FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders FCStone LLC to Pay a $1.5 Million Civil Monetary Penalty for Failing to Have Risk Controls, in Violation of Supervision Obligations
Washington, DC - The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against FCStone LLC, a Futures Commission Merchant (FCM) headquartered in New York, New York, for failing to diligently supervise its officers and employees relating to its business as an FCM in violation of Commission Regulation 166.3, 17 C.F.R. § 166.3 (2008). FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 and part of 2009, allowing one account (Account) to acquire a massive options position that it could not afford to maintain. Ultimately, FCStone was forced to take over the Account, and lost approximately $127 million. The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.
The Order finds that from January 1, 2008 through March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the Account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two Account owners accumulated a massive position -- more than 2.5 million relatively illiquid commodity option contracts, which the Account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the Account owners were unable to meet their financial obligations with respect to the Account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions, FCStone ended up suffering $127 million in losses. The Commission found that FCStone violated Regulation 166.3 by failing to diligently supervise in a manner designed to mitigate risks associated with customer accounts, such as the risks arising from unsatisfied margin obligations, negative account balances, and the handling of large relatively illiquid positions.
David Meister, the CFTC’s Director of Enforcement stated, "The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order."
The CFTC thanks and acknowledges the Securities and Exchange Commission for its assistance in this matter and the CME Group for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Joan Manley, Allison Baker Shealy, Traci Rodriguez, George Malas and Paul Hayeck. CFTC staff from the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, including Thomas Bloom, Ryan Goodman, Kevin Piccoli and Jan Ripplinger, also provided assistance in this matter.
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2013 — The Securities and Exchange Commission today charged NASDAQ with securities laws violations resulting from its poor systems and decision-making during the initial public offering (IPO) and secondary market trading of Facebook shares. NASDAQ has agreed to settle the SEC’s charges by paying a $10 million penalty – the largest ever against an exchange.
Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.
According to the SEC’s order, several members of NASDAQ’s senior leadership team convened a "Code Blue" conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.
"This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, "Our focus in this investigation was on the design limitation in NASDAQ’s system and the exchange’s decision-making after that limitation came to light. Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern."
The matching of buy and sell orders in an IPO is referred to as "the cross." According to the SEC's order, the systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by NASDAQ, whose IPO cross application calculated the price and volume of the cross based on the orders and cancellations received up until 11:11 a.m. This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11 a.m. and 11:30:09 a.m. to not be included in the cross. Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were "stuck" orders. Immediately prior to the cross, NASDAQ officials noticed a discrepancy between the final indicative pricing and volume totals and the actual totals on NASDAQ’s internal systems. This discrepancy indicated that there was still a problem with the cross and that some cross-eligible orders may not have been handled properly. But NASDAQ failed to address this issue during the minutes and hours following the cross. NASDAQ’s Facebook issues also caused problems in the trading of Zynga shares, and NASDAQ failed to execute 365 orders for Zynga shares in accordance with the price/time priority requirements.
According to the SEC’s order, NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ’s rules do not permit it to use an error account for any purpose. NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules. NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga trading.
The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.
In separate incidents unrelated to the Facebook IPO, the SEC’s order additionally charges NASDAQ with violations of Regulation NMS and Regulation SHO based on its failure to appropriately monitor and enforce compliance with price-test restrictions in October 2011 and August 2012.
The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. Additionally, NASDAQ violated Rule 201(b) of Regulation SHO during two separate incidents in October 2011 and August 2012 and also violated Rule 611 of Regulation NMS during the October 2011 incident. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.
The SEC’s investigation was conducted by Michael Holland, Daniel Marcus, and Amelia A. Cottrell, who are members of the Market Abuse Unit in New York. They were assisted by Brendan Hamill, George Makris, Mark Donohue, Jon Hertzke, and Kristen Lever in the National Exam Program’s Office of Market Oversight under the supervision of John Polise. The case was supervised by Daniel M. Hawke, who is the Market Abuse Unit's Chief, and Sanjay Wadhwa, who is Senior Associate Director of the SEC’s New York Regional Office.
FROM: U.S. JUSTICE DEPARTMENT
Thursday, May 23, 2013
Owner of Investment Company Pleads Guilty to Engaging in a Fradulent Investment Scheme
The owner of an investment company pleaded guilty today for his role in an investment scheme involving false promises, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, U.S. Attorney for the Eastern District of Virginia Neil H. MacBride, and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office.
David Eugene Howard II, 34, of Queens Village, N.Y., pleaded guilty before U.S. District Judge T. S. Ellis III in the Eastern District of Virginia to one count of mail fraud.
According to the plea documents, from in or about March 2008 through in or about April 2009, Howard falsely represented to investors that his company, Flatiron Systems LLC, traded pooled equity accounts using a proprietary trading system called "Pathfinder." Through distributing false and misleading letters, operating agreements, account statements and other materials, he caused investors to send investments of at least $5,000, which were deposited into an account that he exclusively controlled and which he later misappropriated for his own benefit and the benefit of others.
Over the course of his scheme, Howard directly misappropriated approximately $373,000 of $1.8 million in investor funds. Howard’s misappropriation included approximately $86,000 in transfers to his personal bank account, cash withdrawals and personal expenditures made with his company debit card, to include approximately $34,500 in charges at a night club and approximately $3,600 in charges towards the purchase of a Tiffany necklace for Howard’s girlfriend at the time.
According to court documents, in December 2008, Howard falsely informed investors that trading had been voluntarily halted so that an independent audit could be performed. Nonetheless, Howard continued to transfer approximately $26,500 in investor funds to his personal bank account, along with additional cash withdrawals and personal expenditures over the course of the following four months. Howard followed up with another letter which falsely advised investors of prolonged audit and tax procedures, which his nonexistent attorneys and accountants were purportedly diligently working on.
At sentencing, Howard faces a maximum penalty of 20 years in prison, a fine of $250,000 or twice the gross gain or loss, and full restitution. Sentencing is scheduled for Sept. 20, 2013.
In a related action, the U.S. Securities and Exchange Commission (SEC) filed a civil enforcement action against Howard on March 21, 2011.
This prosecution is the result of an investigation by the FBI’s Washington Field Office, along with a parallel investigation by the SEC. The case is being prosecuted by Trial Attorneys Mark Grider, N. Nathan Dimock, and Luke B. Marsh of the Justice Department Criminal Division’s Fraud Section, and by Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia.
