COURT ORDERS COLORADO MAN TO PAY $1.2 MILLION TO SETTLE CFTC FRAUD CHARGES

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Colorado Orders Michael Gale to Pay More than $1.2 Million to Settle Fraud Charges in CFTC Enforcement Action


Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against Defendant Michael Gale of Littleton, Colorado, individually and doing business as Capital Management Group, requiring him to pay $479,402.35 in restitution to defrauded customers. The Consent Order of Permanent Injunction, entered on June 25, 2013, by Senior U.S. District Judge John L. Kane of the District of Colorado, also imposes a $750,000 civil monetary penalty. The Order imposes permanent trading and registration bans against Gale and prohibits him from violating the anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.

The Order stems from a CFTC Complaint filed July 25, 2012, that charged Gale with fraudulently operating a commodity futures pool, making false statements and providing false tax records to prospective and actual pool participants, misappropriation of pool funds, commingling of pool funds, and failing to register with the CFTC as a commodity pool operator (see CFTC Press Release 6324-12).


The Order finds that Gale solicited and accepted approximately $900,000 from at least nine participants to invest in his commodity pool. Gale lied about his trading record and the pool’s profitability and value, and rather than trade the pool participants’ funds, Gale deposited only a fraction of the funds into an account for trading, and used much of the pool participant money to pay his business and personal expenses, the Order finds. In order to perpetuate the fraud, Gale continued to represent that investments in his pool were profitable and distributed false account performance documentation and false tax records to actual and prospective pool participants, according to the Order. In fact, the Order finds, Gale knew the representations were false because he knew his trading was not profitable and that he had misappropriated significant portions of the pool’s money.

CFTC Division of Enforcement staff members responsible for this case are Allison Passman, Mary Elizabeth Spear, Ava Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

CFTC COMMISSIONER CHILTON'S ADRESS TO THE TRADING SHOW CHICAGO 2013

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION,

"The Anatomy of Speed"

Keynote Address of Commissioner Bart Chilton to the Trading Show Chicago 2013, Chicago, Illinois
June 24, 2013
Jambo!

Jambo! Hello. I wanted to lay a little Swahili greeting on you this morning because we are going to talk a little about Tanzania and technology. Isn’t that what you were expecting, a little Tanzania and technology? Jambo … and you say … Jambo. That’s very good! A hearty hello to you. See how we are already learning and having some fun. Let’s keep it going. I have some new information and data to share with you later.



Magazines
Does anyone here still read magazines, ya know made of paper, that sorta stuff? I do. I still do. Remember when folks used to collect magazines? One collectable magazine was usually stored in your father’s closet.

The other one I’m thinking of was stored in a den or basement. It was a different size and had a yellow binder. I want you guys to all say it out loud. One thoughtful guess in: three, two one, go! You got it, National Geographic. Whoever said the phone book must have had a late night.

We still get Nat Geo at our house and I love it. Sure I enjoy Bloomberg Businessweek but that’s so much like work for me, it’s not very relaxing. I categorically enjoy Rolling Stone, especially Matt Taibbi’s great writing (although sometimes that’s a little like work for me), but the rest of Rolling Stone is just entertaining and enjoyable fun stuff. I can never get enough of Mick and Keith or the Boss. But Nat Geo is really neat in that it takes you to faraway places and has those wonderful photographs.

Last November I was reading a Nat Geo and there’s this story "Cheetahs on the Edge" written by Roff Smith with photos by Frans Lanting. It’s really very well done. It starts off in Tanzania. (How do you say hello in Swahili? Jambo!)

The story describes how the cheetahs live, how they can survive in the cold and heat, and how they are so very adept at knowing the territory and terrain to provide their prey the fewest opportunities to escape. I just couldn’t help but think of the similarities between actual cheetahs and market cheetahs. Quite frankly, I have not once felt that I gave HFTs an incorrect moniker. Reading this article confirms it all in my mind. It is very apt, indeed.

Market cheetahs are out there almost all of the time searching for their food—micro dollars—in milliseconds. They know the market terrain super well, just like cheetahs in the wild in Tanzania.

The Nat Geo story conveys how cheetahs have been, and are today, highly-prized. Well, I’m sure there are a lot of law firms that would like to have a few highly-prized cheetahs on retainer. I’m sure a lot of politicians would value a good campaign-related relationship with some of these cheetahs. Strike that; I know many already do have those relationships right here in this town.

The Nat Geo story also notes that cheetahs are actually a breed apart, a distinct genus, in fact—unlike the other big cats. Cheetahs have claws that are only semi-retractable and work like a sprinter’s shoes which allow them to go from zero to 60 mph in three seconds! And cheetahs aren’t just fast; they have a super short turning radius. They can change directions in a flash, or quicker than a flash. Well, duh on the market cheetahs. They may be like automated trading systems (ATSs) in some ways, like cheetahs in the wild are similar to lions, but they are both distinctly different from other cats in the wild and in markets. The speed of our market cheetahs make them definitively diverse from anything we have seen before. They are a breed apart.

Finally, a study late last year, which was conducted in conjunction with the CFTC, said in essence that cheetah trading imposes quantifiable costs on small investors. Aggressive cheetahs make a lot of money, and they make their biggest paydays when they trade with small, traditional traders. A cheetah trading with a fundamental trader makes $1.92 on a $50,000 trade but if that same trade is made with a small trader, the number goes up to $3.49. This could end up pushing smaller, non-cheetah traders out of markets.

All this is to say that the term cheetah for HFTs is more fitting today than ever. For the record, the word for cheetah in Swahili is "duma." Sounds like puma, but duma with a "d." Got it? Good, there may be a quiz.


The PROTECT Act—HR 2292
One thing I dislike is repeating things I’ve said, particularly when someone in the audience may have heard me discuss the matter before. One can’t avoid it all the time, but I try. In this regard, I’ll just say that I’ve been calling for a few key things to regulate the cheetahs over the years. I won’t go through them all because thankfully there has been some new and thoughtful leadership on these issues in Congress.

Representative Ed Markey has been one of my heroes since I began working in the House of Representatives back in 1985. I couldn’t be more impressed that he has taken it upon himself and his staff to work in this regard and I’m very supportive of his thoughtful legislation, HR 2292, the PROTECT Act. The legislation would require cheetah registration, testing, kill switches, and increased penalties for violations of the Commodity Exchange Act (CEA). The provisions of the PROTECT Act related to penalties aren’t just for cheetahs, but for all violations of the CEA. It would increase penalties from the current $140,000 fine per violation to $1,000,000 for individuals and $10,000,000 for entities. And the PROTECT Act gives discretion to the CFTC for how often a violation occurs. Currently, a violation has been considered to be only once per day. That makes no sense in today’s millisecond market environment. It is my hope that the PROTECT Act will become part of legislation to reauthorize the CFTC this year.


Cheetahs Today—New Data
Alright, with all that done, let’s get to some new stuff, shall we? Cheetahs are relatively new to markets. There isn’t one single word in any of the recent financial reform law—Dodd-Frank—about HFTs. Yet, they comprise a large percentage of the daily trading volume—roughly 30 to 50 percent. That’s an average. There are times—feeding times—when they have a much greater percentage of the volume. In fact, some new data I’m discussing for the first time today is fascinating.

Here it is: During the last year, we looked at 20 million trading seconds. Of those 20 million, we pinpointed 189,000 seconds, primarily around the open and close of markets. In those 189,000 seconds we found something astounding: Cheetahs traded at rates of 100-500 trades per second in a major commodity market! By any standards that exist, or have ever been discussed in public, that’s a shell-shocker data point. Trading 100 to 500 times per second, as a cluster, in one commodity contract? Holy mother of cheetahs! That's a mammoth market number any way you look at it. It’s actually pretty hard to even comprehend. This is my head exploding—pooofff!

