FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today announced additional charges in an insider trading case against two brokers who traded on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.
In an amended complaint filed in federal court in Manhattan, the SEC is now charging research analyst Trent Martin, who was the brokers’ source of confidential information in an insider trading scheme that yielded more than $1 million in illicit profits. Martin worked at a brokerage firm in Connecticut and specialized in Australian equity investments, and he learned nonpublic information about the impending IBM-SPSS transaction from an attorney friend who was working on the deal. Rather than maintaining the confidence of the information, Martin used the information for his own benefit, purchasing SPSS securities and subsequently tipping his roommate Thomas C. Conradt, who traded and tipped his friend and fellow retail broker David J. Weishaus. Martin was specifically named as their source in instant messages between Conradt and Weishaus about their illegal trading.
The SEC charged Conradt and Weishaus with insider trading on November 29. Martin, who fled the U.S. to Australia soon after learning about the SEC’s investigation, currently lives in Hong Kong.
"Martin is a licensed professional who knowingly disregarded insider trading laws to enrich himself, and then fled the United States when he learned of our investigation," said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. "Martin could run but he could not hide, as the long arm of the SEC will extend to those who flee the United States hoping to avoid the consequences of their unlawful conduct."
The SEC alleges that Martin’s attorney friend expected him to maintain information in confidence and refrain from illegal trading or disclosing it to others. The attorney sought moral support, reassurance, and advice when he privately told Martin about his new assignment working on the IBM-SPSS acquisition. The lawyer disclosed to Martin such details as the anticipated transaction price and the identities of the acquiring and target companies while he was describing the magnitude of the assignment.
According to the SEC’s complaint, Martin attempted to purchase SPSS common stock on the very first business day after learning the nonpublic information from his friend. His first three orders were cancelled because he did not have sufficient funds in the account to make the purchases, but he later wired $50,000 from his checking account into his brokerage account to purchase SPSS shares.
The SEC’s complaint alleges that Martin, Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.
The SEC’s investigation, which is continuing, is being conducted by Mary P. Hansen, A. Kristina Littman, and John S. Rymas in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation.
The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the New Zealand Securities Commission, and the Australia Securities and Investments Commission. The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a Toronto-based brokerage firm and its top two executives for failing to supervise overseas day traders who used the firm’s order management system to engage repeatedly in a manipulative trading practice known as layering.
In layering, a trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders, which the trader later cancels. The SEC’s investigation found that Biremis – whose worldwide day trading business enabled up to 5,000 traders on as many 200 trading floors in 30 countries to gain access to U.S. markets – failed to address repeated instances of layering by many of the overseas day traders using its system. The firm’s co-founders Peter Beck and Charles Kim ignored repeated red flags indicating that overseas traders were engaging in layering manipulations. Biremis served as the broker-dealer for an affiliated Canadian day trading firm, Swift Trade Inc.
Biremis and the two executives agreed to a settlement in which the firm’s registration as a U.S. broker-dealer is revoked and permanent industry bars are imposed on Beck and Kim, who also will pay a combined half-million dollars to settle the SEC’s charges.
"Engaged and forceful supervisors are the first line of defense against individual misconduct in financial services companies," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Beck and Kim were neither, as they saw obvious red flags of market manipulation by their firm’s traders but failed to respond or take any steps to prevent the manipulation. They have learned the painful lesson that supervisors who fail to heed repeated red flags of misconduct will no longer have any place in the securities industry."
According to the SEC’s order instituting settled administrative proceedings, Biremis, Beck, and Kim exercised substantial control over the overseas day traders. They backed the traders’ trading with capital from Biremis, determined the amount of Biremis capital available to each individual trader to purchase stocks, and set and enforced daily loss limits on each trader. They also wielded authority to reprimand, restrict, suspend, or terminate traders.
The SEC’s order found that many of the Biremis-affiliated overseas day traders engaged in repeated instances of layering from January 2007 to mid-2010. Beck and Kim learned from numerous sources – including three U.S. broker-dealers and a Biremis employee – that layering was occurring, yet they failed to take any steps to prevent it. For example, in spring 2008, representatives of one U.S. broker-dealer warned Beck and Kim that certain overseas traders were "gaming" U.S. stocks by altering those stocks’ bid and offer prices in order to buy or sell the stock at the altered price. Beck and Kim failed to act on this information.
According to the SEC’s order, Biremis also failed to retain virtually all of its instant messages related to its broker-dealer business, and failed to file any suspicious activity reports (SARs) related to the manipulative trading.
"Broker-dealers must recognize that their supervisory responsibilities over their associated persons don’t end at the U.S. border," said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. "Broker-dealers face severe consequences if they fail to supervise their traders who engage in manipulative trading, whether those traders are located in the U.S. or abroad."
The SEC’s order finds that Biremis, Beck, and Kim failed reasonably to supervise the firm’s associated persons (the overseas day traders) with a view to preventing and detecting their layering manipulations. The order also finds that Biremis willfully violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs and Section 17(a) and Rule 17a-4(b)(4) by failing to retain instant messages.
The SEC’s order revokes Biremis’ registration as a broker-dealer and requires the firm to cease and desist from committing or causing violations of Exchange Act Section 17(a) and Rules 17a-4(b)(4) and 17a-8. The SEC imposed permanent industry bars on Beck and Kim, who each agreed to pay penalties of $250,000. Biremis, Beck, and Kim neither admitted nor denied the findings contained in the SEC’s order.
The SEC’s investigation was conducted by senior counsel Paul J. Bohr and supervised by assistant director Ricky Sachar. The SEC acknowledges the assistance of the Ontario Securities Commission, the U.K. Financial Services Authority, and the Financial Industry Regulatory Authority (FINRA).
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Former Chairman of Board In Connection With A Fraudulent Plan To Evade The Beneficial Ownership Reporting Requirements
The United States Securities and Exchange Commission (Commission) announced today it filed a civil action against Lee S. Rosen, the former Chairman of the Board of publicly traded New Generation Biofuels Holdings, Inc., alleging that he fraudulently evaded the reporting requirements concerning his ownership interest in New Generation shares held in five separate trusts in violation of the antifraud provisions and beneficial reporting provisions of the federal securities laws. According to the Commission's complaint, at various times from June 2007 through May 2010, Rosen, directly or indirectly profited from the sale of New Generation shares held in two of the five trusts and benefited from using shares in two trusts as payment toward an ultimately unsuccessful purchase of a yacht. The complaint alleges that Rosen received at least $666,000 in direct payments from sales of New Generation stock held in three of the trusts and from a trustee's individual brokerage account. The complaint also alleges that Rosen indirectly benefited from using New Generation shares held in two trusts as partial payment in an effort to purchase a yacht. Further, the complaint alleges that Rosen failed to disclose these transactions and his true holdings in New Generation securities in various Commission filings and that Rosen made false and misleading statements and omissions in Commission filings regarding his true beneficial ownership of New Generation shares.
