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

Wednesday, October 31, 2012

Chairman Schapiro Statement on Reopening of Securities Markets

Chairman Schapiro Statement on Reopening of Securities Markets


On October 24, 2012, the Securities and Exchange Commission charged Michael Johnson, a divisional merchandise manager at Kohl's, which is a national department store. The complaint alleged that Johnson assisted the financial fraud at Carter's, Inc, an Atlanta-based manufacturer of children's clothing. Specifically, the SEC alleges that Johnson assisted Joseph Elles, a former Executive Vice President of Sales at Carter's, in concealing his financial fraud from senior Carter's management. That scheme caused Carter's to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.

The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles fraudulently manipulated the amount of discounts that Carter's granted to Kohl's, Carter's largest wholesale customer in order to induce Kohl's to purchase greater quantities of Carter's clothing for resale. In an effort to conceal the scheme, Elles persuaded Kohl's to defer subtracting the discounts from payments until later periods. Elles also persuaded Johnson, who handled the Carter's account at Kohl's to sign a false confirmation that misrepresented to Carter's accounting personnel the timing and amount of those discounts. By concealing the amount of discounts that had been promised to Kohl's, Elles and Johnson caused Carter's to materially understate it expenses in certain quarters and materially overstate its earnings in those quarters.

After conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.

The SEC's complaint alleges that Johnson violated Rule 13b-2 of the Securities Exchange Act of 1934 ("Exchange Act"), which prohibits any person from directly or indirectly falsifying or causing to be falsified an issuer's accounting records. The complaint also alleges that Johnson aided and abetted Elles' violations of Section 13b(5) of the Exchange Act, which among other things, prohibits any person from knowingly falsifying the books, records and/or accounts of an issuer, and Rule 13b2-1 thereunder. The SEC is seeking permanent injunctive relief and financial penalties against Johnson.

This is the third case that the SEC has filed in this continuing investigation. The Commission previously charged Joseph Elles (see
SEC v. Joseph Elles, Litigation Release No. 21784 / December 20, 2010) and Joseph Pacifico (see Litigation Release No. 22517 / October 19, 2012). When the Commission announced the first case, the Commission also announced that it had entered into a non-prosecution agreement with Carter's, based in part on Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. See Release No. 2010-252 / December 20, 2010. Pursuant to that agreement, Carter's has continued to cooperate during the Commission's continuing investigation.

Remarks at the George Washington University Center for Law, Economics and Finance Fourth Annual Regulatory Reform Symposium

Remarks at the George Washington University Center for Law, Economics and Finance Fourth Annual Regulatory Reform Symposium

Monday, October 29, 2012



The Securities and Exchange Commission today announced that it filed an insider trading civil action in the United States District Court for the Southern District of New York against Frank A. LoBue, a former Director of Store Operations at J.Crew Group, Inc. (J.Crew). The complaint alleges that LoBue used material, nonpublic information about sales and expenses of the company’s stores to purchase J.Crew common stock in advance of earnings announcements in May and August 2009.

The Commission’s complaint alleges that in the course of his employment LoBue regularly received nonpublic information about J.Crew’s "Stores" component, which comprised approximately 70% of the company’s sales. In April and May 2009, LoBue received several reports containing information about J.Crew’s expenses, payroll costs, and store sales results for the company’s fiscal first quarter ended May 2, 2009. The reports showed results that were better than expected. The complaint further alleges that LoBue breached duties he owed to the company and its shareholders by using the information to purchase 2,300 shares of J.Crew stock in advance of the company’s May 28, 2009 quarterly earnings release. The market reacted positively to the release, with J.Crew’s stock closing up 26.4% from its prior close.

The complaint also alleges that in July and August 2009 LoBue continued to receive the reports on J.Crew stores, including stores’ sales figures, and that the information showed that the company was experiencing an improving sales trend. The complaint alleges that LoBue again breached his duties by using this information to purchase another 11,680 shares of J.Crew stock ahead of the company’s August 27, 2009 second quarter earnings release. The day following the release, J.Crew stock closed up 6.01% from its prior close. LoBue’s aggregate illicit profits from trading alleged in the complaint were at least $60,735.60. J.Crew terminated LoBue’s employment in February 2010.

Without admitting or denying the allegations in the complaint, LoBue has consented to the entry of a proposed final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; ordering him to pay disgorgement of $60,735.60, plus prejudgment interest thereon of $6,749.33; and imposing a civil penalty in the amount of $60,735.60. The proposed settlement is subject to the approval of the District Court.

The Commission acknowledges the assistance of the Financial Industry Regulatory Authority.

Saturday, October 27, 2012



Washington, D.C., Oct. 26, 2012 — The Securities and Exchange Commission today charged an insurance company CEO with insider trading based on confidential information he obtained in advance of a private investment firm acquiring a significant stake in a Denver-based oil and gas company

The SEC alleges that Michael Van Gilder learned from a Delta Petroleum Corporation insider that Beverly Hills-based Tracinda — which has previously owned large portions of companies such as MGM Resorts International, General Motors, and Ford Motor Company — was planning to acquire a 35 percent stake in Delta Petroleum for $684 million. Van Gilder subsequently purchased Delta Petroleum stock and highly speculative options contracts. He tipped several others, encouraging them to do the same, including a pair of relatives via an e-mail with the subject line "Xmas present." After Tracinda’s investment was publicly announced, Delta Petroleum’s stock price shot up by almost 20 percent. Van Gilder and his tippees made more than $161,000 in illegal trading profits.

The U.S. Attorney’s Office for the District of Colorado today announced a parallel criminal action against Van Gilder.

"Michael Van Gilder crossed the line when he took advantage of highly confidential corporate information to make trades and reap illicit profits," said Sanjay Wadhwa, Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit and Associate Director of the New York Regional Office. "He may have thought that he could get away with it, but he is faced today with the consequences of his actions."

According to the SEC’s complaint filed in federal court in Denver, Van Gilder is the CEO of Van Gilder Insurance Company. He obtained the confidential information about Tracinda’s proposed investment and loaded up on Delta Petroleum stock and options in November and December 2007. He then tipped his broker, a co-worker, and relatives.

The SEC alleges that a mere two minutes after speaking to his source at Delta Petroleum on December 22, Van Gilder e-mailed two relatives with the "Xmas present" subject line and stated, "my present (just kidding) is that I can’t stress enough the opportunity right now to buy Delta Petroleum." That same day, Van Gilder contacted his broker and arranged to purchase more Delta stock and options for himself. Following the public announcement, Van Gilder reaped approximately $109,000 in illegal profits and his broker, co-worker, and a relative made approximately $52,000.

The SEC’s complaint charges Van Gilder with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering him to disgorge his and his tippees’ ill-gotten gains and pay prejudgment interest and a financial penalty, and permanently enjoining him from future violations of these provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by members of the SEC’s Market Abuse Unit — Michael Holland and Joseph Sansone in New York and Jeffrey Oraker and Jay Scoggins in Denver — with substantial assistance from Neil Hendelman of the New York Regional Office. Thomas Krysa, Regional Trial Counsel of the Denver Regional Office, Jeffrey Oraker and Michael Holland will handle the SEC’s litigation.

