition, the provision requires each company to disclose in its proxy material for an annual meeting of shareholders whether its board’s compensation committee retained or obtained the advice of a compensation consultant. The provision also requires a company to disclose whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.

Requirements of the Rules 
Independence of Compensation Committee Members
Under new Rule 10C-1, the exchanges are required to adopt listing standards that require each member of a company’s compensation committee to be a member of the board of directors and to be independent. In developing a definition of independence, the exchanges will be required to consider relevant factors, including, but not limited to:
The source of compensation of a member of the board of directors, including any consulting, advisory or other compensatory fee paid by the company to such director, and

Whether a member of the board of directors of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.

Authority and Funding of the Compensation Committee
Rule 10C-1 requires the exchanges to adopt listing standards providing that the compensation committee of a listed company:
May, in its sole discretion, retain or obtain the advice of a compensation adviser

Is directly responsible for the appointment, compensation and oversight of compensation advisers, and

Must be appropriately funded by the listed company.

Compensation Adviser Selection
Rule 10C-1 also requires the exchanges to adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after considering the following six independence factors:
Whether the compensation consulting company employing the compensation adviser is providing any other services to the company

How much the compensation consulting company who employs the compensation adviser has received in fees from the company, as a percentage of that person’s total revenue

What policies and procedures have been adopted by the compensation consulting company employing the compensation adviser to prevent conflicts of interest

Whether the compensation adviser has any business or personal relationship with a member of the compensation committee

Whether the compensation adviser owns any stock of the company, and

Whether the compensation adviser or the person employing the adviser has any business or personal relationship with an executive officer of the issuer.
The exchanges themselves may impose additional factors.

Oversight by Board Members Outside of a Committee
These listing standards, with limited exceptions, will also apply to members of a listed company’s board of directors who, in the absence of a board committee, oversee executive compensation matters on behalf of the board of directors.

Rule 10C-1 requires the exchanges to exempt the following four categories of companies from the compensation committee independence requirements:
Limited partnerships

Companies in bankruptcy proceedings 
Open-end management investment companies registered under the Investment Company Act of 1940

Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.

Rule 10C-1 authorizes the exchanges to exempt a particular relationship from the independence requirements applicable to compensation committee members.

Rule 10C-1 also exempts controlled companies and smaller reporting companies from all of the requirements of the new compensation committee listing standards and authorizes the exchanges to exempt other categories of issuers. As with all listing standards, the exchanges would need to seek the approval of the SEC before adopting any exemptions.

Compensation Consultant Conflicts of Interest Disclosure
Exchange Act registrants subject to the federal proxy rules already are required to disclose information about their use of compensation consultants, including specific information about fees paid to consultants. Under the new amendments to the proxy disclosure rules, with respect to any compensation consultant that has played a role in determining or recommending the amount or form of executive and director compensation and whose work has raised any conflict of interest, companies will be required to disclose the nature of the conflict and how the conflict is being addressed.

Saturday, June 23, 2012


“I Have One Word for You: Technology”
Remarks by Commissioner Scott D. O’Malia at SIFMA Tech Leaders Forum 2012, New York City, New York
June 19, 2012
In the 1967 film The Graduate, Mr. McGuire, a family friend of recent college grad Benjamin Braddock, played by Dustin Hoffman, gives the young, aimless and slightly disillusioned gentleman the sagest wisdom he can, "I want to say one word to you. Just one word.... Plastics.” Mr. McGuire had a vision that there would be a great future in plastics. Benjamin was worried about his future. He wanted it to be “different.” And this guy was telling him in one word that it could be. Today, that one word is "Technology."
I suppose that doesn’t come as a surprise to anyone in this room full of visionaries. Technology is a tremendous asset; it provides leverage and is a force multiplier. My two eldest daughters, Kelsey and Claire, both have quite an aptitude for math and science. Looking towards their future, I hope that they will hear me when I tell them in their own times of uncertainty, “Technology.”

As a regulator, it is an honor to be invited to speak at an event like this since most folks don’t think of the Commodity Futures Trading Commission (“CFTC”) when it comes to technology. And frankly, that makes sense since we have largely remained in the world of “plastics” when it comes to deploying and utilizing technology to support our oversight responsibilities.

Today, in addition to addressing technology in the markets and in the hands of regulators, I would also like to discuss a few other topics including the Commission's rulemaking progress and budget issues as they relate to implementation of the Dodd-Frank Act and the choices we are making. I’m also happy to answer any questions you may have at the end.

I am grateful for the kind introduction by SIFMA President and CEO Tim Ryan. I would like to give you a few more details about my background and explain why I am so focused on technology.

Prior to my nomination to the Commission, I served as the Clerk of the Senate Committee on Appropriations, Subcommittee on Energy and Water where I had responsibility for funding the Department of Energy (“DoE”). That position’s mission was focused on deploying improved energy technologies. But, what few people realize is that the DoE also funds research on everything from nuclear physics to the nuclear weapons program. Simulating, solving and understanding the most challenging physics questions require massive computer hardware and software operating at speeds that previously didn’t exist. And it was my job to fund this cutting edge technology.

After the ban on underground nuclear testing, the weapons program relied heavily on computer simulation that required bigger and faster computers than what currently existed. So, we invested millions of research dollars into advanced computing and simulation. I am especially proud of the Roadrunner supercomputer, a joint effort with Los Alamos National Laboratory and IBM to create what was then the world’s fastest computer. On May 25, 2008, Roadrunner became the first computer to break and sustain the petaFLOP barrier by processing more than 1.026 quadrillion calculations per second. As you all can imagine it is hard to just walk away from one million, billion calculations per second. And, so I didn’t.