If anyone says they know all about what’s going on with these cheetahs and markets, don’t believe them. How could they? Are they from another planet and have superhuman supercomputer powers? The best case is that some very smart folks know a portion of what is going on. But to suggest that they understand all of this isn’t correct. And, what is going on at this incomprehensible rate raises all sorts of policy, oversight and enforcement issues that our Commission needs to consider.


Fantasy Liquidity
One such issue has been sort of a dirty little secret. That’s the matter of fantasy liquidity created by what are called "wash" trades.

If one trades with yourself, that is putting a price out and hitting that price for yourself, you take no risk, yet create the market impression that a legitimate trade has occurred. It appears to the market as if there is liquidity. If this was only for a few trades, it wouldn’t make much of a difference to the market. It wouldn’t seem like much liquidity. However, if there is a lot of trading going on with only one trader "washing" the trades by themselves, that is not only wrong; it is illegal.

Section 4c of the Commodity Exchange Act states that it is: "unlawful for any person to offer to enter into, or confirm the execution of a transaction involving the purchase or sale of any commodity for future delivery … if the transaction … (i) is, of the character of, or is commonly known to the trade as, a ‘‘wash sale."

At the same time, there are exchange rules out there that say, "No person shall place or accept buy and sell orders in the same product and expiration month … where the person knows or reasonably should know that the … transaction(s) [is a] wash sale(s). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades." Another exchange rule says, "No Market Participant shall … make or report any wash trade...."

Wash sales are clearly a violation of the law, and against exchange rules. When they occur, they create fantasy liquidity. However, given the enormous volumes, I believe some cheetahs are engaging in this type of activity—that is, trading that arguably could qualify as "wash" trading under the CEA.

I’ve asked: Why would cheetahs do that? Are they trying to create fantasy liquidity in an effort to entice easy prey into the markets so that the cheetahs can pounce? That theory is something I’ve suggested we review at the Agency.

Here’s another theoretical answer to my question about why cheetahs might be engaged in creating fantasy liquidity: Many cheetahs are part of exchange market maker programs. Market maker programs pay traders for providing liquidity. When there’s lots of what is perceived as trading volume, it encourages others to trade. When there’s lots of liquidity, exchanges can boast their markets are deep and liquid. So, exchanges often pay cheetahs and other market makers to trade.

However, if a cheetah is truly washing the trades, they aren’t taking on any market risk whatsoever and they are violating the law. The fantasy liquidity may make it appear positive for exchanges, but the exchanges can’t allow that to occur.

By the way, wash trading is clearly unfair to other traders and, if it impacts price discovery, unfair to consumers.


Wash Blockers—For Cleaner Markets
So, one might think the exchanges would put in place what are called "wash blockers." And great, "wash blockers—for cleaner markets!" Guess what, proposed guidance from an exchange—the CME—on this issue is on the table right now.

You might think that as a regulator who has complained about voluminous wash sales that I’d be all for it. You exchange folks go to town—implement, implement, implement. But, whoa doggies, not so fast. What is it they are going to do exactly? How are they going to do it? Are all exchanges going to do the same thing? If not, does one exchange have a better idea than the other? Do we have a better idea? Are there any mitigating circumstances that the Commission needs to consider prior to allowing the exchanges to implement these wash blocker measures?

Well, for me, all of those questions, as well as a few others, need to be vetted internally before we allow the exchanges to self-certify and move forward.

My concern is the same concern that I’ve had with cheetahs and technology in markets, in general. We have all too often just accepted things that are occurring or that folks want to do. The results are that we see market SNAFUs all the time. I used to keep a list of all of the tech issues gone bad. It became too long. We need to take a deep breath and ensure that we know, to the best of our ability, what might occur. Regulators are always so darn reactive. Rather, we need to be more nimble and quick and think about what might be around the corner.

That’s why today, I’m suggesting that we take a chill pill on allowing the new wash blocker guidance without a more thorough review. I’m not saying in a few weeks or so we won’t give the go ahead. I’m just saying, right now there are simply too many unanswered questions that need to be addressed from an oversight and surveillance perspective, and potentially from an enforcement perspective.


Looking into your Dens
On that happy note, I guess I want to leave our fine furry cheetah friends with a message. You are the fastest predators in the market and we are watching you. That doesn’t mean we have all the tools or resources we need or want. We don’t. But, we are working on it. We have, as of fairly recently, developed the capacity to see trades in the milliseconds. That is, one-one-thousandth of a second. We can see what you are doing. We can see all of your trading, even when it is many, many times per second. We won’t stop at getting your instant messages, your emails or your text messages. We are going to come into your dens and look and analyze with experts your algo programs to see if you are violating the law. New regulatory world order, cats. If you are playing by the rules, and I know many of you are, all will be cool. You won’t have anything to worry about. If you aren’t playing by the rules, watch out. You can’t hide. We may be slower than you, but we are a persistent breed of our own.


Asante!
Finally, we all want efficient and effective markets that are devoid of fraud, abuse, manipulation and things like wash trading. Right? Right. That will make it better for everyone. It will make it better for other market participants, but it will make it better for consumers and our nation’s economy.

Asante! That means thanks. Asante, asante, guys. Thank you

CHICAGO RESIDENT ORDERED TO PAY OVER $1.3 MILLION TO SETTLE SETTLE FOREX PONZI SCHEME

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Chicago Resident Christopher Varlesi to Pay over $1.3 Million to Settle Ponzi Scheme Fraud and Misappropriation Action

Varlesi used misappropriated investor funds for business and personal expenses, such as entertainment, travel, restaurants, his children’s tuition, and spa treatments

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against Defendant Christopher Varlesi of Chicago, Illinois, individually and doing business as Gold Coast Futures and Forex, requiring him to pay restitution of more than $638,000 to defrauded investors and a $700,000 civil monetary penalty. The consent Order of permanent injunction, entered June 12, 2013, by Judge James B. Zagel of the U.S. District Court for the Northern District of Illinois, also imposes permanent trading and registration bans against Varlesi and prohibits him from violating the anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.

The Order stems from a CFTC Complaint filed March 7, 2012, charging Varlesi with fraudulently operating a commodity pool to trade commodity futures and off-exchange foreign currency (forex), making false statements to pool participants, misappropriating pool funds, and failing to register with the CFTC as a Commodity Pool Operator.

The Order finds that Varlesi solicited and accepted at least $1.7 million from at least 20 individuals to trade commodity futures and forex contracts by touting his past trading record and ability to profitably trade futures and forex contracts. In exchange for their investment, Varlesi issued promissory notes to pool participants purportedly paying a fixed monthly interest rate on principal, according to the Order. However, Varlesi used no more than $220,000 of the $1,716,169 that he accepted from pool participants to trade commodity futures and forex contracts, the Order finds. Varlesi spent misappropriated investor funds on business and personal expenses, including food, utilities, gas, life insurance, entertainment, travel, restaurants, his children’s tuition, and spa treatments and used approximately $1,343,471 to pay participants purported profits in the manner of a Ponzi scheme, according to the Order.

To perpetuate the fraud, Varlesi made false verbal representations and provided pool participants with fabricated account statements and false account performance documentation, showing that their investments were growing, according to the Order. In fact, the Order finds that Varlesi knew the representations, statements, and account performance documentation were false because he failed to disclose to pool participants that he had misappropriated a significant amount of the pool’s money.

In or around March 2011, Varlesi stopped making interest payments on the promissory notes and admitted to a pool participant that there was no money in his account, the Order finds. Furthermore, despite subsequent promises to repay the pool participants, Varlesi has not done so and still owes 17 pool participants approximately $638,227, the Order finds.

The CFTC appreciates the assistance of the United States Attorney’s Office for the Northern District of Illinois and the Illinois Secretary of State Securities Department.