FROM: U.S. SECURITY AND EXCHANGE COMMISSION
SEC Charges Atlanta-Area Registered Representative and Registered Investment Adviser Representative with Securities Fraud
On May 23, the Securities and Exchange Commission filed an emergency action seeking a temporary restraining order and other emergency relief in federal court in the Northern District of Georgia, charging Blake Richards (Richards), a Buford, Georgia resident with violations of the federal securities laws for misappropriating investor funds.
The Honorable Julie E. Carnes, the Chief Judge of the Northern District of Georgia, granted the Commission’s request for emergency relief, issuing an order that temporarily restrained Richards from further securities laws violations, froze Richards’s assets, prevented the destruction of documents and expedited discovery. The Court also set a hearing date of June 6 for the Commission’s request for a preliminary injunction. The Commission’s complaint also seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Those claims will be adjudicated at a later date.
The Commission’s complaint alleges that, since at least 2008, Richards, a registered representative of a broker dealer, misappropriated at least $2 million from at least seven investors. The majority of the misappropriated funds constituted retirement savings and/or life insurance proceeds from deceased spouses.
In its complaint, the Commission alleges that Richards instructed investors to write out checks to entities under his control with the understanding that Richards would invest their funds in fixed income assets, variable annuities and/or common stock. The complaint alleges that none of these investments were ever made. None of the investments appeared on the client’s brokerage account statements, and Richards received no commission income from these investments. The complaint further alleges that Richards siphoned off the funds entrusted to him for personal use.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 24, 2013 — The Securities and Exchange Commission today announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.
The SEC alleges that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.
"Bergin betrayed the trust of his clients by secretly using information about their trades to gain an unfair trading advantage and reap massive profits for himself," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit.
According to the SEC's complaint filed yesterday in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin is the trader primarily responsible for managing price exposures related to client orders for equity trades.
"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.
According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.
According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.
The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.
In order to halt Bergin's ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and Zaun.
The SEC's complaint alleges that Bergin violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(j) of the Investment Company Act of 1940 and Rule 17j-1. The complaint seeks disgorgement, prejudgment interest, and a penalty as well as a permanent injunction against Bergin.
The SEC's investigation was conducted in the Fort Worth Regional Office by Frank Goodrich and Barbara Gunn of the Asset Management Unit. The litigation will be led by Jennifer Brandt and Mr. Goodrich. The examination that led to the investigation was conducted by Mary Walters, Anthony McNeal, Charles Amsler, Brandon Whitaker, Carol Hahn, Dennis Rogers, and Kim Shaw of the Fort Worth office.
The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Texas and the Federal Bureau of Investigation.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Spencer Montgomery, Brian Reynolds, Arjent Capital Markets LLC, and Chicago Trading Managers LLC to Pay More than $1.8 Million for Commodity Pool Fraud
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Defendants Spencer Montgomery and Brian Reynolds, and a default judgment and permanent injunction Order against Defendants Arjent Capital Markets LLC (Arjent) and Chicago Trading Managers LLC (CT Managers), for defrauding pool participants by knowingly issuing or causing to be issued false account statements for commodity pools. The Orders require Montgomery and Reynolds each to pay a $140,000 civil monetary penalty, Arjent and CT Managers jointly to pay a $1.4 million civil monetary penalty, and Arjent to pay an additional $140,000 civil monetary penalty. The Orders further impose permanent trading and registration bans on all the Defendants and prohibit them from violating the Commodity Exchange Act (CEA), as charged.
The court’s Orders, entered March 19, 2013 and May 15, 2013, respectively, stem from a CFTC Complaint filed on March 13, 2012, that charged the Defendants with violating the CEA’s anti-fraud provisions.
The Orders find that from at least June 2008 through at least November 2009, Arjent, CT Managers, Montgomery, and Reynolds defrauded commodity pool investors, who had invested approximately $10.5 million. CT Managers, Montgomery, and Reynolds knowingly issued and/or causing to be issued false account statements for two commodity pools, which Arjent aided and abetted, while Arjent, Montgomery, and Reynolds knowingly issued or caused to be issued a false account statement for a third commodity pool, the Orders find. Additionally, the Orders find that the Defendants knew that certain debits were being held in the same account as the commodity pools’ assets and that those debits depleted the commodity pools’ assets. Nonetheless, the Orders find that Arjent, CT Managers, Montgomery, and Reynolds issued or caused to be issued account statements that did not reflect the dilution of the commodity pools’ assets by these debits.
The CFTC thanks the National Futures Association, the Chicago Board Options Exchange, the U.S. Securities and Exchange Commission, and the Financial Services Authority (UK) for their assistance.
CFTC staff members responsible for this case are Laura Martin, Janine Gargiulo, Candice Aloisi, Michael Geiser, Judith Slowly, David Acevedo, Manal Sultan, Lenel Hickson, Lisa Hazel, Annette Vitale, Ronald Carletta, Stephen Obie, and Vincent McGonagle.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Director's Brother, and His Friend and His Relative, with Insider Trading in Shares of a Medical Professional Liability Insurer
The Securities and Exchange Commission charged the brother of a director, his friend, and his sister-in-law with insider trading in the securities of an East Lansing, Mich.-based holding company for a medical professional liability insurer.
The SEC alleges that John A. Stilwell misappropriated confidential information from his brother, an American Physicians Capital, Inc., (ACAP) director, about the anticipated acquisition of ACAP by another insurance company. Stilwell in turn shared this nonpublic information with his friend, Dr. Michael C. Moore, and his sister-in-law, Jillian M. Murphy. Moore and Murphy each tipped another person who purchased ACAP shares. The four tippees purchased ACAP stock based on confidential information about the impending sale in the months leading up to a public announcement. Collectively, they made nearly $62,000 in illegal profits on their ACAP stock following the announcement.
Stilwell and his tippees agreed to pay a combined total of about $167,000 to settle the SEC's charges.
According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, Stilwell, a resident of New York, worked as an employee of his brother's investment firm while his brother was serving as a member of ACAP's board of directors. At a meeting on March 12, 2010, ACAP's board confidentially discussed whether it should consider a potential sale of ACAP, instructed company management to evaluate whether or not to continue as an independent, stand-alone company, and authorized ACAP's CEO and Stilwell's brother to determine potential strategic partners and contact them on a preliminary basis in order to determine their interest in acquiring ACAP.
The SEC alleges that, as Stilwell's brother and ACAP's CEO continued taking definite steps toward a sale, Stilwell misappropriated material nonpublic information from his brother and disclosed it to his friend, Moore, and sister-in-law, Murphy. Between April 16 and 30, 2010, Moore, Murphy, and two individuals that they tipped illegally purchased 8,200 shares of ACAP stock based on the confidential information Stilwell tipped. On July 8, the acquisition of ACAP by Napa, Calif.-based insurer The Doctors Company was publicly announced, and ACAP shares closed approximately 28 percent higher than the previous day's closing price.