Technology Advisory Committee 2.0
I have continued to fly the technology flag, and I have focused a great deal of my term thus far on advancing the use of technology to more effectively meet the CFTC’s surveillance, oversight and regulatory responsibilities largely through reestablishing and chairing the Technology Advisory Committee (TAC).

We are re-chartering for a second two-year term, and, like every technology upgrade, I have branded it TAC 2.0.

I have been fortunate enough to bring together a diverse membership with industry-wide expertise and shared goals of establishing technological “best practices” for oversight and surveillance while informing the Commission of the technological issues related to ongoing rulemakings under the Dodd-Frank Act. We have covered such issues as pre-trade functionality and pre-trade credit checks, data collection standards, technological surveillance and compliance, the deployment of technology solutions in the swaps market, and most recently, algorithmic and high frequency trading. To put a finer point on what we have accomplished since bringing back the TAC in June 2010 with its 24 charter members, we have:

Held seven public meetings;
Established the 19-member Subcommittee on Data Standardization charged with providing recommendations based on public/private solutions for creating well-accepted standards for describing, communicating, and storing data on complex financial products;
Established the 23-member Subcommittee on Automated and High Frequency Trading charged with advising the Commission as to a working definition of high frequency trading (“HFT”) in the context of automated trading strategies;
Issued Recommendations on Pre-Trade Practices for Trading Firms, Clearing Firms and Exchanges involved in Direct Market Access; and
Issued recommendations on data standardization through the use of legal entity and product identifiers.

To be sure, our open forums and the contributions of both members and guest presenters have informed and influenced critical policy and regulatory decisions inextricably linked to technological issues, and I believe that many of our rulemakings are better for it.
CFTC is the LEI Leader

In reviewing today’s agenda, I noticed that the Legal Entity Identifier (“LEI”) is a panel topic. Let me take a moment to update you on where the Commission currently is in its LEI implementation strategy. There is good news and not so good news depending on your time horizon. In terms of progress at the CFTC, I’ve got some good news. As to the Global LEI, the news is not as good.

By way of brief background, the CFTC’s swap reporting rules require that counterparties report their trades to a swap data repository (SDR) and be identified by a legal entity identifier. LEIs will be a crucial data aggregation tool that enables the CFTC to utilize the data in SDRs to perform the fundamental mission of monitoring both the swaps and futures markets. It will also give us insight into systemic risk exposure, one of the main goals of the Dodd-Frank Act.

CFTC Leads in Establishing the Legal Entity Identifiers
As was made abundantly clear by the TAC Subcommittee on Data Standards in its final recommendations at our March meeting, a LEI is feasible and the sooner we apply it, the better. As I noted, there is good news and not so good news. The good news is that the Commission is moving to bring LEI’s online for U.S. firms (or anybody transacting in the U.S.) to have an LEI by the time mandatory reporting is required for credit swaps and interest rate swaps, which will be 60 calendar days after the publication in the Federal Register of the Commission’s final rule providing further definition of “swap” (a/k/a “Compliance Date 1”).1

As part of its cooperation with international process, and because the use of identifiers will begin in reporting under CFTC jurisdiction before the global system is established, CFTC is referring to the identifier to be used in reporting under its rules as the CFTC Interim Compliant Identifier or the “CICI”. The Commission anticipates that when the global LEI system is established, the CICI will transition into the global system.
On March 9, 2012 the Commission requested submissions from industry participants wishing to be considered to provide the CICI. The Commission received submissions from several industry participants, and all candidates have provided written demonstrations and live, on-site demonstrations. As I mentioned earlier, the Commission anticipates determining whether a CICI meeting its requirements is available, and designating that provider as the source for CICIs to be used in swap data reporting under Commission jurisdiction, in the very near future.

Status of International LEI Process Coordinated by FSB
While, I was assured that the initial issuance of LEIs by an international body would occur by spring 2012, the international effort has been delayed until March of 2013. The delays are related to governance issues and the insistence upon greater public sector involvement, albeit they still require a private sector solution to implement the systems.

At its May 2012 meeting in Hong Kong, the Financial Standard Boards (“FSB”) approved recommendations for a global LEI system to the G-20 Leaders for consideration (this week) at their summit in Los Cabos, Mexico.2

The recommendations set out a three-tiered governance framework that includes:
A Regulatory Oversight Committee (ROC) committed to support governance in the public interest;
A Central Operating Unit (COU) for ensuring application of uniform global operational standards, and having a Board of Directors that may include both industry representatives and independent participants; and
Local Operating Units (LOUs) that provide the primary interface for entities wishing to register for an LEI, and provide local implementations of the global system.

Further delaying implementation, the recommendations provide for establishment of an LEI Implementation Group (LEI IG), comprised of LEI experts from the global regulatory community charged with launching the global LEI system by March 2013. The LEI IG will be led by representatives from different geographical regions, and will undertake legal and policy work to develop the charter for the ROC and the governing documents for the system, and technology work with the private sector to establish the COU. CFTC will be a member of the LEI IG.

Let me remind you of the good news. In the meantime, the Commission will be adopting its interim LEI, and this should cover roughly half of the overall swaps market. I hope the timely application of an LEI by the Commission will reduce the costs of applying an LEI system retroactively.