CFTC Division of Enforcement staff members responsible for this case are Robert Howell, Mary Elizabeth Spear, Ava M. Gould, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

SEC CHARGES COMPANY AND OWNER WITH MAKING MISLEADING STATEMENTS REGARDING FDA APPROVAL

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Files Charges in Investment Scheme Involving Company Promoting Purported Alzheimer's Treatment
 The Securities and Exchange Commission announced that it filed a civil lawsuit against Nevada corporation Your Best Memories International Inc. and its president, Robert Hurd, of Los Angeles, California, for misleading investors in Your Best Memories about how their funds would be used and for making misleading statements that one of the products touted to investors had received approval from the U.S. Food and Drug Administration as a treatment for Alzheimer's Disease. Also charged was Kenneth Gross, of Porter Ranch, California, for selling Your Best Memories stock without being registered as a broker-dealer as required by the federal securities laws.


According to the SEC's complaint, Your Best Memories purportedly was in the business of raising money from investors on behalf of Moving Pictures, Inc., a Massachusetts-based company in the business of developing products intended to improve memory function in individuals suffering from Alzheimer's disease, dementia or memory loss. The complaint alleges that, in total, Your Best Memories raised approximately $1.2 million from more than 50 investors in an offering of securities that was not registered with the SEC as required under the federal securities laws.

Specifically, the complaint alleges that investors were told by Hurd and Your Best Memories that their funds would, in large part, fund the development and marketing of Moving Pictures' memory enhancing products. According to the complaint however - unbeknownst to investors and contrary to Hurd and Your Best Memories' representations - a mere 17% of the funds raised by Your Best Memories was forwarded to Moving Pictures for their intended purposes. The SEC alleges that Hurd funneled at least 37% of investor funds to himself, by transferring money to another of his companies, Smokey Canyon Financial, Inc., or simply by making cash withdrawals of investor funds. The SEC named Smokey Canyon as a relief defendant, alleging that it was unjustly enriched by its receipt of investor funds. The SEC also alleges that Hurd and Your Best Memories further defrauded investors by making Ponzi payments (using investors' principal to make payments purporting to be investment returns to other investors) and that Hurd and Your Best Memories misled investors by falsely stating that they had secured FDA approval to sell coconut oil as a treatment for Alzheimer's disease, when in fact the FDA never approved such a claim.

The SEC's complaint charges Hurd and Your Best Memories with violations of Sections 5(a) and (c) and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and charges Hurd with aiding and abetting violations by Your Best Memories of Section 17(a)(2) of the Securities Act as well as with control person liability under Section 20(a) of the Exchange Act. The complaint also charges Gross with violations of Sections 5(a) and (c) of the Securities Act and Section 15(a) of the Exchange Act. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest and civil penalties against Your Best Memories, Hurd and Gross. The SEC is also seeking disgorgement and prejudgment interest against relief defendant Smokey Canyon.







































 

PENNY STOCK PROMOTER CHARGED FOR ATTEMPTING TO GENERATE FALSE APPEARANCE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges San Diego-Based Promoter in Penny Stock Scheme

The Securities and Exchange Commission today charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that David F. Bahr of Rancho Santa Fe, Calif., artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn't know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.
In a parallel action, the U.S. Attorney's Office for the Southern District of California today filed criminal charges against Bahr.

The SEC also has issued an order to suspend trading in iTrackr securities.
According to the SEC's complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr's success and future profits.

According to the SEC's complaint, Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers' accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr's stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the SEC's complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr's trading volume during that time. Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.
The SEC's complaint alleges that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks financial penalties, a penny stock bar, and a permanent injunction against Bahr.

The SEC's investigation, which is continuing, has been conducted by Marc Blau and Sara Kalin of the Los Angeles Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of California, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

SEC CHARGES PENNY STOCK PROMOTER WITH FRAUD

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 18, 2013 — The Securities and Exchange Commission charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that David F. Bahr of Rancho Santa Fe, Calif., artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today filed criminal charges against Bahr.

"Bahr tried to artificially inflate the price and volume of iTrackr shares to the detriment of retail investors who wouldn’t have known the real story behind the flurry of market activity," said Michele Wein Layne, Director of the SEC’s Los Angeles Office. "Working with criminal authorities, we were able to stop Bahr’s misconduct before he could seriously impact the markets and harm investors."

According to the SEC’s complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr’s success and future profits.

According to the SEC’s complaint, Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers’ accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr’s stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the SEC’s complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr’s trading volume during that time.

Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.

The SEC’s complaint alleges that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks financial penalties, a penny stock bar, and a permanent injunction against Bahr.

The SEC’s investigation, which is continuing, has been conducted by Marc Blau and Sara Kalin of the Los Angeles Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of California, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

HEDGE FUND MANAGER FOUND GUILTY OF SECURITIES FRAUD

FROM: SECURITIES AND EXCHANGE COMMISSION

Hedge Fund Manager James Fry, Previously Sued by the SEC for Fraud, Found Guilty of Securities Fraud, Wire Fraud, and Making False Statements to the SEC


The Securities and Exchange Commission announced that on June 12, 2013 a jury found Minneapolis-area hedge fund manager James Fry guilty of five counts of securities fraud, four counts of wire fraud, and three counts of making false statements to the SEC during investigative testimony. Sentencing on these charges will be held on a later date. The U.S. Attorney's Office for the District of Minnesota had filed criminal charges against Fry on July 19, 2011.


Fry is a defendant in a pending civil injunctive action filed by the SEC on November 9, 2011 in the United States District Court for the District of Minnesota. The charges leveled by the SEC stem from the same set of facts alleged by the U.S. Attorney's Office. The SEC's complaint alleged that Fry fraudulently funneled more than $600 million of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters. During the period in which he invested with Petters, Fry and his hedge fund management company collected more than $42 million in fees. The SEC's complaint further alleged that Fry falsely assured investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds he managed, Fry concealed it from investors by secretly executing note extensions with Petters.

On February 14, 2012, the Hon. Richard H. Kyle, U.S. District Judge for the District of Minnesota, stayed the SEC's action against Fry pending the resolution of his criminal case.



 

NORM CHAMP'S REMARKS AT 2013 INSURED RETIREMENT INSTITUTE GOVERNMENT, LEGAL & REGULATORY CONVERENCE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Remarks to the 2013 Insured Retirement Institute Government, Legal & Regulatory Conference

by

Norm Champ

Director, Division of Investment Management
U.S. Securities and Exchange Commission
Washington, D.C.
June 18, 2013

Introduction


Good morning and thank you for inviting me to speak to you today. Before I begin, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, any of the Commissioners, or any of my colleagues on the staff of the Commission.


This is a challenging time for our nation’s investors, so many of whom are at a turning point in their investing career. As you know, probably better than most, a large and growing number of the nation’s investors are reaching retirement age and are shifting their focus from the accumulation of retirement assets to the challenge of income management. This translates into a challenge for those of you who issue and sell investment products that provide income solutions, and of course I’m thinking primarily of variable annuities. This in turn raises a challenge for regulators – to provide effective oversight and to protect investors as the landscape changes, with evolving investor needs and new products designed to meet those needs. Many of these challenges are a matter of communication, and improved communication is the key to much of what the staff has accomplished recently, and hopes to accomplish going forward.

With that as a backdrop, I would like to discuss with you some of the important developments in our work to protect investors, including some exciting developments at the Division of Investment Management. As I talk about what’s happening at the Commission, keep in mind that the Commission does not – cannot – work in a vacuum. It is essential that we all work together to protect Americans’ investments. The Commission’s mandate is clear – to protect investors, ensure fair and orderly markets, and promote capital formation. The variable products industry has to do its part by offering products that are well designed to meet investors’ needs and that provide investors the fair deal that they expect and deserve.

The Division is very focused on the way in which our work fits in with the Commission’s mandate. The Division works to protect investors, promote informed investment decisions, and facilitate appropriate innovation in investment products and services through regulating the asset management industry. This mission statement was drafted with the help of the entire Division, and we are firmly committed to that mission.