The SEC thanks the U.S. Attorney’s Offices for the District of Colorado and the Southern District of New York as well as the Federal Bureau of Investigation for their assistance in this matter.

Friday, October 26, 2012



International Association of Deposit Insurers Marks Tenth Anniversary and
Elects New President in London

The Federal Deposit Insurance Corporation (FDIC), the International Association of Deposit Insurers (IADI), the Bank Guarantee Fund of Poland and the Financial Services Compensation Scheme (FSCS) today announced that Acting FDIC Chairman Martin Gruenberg completed his five-year term as President of the IADI during the 11th Annual General Meeting (AGM) and Conference in London this week. Mr. Gruenberg also served as Executive Council Chairman of the Association. Mr. Gruenberg was first elected as IADI's President to serve a three-year term and then re-elected for a two-year term. During the meeting, Jerzy Pruski, President of the Management Board of the Bank Guarantee Fund of Poland, was elected IADI's President and Chairman of the Executive Council.

"It has been a privilege to serve as IADI's President for the past five years," said Mr. Gruenberg. "The financial crisis highlighted the importance of deposit insurance to financial stability and afforded IADI an opportunity to provide valuable leadership during this period."

During the past five years, IADI developed and brought to fruition the first internationally accepted standards for effective deposit insurance systems; and shared its vision of deposit insurance expertise and its mission to enhance deposit insurance effectiveness by promoting guidance and international cooperation. IADI is now recognized as the standard-setting body for deposit insurance by all the major public international financial institutions, including the Financial Stability Board of the Group of 20 (G-20), the Basel Committee for Banking Supervision, the International Monetary Fund and the World Bank.

IADI, which is celebrating its tenth anniversary, is a non-profit organization based in Basel, Switzerland. It contributes to the stability of financial systems around the world by promoting international cooperation and best practices among deposit insurers and other parties responsible for financial safety-net arrangements. The Association has led the effort to establish international standards for effective deposit insurance systems and has sponsored research and training to develop, launch and enhance the operations of national deposit insurance systems. IADI has grown from 26 founding members to 84 participants and partners in its first ten years.

"Jerzy Pruski is an outstanding leader who demonstrates great insight and depth of knowledge on issues related to financial stability and the role of deposit insurance in the financial safety-net. I sincerely welcome Jerzy as President of IADI and as the Chairman of the Executive Council," said Mr. Gruenberg.

Mr. Pruski said, "I am honored to lead this important international organization. I also would like to recognize the Association's new Treasurer, Ms. Rose Detho, the Director of the Deposit Protection Fund Board of Kenya, and thank outgoing Treasurer Bakhyt Mazhenova, Chairman of the Kazakhstan Deposit Insurance Fund, for her tireless service during her tenure".

Mark Neale, Chief Executive of the Financial Services Compensation Scheme (FSCS) noted the success of the week's conference and thanked all participants and speakers. "Deposit protection is a vital component of consumer confidence and financial stability. Mr. Gruenberg's leadership of IADI helped to enhance and promote deposit protection schemes internationally. More than 200 people attended the IADI conference representing all of IADI's Executive Council Members, including representatives from more than 40 countries from around the world. The quality of the speakers and the event itself show how far we have come in the last decade."


Photo Crdit:  U.S. Marshals Service

CFTC Charges Floridian Christopher Smithers with Fraud in Connection with Commodity-Related Activities and Violations of a Federal Court’s Prior Orders

Smithers allegedly defrauded customers in trading commodity futures contracts and in the purchase of gold bullion

Washington, DC
– The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a federal civil enforcement action in the U.S. District Court for the Southern District of Florida charging Christopher Smithers of Jupiter, Florida, with fraud in connection with his commodity-related activities in violation of the Commodity Exchange Act (CEA) and CFTC regulations. The CFTC complaint also charges Smithers with violating two prior U.S. District Court orders that, among other things, permanently prohibited Smithers from engaging in any commodity-related activities.

According to the complaint, filed on October 22, 2012, from at least October 2008 to March 2009, Smithers committed fraud by misrepresenting to customers that his commodity futures trading was profitable when it actually resulted in losses of $220,000. From June 22, 2011 through November 2011, Smithers allegedly falsely represented to various futures commission merchants the identity of the person who opened and controlled commodity trading accounts. Smithers made such misrepresentations to circumvent prior U.S. District Court orders that prohibited him from trading commodity futures contracts, according to the complaint.

The complaint also alleges that in 2011 Smithers misappropriated $162,980 of a customer’s funds that were provided to him for the purchase of gold bullion and that he used the funds for personal expenditures. Finally, during 2011, Smithers fraudulently solicited a customer for funds with which to trade commodity futures, according to the complaint.

The complaint alleges that Smithers’ commodity futures trading was in violation of two previous U.S. District Court for the Southern District of Florida orders of permanent injunction entered against him in CFTC v. Matrix Trading Group., Inc., David Weeden, and Christopher Smithers, Civil Action No. 00-8880-CIV-ZLOCH (S.D. Fla. Oct. 3, 2002) and CFTC v. Christopher Smithers, Prosperity Consultants, Inc., and Jack Smithers, Case No. 05-80592-CIV-Hurley (S.D. Fla. Nov. 6, 2006).

The CFTC complaint seeks civil monetary penalties and injunctive relief against Smithers.

CFTC Division of Enforcement staff responsible for this case are Harry E. Wedewer, Dmitriy Vilenskiy, Danielle E. Karst, John Einstman, Paul G. Hayeck, and Joan M. Manley.

Thursday, October 25, 2012

Enhancing Disclosure in the Municipal Securities Market: What Now?

Enhancing Disclosure in the Municipal Securities Market: What Now?



Federal Court Orders Robert A. Christy and His Company, Crabapple Capital Group LLC, to Pay over $2.6 Million in Monetary Sanctions for Foreign Currency Fraud

Court permanently bars defendants from commodities industry

Washington, DC
– The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring defendants Robert A. Christy of Milton, Ga., and his company, Crabapple Capital Group LLC (Crabapple) of Alpharetta, Ga., to pay over $2.6 million in monetary sanctions for foreign currency (forex) fraud.

Specifically, the order requires the defendants to pay a $1,541,882 civil monetary penalty and $1,099,598 in restitution to settle CFTC charges that they operated a forex commodity pool fraud, misappropriated customer funds, and made false statements to the National Futures Association (NFA). The order also imposes permanent trading and registration bans against the defendants and permanently prohibits them from violating the Commodity Exchange Act and CFTC regulations, as charged.

The order, filed on October 16, 2012, by Judge Richard W. Story of the U.S. District Court for the Northern District of Georgia, stems from a CFTC anti-fraud enforcement action filed against Christy and Crabapple on April 19, 2012 (see CFTC Press Release
6242-12, April 25, 2012).

The order finds that, from at least October 2008 through April 2012, the defendants defrauded 22 individuals who contributed $1,416,000 to an investment pool operated by Crabapple to trade forex. In the course of soliciting investors, according to the order, the defendants’ statements to pool participants regarding the defendants’ forex trading performance were completely false. Christy misrepresented Crabapple’s trading performance history and experience and advertised regular monthly trading profits when, in fact, Crabapple had experienced consistent and significant losses, the order finds.