HFT Technology in the Market
I would like to spend a few minutes to share with you my thinking on high frequency trading. This topic has generated passionate views, both pro and con, and spawned headlines, economic studies and even books on the subject.

HFT currently accounts for a majority (56% in 2011) of the U.S. equity volume3 and is approaching 50% of our futures market transactions. The influx of high frequency traders are behind the massive trading volume increases. Supporters argue that HFTs are the modern pit trader market makers that narrow bids and provide essential liquidity. Detractors complain that HFT have changed the market dynamics by playing games with trade strategies that bait hedgers and have reduced trade size. The bottom line is there is no definition for, or, rather, there is a struggle to find an appropriate characterization of this practice in our markets.

In a forthcoming study to appear in The Journal of Portfolio Management, Easley, Lopez de Prado, & O'Hara4point out that automated trading systems have created two markets. One market populated by low frequency traders that focus on “macro factors” like available supply, monetary policy and financial statements, while the HFT market focuses “market microstructural factors such as “rigidities in price adjustments across markets” and “variations in matching engines.” The authors accurately point out that the “the goal [of HFT] is to exploit inefficiencies derived for the markets microstructure, such as rigidities in price adjustment within and across markets [agents], idiosyncratic behavior and asymmetric information." What we have here is a tale of two markets operating in one venue.

This is a topic I am very interested in, especially in terms of its relative impact on the markets. What I find most intriguing about the debate itself is that it is not always clear that folks on the pro side and folks on the con side are even talking about the same thing. One person’s HFT may not be another’s. In an effort to take the first step and define the practice, last November, I sent a letter to the Technology Advisory Committee members asking them for their opinion on a definition of HFT. After hearing back from them, I took the next step and formed through a public nomination process the Subcommittee on Automated and High Frequency Trading to develop an appropriate definition of HFT within the universe of automated trading. My goal is to have a working description of the attributes of HFT activities in order to better understand the impact they have on our markets. Developing a nomenclature is important if only as a means to study this trading activity on a consistent basis. Before we implement a new regulatory regime on any continent or in cyberspace, I believe we need to agree on what and who comprises this growing segment of our markets.

Within the ATS/HFT Subcommittee, we have established four working groups, each tasked with identifying specific issues associated with automated trading. The first working group is tasked with defining high frequency trading within the context of automated trading systems. The second group is examining whether or not there should be multiple categories of HFT. Specifically, this working group is examining distinctions in trading activity and how such distinctions should be identified or tagged by the exchanges in which they operate. The third working group is focusing on oversight, surveillance and economic analysis, to understand how HFTs behave as compared to other automated systems. The fourth working group is addressing market micro structure issues to identify possible disruptions that might be provoked by automated trading systems and potential solutions to mitigate such events. Under the leadership of CFTC Chief Economist Andrei Kirilenko and fellow CFTC staff these working groups have been conducting weekly conference calls and will be presenting their preliminary views at the public meeting of the TAC I am holding tomorrow at our CFTC headquarters in Washington.

My goal is to collect the facts, develop the data about the impact of HFT (and all automated trading for that matter) and establish a consistent, universally acceptable view on our new market participants. I never intended to assemble this group to develop rulemakings. This expert group was organized to define and discuss the current and potential impacts of HFT in the futures and swaps markets. It is up to the Commission to develop the policy solutions, and I hope that the Commission will benefit from the extensive debate and hard work of the Subcommittee as well as empirical market data before it considers taking action.

Technology in the Hands of Regulators
Technology in the hands of regulators is a good thing, and I will always support it in any role I have. We are now at the CFTC only beginning to leave “plastics,” but our new Office of Data and Technology headed by Chief Information Officer John Rogers is making progress. Trust me, it is all relative. What my colleagues are seeing now is that technology offers us the opportunity to see across our jurisdictional markets (futures and swaps) and the only way we can develop the appropriate level of surveillance is through the deployment of algorithms and automation. Expanding our surveillance to include order data will require additional hardware to store and sort a massive amount of data. The CFTC has a long way to go, especially when it comes to automating some of our more mission-critical goals such as monitoring systemic risk, but we have learned a thing or two during our first attempts to automate large trader reporting for swaps and I have some ideas as to how we can leverage our expertise.

High-Frequency Regulation
One thing I have been critical of is our speed of regulation—which has nothing to do with technology. In fact, it is speed that I think has caused us to err in some of our rules such as the large trader swaps reporting rules and in our cost-benefit analyses. I do have good news on both fronts though, and things are looking bright and shiny, but not like plastic.

For those of you who are unfamiliar with the typical Washington rulemaking process, it is generally long and all-consuming. Before the Dodd-Frank Act, the Commission issued three or four rules a year at best. My friend and former Commissioner Mike Dunn would always say that most of the Commission’s rules normally take anywhere from 15 to 18 months to finalize. So, trying to complete more than 50 rules in that amount of time guarantees mistakes and errors.

Remember the bumper sticker during Bill Clinton’s 1992 campaign, "It’s the economy, Stupid”. Well, that is still true today. However, in the Dodd-Frank microcosm “It’s the implementation, Stupid.” Let me give you an example of how important it is for the Commission to develop well thought out rules, informed by actual and realistic cost benefit analysis. We can’t guess or make assumptions about the swaps market and hope or expect market participants will be able to comply.

The Commission passed its final large trader reporting rule for physical commodity swaps under Part 20 in July 2011.5 There were a number of problems including:
The futures and options position reporting format under Parts 16 and 17 of the Commission regulations simply could not accommodate the new data needs for Part 20 swap reporting, and Industry standards for large trader swaps reporting (via XML) did not exist.