The SEC's complaint, which was filed in the United States District Court for the Southern District of Florida, charges Rosen with violating Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(d) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13d-1, 13d-2, 16a-3, and 16a-8 thereunder. Rosen has agreed to settle the SEC's charges without admitting or denying the allegations. Rosen consented to a permanent injunction, and an order requiring him to pay $666,000 in disgorgement, plus $50,484 in prejudgment interest, a $195,000 civil money penalty, and barring him from serving as an officer or director.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION,
CFTC Settles Charges against Virginia Resident Alexander Giap for Engaging in Two Fraudulent Commodity Futures Trading Schemes
Federal Court in Virginia orders Giap to pay over $700,000 in restitution and penalties and permanently bars him from the commodities industry
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring defendant Alexander Giap of Falls Church, Va., to pay $456,743 in restitution to defrauded customers and a $250,000 civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) (see CFTC Press Release 6191-12, February 27, 2012, as a Related Link). The consent order of permanent injunction, entered on December 17, 2012, by the Honorable Claude M. Hilton of the U.S. District Court for the Eastern District of Virginia, also imposes permanent trading and registration bans against Giap and prohibits him from violating the CEA, as charged.
The order finds that Giap engaged in two schemes in which he acted as an unregistered Commodity Trading Advisor (CTA). In the first scheme, which took place in 2009, Giap solicited customers to participate in iTRADE, a purported "school" that Giap used to conduct his CTA business, according to the order. iTRADE "students" provided Giap with "tuition" ranging from $4,000 to $20,000 and traded under Giap’s direction, the order finds. Giap and iTRADE offered a money back guarantee under which the iTRADE students would retain all profits from trading until they had recovered their initial deposit, the order finds. However, Giap’s trading resulted in substantial losses, losing money seven out of the nine months from January 2009 through September 2009, according to the order.
Furthermore, the order finds that Giap made a number of material misrepresentations and failed to disclose material facts when he solicited customers to engage his services, including that he was a convicted felon who still owed restitution relating to his criminal conviction and was subject to Internal Revenue Service liens for delinquent taxes. Giap also failed to disclose the full extent of his history of losses incurred trading commodity futures, that he was not registered with the CFTC as a CTA, and that he had never traded commodity futures prior to January 2009, according to the order.
In Giap’s second commodity futures trading scheme, which began in October 2009, he defrauded three additional customers through the same material omissions as his first scheme, and his trading resulted in substantial financial losses to customers, according to the order.
The CFTC thanks the Virginia Corporation Commission for its assistance.
CFTC Division of Enforcement staff members responsible for this matter are Allison Baker Shealy, Jason Mahoney, Timothy J. Mulreany, George Malas, Rainey Perez, John Einstman, Paul G. Hayeck, and Joan Manley.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Court Enters Final Judgment Against Massachusetts Investment Adviser and its Principal, Orders Payment of Over $1.7 Million in Illicit Gains and Penalties
The Securities and Exchange Commission announced that, on December 12, 2012, a federal judge in Boston, Massachusetts entered a final judgment against registered investment adviser EagleEye Asset Management, LLC, and its sole principal, Jeffrey A. Liskov, both of Plymouth, Massachusetts, in an action the Commission previously filed against them. The Commission’s action alleged that that the defendants defrauded advisory clients concerning foreign currency exchange ("forex") trading.
On November 26, 2012, after an eight-day trial, a federal jury found that EagleEye and Liskov violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 206(1) of the Investment Advisers Act of 1940. After a judicial hearing on remedies, Judge William G. Young also found violations by EagleEye and Liskov of Section 204 of the Advisers Act and Rule 204-2 thereunder, concerning their obligation to maintain true, accurate, and current certain books and records relating to EagleEye’s investment advisory business. The court ordered that EagleEye and Liskov are permanently enjoined from future violations of the foregoing provisions of the securities laws. The court further ordered EagleEye and Liskov to pay, jointly and severally, disgorgement of their ill-gotten gains in the amount of $301,502.26, plus pre-judgment interest on that amount of $29,603.59. The court also ordered EagleEye and Liskov each to pay a civil penalty of $725,000.
In its complaint, filed on September 8, 2011, the Commission alleged that, between at least November 2008 and August 2010, Liskov made material misrepresentations to several advisory clients to induce them to liquidate investments in securities and instead invest the proceeds in forex trading. The forex investments, which were not suitable for older clients with conservative investment goals, resulted in steep losses for clients, totaling nearly $4 million, but EagleEye and Liskov came away with over $300,000 in performance fees, in addition to other management fees they collected from clients. Liskov’s strategy was to generate temporary profits on client forex investments to enable him to collect performance fees, after which client forex investments invariably would sharply decline in value.
According to the Commission’s complaint, Liskov made material misrepresentations or failed to disclose material information to clients concerning the nature of forex investments, the risks involved, and his poor track record in forex trading for himself and other clients. The Commission’s complaint further alleged that, in the case of two clients, without their knowledge or consent, Liskov liquidated securities in their brokerage accounts and transferred the proceeds to their forex trading accounts where he lost nearly all client funds, but not before first collecting performance fees for EagleEye (and ultimately himself) on short-lived profits in the clients’ forex accounts. The complaint alleged that Liskov accomplished the unauthorized transfers by doctoring asset transfer forms. On several occasions, Liskov took old forms signed by the clients and used "white out" correction fluid to change dates, asset transfer amounts, and other data. Liskov also used similar tactics to open multiple forex trading accounts in the name of one client, thereby maximizing his ability to earn performance fees for EagleEye (and ultimately himself) on the client’s investments, all without disclosing this to the client or obtaining the client’s consent.
The Commission alleged that, as a result of this conduct, EagleEye and Liskov violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. The Commission also alleged that EagleEye failed to maintain certain books and records required of investment advisers in violation of Section 204 of the Advisers Act and Rule 204-2 thereunder, and that Liskov aided and abetted EagleEye’s violations of these provisions.
The Commission acknowledges the assistance of Secretary of the Commonwealth of Massachusetts William F. Galvin’s Securities Division and the Commodity Futures Trading Commission, both of which filed related cases against the defendants in September 2011.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today charged four securities industry professionals with conducting a fraudulent penny stock scheme in which they illegally acquired more than one billion unregistered shares in microcap companies at deep discounts and then dumped them on the market for approximately $17 million in illicit profits while claiming bogus exemptions from the federal securities laws.