Without admitting or denying the allegations in the SEC's complaint, Stilwell, Moore, and Murphy consented to the entry of final judgments ordering them to pay disgorgement, prejudgment interest, and financial penalties, and permanently enjoining them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Specifically, Stilwell agreed to pay approximately $41,500; Moore, a resident of Colorado, agreed to pay approximately $113,000; and Murphy, also a resident of Colorado, agreed to pay approximately $12,000. The proposed settlement is subject to court approval.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 22, 2013 — The Securities and Exchange Commission today charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.
An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.
South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.
"South Miami's fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments," said Elaine C. Greenberg, Chief of the SEC Enforcement Division's Municipal Securities and Public Pensions Unit. "The tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption."
Eric I. Bustillo, Director of the SEC's Miami Regional Office, added, "Municipalities in South Florida and elsewhere cannot rely on a lack of internal procedures or experience in debt offerings to excuse fraudulent disclosures made to investors."
According to the SEC's order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer's limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.
According to the SEC's order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city's lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city's then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.
However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering's proceeds and the altered terms of the parking garage lease.
According to the SEC's order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds' tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city's settlement and payments, bondholders were not financially harmed and they're not required to include any interest from the bonds in their gross incomes.
The SEC's order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city's policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant's determinations and implement all recommendations. South Miami neither admitted nor denied the SEC's findings. A full description of the undertakings can be found in the SEC's order.
This SEC's investigation was conducted in the Miami Regional Office by Senior Counsel Sean M. O'Neill under the supervision of Assistant Regional Director Jason R. Berkowitz, both members of the Municipal Securities and Public Pensions Unit.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The United States Securities and Exchange Commission announced today that the Honorable Ronnie Abrams of the United States District Court for the Southern District of New York entered a final judgment against defendant Ren Hu on May 17, 2013. The final judgment imposes on Hu a permanent injunction against future violations of Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, and 13b2-2 thereunder, and further from aiding and abetting violations of Section 13(b)(2)(B) of the Exchange Act. The final judgment also imposes a 3-year officer and director bar against Hu but does not include any civil monetary penalty based on Hu's financial condition.
The SEC's Complaint, filed on July 30, 2012, charged Hu, former chief financial officer of China Yingxia, with fraudulent representations in Sarbanes-Oxley certifications. Among other things, the Complaint alleges that Hu made material misrepresentations in several SOX certifications. The SEC alleges that Hu misrepresented that he had designed or caused to be designed disclosure and internal controls, when he had not done so. The SEC also alleges that Hu knowingly failed to implement internal controls, aided and abetted China Yingxia's failure to do so, and made materially misleading statements to auditors concerning such controls and potential fraud by the CEO, who has reportedly been convicted by Chinese authorities for illegal fundraising activities, similar to a Ponzi scheme. China Yingxia, a Chinese reverse merger company, failed in early 2009. Hu consented, without admitting or denying the allegations of the SEC's Complaint, to the entry of the final judgment.
The Commission also previously reached several other settlements stemming from its investigation into China Yingxia. The Commission's related civil injunctive actions are still pending.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Final Settlements Reached in "Golden Goose" Wall Street Insider Trading Case
The Securities and Exchange Commission today announced that on May 14, 2013, the Honorable Lorna G. Schofield, United States District Judge for the Southern District of New York, entered final judgments against defendants Jamil Bouchareb, Daniel Corbin and Corbin’s companies, Corbin Investment Holdings, LLC and Augustus Management LLC. These are the last remaining defendants in a Commission case alleging widespread insider trading. The Commission’s case alleged the defendants traded in 11 to 12 corporate transactions based on inside information obtained from Matthew Devlin, a former Lehman Brothers, Inc. representative, who had misappropriated the confidential information from his wife, a partner in a public relations firm working on the deals. Because the inside information was valuable, Bouchareb and Corbin referred to Devlin’s wife as the "golden goose." A judgment against defendant Matthew Devlin was previously entered by the Court.
Bouchareb and Corbin agreed to pay a total of over $1.2 million in disgorgement and prejudgment interest to settle the Commission’s charges. The final judgments against Bouchareb, Corbin and Corbin’s companies permanently enjoin them from violating antifraud provisions Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5 and 14e-3. Bouchareb was ordered to pay disgorgement of $921,082 and prejudgment interest of $127,216. Corbin was ordered to pay disgorgement of $164,515.50 and prejudgment interest of $26,164.83. Bouchareb’s and Corbin’s disgorgement includes the entities’ trading profits. Bouchareb’s disgorgement also includes profits generated by his parents’ trading and trading profits generated by his girlfriend, relief defendant Maria Checa and her entity, relief defendant Checa International, Inc. Corbin’s disgorgement includes trading profits generated by his father, relief defendant Lee Corbin.
Devlin was permanently enjoined from violating Sections 10(b) and 14(e) of the Exchange Act and Exchange Act Rules 10b-5 and 14e-3 in a judgment entered on October 19, 2012. In a related administrative proceeding, the Commission barred Devlin from associating with any broker, dealer, investment adviser, municipal securities dealer, or transfer agent, and barred Devlin from participating in any offering of a penny stock. (In the Matter of Matthew C. Devlin, Administrative Proceeding File No. 3-15315, May 6, 2013).
Bouchareb, Corbin and Devlin also pleaded guilty in parallel criminal cases brought by the U.S. Attorney’s Office for the Southern District of New York. Bouchareb was sentenced to 30 months’ imprisonment followed by two years of supervised release and ordered to pay a $20,000 fine and forfeit $1,582,125. Corbin was sentenced to serve six months in prison followed by two years of supervised release and ordered to forfeit $1 million. Based on Devlin’s cooperation with the criminal authorities, the court sentenced Devlin to three years’ probation and ordered him to pay a $10,000 fine and forfeit his gains of $23,000.
In prior settlements, the four other defendants in the case agreed to be enjoined from violating the antifraud provisions and pay over $1.3 million in disgorgement, prejudgment interest and civil penalties. The Commission’s relief included permanent industry bars and a forthwith suspension from appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice. Two of these defendants also had pleaded guilty in parallel criminal cases.
The Commission acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation. The Commission also thanks the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.
FROM: U.S. SECURITES AND EXCHANGE COMMISSION
Washington, D.C., May 16, 2013 — The Securities and Exchange Commission today charged a father and son and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations.