The Industry couldn’t comply within the two-month implementation deadline, and an extension had to be grated 6. On December 7, 2011, the Commission issued a 172-page guidebook7, which was longer than the rule itself.

The Commission’s Office of Data and Technology (ODT) has now developed rules to ensure that data is submitted accurately and has provided data submitters with an automated way to test their data at any time. As well, ODT now provides an automated feedback mechanism to submitters so they will know about data reporting issues (e.g., files not received, missing data) in real-time. And, just to be sure, DMO and ODT revised the Part 20 guidebook, and released the new 226-page version about three weeks ago.8
On November 20, 2011, the Commission started to receive records on a limited basis. Today, our CIO informs me that we are now receiving approximately 500,000 records per day from clearing members and an additional 200,000 records from clearing organizations. The no-action relief issued to reporting industry participants by the Division of Market Oversight9 will end in less than two weeks on July 2nd, so I am eager to hear the numbers.

I know ODT is eager about the upcoming final rule that will further define the term “swap”. Swap dealers will be required to submit data under Part 20 just 60 days after that final rule is published. Today, 50% of clearing members are in compliance with the FIXML or FpML reporting, and given what we have put them through, that is good news to me.

The lesson, I think, has been learned: swaps and futures markets are different. The large trader reporting project proves my point that the Commission must spend an appropriate amount of time understanding swaps markets and the ramifications of these rules, including the cost and benefits of each and every rule before they are finalized, not after.

Some of you may know that I have been very critical of the Commission’s cost-benefit analyses. The Commission previously minimized the role of performing complete cost-benefit analyses by turning the process into an administrative, check-the-box exercise. The good news is the Commission has altered course and the Chairman recently signed a Memorandum of Understanding with the Office of Information and Regulatory Affairs (“OIRA”) within the White House to provide technical expertise in order to develop a more thorough process for conducting the Commission’s cost-benefit analyses during the implementation of the Dodd-Frank Act.

In my view, there are three critical areas where the Commission can and must improve its cost-benefit analysis. First, the Commission should develop a realistic and status quo ante baseline. Second, the Commission should develop replicable quantitative analysis, which will allow it to make informed decisions about the market. Finally, the Commission should develop a range of policy alternatives for consideration. All three of these standards are best practices recommended in the Office of Management and Budget Circular A-4, Regulatory Analysis, which was issued in 2003. I can’t help but wonder that if we had committed the time and resources towards engaging in more thorough cost-benefit analyses that considered not only the differences between the futures and swaps markets, but that set appropriate baselines, considered alternatives, and truly attempted to quantify those baselines and alternatives, that we wouldn’t be challenged as an agency to put forth rules that are sure to stand the test of time—or at least a legal challenge. Plastic might last for an awful long time, but our rules need to be even stronger than that. We need to move on from that illusion and be “different.”

Before I close, I would like to a moment to highlight the budget situation.
This year, we have a unique budget situation. There are two budget deals that the Commission must manage. The first is our annual appropriation. Every year, brings uncertainty when the House and Senate produce two different funding solutions. This year is no different, and it will be resolved. The Senate and House will reconcile their differences and we are likely to have more funding in 2013 than we have in 2012. The only remaining question is, “When?”

The second budget factor is the debt summit that Congress and the Administration agreed to last August. This deal is set to implement on Jan 1, 2013, and it will automatically cut discretionary spending government-wide by 8 percent ($1.2 trillion in 2013). The impact on the Commission’s current year budget would be a $16.4 million reduction, translating to $188 million in total spending.

I am not aware of any plan of action for the Commission to hedge its budget exposure in the likely event that the mandatory cuts occur in January. I want to make sure the Commission avoids layoffs or other morale-busting action. Also, I don’t think anyone can predict what spending baseline the January cuts will be initiated. The prudent action is to avoid over-spending until our budget future is clear.

I have asked our budget officers for some information about the Commission’s spending outlook. Today, we have 692 people on board, less than the 710 FTE’s planned for under our $205.3 M budget. This amounts to $130 million in spending on employees and $45 million on IT, which is $175 million total, $13 million below the level proposed to be cut in January.

Just like the markets, we need to hedge our risk. Clearly our most pressing risk is the impact of morale-busting layoffs. We have worked our staff extraordinarily hard to develop the rules, take the meetings and respond to questions. Now we are moving toward critically important rules (e.g. margin, SEF, mandatory clearing and trading, definitions, extraterritoriality). We are also entering into the implementation phase. We need people to interpret the vague and uncertain rules we have just put into effect.
Now is the time for the Commission to lock in our hedge, freeze our spending so we don’t risk over-spending and forced layoffs. This debt summit deal has been in place for almost one year. To not prepare for the worst would be irresponsible and unfair to our current employees and the Commission as a whole.

Without a doubt the Commission has a number of very real challenges ahead. First, we are adapting sensible rules that fulfill the statutory mandates of the Dodd-Frank Act. These rules must be developed with careful cost benefit analyses to ensure both the market and the Commission have the capacity to implement the proposals in a cost-effective and timely manner. We must also pay closer attention to the rule implementation. The more we work to understand the impact of our rules, the more likely the implementation process will be successful.