The SEC alleges that Danny Garber, Michael Manis, Kenneth Yellin, and Jordan Feinstein acquired shares at about 30 to 60 percent off the market price by misrepresenting to the penny stock companies that they intended to hold the shares for investment purposes rather than immediately re-selling them. Instead, they immediately sold the shares without registering them by purporting to rely on an exemption for transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to their transactions. To create the appearance that the claimed exemption was valid, they created virtual corporate presences in Minnesota, Texas, and Delaware. The SEC also charged 12 entities that they operated in connection with the scheme.
According to the SEC’s complaint filed in federal court in Manhattan, Garber, Manis, Yellin, and Feinstein all live in the New York/New Jersey area and operated the scheme from 2007 to 2010. They each have previously worked in the securities industry either as registered representatives or providers of investment management or financial advisory services.
"These penny stock purchasers had enough securities industry experience to know that their penny stock trading was not exempt from the securities laws as they claimed," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "They repeatedly violated the registration provisions and in the process also committed securities fraud. We will continue to fight microcap stock abuses that result in the unregistered distribution of shares without vital information about those companies being known to investors."
The SEC’s complaint alleges that Garber, Manis, Yellin, Feinstein and the named entities violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC’s complaint seeks a final judgment, among other things, ordering all of the defendants to pay disgorgement, prejudgment interest and financial penalties; permanently enjoining all the defendants from future violations of the securities laws; and permanently enjoining all the defendants from participating in penny stock offerings.
The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Laura Yeu, Elzbieta Wraga, Haimavathi Marlier, Yitzchok Klug and Paul Gizzi of the New York Regional Office. Mr. Gizzi and Ms. Marlier will lead the SEC’s litigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced today that former Enron senior vice presidents Rex T. Shelby and Scott Yeager and the former chief financial officer of Enron Broadband Services (EBS) Kevin A. Howard have agreed to settle the SEC's pending civil actions against them.
The SEC charged Shelby and Yeager with securities fraud and insider trading on May 1, 2003, amending a complaint previously filed March 12, 2003, which charged Howard and Michael W. Krautz, a former senior director of accounting at EBS, with securities fraud. The SEC’s civil case was stayed by the U.S. District Court while criminal proceedings occurred against these defendants.
To settle the SEC’s action against them, Shelby agreed to pay a civil penalty of $1 million, and Yeager and Howard agreed to pay civil penalties of $110,000 and $65,000, respectively. In addition, they each consented to the entry of a final judgment enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and permanently barring them from serving as an officer or director of a public company. Howard also agreed to be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13. These settlement agreements are subject to court approval. Separately, Howard also consented to the entry of an Administrative Order, pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending him from appearing or practicing before the Commission as an accountant.
In the related criminal proceedings, the Department of Justice previously entered into plea agreements with Shelby and Howard on related charges. Shelby and Howard agreed to respectively forfeit $2,568,750 and $25,000 that, along with the Commission's civil penalties announced today, will contribute $3,658,750 for the benefit of injured investors through the Commission's Enron Fair Fund. Yeager was acquitted in a related criminal proceeding.
As alleged in the Commission's complaint, Shelby, Yeager and other EBS executives engaged in a fraudulent scheme to, among other things, make false or misleading statements about the technological prospects, performance, and financial condition of EBS. These statements were made at Enron's annual analyst conference and in multiple press releases during 2000. While aware of material non-public information concerning the true nature of EBS' technological and commercial condition, Shelby and Yeager sold a large amount of Enron stock at inflated prices. In another part of the scheme, Howard engaged in a sham transaction, known as "Project Braveheart," in which Enron improperly recognized $53 million in earnings in the fourth quarter of 2000 and $58 million in earnings in the first quarter of 2001.
The Commission also announced today that it filed notices of voluntary dismissal of its case against Krautz, along with its case against Schuyler M. Tilney and Thomas W. Davis, two former Merrill Lynch executives who were charged on March 17, 2003 with aiding and abetting Enron’s securities fraud. Krautz was acquitted at trial in a related criminal proceeding.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Company based in Massachusetts and Canada and Other Parties in Stock Pump-and-Dump Scheme Involving Fictitious Buyout Offer
The Securities and Exchange Commission filed an enforcement action on December 17, 2012, in federal court in Boston charging Spencer Pharmaceutical Inc., its officers, and several other parties for their roles in a "pump-and-dump" scheme involving Spencer’s stock. The Commission’s complaint alleges that Jean-François Amyot, a Canadian resident who controlled Spencer, orchestrated the scheme and worked with Maximilien Arella and Ian Morrice, Spencer’s officers and directors, as well as IAB Media Inc. and Hilbroy Advisory Inc., two other companies controlled by Amyot, to create and disseminate false press releases, including press releases about a fictitious buyout offer for Spencer, and to otherwise promote Spencer’s stock. The Commission alleges that the promotional campaign pumped up the price of Spencer’s stock, and Amyot benefited by dumping his own Spencer stock at artificially inflated prices.
The Commission’s complaint, filed in the U.S. District Court for the District of Massachusetts, alleges that beginning in November 2010, Spencer, a purported pharmaceutical company with addresses in Boston, Massachusetts, and Canada, disseminated false and misleading press releases claiming that it had received an unsolicited buyout offer from a Mideast company for $245 million when, in fact, the purported buyout offer was not real. The complaint further alleges that Arella and Morrice worked with Amyot to create and disseminate the fraudulent press releases. According to the complaint, while Spencer was issuing the press releases, the defendants were conducting a promotional campaign using Internet websites and newsletters to tout Spencer’s stock and the bogus buyout offer, and the false press releases and promotional campaign were successful in pumping up the price of Spencer’s stock. For example, after Spencer publically announced that the Mideast company proposed to pay $245 million for Spencer, the price of Spencer stock more than doubled in two days – opening at $0.25 per share on November 10, 2010 and closing at $0.60 per share on November 12 – and the daily trading volume for Spencer’s stock reached almost six million shares on November 11, compared to a daily average trading volume of less than 50,000 shares during the previous three months. During the time the buyout offer was being promoted, Amyot sold approximately 36 million Spencer shares for gross proceeds of approximately $5.8 million. Each of the defendants are charged by the Commission with violating various antifraud provisions of the federal securities laws. The complaint further charges Spencer, Amyot, and Arella with violating securities registration provisions of the securities laws. According to the complaint, Amyot and Arella were involved in a series of transfers involving 12 million Spencer shares that were done to evade the securities registration requirements and move the shares into an account controlled by Amyot.
The Commission also suspended trading in Spencer securities on December 17, 2012, 34-68447. Securities of Spencer were quoted on OTC Link operated by OTC Markets Group Inc.