The SEC alleges that Charles J. Dushek and his son Charles S. Dushek placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). Lisle, Ill.-based CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.
"The Dusheks and their firm had an obligation to treat clients fairly and honestly," said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. "Instead, they exploited the trade allocation process to enrich themselves at the expense of their clients."
According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day – and often several days – by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.
The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.
The illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security, according to the SEC. It alleges that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles including a Mercedes Benz SL550, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.
According to the SEC’s complaint, CMA misrepresented its proprietary trading activities to clients in a brochure that is part of the firm’s Form ADV. The brochure falsely claimed that Dushek Sr. maintained "reports" of his proprietary trading activities that he submitted to an associate for review, when he did not maintain such reports nor have any associate review his trading. The brochure further stated, "We do not merge or aggregate any client order with any employee order." That claim also was false. When the Dusheks placed orders, there were no client orders or employee orders but instead merely block purchases in CMA’s brokerage accounts that were later allocated to client accounts or personal accounts.
The SEC’s complaint charges the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.
The SEC’s investigation was conducted by Nicholas Eichenseer, Vanessa Horton, and Paul Montoya of the Chicago Regional Office. Steven Seeger will lead the SEC’s litigation.
FROM: COMMODITY FUTURES TRADING COMMISSION
May 13, 2013
CFTC Charges Global Precious Metals Trading Company and Michael Ghaemi of Coral Gables, Florida with Fraudulent Precious Metals Scheme
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil injunctive enforcement action in the U.S. District Court for the Southern District of Florida against Defendants Global Precious Metals Trading Company, LLC (GPMT) of Coral Gables, Florida, and its owner Michael Ghaemi, who resides in Miami, Florida. The CFTC’s Complaint charges that, since July 2011, the Defendants solicited and accepted more than $800,000 from approximately nine U.S. customers in connection with illegal off-exchange retail commodity transactions and then misappropriated virtually all of the customers’ funds.
According to the CFTC Complaint, the Defendants claimed to purchase and store physical metal, including gold, silver, platinum, and palladium, for customers. Defendants told customers that the minimum investment to purchase physical metal was $25,000, and that the customers would finance the remaining amount of the total value of the physical metals purchased through a loan which GPMT would arrange.
These claims were false, according to the Complaint. Instead of purchasing, storing, or financing the purchase of physical metals, the Defendants misappropriated the customers’ funds and used the funds for Ghaemi’s benefit, including to make car payments, pay Ghaemi’s salary, pay for Ghaemi’s travel and entertainment expenses, and to margin their own speculative metals trading account in London. According to the Complaint, the Defendants have returned less than $65,000 of the over $800,000 obtained from customers and misappropriated the remaining funds.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010, which expanded the CFTC’s jurisdiction over retail commodity transactions like these, prohibits fraud in connection with such transactions, and requires that these transactions be executed on or subject to the rules of a board of trade, exchange, or contract market, according to the Complaint.
CFTC’s Precious Metals Fraud Advisory
In January 2012, the CFTC issued a Precious Metals Consumer Fraud Advisory to alert customers to precious metals fraud. The Advisory stated that the CFTC had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Advisory specifically warns that frequently companies do not purchase any physical metals for the customer, but instead simply keep the customer’s funds. The Advisory further cautions consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.
In its continuing litigation against the Defendants, the CFTC is seeking preliminary and permanent civil injunctions in addition to other remedial relief, including restitution to customers.
The CFTC thanks the Florida Office of Financial Regulation and the United Kingdom Financial Conduct Authority for their assistance.
CFTC Division of Enforcement staff responsible for this action are Camille Arnold, Heather Johnson, Joseph Konizeski, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
FROM: SECURITIES AND EXCHANGE COMMISSION
Final Judgments Entered Against Connecticut-Based Investment Adviser and His Firm Charged with Fraud for Stealing Investor Funds
The Securities and Exchange Commission announced today that on May 16, 2013, the United States District Court for the District of Connecticut entered final judgments by consent in a previously filed enforcement action against Stephen B. Blankenship and his investment advisory firm, Deer Hill Financial Group, LLC. The judgments enjoin Blankenship and Deer Hill from future violations of the federal securities laws.
On September 13, 2012, the Commission filed an enforcement action charging Blankenship, then a resident of New Fairfield, Connecticut, and Deer Hill Financial Group, LLC, a Connecticut limited liability company under Blankenship’s control, with a scheme to defraud investors. The Commission’s Complaint alleged that, from at least 2002 through November 2011, Blankenship misappropriated at least $600,000 from at least 12 brokerage customers by falsely representing that he would invest their funds in securities through defendant Deer Hill. The Court’s judgment enjoins Blankenship and Deer Hill from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. The judgment also enjoins the defendants from future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 15(a) of the Exchange Act.
Based on the same misconduct, the U.S. Attorney’s Office for the District of Connecticut charged Blankenship with criminal violations. On December 5, 2012, the United States District Court for the District of Connecticut sentenced Blankenship to forty-one months imprisonment plus three years of supervised release and ordered him to pay a fine of $7,500 and restitution in the amount of $607,516.81, based on his earlier guilty plea to one count of Mail Fraud and one count of Securities Fraud.
On October 11, 2012, the Commission barred Blankenship from working in the securities industry. The bar was based on his guilty plea to the federal criminal charges. The Connecticut Department of Banking’s Securities Division also obtained, by consent, a revocation of Blankenship’s registration and has barred Blankenship and Deer Hill from operating in Connecticut.
FROM: FEDERAL DEPOSIT INSURANCE CORPORATION
Remarks by Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation to the Exchequer Club, Washington, DC
May 15, 2013
Good afternoon. I appreciate the invitation to speak here today.
In my remarks I would like to focus on three keys areas of focus for the FDIC. The first is a brief overview of the current state of the banking industry. The second is a discussion of the progress that the FDIC has made on our Community Banking Initiative. The last topic that I intend to address is our work in implementing the new authority provided to the FDIC to resolve systemically important financial institutions, particularly as it relates to the progress being made on international coordination on resolution planning efforts.
Overview of the Banking Industry
Let me begin with an overview of the banking industry.
We have now seen three consecutive years of gradual but steady improvement in the financial condition of the banking industry in the United States following the financial crisis. Industry net income has now increased on a year-over-year basis for 14 consecutive quarters. Annual income for the industry in 2012 was just over $141 billion – the highest level of annual earnings since 2006 and the second highest ever.