Second, as we approach the end of the fiscal year, we must be very careful about our spending. The budget challenges facing this nation are real and must be addressed. As such, the Commission must pick its path carefully to navigate the fiscal challenges ahead.
Finally, the Commission must make technology a much higher priority. We have taken the right steps to begin to adopt the 21st Century market technology, and put the fax machine era in our rear-view mirror, but we still have a long way to go before we are at an acceptable position. We also need to work hard to continue to understand the role technology plays in both the fundamental trading strategies as well as the microstructure strategies that the HFTs deploy. I will continue to use the Technology Advisory Committee to engage market participants to find solutions to these challenging questions.
Thank you.

1 Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2136, 2196 (Jan. 13, 2012) (To be codified at 17 C.F.R. pt. 45).

2 Financial Stability Board (FSB), A Global Legal Entity Identifier for Financial Markets,
June 8, 2012, available

3 U.S. Securities and Exchange Commission, Organizational Study and Reform at 258, Mar. 10, 2011, available at

4 David Easley, Marcos M. Lopez de Prado & Maureen O’Hara, The Volume Clock: Insights into the High Frequency Trading Paradigm, The Journal of Portfolio Management (forthcoming) (Fall 2012), Electronic copy available at:
5 Large Trader Reporting for Physical Commodity Swaps, 76 Fed. Reg. 43,851 (July 22, 2011) (to be codified at 17 C.F.R. pts. 15 and 20).

6 See Temporary and Conditional Relief from the Requirements of §§ 20.3 and 20.4 of the
Commission's Regulations Regarding Large Swaps Trader Reporting for Physical Commodities (Nov. 18, 2011),available at:

7 Large Trader Reporting for Physical Commodity Swaps: Division of Market Oversight Guidebook for Part 20 Reports, Dec. 1, 2011, available

8 Large Trader Reporting for Physical Commodity Swaps: Division of Market Oversight Guidebook for Part 20 Reports, June 1, 2012, available

9 Staff No-Action Relief: Temporary and Conditional Relief from the Requirements of §§ 20.3 and 20.4 of the Commission’s Regulations Regarding Large Swaps Trader Reporting for Physical Commodities (Mar. 20, 2012),available at:


June 20, 2012
The Securities and Exchange Commission announced today that it has charged Gary J. Martel, a resident of Chelsea, Massachusetts, with defrauding investors. The Commission’s complaint, filed in federal district court on June 19, 2012, alleges that, from at least 2006 to the present, Martel, who conducted business under multiple names including Martel Financial Group and MFG Funding, defrauded at least 12 investors in Massachusetts, Vermont and Florida of at least $1.6 million, and likely obtained significantly more from other investors. Today, with Martel’s consent, a federal judge entered an order freezing Martel’s assets and prohibiting him from continuing to violate the antifraud provisions of the federal securities laws.

According to the complaint, Martel told investors, many of whom were retirees looking for a safe investment earning reliable income, that he would place their money in “pass-through bonds” or other purported fixed income or pooled investment products, which he assured investors were safe. The complaint alleges that Martel gave investors purported account statements showing interest earned and sometimes made small distributions of supposed interest, which encouraged investors to give Martel more money to invest. Martel also allegedly offered other fraudulent investments. In March 2012, according to the complaint, Martel solicited investments in a Facebook investment pool, claiming it would allow small investors to “own a piece” of the Facebook IPO. In fact, however, the complaint alleges that the investments Martel offered were fictitious and/or no longer exist, and that he transferred funds out of the bank account where investor funds were deposited to bank accounts he maintained for his businesses.

The Commission’s complaint alleges that Martel violated 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. In its action, the Commission seeks the entry of a permanent injunction against Martel, disgorgement of ill-gotten gains plus pre-judgment interest thereon, and the imposition of civil monetary penalties. In addition to freezing Martel’s assets and prohibiting him from violations of antifraud provisions of the federal securities laws, the order entered by the court today further prohibits Martel from soliciting, accepting, or depositing any money from investors and from altering or destroying any relevant documents and also requires him to provide an accounting of their assets and uses of investor funds.

The Commission appreciates the assistance of Secretary of the Commonwealth of Massachusetts William F. Galvin and the Massachusetts Securities Division, which notified the Commission of Martel’s conduct and investor losses and last week filed an action against Martel based on the same conduct.

Friday, June 22, 2012


June 18, 2012 
The Commission announced today that, on June 14, 2012, the Honorable Douglas P. Woodlock of the United States District Court for the District of Massachusetts sentenced Jon Latorella of Marblehead, Massachusetts, to 60 months’ imprisonment, to be followed by three years of supervised release, and the payment of restitution to be determined at a later hearing. Latorella is the former chief executive officer of LocatePlus Holdings Corporation (“LocatePlus”), a Massachusetts-based information technology company that sold on-line access to public record databases for investigative searches. On November 10, 2010, the United States Attorney’s Office for the District of Massachusetts (“USAO”) charged Latorella and former LocatePlus chief financial officer James Fields with conspiracy to commit securities fraud for their role in a scheme to fraudulently inflate revenue at LocatePlus as well as a scheme to manipulate the stock of another company.

On November 10, 2010, the same date on which the indictment against Latorella and Fields was unsealed, the Securities and Exchange Commission (“Commission”) amended a previously-filed civil injunctive action against LocatePlus arising out of the same conduct, to add Latorella and Fields as defendants. The Commission’s civil injunctive action is stayed until the conclusion of the criminal case, which remains pending against both Fields and LocatePlus.