The Commission alleges that Spencer, Amyot, Arella, and Morrice violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; that IAB Media and Hilbroy violated Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c); and that Arella, Morrice, IAB Media, and Hilbroy aided and abetted the violations by Spencer of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The Commission also alleges that Amyot is liable for Spencer’s violations of Section 10(b) and Rule 10b-5 as the company’s control person and that Spencer, Amyot, and Arella violated Sections 5(a) and 5(c) of the Securities Act. The Commission is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against Spencer, Amyot, Arella, Morrice, IAB Media, and Hilbroy. It also seeks an order prohibiting Amyot, Arella, and Morrice from serving as an officer or director of a public company and from participating in the offering of a penny stock.
The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers in this matter.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China and Poland.
The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore "marketing agreements" to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services, and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with off-shore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.
The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.
As alleged in the SEC’s complaint filed in federal court in Washington D.C.:
Lilly’s subsidiary in Russia paid millions of dollars to off-shore entities for alleged "marketing services" in order to induce pharmaceutical distributors and government entities to purchase Lilly’s drugs, including approximately $2 million to an off-shore entity owned by a government official and approximately $5.2 million to off-shore entities owned by a person closely associated with an important member of Russia’s Parliament. Despite the company’s recognition that the marketing agreements were being used to "create sales potential" with government customers and that it did not appear that any actual services were being rendered under the agreements, Eli Lilly allowed its subsidiary to continue using the agreements for years.
Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians.
Lilly’s subsidiary in Brazil allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate $1.2 million in sales of a Lilly drug product to state government institutions.
Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list.
Lilly agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8,700,000 for a total payment of $29,398,734. Without admitting or denying the allegations, Lilly consented to the entry of a final judgment permanently enjoining the company from violating the anti-bribery, books and records, and internal controls provisions of the FCPA, Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act. Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures. The settlement is subject to court approval.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony Before the US House of Representatives Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management
Commissioner Jill E. Sommers
December 13, 2012
Good morning Chairman Conaway, Ranking Member Boswell and members of the Committee. Thank you for inviting me to testify on the challenges facing U.S. and international markets resulting from the Dodd-Frank derivatives reforms. I have worked in the derivatives industry for over fifteen years and have been a Commissioner at the Commodity Futures Trading Commission (CFTC or Commission) since August of 2007. During my time at the Commission I have served as the Chairman and sponsor of the CFTC’s Global Markets Advisory Committee (GMAC) and have represented the Commission at meetings of the International Organization of Securities Commissions (IOSCO), one of the principal organizations formed to develop, implement and promote internationally recognized and consistent standards of regulation, oversight and enforcement in the securities and derivatives markets. I am pleased to give you my perspective on the many challenges facing regulators across the globe in their quest to meet the commitments on over-the-counter (OTC) derivatives reform made by the G20 Leaders in 2009 and, in particular, the challenges presented in interpreting the cross-border scope of Dodd-Frank. The views I present today are my own and not those of the Commission.
Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to the Commodity Exchange Act, provides that the Act shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States, or contravene rules or regulations prescribed by the Commission designed to prevent evasion. In 2011 the Commission acknowledged the growing uncertainty surrounding the extraterritorial reach of Dodd-Frank and in August of that year held a two-day roundtable, followed by a public comment period. In July 2012 the Commission published proposed guidance setting forth an interpretation of how it might construe Section 2(i), followed by another round of public comment. The guidance included a proposed definition of "U.S. person," the types and levels of activities that would require foreign entities to register as U.S. swap dealers or major swap participants (swap entities), and the areas in which such swap entities might be required to comply with U.S. law and those in which the Commission might recognize substituted compliance with the law of an entity’s home jurisdiction.
On November 7, 2012 I convened a meeting of the GMAC to further discuss the Commission’s proposed interpretive guidance and to identify questions and areas of concern in implementing the CFTC’s proposed approach. A number of foreign jurisdictions were represented, including regulators from Australia, the European Commission, the European Securities and Markets Authority, Hong Kong, Japan, Quebec and Singapore. Representatives of the U.S. Securities and Exchange Commission (SEC) also attended to discuss the SEC’s perspective. A common theme that emerged was concern over the breadth of CFTC’s proposed definition of "U.S. person," the implications of having to register in the U.S., the uncertainty of the Commission’s proposal on substituted compliance, and the need to identify areas where complying with a particular U.S. requirement might conflict with the law of a foreign swap entity’s home country regime.
On November 28, 2012 regulatory leaders from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States met in New York to continue the dialogue. In a press statement issued after the meeting the leaders supported the adoption and enforcement of robust and consistent standards in and across jurisdictions, and recognized the importance of fostering a level playing field for market participants, intermediaries and infrastructures, while furthering the G20 commitments to mitigating risk and improving transparency. The leaders identified five areas for further exploration, including:
the need to consult with each other prior to making final determinations regarding which products will be subject to a mandatory clearing requirement and to consider whether the same products should be subject to the same requirements in each jurisdiction, taking into consideration the characteristics of each domestic market and legal regime;
the need for robust supervisory and cooperative enforcement arrangements to facilitate effective supervision and oversight of cross-border market participants, using IOSCO standards as a guide;
the need for reasonable, time-limited transition periods for entities in jurisdictions that are implementing comparable regulatory regimes that have not yet been finalized and to establish clear requirements on the cross-border applicability of regulations;
the need to prevent the application of conflicting rules and to minimize the application of inconsistent and duplicative rules by considering, among other things, recognition or substituted compliance with foreign regulatory regimes where appropriate; and
the continued development of international standards by IOSCO and other standard setting bodies.
The authorities agreed to meet again in early 2013 to inform each other on the progress made in finalizing reforms in their respective jurisdictions and to consult on possible transition periods. Future meetings will explore options for addressing identified conflicts, inconsistencies, and duplicative rules and ways in which comparability assessments and appropriate cross-border supervisory and enforcement arrangements may be made.
The Commission has worked for decades to establish relationships with our foreign counterparts, built on respect, trust, and information sharing, which has resulted in a successful history of mutual recognition of foreign regulatory regimes in the futures and options markets spanning 20-plus years. At the Pittsburg summit in 2009 all G20 nations agreed to a comprehensive set of principles for regulating the OTC derivatives markets. We should rely on their regional expertise. While the pace of implementing reforms among the various jurisdictions has been uneven, I have no reason to believe that comparable or equivalent regulation is unachievable. It is obvious that more time is needed to facilitate an orderly transition to a regulated environment. It is important that assessments of comparability be made at a high level, keeping in mind the core policy objectives of the G20 commitments rather than a line-by-line comparison of rulebooks. It is also important to avoid creating an unlevel playing field for U.S. firms just because the U.S. is ahead of the rest of the world in finalizing reforms. U.S. firms should not be disadvantaged by tight compliance deadlines set by the CFTC. Global coordination is key. It is my hope that in the coming days the Commission will issue clear and concise relief from having to comply with various Dodd-Frank requirements, for both domestic and foreign swap entities, until we have a better sense of the direction in which we are all headed.
I am grateful for the opportunity to speak about these important issues and am happy to answer any questions.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.