The order also finds that the defendants misappropriated most of the pool participants’ money. Christy treated Crabapple’s checking account as his personal piggy bank, using the money in the account for a variety of personal, business, and marketing expenses, even though the defendants told pool participants that their contributions would be used to trade forex, according to the order.

The defendants concealed their fraud by preparing and distributing false monthly account statements to pool participants and by making false statements and submitting false accounting records to the NFA in the course of an NFA examination, the order finds.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia and the NFA.

CFTC Division of Enforcement staff responsible for this case are Jo Mettenburg, Thomas Simek, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.

Wednesday, October 24, 2012



CFTC Orders Morgan Stanley Smith Barney LLC to Pay $200,000 for Supervision Violations

Washington, DC
- The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges that Morgan Stanley Smith Barney LLC (the respondent), a futures commission merchant (FCM) based in Purchase, N.Y., violated CFTC regulation 166.3 by failing to diligently supervise its employees’ handing of customer accounts.

The CFTC order requires Morgan Stanley Smith Barney to pay a $200,000 civil monetary penalty and prohibits it from violating CFTC regulation 166.3, as charged.

According to the order, the respondent’s "Customer A" provided trust services for its clients. In the course of providing such services to one of its clients, the order finds that Customer A accepted orders to trade commodity futures contracts on behalf of its own third party client, accepted the third party client’s money to place those trades, and affected the trades via a contract market on the third party client’s behalf. These contracts were traded in a proprietary futures account in Customer A’s name carried initially at Citigroup Global Markets Inc. (CGMI), a registered FCM, and later in an account carried by the respondent, the order finds. Through these actions, Customer A acted as an FCM, without being registered as such, in violation of the Commodity Exchange Act (CEA), according to the order.

According to the order, from 2006 to 2008, Customer A conducted five transfers of funds from its proprietary commodity futures trading account to a third party client’s bank account. The fact that funds were moving from a proprietary trading account to a third party bank account should have led the respondent’s employees executing the transactions to question Customer A’s actions and to investigate to determine whether the account was being carried properly, the order finds.

However, the respondent’s employees failed to diligently investigate the suspicious transactions, according to the order.

No later than January 15, 2010, the respondent realized that Customer A’s proprietary futures trading account had been carried improperly since 2006, the order finds. Nonetheless, the respondent continued to allow trading on behalf of the third party client to take place in Customer A’s account in January 2010, March 2010, and May 2010, according to the order. The order finds that the third party client’s funds were ultimately moved from Customer A’s proprietary account to an account in the third party client’s name on or about May 27, 2010.

At the time of the above-described events, the respondent maintained an inadequate system of supervision and internal controls to detect and deter violations of the CEA and CFTC regulations, the order finds. Consequently, the respondent failed to diligently supervise the handling by its partners, officers, employees and agents relating to its business as a CFTC registrant, in violation of regulation 166.3, the order finds.

CFTC Division of Enforcement staff responsible for this case are Jason Mahoney, Timothy J. Mulreany, George Malas, Paul Hayeck, and Joan Manley.

Monday, October 22, 2012



On October 18, 2012, the Securities and Exchange Commission charged Joseph Pacifico, a former President of Carter’s, Inc., the Atlanta-based marketer of children’s clothing, for engaging in financial fraud at Carter’s. The SEC alleges that Pacifico’s misconduct caused Carter’s to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.

The SEC’s complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Carter’s Executive Vice President of Sales, Joseph Elles, who reported to Pacifico, fraudulently manipulated the amount of discounts that Carter’s granted to its largest wholesale customer in order to induce that customer—itself a large national department store—to purchase greater quantities of Carter’s clothing for resale. Elles then concealed his conduct by persuading the customer to defer subtracting the discounts from payments until later periods and creating and signing false documents misrepresenting the timing and amount of those discounts to Carter’s accounting personnel.

After Pacifico discovered Elles’s scheme, the complaint alleges that Pacifico signed a false certification to Carter’s accounting personnel that understated the amount discounts that Carter’s owed to the customer. The complained also alleges that Pacifico signed false internal forms that also misstated that discounts to be paid to the customer related to sales in 2009 when, in fact, the discounts related to prior financial periods. After conducting its own internal investigation, Carter’s was required to issue restated financial results for the affected periods.

The SEC’s complaint alleges that Pacifico violated Section 17(a)(2) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5(b) and 13b2-1 thereunder, and aided and abetted Carter’s violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5(b),12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is seeking permanent injunctive relief, financial penalties, and an officer and director bar against Pacifico.

Sunday, October 21, 2012



On October 18, 2012, the United States Securities and Exchange Commission charged Geoffrey H. Lunn, Darlene A. Bishop and Vincent G. Curry for their roles in making false and misleading statements to investors and misappropriating investors’ money in connection with a $5.77 million investment scheme under the name of Dresdner Financial, a fictitious financial services company purportedly based in Chicago, Illinois.

The SEC’s complaint, filed in the U.S. District Court for the District of Colorado, alleged that between February 2010 and February 2011, the defendants raised $5.77 million from at least 70 investors located throughout the United States and several foreign countries. According to the complaint, Lunn solicited marketers and investors to the scheme by telling them that he was the Vice-President of Dresdner and that Dresdner’s principals had connections to Dresdner Bank (formerly one of Germany’s largest banks). As marketers, Bishop and Curry played significant roles in the scheme by soliciting and lulling investors while receiving payments from the investors’ money. The complaint alleged that Lunn, Bishop and Curry told investors that Dresdner offered 100% guaranteed rates of return through a process involving the lease and monetization of bank instruments. For example, the defendants told investors that by investing $44,000 in Dresdner’s .44 Magnum Leveraged Financing Program, they would receive a payment of $2 million within 10-12 banking days. When they were unable to repay investors after the promised 10-12 days, the defendants perpetuated the scheme by repeatedly postponing the payout dates and claiming that the delays were due to holds placed by banks or the government. In reality, all of these statements were false and Dresdner and its investment programs were nothing more than an elaborate hoax.

According to the complaint, Lunn did not invest any of the investors’ funds as promised. Instead, Lunn began making cash withdrawals from the investors’ money after the very first deposit. Over the course of the scheme, Lunn withdrew over $1 million in cash and Western Union transfers which he claims to have given to Dresdner’s creator, a one-eyed man who used the alias "Robert Perello." Lunn also gave at least $848,500 to three Las Vegas call girls, paid over $1.3 million to marketers (including over $650,000 to Bishop and Curry), paid $1 million to a favored investor in a Ponzi-like payment, and using the remaining investor funds to pay for his personal and business expenses.

The SEC’s complaint alleges that Lunn, Bishop and Curry violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the broker registration provisions of Section 15(a) of the Exchange Act. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest and civil penalties against all three defendants.

Friday, October 19, 2012

Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws

Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws



Washington, D.C., Oct. 18, 2012 — The Securities and Exchange Commission today announced that a Hong Kong-based firm charged with insider trading in July has agreed to settle the case by paying more than $14 million, which is double the amount of its alleged illicit profits. The proposed settlement is subject to the approval of Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York.