Thursday, June 21, 2012


“The Good Doctors”
Keynote Address of Commissioner Bart Chilton to the Mutual Fund Directors Forum, 2012 Policy Conference, Washington, DC
June 19, 2012
Good evening and thanks for that kind introduction.  It’s great to be with you.  I'm always impressed with people like you who take the time and travel away from your businesses and families to visit Washington and make your case on issues. That's an important thing, and it doesn't matter on which side of issues you fall. It’s a privilege to have an opportunity to be with you for some of your time in D.C. Even after 26 years in this town, it is still intriguing to hear that magical word “policy.”  I hope this year’s policy conference goes well for you.

Regulatory Health
Let’s discuss some policy issues, but do it within the construct of financial market regulatory health.

Before I get to it, is there a doctor in the house? The older I get, the nicer it is to know if we are close to a doctor. Any medical doctors, PhDs, doctors of love, as Gene Simmons says, anyone? Okay, great.

The financial health of markets: aren’t these markets astonishing? Aren't you sometimes simply in awe—in awe—of what they do and how they do it. They are pulsing every day and all night around the world to the beat of 160 million transactions a day.  It’s incredible they work as well as they do.  At the same time, though, we all know that once-in-a-while, they need a doctor. There is often a shock associated with that awe. Maybe that’s because of a Flash Crash, a major bankruptcy, a massive trading loss or any number of other problems. And yes, when there’s talk about needing a doctor—or, in this context—needing a little regulatory check-up, some people’s blood pressure starts to rise.  Chill pills are for that stuff, dude. Let’s just review how not taking very good care of our financial markets got us to where we are today.

 Dr. Drew
We don’t need to guzzle ginkgo biloba beverages to recall 2008 and the collapse of Bear Stearns, Lehman Brothers and AIG; the resulting dreadful bailout and the devastating effect on our own and a large part of the global economy.  Thinking about all of that raises a little financial PTSD for some people.
“Doctor my eyes,
Tell me was I wrong.
Was I unwise to leave them open for so long?”

Well, as hard as it is to think about 2008, there is that whole “learning from our experiences” or rather—mistakes—thing.

Who is familiar with CNN's Dr. Drew Pinsky, Dr. Drew—the former Love Line co-host?  If you’ve ever watched the show, he deals a lot with addictions—drug addictions, alcohol addictions, food addictions, sex addictions—you name it.  He is an impressive guy and he's helped a lot of people. One thing he always says is that the first step to recovery is admitting you have issues.

Well, in 2008 and the years leading up to it, we had issues. We had a problem, and we’re still in recovery today.  The point there is that we are recovering.  We are getting better, thank you very much. Congress recognized that we had a problem and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act about two years ago right now.  That’s good, because we clearly needed something: therapy, recovery, whatever. As they often say in this town, "mistakes were made."

 Dr. Seuss
Once you’ve acknowledged the problem, therapists would suggest dissecting it to understand what went wrong. There were a couple of causes to the financial illness—the economic crisis—“Things,” if you will—that led to the system pretty much failing us.
 Thing One—shout out to good Dr. Seuss—were lax or non-existent laws and regulations that allowed the free markets to rock ‘n’ roll so much that they rolled right over our economies—and our citizens.

There is an old saying about how the best things in life are free. Well, the worst things in life are also sometimes free, like disease and famine and, yes, unbridled free markets with zero, zip, zilch oversight.  Of course, it wasn’t just the lax laws, rules and regulations.  Nope, Thing One just allowed for unprotected and risky behavior...and risky business.
Thing Two were the active agents:  the captains of Wall Street—that’s how the FCIC, the Financial Crisis Inquiry Commission, described them. They wholly developed these very pioneering products, these innovative investments to be traded and re-traded.

Light markets, dark markets, big markets, small,
Green, red and black markets, they traded them all,
Burning up the fiber and fires on the phones,
And then what they did, was trade bundles of loans,
The markets were rising with new dough, don't you know,
And cheetah technology, that just never went slow,
The risk was so portable, so easy to move,
That sometimes they wondered, just whose risk they might lose Trading and trading is what kept them alive
And they did so, this trading, 24-7...365.
Thing One and Thing Two:  those harmless numskulls, what could go possibly go wrong?

 Dr. No
 Well, go wrong it did. We admitted and acknowledged we had a problem and received some treatment.  The problem, the condition if you will, today is: the recovery—the work—is not complete and there is temptation to do away with the very laws—the recovery program—we were admitted to in reaction to the 2008 financial crisis and the all-to-close-to collapse of national economies.  Let’s call that a near relapse.
There have been moves afoot in Congress to repeal some or all of Dodd-Frank, primarily by some of those who voted against it in the first place.  That's okay; they do and vote the best they see fit. Nobody is suggesting we all have to go about things the same way. Remember the James Bond antagonist, Dr. Julius No? Let’s call these folks Dr. Nos.  Many of this group voted no, or nay—on Dodd-Frank and on full funding for regulators.  The Dr. Nos would defund the precise market health professionals who were given the rather tough task of keeping an eye on Wall Street.  And, still others, including regulated entities themselves, like your group, are choosing to fight the new regulations in court. That’s fine. We are a litigious society. I'm not going to touch that one now. I'll leave that not to the doctors, but the lawyers.

The President requested, and the Senate Appropriations Committee passed, a CFTC funding level of $308 million. In the House, the Dr. Nos are proposing only $180 million. In Europe, they’d call that an “austerity measure.” But let’s call it what it is: a seriously substantial and severe budget reduction. Cutting our Agency’s oxygen off so that our nation can’t have market health professionals on the case or the technology we require to monitor those that we are supposed to be overseeing is not putting the financial health of the American people first.