The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.
Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.
"Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned nest assets."
The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.
According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.
The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.
"While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used," said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.
According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged New York-based fund manager Steven B. Hart (Hart) with repeated violations of the federal securities laws related to two distinct multi-year trading schemes, involving illegal matched trading and insider trading. In addition, the Commission charged Hart with making fraudulent representations in two securities purchase agreements.
The SEC alleges that from January 17, 2008 through June 4, 2009, Hart used his control of Octagon Capital Partners, LP, a small investment fund he controls, and his position of authority at an investment fund for which he was employed as a portfolio manager to direct thirty-one matched trades between the two investment funds, benefitting Octagon at the expense his employer's fund. Generally, Hart caused Octagon to purchase stock in small, thinly traded issuers at the going market price and, on the following day, sold the same stock to his employer's fund at a price substantially above the prevailing market price. Each of the sales from Octagon to the employer's fund occurred in premarket trading; thus, Hart ensured that the trades matched. Later that same day or within a few days of the matched trades, the employer's fund, at Hart's direction, sold the recently-acquired stock on the open market at a loss. As a result of this scheme, Hart generated ill-gotten gains of $586,338 for Octagon.
According to the SEC's complaint, Hart, after being confidentially solicited to invest in numerous securities offerings - and despite expressly agreeing to keep the information he received confidential and to not trade on it by agreeing to go "over-the-wall" - nevertheless traded on behalf of Octagon while in possession of material nonpublic information concerning the offerings. From June 19, 2007 through March 15, 2011, in breach of a duty of trust or confidence, Hart directed trades in the securities of nineteen issuers conducting twenty separate offerings, including PIPEs, registered direct offerings, and confidentially marketed public offerings. As a result of Hart's conduct, Octagon derived ill-gotten gains of $244,733.
In addition, on two occasions, in order to induce issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that, after he was solicited, Octagon had not traded the issuers' securities in the days leading up to the public announcement of the transactions. Despite going "over-the-wall" during the solicitation process for the offerings, Hart nevertheless directed short sales of the issuer's securities, realizing insider trading gains, and subsequently signed the securities purchase agreements.
The SEC filed action in the U.S. District Court for the Southern District of New York against Hart, alleging violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the allegations of the complaint, Hart consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. Hart also agreed to pay $831,071 in disgorgement and $103,424 in prejudgment interest, and a civil penalty of $394,733. The settlement is subject to court approval.
The SEC's investigation was conducted in the New York Regional Office by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz, with assistance from Frank J. Milewski. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Court finds that defendants fraudulently solicited and accepted over $1.4 million from customers to trade crude oil futures contracts in a commodity pool
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court order against defendants Christopher D. Daley and his firm, TC Credit Service, LLC doing business as Del-Mair Group, LLC (DMG), both of Houston, Texas, requiring Daley and DMG to jointly pay $654,183 in restitution to defrauded investors and a civil monetary penalty of $1,995,000. The order also imposes permanent trading and registration bans against the defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act and CFTC regulations, as charged.
The order of default judgment, entered by Judge Keith P. Ellison of the U.S. District Court for the Southern District of Texas, stems from a CFTC enforcement action filed on June 18, 2012, against Daley and DMG, charging them with solicitation fraud and misappropriation in the operation of a commodity pool scheme (see CFTC Press Release 6301-12, July 11, 2012, as a Related Link). Daley was owner and sole employee of DMG, and neither defendant has ever been registered with the CFTC.
The order finds that Daley fraudulently solicited and accepted over $1.4 million from customers to participate in a commodity pool to trade crude oil futures contracts. In soliciting customers, Daley represented that DMG would generate monthly returns of 20 percent and distributed account opening documents that guaranteed 20 percent to 60 percent monthly returns on deposits, the order finds, noting that these representations were false. In reality, Daley’s trading accounts sustained net losses each month. The order also finds that the defendants misappropriated customers’ funds by using those funds to pay other customers’ purported returns, to pay for Daley’s personal expenses, and to trade in Daley’s personal commodity interest accounts. The defendants distributed false account statements to pool participants reporting returns supposedly earned as a result of Daley’s futures trading and acted in capacities requiring registration with the CFTC, the order finds.
CFTC Division of Enforcement staff responsible for this case are Eugene Smith, Patricia Gomersall, Antoinette Chance, Christine Ryall, Paul Hayeck, and Joan Manley.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Northern District of Illinois against Joseph J. Hennessy and his firm, investment adviser Resources Planning Group ("RPG"), for defrauding clients and others who were promised returns that would "beat the market" for investing in a private equity fund they managed. What investors didn't know was the fund was failing and they were being used to raise money to repay promissory notes to earlier investors.
The SEC alleges that Hennessy and RPG raised more than $1.3 million by misrepresenting the Midwest Opportunity Fund (MOF) as a viable private equity fund that could offer high returns. Hennessy failed to tell investors about the fund's poor financial condition or that their money was being used to repay MOF promissory notes that he had personally guaranteed. He therefore misappropriated client funds to make payments on the notes and prop up the fund.
According to the SEC's complaint, Hennessy financed MOF's acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65 million in promissory notes, all of which he personally guaranteed. When MOF's portfolio companies were unable to pay management fees later that year, MOF lacked sufficient funds to repay the notes. From September 2007 to March 2010, Hennessy raised $1.36 million from RPG clients and other investors to make payments on the notes. Hennessy falsely told investors that MOF was viable and offered high returns.
The SEC further alleges that Hennessy misappropriated money from RPG clients. In November 2007, he raised $750,000 from three RPG clients purportedly to invest in MOF. But then Hennessy used that money to redeem another client's investment in the fund. Twice in mid-2009, Hennessy forged letters of authorization from a widowed RPG client to transfer $100,000 from her account to MOF in exchange for promissory notes that have yet to be repaid.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Dec. 12, 2012 — The Securities and Exchange Commission today charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.
The SEC alleges that Sung Kook "Bill" Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tiger Asia Management.
"Hwang today learned the painful lesson that illegal offshore trading is not off-limits from U.S. law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning," said Robert Khuzami, Director of the SEC’s Division of Enforcement.
Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit, added, "Hwang betrayed his duty of confidentiality by trading ahead of the private placements, and betrayed his fiduciary obligations when he defrauded his investors by collecting fees earned from his attempted manipulation scheme."
The SEC also charged Raymond Y.H. Park for his roles in both schemes as the head trader of the two hedge funds involved – Tiger Asia Fund and Tiger Asia Overseas Fund. Park, who lives in Riverdale, N.Y., also agreed to settle the SEC’s charges. Hwang lives in Tenafly, N.J.
