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

Saturday, November 30, 2013


SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions

The Securities and Exchange Commission today announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.

In a principal transaction, an investment adviser acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They must also obtain the client’s consent.

The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.

“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions.

According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions.

The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors.

According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.

The SEC’s investigation was conducted by R. Joann Harris and Asset Management Unit member Barbara L. Gunn of the Fort Worth Regional Office.  The SEC’s litigation will be led by Jennifer Brandt.

Friday, November 29, 2013


SEC Charges Gary C. Snisky with Offering Fraud

The Securities and Exchange Commission (Commission) filed a civil injunctive action on November 21, 2013, in the United States District Court for the District of Colorado against Gary C. Snisky of Longmont, Colorado. The Commission alleges that Snisky recruited and trained a sales force that raised at least $3.8 million from more than 40 elderly investors in Colorado and seven other states by promising guaranteed returns and safety of principal through a purported investment in government secured bonds.

The Commission's complaint alleges that Snisky and his sales force targeted mostly elderly, annuity-holding investors to purchase interests in Arete, LLC, a purportedly safe alternative to an annuity that also allowed for withdrawal of principal. Additionally, the complaint alleges that Snisky and his salespeople represented to investors that Arete provided a guaranteed annual return of 6% to 7%, a 10% bonus to compensate for any annuity withdrawal penalties, and that investor funds would be placed in bonds backed by the "full faith and credit" of the United States Government. These representations, however, were false, as Snisky misappropriated approximately $2.8 million in investor funds, mostly in cash withdrawals, and used these funds to pay commissions to his salespeople and for his personal use.

The Commission's complaint alleges that Snisky violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Sections 206(1), (2), and (4) of the Advisers Act of 1940 and Rule 206(4)-8 thereunder; violated the unregistered broker-dealer provisions of the securities laws in Section 15(a) of the Exchange Act; violated the security registration provisions of the securities laws in Sections 5(a) and (c) of the Securities Act; and aided and abetted Arete's failure to register as an investment company under Section 7(a) of the Investment Company Act of 1940. The Commission's complaint seeks a permanent injunction, disgorgement plus prejudgment interest, a civil monetary penalty, and other relief against Snisky.

The Commission's investigation was conducted in the Denver Regional Office by John C. Martin, Kerry M. Matticks and James A. Scoggins. Polly A. Atkinson will lead the Commission's litigation. The SEC acknowledges the assistance of the U.S. Attorney's Office, the Internal Revenue Service and the Federal Bureau of Investigation for the District of Colorado. The SEC's investigation is continuing.

Thursday, November 28, 2013



The Securities and Exchange Commission today announced the agenda and panelists for its December 5 staff roundtable on the use of proxy advisory firm services by institutional investors and investment advisers.

The roundtable, announced earlier this month, will begin at 9:30 a.m. and will be divided into two sessions.  In the first session, participants will discuss, among other topics, the current use of proxy advisory services, including the factors that may have contributed to their use, the purposes and effects of using the services, and competition in the marketplace for such services.  In the second session, participants will discuss, among other topics, issues identified in the Commission’s 2010 concept release on the U.S. proxy voting system, including potential conflicts of interest that may exist for proxy advisory firms and users of their services, and the transparency and accuracy of recommendations by proxy advisory firms.

The roundtable panelists are:

Karen Barr - General Counsel, Investment Adviser Association
Jeffrey Brown - Head of Legislative and Regulatory Affairs, Charles Schwab
Mark Chen - Associate Professor of Finance, Georgia State University
Michelle Edkins - Managing Director and Global Head Corporate Governance and Responsible Investment, BlackRock, Inc.
Yukako Kawata - Partner, Davis Polk & Wardwell LLP
Hoil Kim - Vice President, Chief Administrative Officer and General Counsel, GT Advanced Technologies, Inc.
Eric Komitee - General Counsel, Viking Global Investors LP
Jeff Mahoney - General Counsel, Council of Institutional Investors
Nell Minow - Co-Founder and Board Member, GMI Ratings
Trevor Norwitz - Partner, Wachtell, Lipton, Rosen & Katz
Harvey Pitt - CEO, Kalorama Partners
Katherine Rabin - CEO, Glass Lewis & Co. LLC
Gary Retelny - President, Institutional Shareholder Services, Inc.
Michael Ryan - Vice President, Business Roundtable, and former president and COO of Proxy Governance, Inc.
Anne Sheehan - Director of Corporate Governance, CalSTRS
Damon Silvers - Director of Policy and Special Counsel, AFL-CIO
Darla Stuckey - Senior Vice President of Policy and Advocacy, Society of Corporate Secretaries
Lynn Turner - Managing Director, LitiNomics, Inc.
The roundtable will be held at the SEC’s headquarters in Washington, D.C., and is open to the public on a first-come, first-served basis.  The event also will be webcast live on the SEC’s website and will be archived for later viewing.

Members of the public are welcome to submit comments on the topics to be addressed at the roundtable.  Comments may be submitted electronically or on paper; please use one method only.  Any comments submitted will become part of the public record of the roundtable and posted on the SEC’s website.