For the past year, the Division has been engaged in a program of change to develop a culture of continuous improvement. If we are to best serve investors, we need to continue what we are doing well and improve what isn’t working as well. Today I would like to focus on communication as a key area for continuous improvement – our ability to watch, listen, and learn about market developments; our communications with investors and industry participants; and our internal communications at the Commission. I’ll close with some observations about your communications with investors.

One area where we are seeking to improve is enhancing our awareness, and being more in tune with industry developments and investors’ experiences. This effort involves getting a better and more first-hand understanding of the workings of the investment management industry. It also involves expanding our sources of knowledge so that it doesn’t come from sitting at desks in Washington, but from interacting with you and your colleagues who are directly serving America’s investors.


The Staff’s Ability to Watch, Listen, and Learn About Market Developments

A primary tool in our work towards better awareness is the Division of Investment Management’s new Risk and Examinations Office or "REO."

REO supports the Division’s work primarily through two functions. First, REO maintains an industry monitoring program which provides ongoing financial analysis of the investment management industry, including in particular the risk-taking activities of investment advisers and investment companies. The REO monitoring program’s work includes analysis of the information the industry provides through various regulatory reports, including Form ADV, Form PF, and Form N-MFP. The REO monitoring program also maintains an ongoing dialogue with certain strategically important industry participants. Second, REO conducts an examination program which gathers additional information from the investment management industry to inform the Division’s policy making. All of REO’s work will inform the initiatives that the Division devotes resources to and help inform the rules we are drafting.

REO represents a new area of focus for the Division of Investment Management, and I expect REO to complement the work of the SEC as a whole. I am excited at the prospect that REO can help the staff to be proactive and get out in front of industry trends, rather than reacting to practices that have long ago "left the station."

Early stage work of REO has involved meetings that REO staff and I have had with senior management and fund boards at some of the larger, strategically important fund complexes. We have made it a point not to bring folks into our offices for meetings, but to visit their headquarters, giving the staff a first-hand view of systems, controls, personnel, and even a sense of a firm’s culture and approach to compliance. This illustrates our commitment to effective dialogue and two-way communication. We will be better regulators to the extent that we better understand the workings of the industry we regulate. And if firms see our willingness to reach out and to listen, hopefully they will respond with increased cooperation and more effective communication.

As I noted, the visits thus far have been with fund complexes. I can see similar exercises with variable product issuers as a likely evolution of this strategic work of outreach and communication with important market participants. In addition, the head of REO, Jon Hertzke, will be working closely with the staff of the Insured Investments Office to determine ways in which REO can help with the important work that group does. The expertise of REO staff regarding complex financial instruments is expected to be an invaluable resource to the Insured Investments staff.


Staff Communications with Investors and Industry Participants

The flip side of improving the staff’s awareness is improving the industry and investing public’s awareness of us, or in other words, improving our outside communications. In furtherance of this goal, the Division recently hired a Communications Counsel, Derek Newman to manage our external communications, working with others on the staff to prepare and disseminate public releases, alerts, reports, joint regulatory reports, and key speeches. In addition, we will reach out to you, the industry, to find out what you need additional guidance on or where you have uncertainty about the law. We will then work diligently to get the appropriate guidance out there.

Another way in which we hope to improve communications is through modernizing our website. The Division website has been redesigned to make it more user-friendly, while at the same time making its contents more comprehensive. There is a portion devoted to IM news so that you can stay up to date on developments in IM. We have organized various materials chronologically and topically, which should make it easier to find what you are looking for. We have also created a "Guidance Update" section of the website, which we plan to use as a way to get more information out more quickly. In the "Contact" part of the site, we included an organization chart for the Division, which helps point you to the Division office that might best assist you on a given matter. Our overall goal is to make our positions and our organization more transparent.

We anticipate that the new website will be a valuable resource for the industry and other SEC stakeholders, and I urge you to check it out if you have not done so already.

In addition, the Commission’s Office of Investor Education and Advocacy maintains an investor-focused website, called investor.gov. This site provides user-friendly information for investors, much of which is relevant to seniors and other investors planning for retirement. This includes a brochure on variable annuities and information on topics such as managing lifetime income and avoiding retirement fraud. There is information on senior specialist designations, which imply that financial professionals are expert at advising seniors on financial issues, as well as a link to FINRA’s helpful information on this subject. The site also features investor alerts and bulletins covering such matters as investment scams and settlements of periodic income streams. Our Insured Investments Office has been working together with the Office of Investor Education and Advocacy and others to update the materials on the website, with a view to keeping them relevant and up to date.


Communication at the Commission

The Division of Investment Management is also focused on better communications with our colleagues throughout the Commission. Shortly after I joined the Division, we undertook a series of conversations with our counterparts in other offices, with a view to obtaining their feedback and enhancing their awareness of who we are and what we do. As a result, staff members in other offices are now better able to attach a name and a face in the Division with an area of our work that affects what they do.

The Division has also worked intentionally towards better coordination and cooperation with other offices in connection with major initiatives. We are doing this as an integral part of the process, rather than a late stage check-in with another office after the essential work on the matter has been completed. This involves comparing notes with others on our initiatives early and often, seeking meaningful substantive input at all stages of a major undertaking like a rulemaking.

A great example of this is the proposal for rule amendments for money market funds that was approved by the Commission two weeks ago. Every stage of the process of developing those recommendations involved close collaboration with the Division of Risk, Strategy, and Financial Innovation, recently renamed the Division of Economic and Risk Analysis, and with the offices of each of the commissioners. The proposal was informed by a robust study that the Commission’s economists undertook to address concerns raised last year by commissioners, which allowed the proposal to be rooted in a thorough analysis of data and economics. Our collaborations with the Division of Economic and Risk Analysis, as well as with the Office of the General Counsel and others, resulted in careful consideration of risks, costs, and benefits that characterized the development of those rule recommendations. The Division hopes to continue this collaborative approach to rulemaking as we move forward with upcoming rulemaking priorities.


Issuers’ Communications with Investors

Now I’d like to turn from our communications to your communications.


Accurate Prospectus Disclosure

As insurance products become more complex, effective communication among issuers, producers, and investors about how the products work becomes more important. Also important is communication about how the products may not work to meet investors’ needs, by which I mean how investment objectives can be frustrated, or totally undermined. I think this point is illustrated perfectly by the Massachusetts Mutual Life Insurance Co. settled Commission order issued by the Commission this past November.

The variable annuity contracts at issue in that matter offered a minimum income benefit. As you know, this type of benefit promises that the contract value will, in time, reach a minimum amount, and thus provide a minimum income stream in the payout phase of the contract. The income benefit offered by the insurer was capped at a specified level. A key feature of this contract that was not sufficiently explained to investors provided that, once the cap was reached, withdrawals under the contract could potentially deplete the income benefit to zero.

Not only did the prospectus neglect to sufficiently explain this, but a number of the agents selling the contracts did not understand it themselves. In some cases, in fact, the agents understood the exact opposite, mistakenly telling customers they could maximize their income benefit by taking withdrawals after allowing their income benefit values to reach the cap. In fact, that strategy would, under certain circumstances, have resulted in reductions in the benefit value, reducing and potentially eliminating future income payments. The order also indicated that there were indications that sales agents and others did not understand this product feature that should have alerted the insurance company to the fact that its disclosures were inadequate. MassMutual did take remedial steps that included eliminating the cap on the minimum income benefit. The Commission considered these remedial steps in arriving at the settlement that was announced last fall.

The moral of this story is that your investors’ retirement income should not be put at risk because of complexities in your contracts that are not clearly disclosed. The staff of the Insured Investments Office takes this message to heart in its review of disclosure filings, working on a daily basis to elicit clear and effective communication about ever more complex insurance products. But only you know whether your disclosure accurately describes your contracts. And of course, if there are red flags putting you on notice that your disclosure is not doing the job, for example, if your sales force does not understand your contracts, it is incumbent on you to take appropriate remedial action immediately.