Think about MF Global.  Think about JPMorgan.  Are these markets really any safer and healthier than they were when they did a code blue in 2008?  A little, I’d say.  However, we’re still in recovery mode for sure.  We still require a doctor.  And, it is still essential to pay for it.  There are some folks in this town and on Wall Street who wish Dr. Kevorkian was still around for us regulators. They are doing their best without him to administer a little euthanasia. The financial sector still has 10 lobbyists for every single member of Congress—more than any other sector. They are pretty effective at getting their way.

As regulators, we don't make the laws. If Dodd-Frank went away, I'd think it was a mammoth mistake, but the law is the law and we Commissioners swore an oath to uphold it. That is, however, what we are doing right now—upholding the law—the law. We owe it to taxpayers and consumers to insist that these markets remain healthy.

Dr. Phil
Most folks know TV's Dr. Phil.  He’s forever talking about setting limits, especially in relationships.  If somebody pushes your buttons: be it a parent, child, spouse, co-worker or friend, Dr. Phil will suggest setting some limits.  Don’t get sucked into their world or their drama.  Well, if limits are good enough for Dr. Phil, they’re good enough for me—especially when it seems like an appropriate prescription for a policy I have supported for many years.

 A fundamental part of Dodd-Frank, which only seems to gain public attention when gas prices are high, is speculative position limits.  (And yes, this is another one that’s being challenged in court).

As we all know, oil and gasoline prices were very high earlier this year. The highest prices were actually in the summer of 2008. The average national price of gasoline in July of that year was $4.10 a gallon. There was a lot of attention to the subject then, and there was earlier this year. Today, not so much, although limits are still an essential medication to reduce market manipulation.

Here’s why: numerous studies show a link between speculation and prices. Studies from the International Monetary Fund, the Federal Reserve, and numerous universities all show it.  There was a senior exchange official who a little more than a year ago said there wasn't any evidence that linked speculation to prices. There was even a former colleague of mine who kept saying there was no evidence. Wha wha what? It was amazing. Last year, I put 50 studies, papers and notable quotations from respected individuals on the CFTC web site. They are still there. I talk about them all the time, including right now. I can continue to explain this to people, but I can't comprehend it for them.
Why does a trader need so much concentration that they can push prices around?  I just don’t get it.

 Large concentrations in silver, gold, natural gas, crude oil and orange juice have existed in recent years. I've witnessed it, and at times, I've seen prices react.
In addition to the bankers' lawsuit which seeks to stop our position limits rule from being implemented, regulators have been derelict in not getting them in place sooner.  We keep hearing that imposition of limits is being held up because it's contingent upon our issuance of a swaps definition, and Dodd-Frank requires that we do that as a joint rulemaking with the SEC.  That's correct. Dr. Phil might ask, “How’s that workin’ out for ya?”  Well, I'd say, "Notsamuch, Doc."

I have respect for my regulatory colleagues, but I've gotta say, they’ve moved so slow that I think we need to check their pulse on this one.  Call me an impatient patient, but we have a responsibility to act here, and it's high time we do so to protect markets and consumers.
A man runs into the doctor’s office and says, “Doctor, you need to see me immediately, I think I’m shrinking!” The doctor says, “Calm down and take a seat. You will have to wait your turn and be a ‘little’ patient.” Well, we’ve been a little patient. We’ve been a lot patient.

Earlier this year, in March, I suggested we "consider" using a provision of Dodd-Frank that shifts unresolved jurisdictional disputes to the Financial Stability Oversight Council (FSOC) if an agreement can’t be found. We have been continually reassured we are going to consider this joint rule with the SEC "next month." We've been told that each month since my Agency approved limits. We were told it could happen last December and subsequently almost every month. I see no promise of movement from the SEC on this. We are two years into this new law, and position limits were supposed to be implemented after six months. The FSOC should resolve this.

Dr. Dolittle
Another policy issue I want to spend some time on is the issue of technology in trading.   I was going to call this section “Dr. Strangelove” since he was always fiddling around with technology—in his case nuclear weapons—or maybe “Dr. Leonard McCoy” from Star Trek. “Dammit Jim, I’m a doctor…” not a regulator.

There are a lot of people fiddling around with technology in financial markets today. But instead, I decided on Dr. Dolittle because I call these high frequency computer traders "cheetahs" due to their incredible speed as they travel through the market jungle.  They are out there all the time trying to scoop up micro-dollars in milliseconds. They are wicked smart and clever. I talked to the animals last week. By the way, they really are very agreeable and shrewd folks. I’m just jesting, of course. Nevertheless, I told them very clearly that they need to be regulated.

Here are the problematic symptoms that led to my, umm, diagnosis. The largest futures exchange in the World is in Chicago.  Their third largest trader by volume there has been a cheetah based in Prague.  Bully for the exchange, which has touted this firm in their magazine.

As an aside, I’ll note the curious case of the vanishing articles. The story about this Prague cheetah was in the fall of 2010 and it appeared in the exchange magazine. While you can find the issue on their web site, that article about the cheetah disappeared. I was alerted to this by two reporters who were fact-checking my stuff about the cheetah. When they asked the exchange about it, they were told that the story didn't exist. So, I looked into it. After some digging, I found it again. But, what the exchange did was took it off their web site. As it turns out, there is another story missing from that same edition: one about Jon Corzine, in which he talks about taking more risks as the, then, new head of MF Global. I have both stories. Folks have a right to keep whatever they want on their websites. I just think it is curiously peculiar that they'd pull those two stories—strange, but true.