According to the SEC’s complaint filed in federal court in Newark, N.J., from December 2008 to January 2009, Hwang and his advisory firms participated in two private placements for Bank of China stock and one private placement for China Construction Bank stock. Before disclosing material nonpublic information about the offerings, the placement agents required wall-crossing agreements from Park and the firms to keep the information confidential and refrain from trading until the transaction took place. Despite agreeing to those terms, Hwang ordered Park to make short sales in each stock in the days prior to the private placement. Hwang and his firms illegally profited by $16.2 million by using the discounted private placement shares they received to cover the short sales they had entered into based on inside information about the placements.
The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange. These stocks were among the largest short position holdings in the hedge funds’ portfolios. The more assets the hedge funds had under management, the greater the management fee that Tiger Asia Management was entitled to collect. So Hwang directed Park to place losing trades in order to depress the stock prices, which would inflate the calculation of the management fees. Hwang and Tiger Asia Management made approximately $496,000 in fraudulent management fees through this scheme.
The SEC’s complaint charges Hwang, his firms, and Park with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. Hwang and his firms also are charged with violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Park is charged with aiding and abetting those violations.
The settlements, which are subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest. Each of them has agreed to pay a penalty of $8,294,348 for a total of 24,883,044. Park agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.
The SEC’s investigation was conducted by Thomas P. Smith, Jr., Sandeep Satwalekar, and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York, and Frank Milewski of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, the Japanese Securities and Exchange Surveillance Commission, and the Hong Kong Securities and Futures Commission.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony Before the U.S. House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, Washington, DC
Chairman Gary Gensler
December 12, 2012
Good morning Chairman Garrett, Ranking Member Waters and members of the Subcommittee. I thank you for inviting me to today’s hearing on implementation of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) swaps market reforms. I would like to thank Robert Cook from the Securities and Exchange Commission (SEC). I’d also like to thank my friend, Chairman Mary Schapiro, who has been a terrific partner. Our agencies have consistently coordinated on this reform effort. I also want to thank my fellow Commissioners and the CFTC staff for their hard work and dedication.
The New Era of Swaps Market Reform
Swaps market reform is now becoming a reality. The marketplace is increasingly shifting to implementation of the common-sense rules of the road that Congress included in the Dodd-Frank Act.
The financial crisis cost eight million American jobs, millions of people lost their homes, and thousands of businesses closed their doors – in part because of the unregulated swaps market. In the aftermath of the crisis, President Obama convened the G-20 leaders in Pittsburgh in 2009. They came to an international consensus that the opaque swaps market should be brought into the light through transparency and oversight, and that standardized swaps between financial entities should be centrally cleared by the end of 2012.
In 2010, Congress and President Obama came together to pass the historic Dodd-Frank Act. The key objectives of the law’s swaps provisions are:
Lowering the risk of the interconnected financial system by bringing standardized swaps into centralized clearing;
Bringing public transparency to the marketplace; and
Ensuring that swap dealers and major swap participants are specifically regulated for their swaps activity.
The CFTC has made significant progress in each of these areas. October 12, given the completed foundational definition rules, marked the new era of swaps market reform.
As a result of completed reforms:
Standardized swaps between financial entities will be cleared starting in March, fulfilling the U.S. commitment at the G-20 meeting in Pittsburgh;
Initial data reporting to regulators has begun and will be expanded as swap dealers report their transactions. The public will benefit from real-time reporting early next year; and
Swap dealers have begun the process of registering, and we anticipate many dealers will do so later this month.
With 42 finalized swaps market reforms, the CFTC has completed about 80 percent of the Dodd-Frank swaps rules. We are seeking to consider and finalize the remaining rules in the first half of 2013. I believe it’s also critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities, as Congress directed the CFTC to do.
Throughout this process, the CFTC has worked toward a smooth transition to a transparent, regulated swaps marketplace and has phased in the timing for compliance to give market participants appropriate time to adjust.
I will now go into further detail on the Commission’s swaps market reform efforts.
Lowering Risk and Democratizing the Market through Clearing
Central clearing, the first building block of Dodd-Frank reform, lowers the risk of the highly interconnected financial system. It also broadens access to many more market participants, as they no longer will have to individually determine counterparty credit risk. Now clearinghouses will stand between buyers and sellers. This broadened access through central clearing will help promote greater competition and lower costs to users of swaps.
Clearinghouses have lowered risk for the public and fostered competition in the futures markets since the late 19th century. Now central clearing will do the same for the swaps market.
A key milestone was reached last month with the adoption of the first clearing requirement determinations. This follows through on the U.S. commitment at the G-20 meeting that standardized swaps between financial entities should be brought into central clearing by the end of 2012. The vast majority of interest rate swaps and credit default index swaps will be brought into central clearing. Swap dealers and the largest hedge funds will be required to clear in March, and compliance will be phased in for other market participants through the summer of 2013. Consistent with congressional intent, the CFTC finalized rules to ensure that end-users using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing. The CFTC will continue working with market participants on implementation.
Promoting Transparency
Transparency, the second building block of reform, lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition. It provides critical pricing information to businesses across the country that use swaps markets to lock in a price or hedge a risk.
Bright lights have begun to shine on the swaps market. As a result, swaps transactions are being reported to regulators through swap data repositories. The public also will benefit from real-time reporting of the price and volume of transactions beginning in early 2013, based on rules the CFTC completed in 2011. In addition, the daily valuation over the life of uncleared swaps will be provided to each counterparty. For cleared swaps, it will be provided to the public as well. With these transparency reforms, the public and regulators will have their first full window into the swaps marketplace, a fundamental shift that Congress included in the Dodd-Frank Act.
Looking ahead, Commissioners are now reviewing final rules that would allow market participants to view the prices of available bids and offers. These reforms on trading platforms called swap execution facilities (SEFs) and minimum block sizes will bring pre-trade transparency to the swaps market, further enhancing liquidity and price competition. These rules will build on the democratization of the swaps market that comes with the clearing of standardized swaps.
Promoting Market Integrity and Lowering Risk through Swap Dealer Oversight
Comprehensive oversight of swap dealers, the third building block of reform, will promote market integrity and lower their risk to taxpayers and the rest of the economy.
As the result of CFTC rules completed in the first half of this year, swap dealers have begun the process of registering and, for the first time, will come under comprehensive oversight. We anticipate many dealers will register by the end of this month.
Once swaps dealers register, they will report their trades with U.S. persons to both regulators and the public. In addition, they will implement crucial back office standards that lower risk and increase integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also will be required to implement sales practice standards that prohibit fraud, treat customers fairly and improve transparency. These reforms will be phased in next year.
We are collaborating closely internationally on a global approach to margin requirements for uncleared swaps through the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). I would anticipate that the CFTC, in consultation with European regulators, would take up the margin rules, as well as related rules on capital, next year with the benefit of this international work.