Disclosure Challenges for New Products

In its work, the staff pays close attention to the way in which issuers communicate the material features, risks, and costs of new types of annuities. For example, in the past year the staff has reviewed several filings for index annuities that have features similar to structured notes and that have registered with the Commission as a result of the potential for significant downside loss. These contracts generally provide returns linked to an index, such that if the index goes up, investors benefit in proportion to the increase, subject to a cap. Investors bear the risk of loss in excess of a specified amount of loss protection offered under the annuity. In addition, these annuities apply an adjustment to early withdrawals using often complex formulas. The staff has noted that sometimes these formulas can result in a loss of principal, even if the reference index has appreciated at the time of the withdrawal.

In its reviews of prospectuses for these annuities, the staff has focused on clear disclosure to investors of: (1) the total amount that they can lose; (2) the limits on what they can gain; and (3) the potential for principal loss on early withdrawal. The staff has also insisted upon prominent disclosure when the contract provides that the investor is automatically rolled at the end of a term into a new term with different, possibly less favorable benefits, as well as how investors can opt out of such automatic rollovers. Also, given the potentially dramatic impact of early withdrawals, the staff has asked for plain English disclosure concerning the methods used for calculating early withdrawal amounts. These calculations are complex, and the challenge for issuers is conveying in simple terms what the calculations are designed to accomplish and explaining clearly how that goal is achieved.

Finally, the staff has focused on the names of these products. While investors should never rely on a product name as the sole source of information about it, a name can communicate a great deal. Given the significant downside risk of some of these recently registered index annuities, the staff is careful to watch for names that might suggest that the product is without such risk, and has in fact asked for name changes in certain cases. Note that our goal is not to discourage the use of descriptive names for new products, but rather to see that product names do not suggest a level of safety that they do not provide.

As you prepare filings for new products, keep in mind the vital importance of clearly conveying how the products work and what the important points of disclosure should be. I applaud your efforts to find innovative solutions to the problems investors are facing in the retirement space, but at the same time I urge you to make every effort to accurately and fully communicate to investors exactly what they are buying - not just the benefits, but the risks, as well.


Variable Annuity Summary Prospectus

Another area of staff focus is a new rule that would create a summary prospectus for variable annuities. We are working hard to fashion a framework for disclosure that would help you communicate concise, user-friendly information to investors considering these products. As you know, the features and pricing of variable annuities can be complex and difficult to understand. We continue to be committed to attacking the problem of long and complex disclosure about variable annuities, while at the same time, facilitating disclosure for each variable annuity that will tell the full story – the key facts that investors need to know about the limitations and costs, as well as the benefits, of their investment.

The Division continues to believe that the mutual fund summary prospectus, adopted in 2009, and now used successfully by so many funds, may offer a useful model for providing the disclosure that variable annuity investors need. The mutual fund summary prospectus may serve as a model for the concept of providing key information in a concise and user-friendly format, and for the concept of "layered" disclosure, that is, an approach in which the key information is sent or given to an investor and more detailed information is provided online and in paper upon request. We believe that this approach can maximize effective use of modes of communication -- paper or electronic -- and can make it easier for investors to choose between them. Just as important, it can help make information readily available 24/7 -- whenever the investor needs it.

In connection with our efforts to develop a variable annuity summary prospectus, we are seriously considering ways of improving delivery of information to both investors contemplating the purchase of a new contract and investors considering additional investments in an existing contract. Ideally, each investor would have ready access to information that is tailored to his or her information needs. The Division is looking at ways to achieve that result.


Conclusion

I hope I have conveyed some of the ways that the Division is working to improve the communications that are key to the success of our work. The establishment of the Risk and Examinations Office is an exercise in proactive listening and watching; having our ear to the rail if you will, so that we are not blindsided by market trends and industry developments. Several of the changes in the Division, including revamping our website, are aimed at better communicating with you and with the investing public. The Division’s efforts to communicate more effectively with our colleagues throughout the Commission have already borne fruit, most notably in the Commission’s recent money market fund proposal. The disclosure issues I have discussed highlight the central importance of your disclosure documents as key communication tools for reaching your investors. And the staff is excited about the possibilities for a summary variable annuity prospectus, and the layered disclosure approach generally, to make that communication effort more effective.

Of course, it takes two for communication to take place, and I hope I have also conveyed the importance of your role in all of this. We expect you to take to heart our invitation, indeed our earnest expectation, that you who design, offer, and sell these important products will communicate your concerns and your ideas as we work together to serve the needs of America’s investors.










 

MAN AND COMPANY ORDERED TO PAY RESTITUTION AND PENATIES TO SETTLE FOREX FRAUD CHARGES

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Puerto Rico Orders Angel F. Collazo, ACJ Capital, Inc., and Solid View Capital LLC to Pay over $1.5 Million to Settle Forex Fraud Charges in CFTC Enforcement Action

Court also orders Fernando Clemente and Felgi Investments Corp. to pay $150,000 in restitution and penalties and to disgorge over $120,000


Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court consent order requiring defendants Angel F. Collazo, formerly of Salinas, Puerto Rico, and his companies, ACJ Capital, Inc. (ACJ) and Solid View Capital LLC (Solid View), both of San Juan, Puerto Rico, jointly and severally to pay $843,444 in restitution and to pay a $750,000 civil monetary penalty for fraudulently soliciting customers to participate in an off-exchange leveraged foreign currency (forex) pool, misappropriating pool participant funds, and issuing false statements to conceal trading losses and misappropriation.

The CFTC also obtained a second federal court consent order, requiring defendants Fernando Clemente, of Weston, Florida, and his company, Felgi Investments Corp. (Felgi) of Caguas, Puerto Rico, to pay $30,000 in restitution, to disgorge $120,933 in pool participant funds to which they were not legitimately entitled, and to pay a $120,000 civil monetary penalty.

The Orders also impose permanent trading and registration bans against all defendants and prohibit them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The orders, entered by Judge Jose A. Fuste of the U.S. District Court for the District of Puerto Rico on February 13, 2013 and June 10, 2013, respectively, stem from a CFTC complaint originally filed in February of 2012 (see CFTC Press Release 6180-12, February 15, 2012). In July 2012, the CFTC complaint was amended to include defendants Clemente and Felgi. Clemente and Felgi were also named as relief defendants for receiving funds from ACJ, Solid View, and Collazo to which they were not legitimately entitled.


The February 13, 2013 Order finds that Collazo and his companies fraudulently solicited commodity pool participants by falsely claiming profitable returns, while minimizing and failing to fully disclose the risks of trading leveraged forex. The Order also finds that Collazo, ACJ, and Solid View misappropriated pool funds to make payments to pool participants and for personal uses, failed to disclose their intended uses of pool participant funds, misrepresented the profitability of pool trading accounts, and distributed statements to ACJ and Solid View pool participants that contained false account values, including showing consistent trading profits.

The June 10, 2013 Order finds that Clemente and Felgi, misappropriated $30,000 in customer funds that were to have been provided by Felgi to Solid View for personal uses and failed to disclose their intended uses of pool participant funds. The Order also finds that Clemente and Felgi retained $120,933 in purported trading profits to which they were not entitled.

The CFTC appreciates the assistance of the U.S. Attorney’s Office of the District of Puerto Rico in this matter.

CFTC Division of Enforcement staff members responsible for this case are Kara Mucha, James A. Garcia, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.

CFTC ORDERS ABN AMRO TO PAY $1 MILLION TO SETTLE CHARGES

FROM: COMMODITY FUTURES TRADING COMMISSION

CFTC Orders ABN AMRO Clearing Chicago LLC to Pay $1 Million to Settle Charges of Segregated and Secured Fund Deficiencies, a Minimum Net Capital Violation, Books and Records Violation, and Supervision Failures


Washington, DC –The U.S. Commodity Futures Trading Commission (CFTC) issued an Order on June 18, 2013, filing and settling charges against ABN AMRO Clearing Chicago LLC (ABN AMRO) of Chicago, Illinois, for failing to segregate or secure sufficient customer funds; failing to meet the minimum net capital requirements, failure to maintain accurate books and records, and failure to supervise its employees.