We now have seen 10 consecutive quarters of improving credit quality for the industry. Delinquent loans and charge-offs have been steadily coming down now for over two years. Importantly, loan balances for the industry as a whole have now grown for six out of the last seven quarters. In the fourth quarter of last year, loans grew by nearly $120 billion. The largest single category for growth was in commercial and industrial lending, but we also saw increases in consumer loans, farm loans, and even real estate loans. These positive trends have been broadly shared across the industry, among large institutions, mid-size institutions, and community banks. So I think it is fair to say that we continue to see a gradual but steady recovery in the U.S. banking industry that has now been sustained over three years.
The internal indicators for the FDIC also have been moving in a positive direction over this period. We had 51 banks fail in the United States last year, down from 92 failures in 2011 and 157 in 2010. If present trends hold, it is likely that we’re going to see substantially fewer bank failures this year. The problem bank list at the FDIC – institutions that had our lowest supervisory CAMELS ratings of 4 or 5 – peaked in March of 2011 at 888 institutions. By the end of last year the number of problem banks had fallen to 651, which marks another substantial improvement.
Meanwhile, the Deposit Insurance Fund, which was more than $20 billion in the red at its low point just three years ago, is now almost $33 billion in the black. By law, the FDIC is required to build up the reserve ratio for the Deposit Insurance Fund to 1.35 percent of insured deposits by 2020. We are now at over 0.4 percent, and we are very much on track to meet this statutory requirement.
Digging out of the aftermath of the financial crisis we went through, followed by the deepest recession since World War II, has been an enormous challenge for the banking industry. The economic recovery, I think it is fair to say, has been slow and modest thus far, with economic growth right around the two percent mark.
Our sense is that if we can maintain even that modest level of growth, the industry will continue to work its way out of the aftermath of this crisis and the ensuing recession. We still have elevated levels of problem loans and problem banks here in the U.S., and more work to do in repairing balance sheets, but we have now sustained a positive direction for an extended period of time. I think the improvement in bank balance sheets points to the real possibility of a more virtuous cycle for the financial system going forward.
We expect to release updated numbers for the first quarter of 2013 at the end of this month.
FDIC Community Banking Initiatives
I would next like to discuss our efforts at the FDIC over the past year or so to focus on the important role of – and particular challenges faced by – community banks.
Over the past few years, a great deal of attention has been placed on the large, complex financial institutions that really were at the heart of the crisis. But the crisis and the recession have clearly had significant consequences for community banks that are still very much in evidence. As the lead federal supervisor for the majority of community banks in the United States, we at the FDIC felt we had a particular responsibility coming out of the crisis not just to carry out our supervisory responsibilities, but to try to take a careful look at what’s happened to community banks in the United States over the longer term and the role they play in our financial system.
Comprehensive research covering the community banking is critical, in my view, to formulating policies that are well-informed as to the particular challenges community banks have faced and the trends that will shape the sector in coming years.
Our Research Division assembled 27 years of banking data and developed a new research definition of the community bank that is based not just on size but on the characteristics that define community banking, namely: traditional relationship lending, reliance on stable core deposit funding, and a focus on a limited geographic community. By these standards, most banks with under $1 billion in assets do indeed qualify as community banks. But we also found another 330 institutions with assets between $1 and $10 billion that also met our community bank definition in 2011.
Our study, our data and our definitions are all available on the FDIC’s website, and we are already seeing other researchers making use of them and extending this work further in the years ahead. I would like to share with you what I see as some of the most important findings of the study. Community banks made up about 14 percent of U.S. banking assets in 2011, but held 46 percent of all the small loans to businesses and farms made by FDIC-insured institutions. What this tells you is that community banks play a role in our financial system that actually has consequence far beyond their share of total industry assets. By its nature, small business lending is often labor-intensive and highly customized, which is the kind of lending that community banks really are set up to do. By contrast, the very largest institutions are generally are not so interested in such a customized approach, and are looking to provide more standardized products that they can offer on a larger scale.
So it’s really not at all clear whether U.S. small businesses would have sufficient access to the type of credit they need if there were not a strong community banking sector to fill this critical niche in our financial system. And that has implications not just for the banking system, but for the economy and job creation as a whole
The study also found that of the more than 3,200 counties in the United States, more than 600 of them – almost 20 percent of the total – have no FDIC-insured banking offices except those operated by community banks. There are literally thousands of communities across the country – in rural areas, small towns and urban neighborhoods – which would have no access to an FDIC insured bank but for community banks.
So from the standpoint of both filling a critical niche in our financial system and providing access to mainstream financial services in communities all over our country, community banks are in some measure irreplaceable. There is an important public interest from the FDIC’s perspective in having a strong, vital community banking sector in the U.S. financial system. These initial findings lead naturally to another question that many community bankers have been asking, and that is: What will be the future for community banks in the United States? Will the pressures of competition, particularly from the larger institutions, and the pressures for consolidation be so great that community banks will be unable to continue carrying out their traditional role in our financial system and economy?
These are questions we looked at closely, and I would like to share three basic findings with you. By any measure, we still have a very substantial community banking sector in the United States. Community banks continued to make up around 92 percent of all FDIC-insured institutions as of 2011, up from 87 percent in 1984.
Six out of every seven of these community banks have assets less than $500 million.
Despite the historic challenges they have faced as a result of the recent crisis, the vast majority of community banks came through this crisis in pretty good shape. We have also learned a great deal about business models that proved highly vulnerable to the stresses of the crisis, and those that held up under the stress.
The FDIC Inspector General conducts a material loss review for every failed bank, which it delivers to the FDIC Board and ultimately makes available to the public. When the FDIC Board asked the IG to go back and identify key attributes of institutions that failed during the crisis, his report cited three common factors:
rapid growth;
concentrations in high-risk assets – particularly commercial real estate and construction and development loans; and
reliance on volatile brokered deposits.
These factors were cited in failing bank cases that came before the FDIC Board throughout the crisis.
What’s striking is that these are not characteristics that generally reflect how community banks in the United States do business. The fact is that most community banks engage in careful, generally conservative, relationship lending; generally rely heavily on stable core deposits; know their customers well; and manage their business very carefully. Thousands of institutions that followed this basic approach came through this episode in reasonably good shape.
As for the post-crisis period, there are those who are suggesting that smaller institutions will not be able to make it, and will be forced to merge in order to achieve economies of scale and remain competitive. Our study didn’t find much evidence to support that contention.
Our analysts found that while average costs generally declined as size increased, most of these economies of scale were already realized once the institution reached a size of $100 to $300 million or so, depending on its lending specialty. This finding is consistent with the experience of FDIC bank supervisors in the field, who have found that community banks can be viable at virtually any size so long as they build stable business relationships and stick to their local markets and areas of lending expertise.