The SEC filed an emergency action against Well Advantate to freeze its assets less than 24 hours after the firm placed an order to liquidate its entire position in Nexen Inc. The SEC alleged that Well Advantage had stockpiled shares of Nexen stock based on confidential information that China-based CNOOC Ltd. was about to announce an acquisition of Nexen. Well Advantage sold those shares for more than $7 million in illicit profits immediately after the deal was publicly announced. Well Advantage is controlled by prominent Hong Kong businessman Zhang Zhi Rong, who also controls another company that has a "strategic cooperation agreement" with CNOOC.

"If approved by the court, Well Advantage has agreed to give up all of its ill-gotten profits from these trades and pay a substantial penalty on top of that," said Sanjay Wadhwa, Deputy Chief of the SEC Enforcement Division's Market Abuse Unit and Associate Director of the New York Regional Office. "The speedy resolution of this case shows the serious consequences that await traders who engage in insider trading."

Well Advantage has agreed to the entry of a final judgment requiring payment of $7,122,633.52 in illegal profits made from trading Nexen stock, and payment of a $7,122,633.52 penalty. The proposed judgment also enjoins Well Advantage from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. Well Advantage neither admits nor denies the charges.

The SEC's investigation, which is continuing, has been conducted by Michael P. Holland, Simona Suh, Charles D. Riely, and Joseph G. Sansone — members of the SEC's Market Abuse Unit in New York - and Elzbieta Wraga and Aaron Arnzen of the New York Regional Office.

The SEC appreciates the assistance of the Financial Industry Regulatory Authority(FINRA

Thursday, October 18, 2012



Washington, D.C., Oct. 17, 2012The Securities and Exchange Commission today charged a former $1 billion hedge fund advisory firm and two executives with scheming to overvalue assets under management and exaggerate the reported returns of hedge funds they managed in order to hide losses and increase the fees collected from investors.

The SEC alleges that New Jersey-based Yorkville Advisors LLC, founder and president Mark Angelo, and chief financial officer Edward Schinik enticed pension funds and other investors to invest in their hedge funds by falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure. They misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.

This is the seventh case arising from the SEC’s Aberrational Performance Inquiry, an initiative by the Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns. Performance that is flagged as inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny.

"The analytics put Yorkville front and center on our radar screen," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "When we looked further we found lies to investors and the firm’s auditors as well as a scheme to inflate fees by grossly overvaluing fund assets. We will continue to pursue hedge fund managers whose success is based on fiction rather than fact."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Yorkville, Angelo, and Schinik defrauded investors in the YA Global Investments (U.S.) LP and YA Offshore Global Investments Ltd hedge funds.

The SEC alleges that Yorkville and the two executives:
Failed to adhere to Yorkville’s stated valuation policies.
Ignored negative information about certain investments by the funds.
Withheld adverse information about fund investments from Yorkville’s auditor, which enabled Yorkville to carry some of its largest investments at inflated values.
Misled investors about the liquidity of the funds, collateral underlying the investments, and Yorkville’s use of a third-party valuation firm.

The SEC alleges that by fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik enticed more than $280 million in investments from pension funds and funds of funds. This enabled Yorkville to charge the funds at least $10 million in excess fees based on the inflated values of Yorkville’s assets under management.

The SEC’s complaint charges Yorkville with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Yorkville also is charged with violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Angelo is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-8. He also is charged with aiding and abetting Yorkville’s violations of the Exchange Act and Advisers Act. Schinik is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and with aiding and abetting Yorkville’s violations of the Exchange Act and Advisers Act.

The SEC’s Aberrational Performance Inquiry is a joint effort among staff in its Division of Enforcement, Office of Compliance, Inspections and Examinations, and Division of Risk, Strategy and Financial Innovation. The SEC’s investigation was conducted by Stephen B. Holden, Brian Fitzpatrick, and Kenneth Gottlieb with the support of Frank Milewski under the supervision of Valerie A. Szczepanik and Ken Joseph. The SEC’s litigation is being led by Todd Brody.

Wednesday, October 17, 2012

SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants

SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants



October 5, 2012 the Honorable James C. Mahan, United States District Judge

for the District of Nevada, entered a Final Judgment against Derek F.C. Elliott

On May 24, 2012, the United States Securities and Exchange Commission filed a

complaint, in the United States District Court for the District of Nevada,

against James B. Catledge, Derek F.C. Elliott, EMI Resorts (S.V.G.) Inc., EMI

Sun Village, Inc. and Sun Village Juan Dolio alleging that James B. Catledge and

Elliott, and certain of their related entities, made material misrepresentations

to investors in connection with the unregistered sale of interests in two

resorts in the Dominican Republic. The Final Judgment against Elliot seeks no

civil penalty at this time, waives disgorgement and authorizes the Commission to

seek a civil penalty of not more than $250,000 by subsequent motion.

The Final Judgment enjoins Elliott from future violations of Sections 5(a),

5(c) and 17(a)(1), (2) and (3) of the Securities Act of 1933 and Section 15(a)

of the Securities Exchange Act of 1934. Elliott consented to the relief granted

in the Final Judgment.

Monday, October 15, 2012



James L. Cooper Held in Civil Contempt after Failing to Comply With Judgment

The Securities and Exchange Commission today announced that on August 20, 2012, the Honorable Jack Zouhary of the United States District Court for the Northern District of Ohio found James L. Douglas a/k/a James L. Cooper in civil contempt for failure to pay in full a judgment entered in 1983.

On January 18, 1982, the SEC filed a complaint against Douglas, alleging that he had raised more than $7.5 million by offering and selling unregistered oil and gas partnerships through false pretenses. Douglas subsequently settled. On August 26, 1983, the Court entered an Order Directing Ancillary Relief, ordering him to disgorge $200,000 within three years.

Douglas did not comply with the Court’s payment schedule, paying only $121,975.29 of the $200,000 judgment, and leaving an unpaid balance of $78,024.71 plus post-judgment interest. Counsel for Douglas at the time reported that Douglas lacked the ability to pay, and that Douglas may have moved to Scotland.

Based on the non-payment, the SEC filed a motion for contempt on July 8, 1988. On August 8, 1988, the Court granted the SEC’s motion, found Douglas in contempt, and issued a warrant for his arrest. The warrant was never executed because the U.S. Marshals could not locate Douglas. In 2010, the SEC learned that Douglas had returned to the U.S. and that his fortunes had changed. Douglas filed suit on behalf of his deceased wife’s estate against several tobacco companies in Florida state court. In March, 2010, the jury awarded $2.5 million to the Estate of Charlotte M. Douglas, of which Douglas is the sole beneficiary. The verdict is currently on appeal to the Supreme Court of Florida.