According to the CFTC Order, during the period March 19, 2009, through January 2012, ABN AMRO reported three instances of under-segregated customer funds in violation of Section 4d(a)(2) of the Commodity Exchange Act (CEA), 7 U.S.C. § 6d(a)(2) (2006 & Supp. V 2012), and Commission Regulation 1.20(a), 17 C.F.R. § 1.20(a) (2011) and one instance of under-secured customer funds in violation of Section 4d(a)(2) of the CEA, 7 U.S.C. § 6d(a)(2) (2006 & Supp. V 2012), and CFTC Regulation 30.7, 17 C.F.R. § 30.7 (2011). Each of these violations was the result of clerical errors and/or a lack of adequate policies and procedures related to customer movement of funds.

The Order also states that during a CME Group routine audit of ABN AMRO’s books and records as they were on the close of business on May 31, 2011, the CME Group found that ABN AMRO had improperly used a customer’s withdrawn warehouse receipts as collateral for margining purposes. Without these warehouse receipts, the customer’s accounts were under-margined on several occasions, and ABN AMRO had to reduce its adjusted net capital by an amount equal to the margin deficits. Once these reductions were calculated, it was determined that ABN AMRO failed to meet the minimum net capital requirements for a single month-end, in violation of Section 4f(b) of the Act, 7 U.S.C. § 6f(b) (2006), and Regulation 1.17(a)(1)(i), 17 C.F.R. § 1.17(a)(1)(i) (2011).

Also, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) Examination staff conducted a limited review of ABN AMRO beginning January 27, 2012. According to the Order, at that time, ABN AMRO was unable to produce a complete and accurate margin report listing for a very limited number of certain types of accounts (e.g., omnibus accounts that offset margin requirements for certain spread transactions). The Order finds that ABN AMRO violated Section 4g(a) of the CEA, 7 U.S.C. § 6g(a) (2006), and CFTC Regulation 1.35(a), 17 C.F.R. § 1.35(a) (2011), when it failed to keep accurate books and records sufficient to determine the margin status of each customer.

The Order finds that each of these violations was a result of ABN AMRO’s insufficient controls, reflecting a lack of supervisory controls over commodity interest accounts and/or other activities of its partners, employees, and agents relating to its business as a Commission registrant in violation of CFTC Regulation 166.3, 17 C.F.R. § 166.3 (2011).

Based on these violations of the CEA and CFTC Regulations, the Order imposes a $1 million civil monetary penalty, a cease and desist order, and requires ABN AMRO to retain an independent consultant to review and evaluate the effectiveness of its existing internal controls and policies and procedures and adopt any recommendations for improvement made by the consultant.

The CFTC thanks the CME Group for its assistance with this matter.

CFTC Division of Enforcement staff responsible for this action are Allison Baker Shealy, John Einstman, Paul G. Hayeck, and Joan Manley. Kevin Piccoli, Melissa Hendrickson, Carrie Coffin, and Michael Guritz of DSIO also assisted in this matter.

MAN AND COMPANY CHARGED IN COMMODITY POOL FUND COMINGLING CASE

FROM: COMMODITY FUTURES TRADING COMMISSION

CFTC Charges North Carolina Resident James A. Shepherd and James A. Shepherd, Inc. with Commodity Pool Fraud
Defendants charged with fraudulently soliciting approximately $10 million from approximately 176 investors and misappropriating and commingling at least $4.45 million of the pool’s funds


Washington, DC —The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil enforcement Complaint against James A. Shepherd (Shepherd) and James A. Shepherd Inc., a registered Commodity Pool Operator, charging them with fraudulently soliciting, accepting, and pooling approximately $10 million from approximately 176 individuals to invest in a commodity pool called the Shepherd Major Play Option Fund LP (Pool) for the purpose of trading options on futures contracts. Shepherd allegedly misappropriated at least $4.45 million of the pool’s funds.

According to the CFTC’s Complaint, Shepherd fraudulently told pool participants and prospective pool participants that their funds would be invested in on-exchange options on commodity futures and that the Pool’s assets would not be commingled with the assets of any other entity. Rather than trade funds as represented, Defendants allegedly misappropriated a large portion of Pool funds and commingled those funds with funds unrelated to the Pool. Beginning in 2006, Shepherd allegedly transferred a large portion of Pool funds to: (i) Shepherd’s own bank account, for his own personal use and to repay other business obligations unrelated to the Pool; (ii) futures and options trading accounts maintained in Shepherd’s own name, which suffered significant trading losses; and (iii) a bank account in the name of a separate hedge fund operated by Shepherd, which he used to pay redemptions to those hedge fund investors.

The Complaint further alleges that Defendants concealed the fraud by distributing to pool participants periodic statements and annual certified financial statements that falsely represented the net asset value of the Pool. Defendants further concealed the fraud by forging bank statements and bank confirmations and making false statements to the Pool’s outside auditor and the NFA during the course of their respective audits, according to the complaint.

In its continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the Commodity Exchange Act as charged.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Western District of North Carolina, the Federal Bureau of Investigation and the National Futures Association.

CFTC Division of Enforcement staff members responsible for this case are Elizabeth C. Brennan, Patryk J. Chudy, W. Derek Shakabpa, Michael P. Geiser, Philip Rix, David Acevedo, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.

REVLON CHARGED BY SEC WITH MISLEADING SHAREHOLDERS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 13, 2013 — The Securities and Exchange Commission today charged cosmetics and beauty care manufacturer Revlon with violating federal securities laws when the company misled shareholders during a "going private transaction."

Going private transactions can occur in many forms and typically involve the company delisting and deregistering its stock and cashing out their shareholders so the company or a private equity firm can acquire all of the outstanding shares. An SEC investigation found that during a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon engaged in "ring fencing" that deprived its independent board members from knowing critical information: the transaction's consideration had been deemed inadequate by a third party who evaluated whether current and former employees invested in Revlon common stock through the company's 401(k) plan could exchange their shares.

Revlon agreed to settle the SEC's charges and pay an $850,000 penalty.

"Going private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders," said Antonia Chion, Associate Director in the SEC's Division of Enforcement. "By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors."

According to the SEC's order instituting settled administrative proceedings, controlling shareholder MacAndrews and Forbes (M&F) asked Revlon in 2009 to offer minority shareholders the option to exchange their common stock shares on a one-for-one basis for preferred shares with certain financial characteristics. The exchanged shares would then be provided to M&F to pay down Revlon's debt. The trustee administering Revlon's 401(k) plan decided that 401(k) members could tender their shares only if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) members would receive was at least equal to the fair market value of the exchanged common stock shares. The third-party financial adviser ultimately found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders.

The SEC's order finds that Revlon did not want to disclose the third-party financial adviser's view on the adequacy of the transaction's consideration. In an attempt to avoid a potential disclosure obligation, the company engaged in what one employee termed as "ring fencing" to avoid receiving the adequate consideration determination from the third-party adviser:
Revlon amended the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with Revlon.
Revlon ensured that it was not a party to any engagement letter concerning the adequate consideration determination.
Revlon directed the trustee to inform Revlon of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination.
In a notice sent to the 401(k) members and publicly filed as an exhibit to the exchange offer documents, Revlon removed the explicit term "adequate consideration" and replaced it with citations to ERISA statutes.
The SEC's order finds that Revlon's ring-fencing conduct resulted in various materially misleading disclosures to its shareholders. For example, Revlon represented in its offering documents that the board's process was full, fair, and complete in determining the fairness of the exchange offer. In reality, the process was compromised because Revlon's board was unable to consider the adequate consideration determination as part of its process to evaluate and ultimately approve the offer. Thus, Revlon's shareholders were deprived of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the adequate consideration determination.

The SEC's order finds that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit. The SEC's order requires Revlon to cease and desist from committing or causing these violations and any future violations. Without admitting or denying the SEC's findings, Revlon agreed to the settlement and financial penalty.