None of this is meant to deny that fact that the industry has experienced enormous consolidation over the past 25 years, and that consolidation will likely continue in the future. But it is also important to look at the forces that drove this historic consolidation, and ask how important they might be going forward. Around half of the institutions that left the industry during the study period did so via voluntary mergers. The other half were almost entirely made up of failures and intra-company consolidations within existing holding companies.
To the extent that most of the failures took place during the two major banking crises of the past 27 years, it is clear that safe and sound banking will be essential to limiting the future pace of industry consolidation. In addition, it seems clear that the wave of voluntary combinations that drove consolidation over the past 25 years was related in significant measure to the relaxation of restrictions on intrastate branching and interstate banking that took place before 1995. Before that time, unit banking laws in some states and restrictions on the ability to branch across state lines resulted in an artificially high number of bank charters, which were in many cases essentially run as branches within the holding company structure.
With the elimination of branching restrictions in the 1980s and early 1990s, and with the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, consolidation of banking charters was sure to take place. And it did. Between 1984 and 2011, the total number of federally-insured bank and thrift charters declined by 59 percent. But the thing to keep in mind is that the one-time statutory changes that spurred a significant portion of that consolidation are now well behind us. Most of the consolidation that will result from those changes has already taken place.
It seems to me that if we could manage to run our financial system over the next 20 years so that we have fewer crises and fewer failures, the pace of consolidation over the coming decade or two may not be nearly as fast as we’ve seen over the past 20 years, particularly in the community bank model. And we think that the basic business model that community banks adhere to remains not only viable but also quite critical to the functioning of the banking system in the United States.
Supervisory Initiatives
This research effort is really only part of our effort to better understand the community banking sector and address issues of concern to community bankers.
We have had an ongoing dialogue with the FDIC Community Bank Advisory Committee, and conducted roundtable discussions with community bankers in each of the FDIC’s six supervisory regions across the country. We undertook an Examination and Rulemaking Review with the goal of identifying ways to make the supervisory process more efficient, consistent, and transparent. We initiated a Regulatory Calendar on the FDIC website to alert stakeholders to critical information as well as comment and compliance deadlines relating to changes in federal banking laws and regulations. The Calendar includes notices of proposed, interim and final rulemakings, as well as guidance affecting insured financial institutions.
In response to concerns about pre- and post-examination processes, FDIC supervisors developed a web-based tool that generates a pre-examination document and information request tailored to a specific institution’s operations and business lines. We’re also improving how information is shared electronically between bankers and examiners.
Supervisory staff conducted outreach sessions during the year to provide technical training and opportunities for discussion on subjects of interest to community bankers. One example is the Director and Banker Colleges hosted in each region. These Colleges are held in conjunction with state trade associations, and address topics of critical interest to community bankers.
With these specific steps comes a wide range of other initiatives to achieve more effective two-way communication between supervisors and the industry, which is really the foundation of effective and efficient supervision.
In April, the FDIC released the first in a series of technical assistance videos to provide useful information to bank directors, officers, and employees on areas of supervisory focus and proposed regulatory changes. This first installment was designed to provide new bank directors with information to prepare them for their important fiduciary role. Three of the videos address the roles and responsibilities of a director and the other three videos provide information about the FDIC's Risk Management and Compliance Examination processes.
A second installment, to be released by June 30, 2013, is a virtual version of the FDIC's Directors' College Program that regional offices deliver throughout the year. The initial curriculum will consist of six modules covering interest rate risk, third party relationships, corporate governance, the Community Reinvestment Act, information technology, and the Bank Secrecy Act.
A third installment, to be released by year-end, will provide virtual technical training for bank officers and employees. These videos will provide more in-depth coverage of important supervisory topics and focus on management's responsibilities. The training program will include Fair Lending, appraisals and evaluations, interest rate risk, troubled debt restructurings, the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance.
For complex rulemakings, the FDIC will continue to provide overviews and instruction in a variety of formats, including videos. These will be modeled on videos that the FDIC recently released on the capital rulemaking process.
I refer you to our web page on the FDIC Community Banking Initiative for a more complete summary of our activities in this area.
International Coordination on Resolution Authority
I would now like to address one final, and critical, area of focus for the FDIC - the significant progress being made on a cross border basis to coordinate with foreign jurisdictions on our resolution strategy for a systemically important financial institution. It is a key part of our overall effort of the FDIC to address our new responsibilities under the Dodd-Frank Act. I want to focus specifically on this work because addressing this issue as a threshold matter requires international cooperation. As we looked at the foreign operations of our major companies, it very quickly became apparent that the substantial majority of the foreign assets of our major firms was located in the UK. We estimate that nearly 70 percent of the on- and off-balance-sheet foreign assets of our major firms are in the United Kingdom. So, as a threshold for us, if we wanted to think realistically about managing an orderly resolution of one of our companies, we had to establish a cooperative relationship with our UK counterparts.
It was perhaps by sheer good fortune that, among the major industrial countries, the U.S. and the UK were already in the forefront of establishing new authorities to deal with the systemic resolution issues. In addition, the leaders of the key agencies our two countries have been very much focused on this issue and have made it a priority. So when we sat down to engage with our counterparts at the Bank of England and the Financial Services Authority, we found leadership at both agencies already very much engaged and focused on this issue and very receptive to cross-border cooperation.
In addition, when we sat down with our UK colleagues to talk about how we might handle the failure of one of these companies, they essentially outlined for us a strategy based on taking control of the failed company at the parent level, while keeping subsidiaries open and operating essentially for the same reason as we had, quite independently, come to a similar conclusion. The fact that we independently hit upon a strategy, that has come to be called the single point of entry, that we both felt held the greatest potential for viably carrying out this responsibility was an enormous facilitator of bilateral cooperation on these issues, so that now it’s fair to say that we’re doing joint resolution planning on our institutions of mutual interest.
The Financial Stability Board of the G-20 has identified 28 global Systemically Important Financial Institutions (SIFIs) in the world. Of those 28, eight are in the United States four are in the UK. So of the 28 global SIFIs, 12 are in our two jurisdictions. Establishing a close cross-border working relationship between the U.S. and the UK is not only a threshold issue for our two respective national jurisdictions, but it also gets you a significant way down the road in beginning to come to grips with the international challenges posed by these G-SIFIs. Our cooperative relationship is such that the FDIC and the Bank of England were able to produce a joint paper in December of last year outlining the work that we've done together. That study is posted on the FDIC web site, and I invite you to take a look at it.