On January 23, 2012, the SEC filed a Motion for a Rule to Show Cause and for an Order of Civil Contempt, requesting that the Court hold Douglas in contempt for a second time. The Court presided over four days of evidentiary hearings. On August 20, 2012, the Court granted the SEC’s motion, holding Douglas in contempt for a second time. The Court ruled that "Defendant’s lavish lifestyle apparently is over, but he has dodged his legal debt long enough, and it is high time for him to pay what he owes." See August 20, 2012 Memorandum Opinion and Order. The Court also ruled that, under 28 U.S.C. § 1961, Douglas must pay post-judgment interest at the statutory rate of 10.74% from the "date of the entry of the judgment" in 1983. "That rate may seem high by today’s standards, but it is properly calculated. . . . And if [Douglas] finds the amount due unreasonable, it is the result of his own misconduct for avoiding payment for so long." See August 20, 2012 Memorandum Opinion and Order. Based on the SEC’s calculation, the post-judgment interest now exceeds $1.7 million.

Sunday, October 14, 2012



CFTC Orders Farr Financial Inc. to Pay $280,000 to Settle Charges of Improper Investment of Customer Segregated Funds and Supervision Failures

Washington, DC
– The U.S. Commodity Futures Trading Commission (CFTC) today announced the Farr Financial Inc. (Farr) of San Jose, Calif., agreed to pay a $280,000 civil monetary penalty to settle CFTC charges that it failed to properly invest customer segregated funds and failed to diligently supervise those investment activities. Farr is currently registered with the CFTC as an introducing broker and was registered as a futures commission merchant (FCM) during the period relevant to the settlement.

FCMs receive money, securities, and other property (funds) from their customers to margin, guarantee, or secure the customers’ futures and options trades. Under the Commodity Exchange Act (CEA) and CFTC regulations, FCMs are required to segregate customer funds from funds belonging to the FCM, and can invest customer funds only in investments enumerated in CFTC regulation 1.25, such as obligations of the United States, any state (or subdivision thereof), obligations fully guaranteed as to principal and interest by the United States, and other specified instruments that satisfy a general prudential standard consistent with the objectives of preserving principal and maintaining liquidity for customer funds.

During the period from late 2007 through the end of 2010, Farr invested customer funds in at least seven different accounts that failed to comply with the requirements of regulation 1.25, the CFTC order finds. These investments included (1) an investment in a money market mutual fund from which funds could not be withdrawn by the next business day as required by regulation 1.25, (2) five savings or money market deposit accounts, which are not permitted investments under regulation 1.25, and (3) a certificate of deposit whose issuer did not meet the then-existing credit rating requirement of regulation 1.25, the order finds.

Furthermore, Farr failed to diligently supervise its employees and agents in violation of regulation 166.3, the order finds. Farr failed to implement any written policies or procedures governing the opening and maintenance of customer segregated accounts and failed to implement an adequate supervisory structure to insure the proper segregation of funds, according to the order.

Farr also violated several other regulations involving customer funds, including failing to prepare and maintain certain required records and miscalculating the amount of money it was required to segregate for its customers, according to the order.

In addition to imposing the $280,000 civil monetary penalty, the CFTC order requires Farr to cease and desist from further violations of the CEA and CFTC regulations, as charged.

The CFTC thanks the National Futures Association for its assistance in this matter.

CFTC staff members responsible for this case are Theodore Z. Polley III, Ken Hampton, William P. Janulis, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner of the CFTC’s Division of Enforcement, and Tom Bloom and Kurt J. Harms of CFTC’s Division of Swap Dealer and Intermediary Oversight.

Saturday, October 13, 2012



Attorney General Eric Holder Speaks at the Southeastern Regional Investor Fraud Summit

Miami ~ Friday, October 12, 2012

Thank you, Willy, for that kind introduction, and for the great work that you – and your team in the United States Attorney’s Office – are leading here in the Southern District of Florida.

It’s a pleasure to be back in Miami this afternoon, and a privilege to join with so many critical leaders – including the outstanding U.S. Attorneys for the Middle and Northern Districts of Florida, Robert O’Neill and Pamela Marsh; the many dedicated investigators, law enforcement leaders, attorneys, and support staff who stand on the front lines of our anti-fraud efforts every day; as well as a broad range of critical partners – from the FBI, to state and local authorities, to the Federal Trade Commission, the Securities and Exchange Commission, and other agencies – as we explore strategies for advancing the Justice Department’s efforts to prevent and combat investor fraud; and to protect the rights, interests, and security of the American people.

Thank you all for being here. I also want to thank President [Eduardo] Padron, and the Miami Dade College community, for hosting this important Summit. And I want you to know that this entire community – and, especially, the victims of this week’s tragic accident – are in our thoughts and prayers at this difficult time.

Today marks the last of six regional summits that have been convened over the last twelve days in fraud "hot spots" across the country. And I’m grateful that we have such a large and diverse group gathered here. I’d like to extend a special welcome to the experts and allies from the AARP, FINRA , and other private sector, non-profit, and advocacy organizations – who are here to help drive this conversation forward. Finally, I’d like to recognize, and thank, Dr. John Gentile and Manuel Comella for courageously sharing their personal stories with us, for teaching us about the devastating impact that fraud crimes can have, and for raising their voices to help prevent others from being victimized.

Especially today – as our nation continues to recover from once-in-a-generation economic challenges, and as we move to confront a recent, and troubling, rise in investment fraud schemes – the urgency of this work has been brought into stark focus. And, as you’ve been discussing, the need to move both aggressively and collaboratively to help the American people safeguard their homes, their investments, and their hard-earned savings – and to bring fraudsters to justice – has never been more clear.

Recent estimates reveal that, since 2011, more than $20 billion has been lost to investment fraud schemes – and that, between 2008 and 2011, the incidence of these crimes increased by more than 130 percent. The FBI has indicated that these offenses represent an astonishing 60 percent of all corporate and securities fraud investigations that are currently being conducted. And their scope and complexity continues to increase.

From illegal kickback and market manipulation plots, to Ponzi schemes, business opportunity scams, affinity fraud, and "strike it rich" scams – we’ve seen that these crimes are as diverse as the imaginations of those who perpetrate them, and as sophisticated as modern technology will permit. Their costs can be measured not only in dollars and cents – but in lives turned upside down.

Far more compelling than any statistics I can cite are the stories you heard this morning – and thousands like them that play out every day in cities and towns across the country. Heartbreaking stories of bankruptcies, foreclosures, forced moves, and unexpected debt; of individual lives and families shattered by fraud; and of entire communities devastated by the actions of those who violate the law to take advantage of their fellow citizens – and, all too often, their own neighbors, coworkers, and family members.

You’ve all heard these tragic stories – and some of you have seen and experienced the consequences of investor fraud crimes firsthand. Not only do you understand what we’re up against, you also recognize that this problem has reached crisis proportions – that fraud is most frequently committed by seemingly trustworthy individuals who prey upon their fellow community members; and that these schemes often target senior citizens and other vulnerable members of society.

Even more importantly, you know – as I do – that, despite our record of success, and despite the Justice Department’s commitment to fighting investor fraud, government won’t be able to make the progress we need – and attain the results that the American people deserve – on its own. By taking part in today’s Summit, you’ve proven your dedication to helping us confront these challenges. And I want to assure you that you’ll always have a strong partner – and a steadfast ally – in our nation’s Department of Justice, and in your local United States Attorney’s Office.