The SEC's investigation was conducted by Senior Counsel George B. Parizek and Staff Accountant Andrew M. Shirley, and supervised by Assistant Director Ricky Sachar.

WEALTH MANAGEMENT COMPANY CHARGED WITH INSIDER TRADING

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Files Insider Trading Charges Against Whittier Trust and Fund Manager


On June 7, 2013, the Securities and Exchange Commission charged a South Pasadena, Calif.-based wealth management company and a former fund manager with insider trading on non-public information about technology companies. The charges arise from the agency's ongoing investigation into expert networks and hedge fund trading.


The SEC alleges that Whittier Trust Company and fund manager Victor Dosti of San Marino, California, participated in an insider trading scheme involving the securities of Dell, Nvidia Corporation, and Wind River Systems. Dosti generated profits and avoided losses for funds he managed at Whittier Trust by trading on confidential information that he obtained from Danny Kuo, a Whittier Trust fund manager who Dosti supervised. Kuo was charged by the SEC in January 2012 and is currently cooperating with the investigation.

Whittier Trust and Dosti agreed to pay nearly $1.7 million to settle the charges.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Dosti used non-public information obtained from employees at Dell and Nvidia to trade in advance of five quarterly earnings announcements in 2008, 2009 and 2010. Dosti reaped profits and avoided losses of more than $475,000 for Whittier Trust funds. Dosti also made $247,000 in illicit profits for Whittier Trust funds by trading Wind River stock based upon detailed information that Kuo obtained from an Intel employee about Intel's confidential negotiations to acquire Wind River in 2009.

The SEC's complaint charges Whittier Trust and Dosti with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. Whittier Trust agreed to pay disgorgement of $724,051.62 plus prejudgment interest of $75,296.00 and a penalty of $724,051.62. Dosti agreed to pay disgorgement of $77,900.00 plus prejudgment interest of $2,951.43, and a penalty of $77,900.00. The settlements are subject to court approval and would permanently enjoin Whittier Trust and Dosti from future violations of the antifraud provisions of the federal securities laws. Whittier Trust and Dosti neither admit nor deny the SEC's charges. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC CHARGES BROTHERS IN INSIDER TRADING CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Brothers with Insider Trading


On June 11, 2013, the Securities and Exchange Commission filed a civil injunctive action in the Northern District of Ohio against Andrew W. Jacobs ("A. Jacobs") and his brother Leslie J. Jacobs II ("L. Jacobs"). The Commission alleges that A. Jacobs provided L. Jacobs material non-public information about a pending tender offer for Chattem, Inc. securities. L. Jacobs then traded on the basis of the information he received from his brother.


According to the Commission's complaint, on December 21, 2009, Sanofi-Aventis ("Sanofi"), a French pharmaceutical company, announced its intent to make a tender offer for Chattem, a Tennessee-based distributor of over-the-counter pharmaceutical products, at the price of $93.50 per share ("Announcement"). Shares of Chattem closed 32.60% higher on the day of the Announcement than the prior trading day's close of $69.98 and volume increased more than 3,000% to 10.3 million shares.

The Commission alleges that A. Jacobs learned of the tender offer in a confidential conversation with his brother-in-law, who was at the time a Chattem executive. The executive, with whom A. Jacobs had been friends since business school and who was married to his wife's sister, requested that A. Jacobs keep their discussion confidential. A. Jacobs agreed to do so. Nonetheless, according to the complaint, the next day, A. Jacobs called his brother L. Jacobs A and told him that Chattem was going to be acquired. A few days later, L. Jacobs purchased 2000 shares of Chattem at a cost of $136,579.85. After the Announcement, L. Jacobs sold those shares for a profit of $49,457.21.

The Commission's complaint, filed in the United States District Court for the Northern District of Ohio, alleges that each defendant violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and seeks against each defendant permanent injunctions, disgorgement with prejudgment interest and civil monetary penalties pursuant to Section 21A of the Exchange Act. The Commission also seeks an officer and director against A. Jacobs, who was a high-level executive of a public company at the time of the tip.

COMPLAINT FILED BY CFTC AGAINST MAN WHO OPERATED UNREGISTERED COMMODITY POOL

FROM: COMMODITY FUTURES TRADING COMMISSION

CFTC Files Enforcement Action against Arizona Resident for Issuing False Account Statements and Operating as an Unregistered Commodity Pool Operator


Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a civil complaint against Thomas L. Hampton, an Arizona resident. The CFTC’s complaint charges Hampton with acting as an unregistered commodity pool operator (CPO) and issuing false account statements in violation of the Commodity Exchange Act.

The complaint filed on June 11, 2013, in the United States District Court for the District of Arizona Phoenix Division alleges that from approximately September 2010 through at least September 2011 ("relevant period"), Hampton, while acting as an unregistered CPO, operated Hampton Capital Markets, LLC, an Arizona limited liability company, as a commodity pool and/or hedge fund. The complaint further alleges that, during the relevant period, Hampton solicited approximately $5.2 million from at least 72 pool participants to invest in the pool for the purpose of trading commodity futures contracts, including E-mini S&P 500 futures contracts and E-mini Dow futures contracts, as well as securities based index products. The complaint also alleges that Hampton defrauded pool participants by issuing false account statements that represented that the pool was generating significant trading profits, when Hampton knew that the pool was sustaining consistent net losses.

In its continuing litigation, the CFTC seeks a return of ill-gotten gains, restitution, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the federal commodities laws.

The CFTC appreciates the assistance of the Arizona Corporation Commission, Securities Division and the United States Attorney’s Office for the Southern District of New York.

CFTC Division of Enforcement staff responsible for this case are: Eugene Smith, Tracey Wingate, Kyong J. Koh, Peter M. Haas, Paul G. Hayeck, and Joan Manley.




 

FORMER TRADER SETTLES CHARGES IN INSIDER TRADING/KICKBACK SCHEME

FROM: SECURITIES AND EXCHANGE COMMISSION

Former Trader Emanuel Goffer Settles SEC Insider Trading Charges

 The Securities and Exchange Commission announced today that on June 7, 2013, The Honorable Richard J. Sullivan of the United States District Court for the Southern District of New York, entered a final judgment against Emanuel Goffer in SEC v. Cutillo et al., 09-CV-9208, an insider trading case the SEC filed on November 5, 2009. In its complaint, the SEC charged nine defendants, including Goffer, a former proprietary trader at the broker-dealer Spectrum Trading, LLC, with insider trading ahead of corporate acquisition announcements.


The SEC's complaint alleged that Zvi Goffer, Emanuel's brother, orchestrated this insider trading scheme in which an attorney with the law firm Ropes & Gray LLP misappropriated from the firm material, nonpublic information concerning potential corporate acquisitions, and tipped the inside information, through another attorney, to Zvi, in exchange for kickbacks. The complaint further alleged that Zvi tipped the information to a number of individuals, including his brother Emanuel. As alleged in the complaint, the tips related to potential acquisitions involving Ropes & Gray clients, including the acquisitions of Alliance Data Systems Corp., Avaya Inc. and 3Com Corp. As alleged in the complaint, Emanuel Goffer traded on the inside information he received from his brother, resulting in illicit profits of more than $1.3 million.

To settle the SEC's charges, Goffer consented to the entry of a final judgment that: (i) permanently enjoins him from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and (ii) orders disgorgement plus prejudgment interest of $1,546,021. The disgorgement obligation will be off-set in part by a forfeiture order in a related criminal case, and the remainder waived in light of his financial condition. In related administrative proceedings, Goffer also consented to the entry of an SEC order barring him from association with any broker, dealer, investment adviser, municipal securities dealer or transfer agent, and barring him from participating in any offering of a penny stock. In the related criminal case, Goffer was convicted of securities fraud and conspiracy to commit securities fraud, and was sentenced to three years in prison and ordered to forfeit $761,623. United States v. Emanuel Goffer, 10-CR-0056 (S.D.N.Y.).