In addition to our cross-border work with the UK authorities, we have been engaging actively with the Swiss authorities. As you know, Switzerland is the home country for two of the global SIFIs, both with significant operations in the United States. The Swiss authorities are also working off of the single point of entry approach as their key resolution strategy. So that relationship is also working out quite well, and I think there is actually potential for the U.S., the UK and the Swiss to collaborate together on cross-border resolution. Between those three jurisdictions you have 14 of the 28 global SIFIs.
We have also engaged actively with the European Commission, which is very much focused on the issue of cross-border resolution. As you may know, the EC has proposed a directive which would ensure that the national authorities of the EU member states have broad resolution powers. In addition, EC officials have indicated that sometime this summer they plan to release a proposal to create a EU-wide resolution authority. So we clearly have a very strong interest in engaging with the European Commission.
I met late last year with Michel Barnier, the European Commissioner responsible for financial regulation. Out of that meeting, we had an exchange of letters agreeing to establish a joint working group between the European Commission and the FDIC made up of senior executives of our respective organizations. The focus of that joint working group is going to be resolutions as well as deposit insurance issues. I think we at the FDIC have a great mutual interest on both of those issues with the EC, and I think they feel the same way. That agreement provides that a joint working group meet at least twice a year, once in Washington and once in Brussels. The first meeting of the group actually took place at the FDIC in February, and the meeting in Brussels will take place later this year. We expect there to be video conferences and other exchanges in between.
Our agreement with the EC also provides for the exchange of detailees between the FDIC and the EC as a way for both organizations to get a better understanding of the operations of the other. Earlier this year we hosted a detailee from the European Commission to work at the FDIC, and we currently have a detailee from the FDIC at the EC. We think that this has terrific value for both of us, and that it is a very promising development that we've been able to establish this kind of close working relationship with the European Commission.
Finally, as you may know, Japan is planning to enact legislation to significantly expand the resolution authorities of its regulatory agencies. We have been engaging with Japan at the staff level, and I am hopeful later this year to have a principal level meeting with the Japanese authorities.
From this broad perspective, if we can develop effective working relationships with the UK, the Swiss, the European Union and Japan, we will have engagement with the key home and host jurisdictions for 27 of the 28 G-SIFIs and will thereby lay the foundation for making significant progress on these critical cross-border issues. From our standpoint, if we are able to develop a strategy that we think would realistically allow us to manage an orderly resolution of a SIFI and combine that with effective working relationships with our international counterparts, we believe this would represent the cornerstone for developing the capability to manage an orderly resolution of a systemic financial company.
Conclusion
In conclusion, I would summarize three main points. The banking industry has now had a sustained recovery over the past three years and there is reason to believe it will continue. We believe that the community banking model remains quite viable and there will be a strong community banking sector in the U.S. financial system for the foreseeable future. And finally, there has been substantial and meaningful progress on the international arena both on the understanding of resolution issues and establishing a framework for cross border coordination.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Ohioans Kevin and Keelan Harris, Canada-based Karen Starr, and their Companies, Complete Developments, LLC and Investment International Inc., to Pay over $23 Million for Fraud in Foreign Currency Ponzi Scheme
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court Judgment requiring Defendants Kevin Harris, Keelan Harris, Complete Developments, LLC (CDL), and Investment International Inc. (a/k/a/ I3), all of Warren, Ohio, and Karen Starr of Barrie, Ontario, Canada, collectively to pay restitution and civil monetary penalties of over $23 million for solicitation fraud and misappropriation in connection with operating a multi-million dollar off-exchange foreign currency (forex) Ponzi scheme.
Judge David D. Dowd, Jr. of the U.S. District Court for the Northern District of Ohio entered the default Judgment and Memorandum Opinion on May 8, 2013, requiring CDL, I3, Kevin Harris, Keelan Harris, and Karen Starr to pay over $15.7 million in restitution to defrauded investors. The Judgment also imposes civil monetary penalties of $2.49 million on Kevin Harris, $2.49 million on Keelan Harris, and $2.64 million on Starr and permanently bans them, CDL, and I3 from trading and registering with the CFTC and from violating anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.
The Court’s Memorandum Opinion finds that CDL, I3, Kevin Harris, and Starr violated anti-fraud provisions of the CEA by fraudulently soliciting customers to trade forex and misappropriating customer funds. The Opinion further finds that, from about November 2006 until October 2008, CDL and I3 fraudulently solicited and accepted funds from customers seeking to open "professionally managed" forex trading accounts and that customers invested more than $23 million. Rather than trading forex on their customers’ behalf, the Opinion finds that CDL and I3 operated as a Ponzi scheme and used customers’ money to make payments to other customers and for Kevin Harris, Keelan Harris, and Starr’s own personal use. The Opinion also finds that Kevin Harris, Keelan Harris, and Star controlled CDL and I3 and are liable for CDL and I3’s fraudulent conduct.
Relief Defendants Ordered to Disgorge over $1 Million of Ill-Gotten Gains to Investors
The Judgment orders Relief Defendants Majestic Enterprises Collision Repair, Inc. and UCAN Overseas Corporation S.A. to disgorge $302,277 and $768,000, respectively, consisting of customers funds that they received, but are not entitled to, as a result of the Defendants’ fraudulent conduct. The amounts disgorged are to be applied to the restitution ordered for CDL and I3 customers, according to the Judgment.
CFTC Division of Enforcement staff members responsible for this case are Karin N. Roth, Linda Y. Peng, Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.
FROM: U.S. SECURITIES AND EXCHANGE COMISSION
Washington, D.C., May 9, 2013 — The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) today issued an investor alert.
The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream. The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.
Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future. Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.
"Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income stream products," said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. "This alert will help investors understand the costs as well as the potentially significant risks of these transactions."
Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, "Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks."
The investor alert contains a checklist of questions before selling away an income stream:
Is the transaction legal? Federal law may restrict or prohibit retirees from "assigning" their pension to someone else.
Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
What are the tax consequences? The lump-sum payment you collect may be taxable.
The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:
Investors may encounter commissions of seven percent or higher.
Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
These products could be difficult to sell if you need money and want to sell the product.
Your "rights" to the income stream you purchased could face legal challenges.
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Charges Ron Eibschutz with Aiding and Abetting Disclosures of Material Nonpublic Information about Customer Trades in its Case against the CME Group’s New York Mercantile Exchange and Two Former Employees
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed an amended Complaint in its pending enforcement action, U.S. Commodity Futures Trading Commission v. William Byrnes, et al. (U.S. District Court, Southern District of New York, 13 CIV 1174), naming Ron Eibschutz as a Defendant in its ongoing case against the New York Mercantile Exchange, Inc. (CME NYMEX), and two former CME NYMEX employees, William Byrnes and Christopher Curtin.