International Coordination on Swaps Market Reform
In enacting financial reform, Congress recognized the basic lessons of modern finance and the 2008 crisis. During a default or crisis, risk knows no geographic border. If a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads to the entire consolidated entity. Then finance, rather than serving the rest of the economy, can threaten the rest of the economy.
To give financial institutions and market participants operating outside the U.S. guidance on the cross-border application of Dodd-Frank, the CFTC in June sought public consultation on its interpretation of the Dodd-Frank cross-border provisions. The guidance is a balanced, measured approach, consistent with the cross-border provisions in Dodd-Frank and Congress’ recognition that risk easily crosses borders.
Under the guidance, foreign firms that do more than a de minimis amount of swap-dealing activity with U.S. persons will register with the CFTC two months after crossing the de minimis threshold. Many will do so shortly, with others following later.
For firms that do register with the CFTC, we are very committed to allowing for substituted compliance, or permitting market participants to comply with Dodd-Frank through complying with comparable and comprehensive foreign regulatory requirements.
The guidance includes a tiered approach for foreign swap dealer requirements, which was developed in consultation with foreign regulators and market participants. Some requirements would be considered entity-level, such as for capital, chief compliance officer and swap data recordkeeping. Some requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution, trading documentation and sales practices.
Entity-level requirements would apply to all registered swap dealers, but in certain circumstances, foreign swap dealers could meet these requirements through substituted compliance. In a separate release, the Commission proposed phased compliance regarding entity-level requirements until July 2013. Such phased compliance will allow time for the CFTC, other regulators and market participants to continue coordinating on regulation of cross-border swaps activity.
Foreign swap dealers would comply with Dodd-Frank for transaction-level requirements facing U.S. persons. The timing of transaction-level compliance with U.S. persons will be determined according to the generally applicable schedule of each of the CFTC’s rules. The timing of compliance would be phased, however, for transactions facing guaranteed affiliates of U.S. persons, as well as foreign branches of U.S. persons, until next summer.
Pending further action on the cross-border guidance, the CFTC issued time-limited relief to certain foreign legal entities regarding the counting of swaps toward the de minimis swap-dealing threshold.
The CFTC also will continue to engage with our international counterparts through bilateral and multilateral discussions on reform and cross-border swaps activity. We are bound to have some differences, given our different cultures and political systems, but we’ve made great progress internationally on an aligned approach to reform. We are committed to working through any instances where the CFTC is made aware of a conflict between U.S. law and that of another jurisdiction.
International regulators met in New York in late November and had a very productive meeting regarding the CFTC’s guidance and how other jurisdictions are handling cross-border application of swaps market reform.
The regulators and policymakers at the meeting agreed to a joint statement regarding our progress so far. In short, the statement said:
Authorities should consult with each other prior to making final determinations regarding which derivatives products will be subject to required clearing;
Robust supervisory cooperation arrangements should be established;
Authorities should have appropriate access to data held in trade repositories;
The application of reforms to market participants should be clear, and jurisdictions should consider reasonable, time-limited transition periods so that market participants have adequate time to comply; and
The authorities agreed to continue working together, including on substituted compliance, and to meet regularly, starting in early 2013.
Market Implementation of Swaps Market Reform
As we near the end of 2012, market participants are moving to implementation of swaps market reform.
Given the magnitude of the crisis, Congress gave the CFTC but one year to complete implementing rules.
The CFTC, however, has been working to complete these rules in a deliberative way - not against a clock. We have been careful to consider significant public input, as well as the costs and benefits of each rule. CFTC Commissioners and staff have met nearly 2,000 times with members of the public, and we have held 19 public roundtables on important issues related to Dodd-Frank reform. The agency has received nearly 37,000 comment letters on matters related to reform. Our rules also have benefited from close consultation with domestic and international regulators and policy makers.
The CFTC has been working on smoothing the transition from a marketplace that lacked regulation to a new era of transparency and common-sense oversight. We have consulted broadly on appropriately phasing in reforms over time. In the spring of last year, we put out a concepts document for public comment and held a roundtable with the SEC on phased implementation. Subsequently, we proposed and finalized rules on implementation phasing. For instance, the clearing determinations will be phased in depending on the type market participant in March, then June, then September of 2013. Other reforms include built-in phasing. For instance, data reporting requirements are phased in depending on asset classes and market participants. Clearinghouses began reporting for interest rate and credit derivatives on October 12. Swap dealers will follow when they register. Reporting for foreign exchange, equity swaps and physical commodity swaps (including agricultural and energy swaps) begins in February 2013 for swap dealers and major swap participants. Reporting for all other market participants begins in April 2013. Extensive information on the compliance schedules for each of the CFTC’s reforms is available on our website.
arket Participant Inquiries
Now that the market is moving to implementation, it’s the natural order of things that market participants have questions and have come to us for further guidance. As it is sometimes the case with human nature, the agency receives many inquiries as compliance deadlines approach.
The Commission has sought to ensure that market participants have time to prepare. It has now been two and a half years since the Dodd-Frank Act passed. It has been a year or more since many CFTC rules have been finalized. In particular, the data rules that will largely go into effect in January were adopted by the Commission in 2011. The swap dealer definition and registration rules were completed in the first half of this year.
The CFTC, however, still welcomes inquiries from market participants, as some fine-tuning is expected. Prior to the milestone of October 12 when the foundational definition rules became effective, my fellow commissioners and I, along with CFTC staff, listened to market participants and thoughtfully sorted through issues as they were brought to our attention. We will continue to do so as we approach other important milestones in the future.
For example, CFTC staff issued a number of time-limited no-action letters while the Commission considers related exemptive petitions. These include exemptive petitions for electricity-related transactions on markets administered by Regional Transmission Organizations and Independent System Operators, as well as transactions among rural electric cooperatives and municipal-owned utilities.
Similarly, yesterday, CFTC staff issued a time-limited no-action letter to allow certain swap trading facilities and trading platforms to continue operating while the Commission completes its final rules for SEFs.
CFTC staff has also issued a number of interpretations and no-action letters regarding the definition of U.S. person and what swap dealing activity would be counted toward the de minimis swap-dealing threshold.
In addition, staff has issued interpretations and letters with regard to registration with the CFTC as commodity pool operators. Before October 12, relief was provided for equity real estate investment trusts, which are real estate investment trusts that own and operate real property; and certain securitization vehicles that issue securities backed by financial assets, are regulated by the SEC and do not use swaps to generate investment exposure.
We also sought public comment regarding other entities with inquiries about commodity pool operator registration. After October 12, guidance was provided for additional securitization vehicles. These letters addressed "legacy" securitization vehicles, backed by cash or synthetic assets, that have not and will not issue securities after October 12, 2012; and mortgage real estate investment trusts, which primarily invest in mortgage-backed securities and mortgages on residential and commercial property. In addition, these letters addressed family offices that are exempt from SEC regulation as investment advisers; business development companies that only engage in a minimal amount of commodity interest trading; and funds of funds on a time-limited basis while staff considers additional guidance for those vehicles.