 

DETROIT INVESTMENT ADVISER CHARGED BY SEC WITH STEALING ALMOST $3.1 MILLION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 10, 2013 — The Securities and Exchange Commission today charged the leader of a Detroit-based investment adviser for stealing nearly $3.1 million from the pension fund that the firm manages for the city's police officers and firefighters so he could buy two strip malls in California. The SEC charged four other top officials at the firm for helping him try to cover up the theft.

The SEC alleges that Chauncey C. Mayfield, who is the founder, president, and CEO of MayfieldGentry Realty Advisors, took the money from the Police and Fire Retirement System of the City of Detroit without obtaining permission. He used it to purchase the shopping properties and title them in the name of a MayfieldGentry affiliate. Other executives at MayfieldGentry gradually became aware that Mayfield had siphoned money away from their biggest client. Rather than come clean about the theft and risk losing the sizeable business the firm received from the pension fund, MayfieldGentry officials instead devised a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. Their plan ultimately failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund.

Mayfield and his firm agreed to settle the charges by paying back the stolen amount.

"Mayfield stole pension money from Detroit's retired police officers, firefighters, and surviving spouses and children to buy strip malls," said Andrew Ceresney, Co-Director of the SEC's Division of Enforcement. "To make matters worse, other senior officers at the firm joined together with him to cover up his deceitful and grave betrayal of trust, all for the purpose of keeping the client."

The other MayfieldGentry executives charged in the SEC's complaint are chief financial officer Blair D. Ackman, chief operating officer Marsha Bass, chief investment officer W. Emery Matthew, and chief compliance officer and general counsel Alicia M. Diaz.

According to the SEC's complaint filed in federal court in Detroit, Mayfield took the money from a trust account for the pension fund in 2008. The stolen money could have provided a year of benefits for more than 100 retired police officers, firefighters, and surviving spouses and children. Shortly thereafter, Mayfield told Ackman about the misappropriation, and by May 2011 the other principals at MayfieldGentry were aware of the misdeed. They proceeded to hide the theft by affirmatively misleading the pension fund.

The SEC alleges that during a critical budget meeting with fund trustees in 2011, Diaz stressed MayfieldGentry's success in generating a cash return for the pension fund. He stated that "the cash we deliver at the end of the day is the ultimate testimony in terms of what we do." Diaz touted a projection that MayfieldGentry would remit $4.96 million to the pension fund in 2012. Diaz never told the pension fund trustees that the cash remittance would be reduced by more than 60 percent once the stolen money was taken into account. At the same meeting, Matthews claimed that MayfieldGentry had achieved a benchmark-beating 6.8 percent return for the pension fund. He didn't explain that the 6.8 percent return would be materially impacted by the $3.1 million theft.
According to the SEC's complaint, MayfieldGentry and its executives continued to cover up the theft until they finally informed the pension fund on the evening before the SEC filed a complaint against Mayfield and his firm in May 2012 for their participation in a "pay-to-play" scheme involving the former mayor and treasurer of Detroit. Upon learning of the theft, the pension fund promptly terminated its relationship with MayfieldGentry.


The SEC's complaint alleges that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Ackman, Bass, Matthews, and Diaz aided and abetted those violations. Mayfield and his firm agreed to pay disgorgement in the amount of $3,076,365.88 and be permanently enjoined from violating Sections 206(1) and 206(2) of the Advisers Act. They neither admit nor deny the allegations in the settlement, which is subject to court approval. In a parallel criminal matter, Mayfield is awaiting sentencing in connection with his guilty plea for participation in the pay-to-play scheme.

The SEC's investigation was conducted jointly by the Chicago Regional Office, the Division of Enforcement's Asset Management Unit, and the Municipal Securities and Public Pensions Unit. The investigation was conducted by Brian D. Fagel, Eric A. Celauro, Peter K.M. Chan, and John J. Sikora, Jr. The SEC's litigation against the remaining four defendants will be led by Timothy S. Leiman.

SEC CHARGES WEALTH MANAGEMENT COMPANY WITH INISIDER TRADING

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 7, 2013 — The Securities and Exchange Commission today charged a South Pasadena, Calif.-based wealth management company and a former fund manager with insider trading on non-public information about technology companies. The charges are the agency’s latest in its ongoing investigation into expert networks and hedge fund trading.

The SEC alleges that Whittier Trust Company and fund manager Victor Dosti participated in an insider trading scheme involving the securities of Dell, Nvidia Corporation, and Wind River Systems. Dosti generated profits and avoided losses for funds he managed at Whittier Trust by trading on confidential information that he obtained from Danny Kuo, a Whittier Trust fund manager who Dosti supervised. .

Whittier Trust and Dosti agreed to pay nearly $1.7 million to settle the charges.

"Time and again, Dosti received what he knew was inside information from Kuo and traded on it to generate illicit gains for the funds he managed," said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. "Now, he and Whittier Trust join a long list of insider trading perpetrators who have been held accountable by the SEC for their transgressions."

The SEC has charged more than three dozen individuals and firms in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Dosti used non-public information obtained from employees at Dell and Nvidia to trade in advance of five quarterly earnings announcements in 2008, 2009 and 2010. Dosti reaped profits and avoided losses of more than $475,000 for Whittier Trust funds. Dosti also made $247,000 in illicit profits for Whittier Trust funds by trading Wind River stock based upon detailed information that Kuo obtained from an Intel employee about Intel’s confidential negotiations to acquire Wind River in 2009.

The SEC’s complaint charges Whittier Trust and Dosti with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. Whittier Trust agreed to pay disgorgement of $724,051.62 plus prejudgment interest of $75,296.00 and a penalty of $724,051.62. Dosti agreed to pay disgorgement of $77,900.00 plus prejudgment interest of $2,951.43, and a penalty of $77,900.00. The settlements are subject to court approval and would permanently enjoin Whittier Trust and Dosti from future violations of the antifraud provisions of the federal securities laws. Whittier Trust and Dosti neither admit nor deny the SEC’s charges. The SEC acknowledges the cooperation of Whittier Trust in the investigation.

The SEC’s investigation has been conducted by Stephen Larson, Daniel Marcus and Joseph Sansone – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Justin Smith, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

BROKERAGE FIRM MANAGER CHARGED IN KICKBACK SCHEME INVOLVING A VENEZUELAN BANK

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 12, 2013 — The Securities and Exchange Commission today charged the former head of the Miami office at brokerage firm Direct Access Partners (DAP) for his role in a massive kickback scheme to secure the bond trading business of a state-owned Venezuelan bank.

The SEC charged four individuals last month who enabled the global markets group at DAP to generate more than $66 million in revenue from transaction fees related to fraudulent trades they executed for Banco de Desarrollo Económico y Social de Venezuela (BANDES). A portion of this revenue was illicitly paid to the Vice President of Finance at BANDES, who authorized the fraudulent trades.


The SEC alleges that as managing partner of the global markets group, Ernesto Lujan was an integral participant in the wide-ranging fraudulent scheme that included sham arrangements to hide the kickback payments and route money to the BANDES official through shell corporations. Lujan and others charged in the scheme deceived DAP's clearing brokers, executed internal wash trades, interpositioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue.

"For a scheme this bold to succeed, it required the sneaky collaboration of several individuals including the head of the Miami office," said Andrew M. Calamari, Director of the SEC's New York Regional Office. "Lujan and the others may have believed they were covering their tracks, but the SEC's exam and enforcement teams unraveled their fraud."

In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Lujan.

The SEC's amended complaint filed in federal court in Manhattan charges Lujan and the other defendants 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, which is continuing, has been conducted by Wendy Tepperman, Amanda Straub, and Michael Osnato of the New York Regional Office. The SEC's litigation is being led by Howard Fischer. An SEC examination of DAP that that led to the investigation was conducted by members of the New York office's broker-dealer examination staff. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York, the Department of Justice's Criminal Division, and the Federal Bureau of Investigation.