At every level, my colleagues and I have made the fight against financial fraud a top priority. We’re more determined than ever to eradicate these crimes – and, alongside more than two dozen additional federal government agencies and private sector partners, we’ve made an historic commitment to advancing this work at the national level. We’ve also made remarkable progress.

Driving this effort forward is the Financial Fraud Enforcement Task Force, which constitutes the largest coalition ever assembled to combat financial fraud. I am honored to chair this Task Force – and we can all be encouraged by what it is enabling us to achieve. Since its inception in 2009, the Task Force has helped to leverage the tremendous strength of federal, state, local, and tribal partnerships; to streamline the investigative and enforcement efforts of multiple agencies that can operate across jurisdictions and state lines; and to advance cutting-edge strategies for recovering – and more effectively utilizing – precious taxpayer resources.

Already, this approach is paying dividends. In February, in cooperation with the Department of Housing and Urban Development, 49 state attorneys general, and other partners, the Justice Department reached the largest residential mortgage fraud settlement ever obtained – totaling $25 billion – with five of the nation’s top mortgage servicers. Earlier this year, the Financial Fraud Enforcement Task Force launched a Residential Mortgage-Backed Securities Working Group and a Consumer Protection Working Group to help take our comprehensive fraud-fighting efforts to a new level. On Tuesday of this week, I was proud to join HUD Secretary Donovan and other federal officials in announcing the results of an historic initiative that has helped tens of thousands of homeowners in distress. And just yesterday, I joined with Health and Human Services Secretary Kathleen Sebelius to convene the first-ever meeting of the interagency Elder Justice Coordinating Council – a group that will help guide national efforts to safeguard America’s seniors from neglect, abuse, and financial exploitation, including the fraud crimes we’ve gathered to discuss today.

All of this is only the beginning in our fight against investor fraud. As a result of the cooperation made possible by the Task Force – and thanks to the hard work of investigators, prosecutors, law enforcement officials, and analysts at every level of the Justice Department, in each of our U.S. Attorneys’ Offices, and across a variety of partner agencies and organizations, many of which are represented here – we’ve devoted substantial resources, and an unprecedented level of attention, to stemming the rise in investment fraud schemes. Since the beginning of last year, federal prosecutors have brought a total of roughly 500 cases involving approximately 800 defendants who have been charged, tried, pled, or sentenced because of their alleged involvement in these crimes. And we have secured a 97 percent rate of incarceration for convicted defendants, with many receiving sentences of 10 years or more.

These include a prison sentence of 50 years that was obtained against an individual who preyed on more than 400 elderly victims in a $40 million Ponzi scheme – as well as a sentence of 30 years against another perpetrator who used roughly $15 million that had been entrusted to him by more than 160 retirees to build a home for himself, buy jewelry and luxury cars, pay his friends and family, and make private investments of his own. Right here in the Southern District of Florida, just over two years ago, a high-profile attorney from Ft. Lauderdale pleaded guilty to running a massive $1.2 billion Ponzi scheme – for which he is currently serving a 50-year prison sentence. And last November, we secured a sentence of 20 years against another Florida man who orchestrated a $30 million fraud scheme that victimized more than 500 people.

Here in the Southern Florida, your United States Attorney’s Office has brought together a number of federal and state authorities to fight back against these crimes. To date, their efforts have resulted in charges against more than 100 defendants and over $1.5 billion in restitution ordered. And their work remains ongoing. In fact, just two days ago, Willy and his team – and their colleagues in the Consumer Protection Branch of the Justice Department’s Civil Division – announced yet another indictment charging 10 defendants with participating in a scam that allegedly defrauded thousands of victims – by persuading them to invest in a vending machine business, then failing to deliver on their promises.

Now, these are just a few examples of the significant results we’ve obtained – and the meaningful, measurable progress that’s been made – in our efforts to prevent, deter, and punish fraud targeting investors. Yet there’s no question that serious challenges remain before us. Significant threats are all too common. And it’s only by working together, engaging with relevant authorities at every level, and enlisting the support of an informed public – that we’ll be able to make the difference we need, and capitalize on the momentum we’ve built.

That’s why I made it a priority to be here this afternoon: not only to listen, to learn, and to hear from all of you – but also to pledge my strongest support, and my own best efforts, in carrying this extraordinary work into the future.

Today’s event may mark the last in this series of Regional Investor Fraud Summits – but it proves that our anti-fraud efforts are only just beginning. And, as I look out over this crowd – of dedicated colleagues and indispensible partners – that’s gathered here today, I can’t help but feel confident in where this work will lead us from here. Though this effort is the responsibility of us all, I pledge that this Department of Justice will do whatever is needed to ensure the outcome we want. Our work will not be easy and the completion of our task will take time. But if we remain focused, if we continue to work together, we can, and will, hold accountable those who would prey on our fellow citizens, bring relief to those who have been victimized, and make our nation more safe and more secure.

Thank you.

Friday, October 12, 2012



Washington, D.C., Oct. 3, 2012 — The Securities and Exchange Commission separately charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their respective hedge funds. The charges are the latest in a series of actions taken by the SEC Enforcement Division and its Asset Management Unit against hedge fund-related misconduct in the markets.

In one case, the SEC alleges that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

Since the beginning of 2010, the SEC has filed more than 100 cases involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest. The SEC
issued an investor bulletin detailing some of those cases as examples of why investors must rigorously evaluate a hedge fund investment before making one.

"These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry."

In the past few weeks alone, the SEC has
charged an Atlanta-based private fund manager and his firm with defrauding investors in a purported "fund-of-funds" and then trying to hide trading losses, charged a hedge fund adviser in Oregon with running a $37 million Ponzi scheme through several hedge funds he managed, and charged a New York-based hedge fund manager who touted a diversified and controlled-risk investment strategy for his fund while in reality misusing investor assets to prop up a failing private company. The New York-based fund manager also failed to disclose conflicts of interest, and he falsely overstated his firm’s assets under management in various magazine articles he authored.

"The most serious hedge fund frauds involve advisers who play fast and loose with investor money," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "Investors can complement the SEC’s vigilant enforcement against hedge fund misconduct by becoming increasingly wary of hedge fund managers who boast extreme performance measures and asking well-informed questions about investment strategy, fees, and potential conflicts of interest."

According to the SEC’s complaint filed against Banet and Lion Capital Management in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy. Instead, Banet brazenly took the teacher’s investment totaling $550,000 and used it to pay unauthorized personal and business expenses, including his home mortgage, office rent, and staff salaries. Banet also provided phony account statements showing non-existent investment gains and listing an independent administrator that performed no actual work for the fund.

In a parallel action, the U.S. Attorney’s Office for the Northern District of California today announced criminal charges against Banet. The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office, Federal Bureau of Investigation (FBI), and Immigration and Customs Enforcement (ICE).

According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services filed in federal court in Chicago, investors in the hedge fund were not told that its adviser removed various performance hurdles when calculating fees. Furthermore, inappropriate capital withdrawals were made from the fund. Goldstein, Gatherum, and their firm never told their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state. But even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisers.