So, bully for the exchange. Bully for the cheetah.  Bully for Prague. Hooray for Prague!
However, if we, the U.S. regulators, simply want to look at books and records, perhaps because we are concerned about trading activities on a U.S. exchange—it could happen—that cheetah in Prague is not required to provide us with anything. Nada.  Furthermore, we don’t even have the ability to command books and records information from domestic cheetahs.  Nada. These cats are not required to provide a thing to U.S. regulators, under the current set of circumstances, unless we get a judge to issue a subpoena.  It is simply loco.  Nada? informaciónnes de los catos es un problemo.

At the very least, the cheetahs need to be registered.  Yet, no place in the Dodd-Frank law are these traders even mentioned.  That is how quickly the markets are metastasizing.

I believe there is some value to the cheetahs. However, their awesomeness isn't too difficult to contemplate. I wrote about these traders in a Financial Times op-ed a long time ago (September of 2010).  In it, I suggested, “There is a good argument to be made that ‘parasitical trading’ does not truly contribute to fundamental market functions.”  I’m not trying to get rid of them—make the cheetahs an endangered species.  There's no opposition to new technology here.  The cheetahs do provide liquidity—albeit what I’ve dubbed as "fleeting liquidity."  If you want someone to hedge your commercial risk for 3-5 seconds, I know just the cats for the job.

I also believe that these cheetahs have a disproportionate influence on markets simply because of their speed.  Their trading volume isn’t traditionally large—although in overnight illiquid trading even smaller size trades can move markets. We’ve seen that many times—but their swiftness as traders can send signals to the market when they’re in pursuit of their prey.  That, in and of itself, is fairly new and presents troublesome issues.
Consequently, I’m suggesting that in addition to the cheetah registration requirement, we require testing of their programs before they are engaged in the market production environment. The programs should have kill switches in case they go feral. We need to require quarterly reports on their wash sales (and that they undertake efforts to stop those from occurring). And finally, cheetah executives, the head of their pride, must be accountable for such reports.

I expect the Agency to issue a concept release related to technology very soon. My colleague, Commissioner O'Malia, has done a lot of good work on these issues as the Chair of our Technology Advisory Committee. I’m hopeful, and expect (certainly if I am to support it), that as part of this concept release, these ideas will be included and we will receive some public comments to facilitate us moving forward.

Dr. Jekyll
A doctor says to her patient, “You have a split personality, a mental disorder—you’re crazy.” To which the patient says, “I want a second opinion.” The doctor says, “Okay, you’re ugly, too.”
Remember Dr. Jekyll from The Strange Case of Dr. Jekyll and Mr. Hyde? It had to do with split personalities, within the same body.

Just like Dr. Jekyll, who had two personalities, we see that the banks themselves have a troublesome duplexity. This split personality was created when the Glass-Steagall Act was repealed in 1999. Currently, banks have two voices in their heads. They have an interest in their proprietary bottom line, and in their customers. When the two distinct personalities are opposed, just like Dr. Jekyll and Mr. Hyde, it can get unpleasant. And, it has. Here's what we know: with the banks, we understand which personality supersedes. They do—the banks. The customers’ interests can become secondary.

Some would argue that the two can exist in the same body, but the evidence doesn't support that—not at all. We saw Goldman Sachs and Citibank both establish what I've termed "fake-out funds," like when a player fakes in a ball game. Only this isn't a game. It involves real money for the bank customers.

The two banks each established these funds, recommended them to their own customers, and then the banks took the opposite position. That's pretty sinister, right? A dreadful mixture of contrasting motives played out in a crooked fashion. The Goldman case was settled with the SEC for $550 million. The Citibank settlement with the SEC, for $285 million, was actually thrown out by U.S. District Judge Jed Rakoff for being too lenient. He called it “a mild and modest cost of doing business.” Soon, he's expected to rule on the matter himself.

“Doctor, doctor, give me the news…” What’s the answer to…these policy blues? No pill is gonna kill this ill, it will take the… Volcker Rule.

Well, the Volker Rule is the law. If regulators are thoughtful and implement it appropriately, it will take the banks’ split personality, their troublesome duplexity, out of the equation. I believe we can, and will. Again, it is our responsibility to do so, under...the law.

Conclusion—Dr. Marcus Welby
Well listen, I should wrap this up.  I know you’ve got another big day tomorrow.  We will leave all of the rest of the doctors alone tonight. Doctor Who? Yeah, him, and the rest: our cowboy Docs Holliday and Scurlock, Docs Severinsen, Hollywood and Watson, Dr. Ruth and Sanjay Gupta, Doctor Frasier Crane and Dr. Laura, Doctors Dre, Evil, Feelgood and Demento. You can play at home. It’s fun for the whole family.
This will really date me, but Dr. Marcus Welby was played by actor Robert Young. He, Young the actor, used to do these television commercials that would start off with him saying something like: “I’m not a doctor, but I play one on TV.” Then, he'd endorse some health-related product, like aspirin. Well, I'm not a doctor. And, I DON'T play one on TV, but I sure have enjoyed speaking about the health of our financial markets and the ongoing need for preventative care by regulators to protect investors, hedgers and yes, most importantly consumers.

I’ve got to run to the ER. Thank you for the opportunity to be with you.  Nurse!

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