We have also addressed a number of issues related to data. CFTC staff set a common date for compliance with the data reporting requirement so that a swap dealer that registers early will be subject to this requirement on the same day as one that registers later. We further phased compliance for swaps dealers to report data regarding certain swaps due to disruptions caused by Hurricane Sandy. We also provided additional time for foreign market participants on the reporting of identifying counterparty information in jurisdictions where secrecy or blocking laws forbid such reporting.
Staff is still considering a number of other specific requests for phased compliance. For instance, to facilitate compliance with new documentation requirements, the International Swaps and Derivatives Association (ISDA) has sponsored a number of documentation protocols for its members and other market participants. The Commission is considering the ISDA and its member firms’ petition for additional time to complete the protocol process or any bilateral amendments to trading documentation.
The CFTC makes all of these interpretations, guidance and no-action letters public through our website and press releases.
Resources
With the market moving to implementation, additional resources for the CFTC are all the more essential. We need resources for the people and technology necessary for effective market surveillance and to enhance customer protection programs. We need resources to handle the incoming registration requests from many new market participants. We need resources to answer all of the questions from market participants on implementation of reform.
At 703 on-board staff, the CFTC’s hardworking team is just 10 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown more than five-fold, and the swaps market is eight times larger than the futures market.
Picture the NFL expanding eightfold to play more than 100 football games in a weekend without increasing the number of referees. This would leave just one referee per game, and, in some cases, no referee. Imagine the mayhem on the field, the resulting injuries to players, and the loss of confidence fans would have in the integrity of the game.
Given this reality, the President has requested additional resources for both staff and investments in technology for this agency. People and technological resources are critical for the CFTC to properly oversee the futures and swaps markets.
Conclusion
The common-sense rules of the road for the swaps market that Congress laid out in the Dodd-Frank Act are now the order of the day. Standardized swaps between financial entities will be cleared starting in March. Initial data reporting to regulators has begun, and the public will benefit from real-time reporting next year. We anticipate many swap dealers will register at the end of this month. I thank you and look forward to your questions.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission filed a civil action in the United States District Court for the Southern District of Florida against InnoVida Holdings LLC, its former CEO Claudio Osorio and its former CFO Craig Toll, CPA, charging them with defrauding investors in an offering fraud scheme. Osorio was an Ernst & Young "Entrepreneur of the Year" award winner in 1997. Separately, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll.
The Commission's complaint alleges that from at least 2007 to April 2010, InnoVida, Osorio and Toll perpetrated an offering fraud that raised at least $16.8 million mainly from investors located in Miami, Florida. According to the SEC's complaint, InnoVida, a manufacturer of alternative housing structures, claimed that its product was fire and hurricane proof and could be produced at economically advantageous prices. The SEC's complaint alleges that Osorio used fraudulent pro forma financial statements to persuade investors to fund InnoVida's alternative housing business. According to the complaint, Toll prepared the pro formas, which falsely reflected that InnoVida had more than $35 million in cash and cash equivalents in its bank accounts, and more than $100 million in equity.
The complaint also alleges that Osorio lied to investors when he told them that he had personally invested tens of millions of his own money into InnoVida, that InnoVida was valued at as high as $250 million, and that a third-party was about to make a substantial investment in InnoVida that would benefit current investors. Further, the complaint alleges that Osorio diverted at least $8.1 million of investor monies to fund his lavish lifestyle. According to the complaint, Osorio was active in local and national fundraising and was able to recruit a high-profile board of directors for InnoVida.
The SEC's complaint charges the defendants with violating 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's complaint, seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against InnoVida, Osorio and Toll to enjoin them from future violations of the federal securities laws. The complaint also seeks an order barring Osorio and Toll from serving as an officer or director of a public company.
The SEC's investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller and Accountant Karaz S. Zaki under the supervision of Assistant Regional Director Elisha L. Frank. Amie Riggle Berlin will lead the SEC's litigation. The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of Florida, and the Federal Bureau of Investigation, Miami Division in investigating this matter.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced today that on October 18, 2012, the Honorable Sandra J. Feuerstein of the U.S. District Court for the Eastern District of New York entered a final judgment against two brothers, Mayer Amsel and David Amsel, following a bench trial in a market manipulation case involving the securities of a company known as East Delta Resources Corp.
The final judgment orders the Amsels to pay, on a joint and several basis, $936,780.46 in disgorgement and $326,631.17 in prejudgment interest. In addition, Mayer Amsel was ordered to pay a civil money penalty of $455,000, and David Amsel was ordered to pay a civil money penalty of $715,000.
Besides monetary remedies, the judgment also provides injunctive relief. The Amsels were permanently enjoined from violating Section 10(b) of the Securities Exchange Act of 1934; Exchange Act Rule 10b-5; and Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933. The judgment likewise permanently enjoins both men from participating in any offering of penny stock and any activities to induce the purchase or sale of any penny stock. David Amsel was permanently enjoined from aiding and abetting violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13. David Amsel was also enjoined from serving as an officer or director of a publicly held company for eight years from September 7, 2012.
The SEC charged the Amsels in January 2010, alleging that together they garnered more than $1 million in illegal profits when they conducted unlawful wash sales and matched sales of unregistered East Delta shares. All of the SEC’s claims against the Amsels were resolved in the SEC’s favor via summary judgment, at trial, or through two post-trial rulings. All of the findings in the court’s summary judgment ruling and post-trial rulings were incorporated into the final judgment.
The court found on summary judgment that the Amsels violated Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act when they executed fraudulent wash sales and matched sales, and that David Amsel aided and abetted East Delta’s violation of Section 13(a) of the Exchange Act when he prepared certain SEC filings for East Delta. Based upon the evidence presented at trial, the court found that both Amsels also violated Sections 5(a) and 5(c) of the Securities Act by selling unregistered East Delta shares, notwithstanding the existence of a Form S-8 registration statement and consulting agreement associated with Mayer Amsel’s stock. Significantly, the court found the Form S-8 ineffective for registration purposes because the "primary character" of Mayer Amsel’s consulting role at East Delta was capital-raising and promotional and thus contrary to the eligibility requirements for effective Form S-8 registration.
The SEC’s case was litigated by Frederick Block, Assistant Chief Litigation Counsel and Danette Edwards, Senior Counsel. The investigation prior to the litigation was led by Stephen Herm, David Neuman, Senior Investigations Counsel, and Gregory Faragasso, Assistant Director.
The SEC appreciates the assistance of the Quebec Autorité des marchés financiers (AMF) and the British Columbia Securities Commission (BCSC) in connection with the investigation leading to the litigation.
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