The SEC’s investigation of Lion Capital Management was conducted by Sahil Desai and Robert Leach of the Asset Management Unit in the San Francisco Regional Office. John Yun is leading the SEC’s litigation. The SEC’s investigation of GEI Financial Services – which stemmed from an Asset Management Unit initiative to detect misconduct by pursuing registered investment advisers with repeated compliance examination deficiencies – was conducted by Andrew Shoenthal, Jeson Patel, Malinda Pileggi, Vanessa Horton, and Paul Montoya of the Chicago Regional Office. John E. Birkenheier is leading the litigation.

The SEC’s investor bulletin on hedge funds was prepared by the Office of Investor Education and Advocacy. It recommends that investors understand a hedge fund’s investment strategy and its use of leverage and speculative techniques before making the investment. It also explains the need to evaluate a hedge fund manager’s potential conflicts of interest and take other steps to research those managing the fund.

"Hedge fund investments generally perform differently, involve higher fees and less liquidity, and may carry greater investment and fraud risk than the mutual funds that investors are accustomed to," said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. "This investor bulletin describes the rigorous due diligence steps that financially-qualified investors should consider before making any hedge fund investment."

Thursday, October 11, 2012



Washington, DC, Sept. 27, 2012 –The Securities and Exchange Commission today issued a staff report intended to help broker-dealers safeguard confidential information from misuse, such as insider trading. The report by the Office of Compliance Inspections and Examinations (OCIE) describes strengths and weaknesses identified in examinations into how broker-dealers keep material nonpublic information from being misused.

This report should help broker-dealers assess the effectiveness of their controls over sensitive information," said OCIE Director Carlo di Florio. "The report illustrates the types of conflicts of interest that may arise between a broker-dealer’s obligations to clients that provide confidential information for business purposes and the potential misuse of such information for insider trading or other improper ends. It also describes various methods that broker-dealers use to identify and effectively manage such conflicts, including information barriers that limit the flow of sensitive information."

Conflicts of interest and other issues of concern raised by the report include:
A significant amount of informal, undocumented interaction occurred between groups that have material nonpublic information and internal and external groups with sales and trading responsibilities that might profit from the misuse of such material nonpublic information
At some broker-dealers, a senior executive might have access to material nonpublic information from one business unit while overseeing a different unit that could potentially profit from misuse of that information, with few if any restrictions or monitoring to prevent such misuse
Some broker-dealers did not have risk controls to address certain business units that possess material nonpublic information such as sales, trading or research personnel who receive confidential information for business purposes; institutional and retail customers or asset management affiliates with access to material nonpublic information, or firm personnel who receive information through business activities outside of investment banking, such as participation in bankruptcy committees or through employees serving on the boards of directors of public companies.

The report also highlights effective practices that examiners observed at some broker-dealers, such as:
Broker-dealers sometimes adopted processes that differentiate between types of material nonpublic information based on the nature of the information or where it originated. In some cases, broker-dealers create tailored "exception" reports that take into account the different characteristics of the information
Some broker-dealers expanded reviews for potential misuse of confidential information to include trading in credit default swaps, equity or total return swaps, loans, components of pooled securities such as unit investment trusts and exchange traded funds, warrants, and bond options
Broker-dealers often considered electronic sources of confidential information and instituted monitoring to identify which employees had accessed the information
Broker-dealers often monitored access rights for key cards and computer networks to confirm that only authorized personnel had access to sensitive areas.

The types of issues identified in this report may be helpful to firms as they review their conflict of interest risk management programs. In particular, in any review of information barriers control programs, broker-dealers should be alert to changes in business practices and available compliance tools.

Tuesday, October 9, 2012



Washington, D.C., Oct. 5, 2012The Securities and Exchange Commission today charged four brokers who formerly worked on the cash desk at a New York-based broker-dealer with illegally overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades.

The SEC alleges that the brokers purported to charge customers very low commission fees that were typically pennies or fractions of pennies per transaction, but in reality they were reporting false prices when executing the orders to purchase and sell securities on behalf of their customers. The brokers made their scheme especially difficult to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers. The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period. Some fees were altered by more than 1000 percent of what was being told to customers.

The SEC further alleges that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Meanwhile, the brokers made millions of dollars in illicit performance bonuses based on the fraudulent earnings they were generating on the cash desk.

The brokers charged in the SEC’s complaint are Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron.

"These brokers stole millions of dollars by overcharging customers for trades involving stocks with high trading volumes and price volatility, which are characteristics they wrongly thought would conceal their illicit pricing scheme," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "They underestimated the SEC’s ability and resolve to pursue such illegal schemes."
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty to criminal charges.

According to the SEC’s complaint filed in federal court in Manhattan, the brokers were employed at an interdealer broker firm. Interdealer brokers typically operate only as agents and execute large volumes of securities trades on behalf of customers for low commissions. The cash desk where these brokers worked executed trades in U.S. and Canadian stocks, and customers were primarily large foreign institutions and foreign banks. The firm’s internal records show that customers were to be charged flat commission rates between $0.005 and $0.02 per share.

The SEC’s complaint alleges that the scheme spanned from 2005 to 2009. Reyftmann, Chouchane, and Leszczynski were sales brokers on the cash desk who were responsible for finding customers, developing relationships, and taking orders from customers. Reyftmann supervised the cash desk. Condron was a sales trader and middle-office assistant on the cash desk who entered orders received from the sales brokers and ensured the orders were executed.

The SEC alleges that the fraudulent scheme worked as follows:
Leszczynski, Chouchane, or Reyftmann received a customer order by phone, instant message, or e-mail and gave the order to Condron, who executed the trade.
Condron recorded the actual execution price on the trade blotter and informed the sales brokers of the execution.
Shortly after the trade was executed, Leszczynski, Chouchane, or Reyftmann examined other market executions around the time of the actual execution to determine whether the stock price fluctuated.
If the stock price’s fluctuation was favorable to the firm and sufficient to conceal the fraud from customers, the sales brokers instructed Condron to record a false execution price in the gross price field on their internal trade blotter.
Leszczynski, Chouchane, Reyftmann, or Condron then reported the false execution price and the commission to the customers.

The SEC alleges that the brokers further defrauded customers by stealing portions of their profitable trades and keeping them for the firm:
After receiving and executing a customer’s limit order to buy shares, Reyftmann, Chouchane, or Leszczynski looked for an opportunity to sell that same stock at a higher price than the price at which the customer’s trade was executed.
Leszczynski, Chouchane, or Reyftmann then instructed Condron to sell a portion of that customer execution back at the higher price.
Rather than properly recording the actual price and quantity of the order fill, Condron entered a partial fill into the trade blotter, keeping the secret profits for the firm.
Leszczynski, Chouchane, Reyftmann, or Condron then reported a partial fill to the customer, falsely stating that they were unable to fully execute the customer’s limit order.

Meanwhile, the SEC alleges that the brokers’ scheme enriched not only the firm but themselves as well. The four brokers received substantial performance bonuses totaling more than $15.6 million based, in part, on the fraudulent earnings generated by the cash desk.