The amended Complaint charges CME NYMEX, Byrnes, and Curtin with violating the Commodity Exchange Act (CEA) and CFTC Regulations through the repeated disclosures during a two and one-half year period of material nonpublic customer information to Eibschutz, an outside commodity broker who was not authorized to receive the information, and charges Eibschutz with aiding and abetting the violations.
The CFTC’s amended Complaint alleges, as did the initial complaint, that at least from in or about February 2008 to September 2010, Byrnes knowingly and willfully disclosed material nonpublic information about CME NYMEX trading and customers, including about trades cleared through CME ClearPort, to Eibschutz on at least 60 occasions, and that between May 2008 and March 2009, Curtin knowingly and willfully disclosed the same type of information to Eibschutz on at least 16 additional occasions. The nonpublic customer information unlawfully disclosed by Byrnes and Curtin, in conversations often captured on tape, included details of recently executed trades, the identities of the parties to specific trades, the brokers involved in trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants, according to the amended Complaint.
The amended Complaint alleges that Eibschutz aided and abetted the violations of the CEA and CFTC Regulations, including by, among other things, repeatedly soliciting Byrnes and Curtin for the specific material nonpublic information they disclosed to him and providing them with information they needed to identify and locate information about the specific trades in which Eibschutz was interested.
In its continuing litigation, the CFTC seeks civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws, as charged.
CFTC Division of Enforcement staff responsible for this case include Patrick Daly, James Wheaton, David W. MacGregor, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle
FROM: U.S SECURITIES AND EXCHANGE COMMISSION
SEC Charges China-based Company and Former Chief Financial Officer in Fraudulent Scheme involving Non-Existent Computing Business
The Securities and Exchange Commission announced today that it filed an enforcement action on May 8, 2013, in federal court in New York City charging Subaye, Inc., a company based in China whose stock trades in the U.S., and James T. Crane, its former Chief Financial Officer and a U.S. citizen believed to be recently living in southern California, with engaging in a fraudulent scheme during 2010-2011. The Commission alleges that Subaye and Crane misrepresented the company’s business and operations, deceived the company’s auditors, and misled investors about the company’s true status and revenues. According to the complaint, Subaye claimed to be operating a cloud computing business but investigations found no evidence of such a business. Subaye has offered to settle the case, while the action against Crane is unsettled.
The Commission’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Subaye began promoting itself during 2010 as a provider of cloud computing services to Chinese businesses. According to the complaint, Subaye claimed to have over 1,400 sales and marketing employees in 2010, with reported revenues of $39 million that fiscal year and projected revenues of more than $71 million for 2011. However, by May 2011, according to the complaint, and Subaye was revealed to be a company with no verifiable revenues, few, if any, real customers, and no infrastructure to support its claimed cloud computing business. The complaint alleges that the business that Subaye had presented to investors and described in filings with the Commission was imaginary and non-existent.
The complaint further alleges that Crane signed Subaye’s materially misleading filings with the Commission that contained false statements about Subaye’s revenues, business, number of employees, and number of paying customers. According to the complaint, Crane also falsified the books, records, and accounts of Subaye and provided false information to Subaye’s outside auditors. The Commission’s complaint also charges Crane with violating a bar from the Public Company Accounting Oversight Board (PCAOB). According to the complaint, in January 2011, Crane and his Cambridge, Massachusetts-based accounting firm were sanctioned by the PCAOB, which permanently revoked his firm’s registration and barred him from being associated with a registered accounting firm or being associated with any public company in an accounting or financial management capacity. The complaint alleges that, in violation of the January 2011 PCAOB order, Crane remained as the CFO of Subaye until March 2011, even after the PCAOB denied his request to remain as Subaye’s CFO for those two months.
The complaint alleges that Crane violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002; and that Crane aided and abetted Subaye’s violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, thereunder. The Commission is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties. It also seeks an order prohibiting Crane from serving as an officer or director of a public company.
The complaint alleges that Subaye violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-11 thereunder. Subaye has agreed to settle this matter, subject to Court approval, without admitting or denying the allegations in the Commission’s complaint, by consenting to the entry of a final judgment that would permanently enjoin it from future violations of the above law sections.
The Commission acknowledges the assistance of the Ontario Securities Commission and the Public Company Accounting Oversight Board.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Court Enters Final Judgments Against Richard Verdiramo and Vincent L. Verdiramo, Esq.
The U.S. Securities and Exchange Commission announced today that on April 29, 2013, the United States District Court for the Southern District of New York entered final judgments against Richard Verdiramo and Vincent L. Verdiramo, Esq., that require the defendants to pay full disgorgement and civil money penalties, and bar them from penny stock offerings and from serving as officers or directors of public companies. This relief supplements the injunctions and disgorgement that the SEC had previously obtained and concludes the SEC’s case against the defendants.
In March 2010, the SEC charged Richard Verdiramo, RECOV Energy Corp.’s former Chairman, CEO, President, and CFO, with, among other things, committing fraud and violating the securities registration requirements based on his issuances of RECOV stock for his and his father’s personal benefit. The SEC charged his father, Vincent Verdiramo, an attorney who facilitated the misconduct and who was a recipient of some of the RECOV stock, with aiding and abetting his son’s fraud and with violating the securities registration requirements.
The Court previously ordered all of the injunctive relief sought by the Commission in its Complaint against both Richard and Vincent Verdiramo for all of their misconduct. The Court had also previously ordered the defendants to pay full disgorgement for their violations of the securities registration requirements, including holding Richard Verdiramo jointly and severally liable with other defendants. In November 2011, the SEC issued an order suspending Vincent Verdiramo from appearing or practicing before the SEC as an attorney.
The recent judgment requires Richard Verdiramo to disgorge an additional $145,000 in ill-gotten gains plus $61,968 in prejudgment interest, and requires him to pay a civil penalty of $100,000. In addition, the Court barred Richard Verdiramo from participating in any penny stock offering and from serving as an officer or director of any reporting company for five years. The Judgment against Vincent Verdiramo orders him to disgorge an additional $462,000 in ill-gotten gains, plus $197,444 in prejudgment interest, and requires him to pay a civil penalty of $100,000. The Court also permanently barred Vincent Verdiramo from participating in any penny stock offering and from serving as an officer or director of any reporting company. Both Richard and Vincent Verdiramo consented to the entry of the final judgments against them without admitting or denying any of the allegations of the SEC’s Complaint.
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