The SEC alleges that Leszczynski, Chouchane, Reyftmann, and Condron violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation, which is continuing, has been conducted by Mary P. Hansen (Assistant Director in the Market Abuse Unit in the Philadelphia Regional Office), A. Kristina Littman (Senior Counsel in the Philadelphia office) and Darren Boerner (Specialist in the Market Abuse Unit in the Chicago Regional Office). G. Jeffrey Boujoukos (Regional Trial Counsel) and John V. Donnelly (Senior Trial Counsel) in the Philadelphia office are handling the litigation.

The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation

Monday, October 8, 2012



Investor Bulletin: Top Tips for Selecting a Financial Professional

Choosing a financial professional-whether a stockbroker, a financial planner, or an investment adviser-is an important decision. Consider the tips below as you make your choice. Also the third page of this document has a list of questions you can ask a financial professional whose services you are considering.

Tip 1. Do your homework and ask questions.

A lot of the information you’ll need to make a choice will be in the documents the financial professional can provide you about opening an account or starting a relationship. You should read them carefully. If you don’t understand something, ask questions until you do. It’s your money and you should feel comfortable asking about it.

Tip 2. Find out whether the products and services available are right for you.

Financial professionals offer a range of financial and investment services such as:
Financial planning
Ongoing money management
Advice on choosing securities
Tax and retirement planning
Insurance advice

Just like a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection. Think about what you might need, and ask about what would be available to you. For example, do you want or need:

Access to a broad range of securities, such as stocks, options and bonds, or will you mostly want a few types such as mutual funds, exchange traded funds, or insurance products?
A one-time review or financial plan?
To do your own research, but use the financial professional to make your trades or to provide a second opinion occasionally?
A recommendation each time you think about changing or making an investment?
Ongoing investment management, with the financial professional getting your permission before any purchase or sale is made?
Ongoing investment management, where the financial professional decides what purchases or sales are made, and you are told about it afterwards?

Tip 3. Understand how you’ll pay for services and products, and how your financial professional gets paid as well.

Many firms offer more than one type of account. You may be able to pay for services differently depending on the type of account you choose. For example, you might pay:
An hourly fee for advisory services;
A flat fee, such as $500 per year, for an annual portfolio review or $2,000 for a financial plan;
A commission on the securities bought or sold, such as $12 per trade;
A fee (sometimes called a "load") based on the amount you invest in a mutual fund or variable annuity
A "mark-up" when you buy "house" products (such as bonds that the broker holds in inventory), or a "mark-down" when you sell them
Depending on what services you want, one type of account may cost you less than another. Ask about what alternatives make sense for you.

And remember: even if you don’t pay the financial professional directly, such as through an annual fee, that person is still getting paid. For example, someone else may be paying the financial professional for selling specific products. However, those payments may be built into the costs you ultimately pay, such as the expenses associated with buying or holding a financial product.

While some of these fees may seem small, it is important to keep in mind that they can add up, and in the end take away from the profits you otherwise could be making from your investments.

Tip 4. Ask about the financial professional’s experience and credentials.

Financial professionals hold different licenses. For example, financial professionals who are broker-dealers must take an exam to hold a license, while state regulators often require investment advisers to hold certain licenses. Financial professionals also have a wide range of educational and professional backgrounds. They may also have certain designations after their names, which are titles given by industry groups that themselves are not regulated or subject to standards other than their own. If a financial professional has an industry designation, like "CFA," you can look up what it stands for at the "Understanding Investment Professional Designations" page on FINRA’s website at Don’t accept a professional designation as a badge of knowledge without knowing what it means.

Tip 5. Ask the financial professional if he or she has had a disciplinary history with a government regulator or had customer complaints.
Even if a close friend or relative has recommended a financial professional, you should check the person’s background for signs of any potential problems, such as a disciplinary history by a regulator or customer complaints. The SEC, FINRA, and state securities regulators keep records on the disciplinary history of many of the financial professionals they regulate.
Check the background of your financial professional to learn more or to help confirm what he or she has told you:
For financial professionals who are brokers: you can find background information on the person and his/her firm at
FINRA’s BrokerCheck website.
For financial professionals who are investment advisers registered with the SEC: you can find background information on the person and his/her firm at the SEC’s Investment Adviser Public Disclosure database.
State securities regulators also have background information on brokers as well as certain investment advisers. You can find your state regulator at

Investor Checklist
Some Key Questions for Hiring a Financial Professional

Expectations of the Relationship
How often should I expect to hear from you?
How often will you review my account or make recommendations to me?
If my investments aren’t doing well, will you call me and recommend something else?
If I invest with you, how can I keep track of how well my investments are doing?

Experience and Background
What experience do you have, especially with people like me? What percentage of your time would you estimate that you spend on people with situations and goals that are similar to mine?
What education have you had that relates to your work?
What professional licenses do you hold?
Are you registered with the SEC, a state securities regulator, or FINRA?
How long have you done this type of work?
Have you ever been disciplined by a regulator? If yes, what was the problem and how was it resolved?
Have you had customer complaints? If yes, how many, what were they about, and how were they resolved?

What type of products do you offer?
How many different products do you offer?
Do you offer "house" products? If so, what types of products are they, and do you receive any incentives for selling these products, or for maintaining them in a customer’s account? What kind of incentives are they?

Payments and Fees
Given my situation and what I’m looking for, what is the [best / most cost effective] way for me to pay for financial services? Why?
What are the fees that I will pay for products and services?
How and when will I see the fees I pay?
Which of those fees will I pay directly (such as a commission on a stock trade) and which are taken directly from the products I own (such as some mutual fund expenses)
How do you get paid?
If I invested $1000 with you today, approximately how much would you get paid during the following year, based on my investment?
Does someone else (such as a fund company) pay you for offering or selling these products or services?

Sunday, October 7, 2012



SEC Brings Charges in $42 Million Offering Fraud Targeting Seniors

The Securities and Exchange Commission today announced charges against Bradley A. Holcom, of Welches, Oregon, and Jose L. Pinedo, of San Diego, California, in connection with a fraudulent scheme that sold $42 million of promissory notes to more than 150 investors located across the United States, many of whom are senior citizens.

According to the complaint against Holcom, he lured investors by offering them guaranteed monthly interest payments on purportedly safe deals. He promised that their funds would be used to finance the development of specific pieces of real estate, and that each investment would be fully secured. In reality, the investments were unsecured, and the same piece of underlying property was often pledged as purported collateral on numerous investors’ promissory notes.

In addition to his misrepresentations, the complaint alleges that Holcom was also running a classic Ponzi scheme. While Holcom used some of the investors’ money to develop real estate, he also relied on those funds to make interest and principal payments on promissory notes as they came due. Holcom also used investor funds for personal use and on unrelated business ventures. By 2008, as the real estate market declined, Holcom’s scheme collapsed. Investors lost principal in excess of $25 million.

The Commission also alleges that Pinedo, who served as Holcom’s bookkeeper and as an officer or manager of Holcom’s numerous corporate entities, routinely signed promissory notes and other false and misleading documents that were sent to investors.

The Commission alleges that Holcom violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The Commission is seeking a permanent injunction, disgorgement plus pre- and post-judgment interest, and civil penalties against Holcom. Without admitting or denying the allegations in the Commission’s complaint against him, Pinedo has agreed to settle the matter, and consented to a final judgment enjoining him from violations of Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) of the Securities Act.