Wednesday, November 27, 2013


Court Enters Final Judgment by Consent Against SEC Defendant Corey Ribotsky

The Securities and Exchange Commission announced that, on November 14, 2013 the Honorable Joseph F. Bianco, United States District Court Judge for the Eastern District of New York, entered a final judgment by consent against Defendant Corey Ribotsky. In addition, Judge Bianco also dismissed all claims against Defendant The NIR Group, LLC at the SEC's request because that entity is defunct and has no assets.

The SEC filed this enforcement action on September 28, 2011, alleging, among other things, that during the financial crisis Ribotsky and NIR made false statements to investors regarding the poor performance and trading strategy of the various AJW Funds he managed through NIR. The SEC also alleged that Ribotsky misappropriated client assets and mislead investors about the decision to form the AJW Master Fund.

Ribotsky consented to the final judgments without admitting or denying the allegations in the Commission's complaint. The final judgment against Ribotsky imposed permanent injunctions prohibiting Ribotsky from violating Section 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Ribotsky has also agreed to pay $12,500,000 in disgorgement, $1,000,000 in prejudgment interest, and a $1,000,000 civil penalty.

To settle the Commission's related administrative proceedings that the Commission will separately institute, Ribotsky has consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after four years.

Tuesday, November 26, 2013



The Securities and Exchange Commission today charged a former employee at a Silicon Valley-based semiconductor company for his role tipping nonpublic information used in connection with Raj Rajaratnam’s massive insider trading scheme.

The SEC alleges that Sam Miri, who worked in the communications division at Marvell Technology Group, tipped confidential information about the company’s financial performance to former Galleon Management portfolio manager Ali Far.  He used the nonpublic information provided by Miri to trade Marvell securities on behalf of hedge funds that he founded after leaving Galleon.  Far and Spherix Capital, who were among those earlier charged by the SEC in the Galleon matter, earned hundreds of thousands of dollars in illicit profits based on Miri’s tips.  In exchange for the illegal tips, Far arranged four quarterly payments to Miri totaling approximately $10,000.

Miri, who lives in Palo Alto, Calif., has agreed to settle the SEC’s charges by paying more than $60,000 and being barred from serving as an officer or director of a public company.

“Miri finds himself playing the role of defendant because he chose to violate his duty to protect his employer’s confidential information by selling it to a hedge fund manager in exchange for quarterly payments,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “A total of 35 firms and individuals have now been held accountable for their varying roles in the Galleon scheme.”

According to the SEC’s complaint filed in federal court in Manhattan, Miri tipped Far in May 2008 with inside information about Marvell’s plans to announce a permanent chief financial officer after a string of interim chief financial officers.  With an earnings announcement scheduled for later that month, Miri also revealed confidential information about Marvell’s sales revenue and profitability as well as projections of future earnings potential.  In the days leading up to the announcement, Spherix Capital hedge funds purchased approximately 300,000 shares of Marvell common stock.  When the stock climbed more than 20 percent after Marvell announced its quarterly financial results and new CFO on May 29, Far’s hedge funds reaped approximately $680,000 in ill-gotten gains.

The SEC’s complaint charges Miri with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Miri agreed to pay $10,000 in disgorgement, $1,842.90 in prejudgment interest, and a $50,000 penalty.  Miri also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the charges, Miri agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by John Henderson, Diego Brucculeri, and James D’Avino of the New York Regional Office.  The case has been supervised by Joseph Sansone of the Market Abuse Unit and 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.

Monday, November 25, 2013



The Securities and Exchange Commission today charged a self-described institutional trader in Colorado with defrauding elderly investors into making purported investments in government-secured bonds as he used their money to pay his mortgage.

The SEC alleges that Gary C. Snisky of Longmont, Colo., primarily targeted retired annuity holders by using insurance agents to sell interests in his company Arete LLC, which posed as a safe and more profitable alternative to an annuity.  Investors were told their funds would be used to purchase government-backed agency bonds at a discount, and Snisky as an institutional trader would use the bonds to engage in overnight banking sweeps.  However, Snisky did not purchase bonds or conduct any such trading, and he misappropriated approximately $2.8 million of investor funds to pay commissions to his salespeople and make personal mortgage payments.

“With one hand Snisky ushered investors into a supposedly safe investment opportunity with guaranteed profits, and with the other hand he put investors’ money into his own pocket,” said Julie K. Lutz, director of the SEC’s Denver Regional Office.

In a parallel action, the U.S. Attorney’s Office for the District of Colorado today announced criminal charges against Snisky.

According to the SEC’s complaint filed in federal court in Denver, Snisky raised at least $3.8 million from more than 40 investors in Colorado and several other states. Beginning in August 2011, Snisky recruited veteran insurance salespeople who could sell the Arete investment to their established client bases that owned annuities. The majority of investors in Arete used funds from IRAs or other retirement accounts.

The SEC alleges that Snisky described Arete as an “annuity-plus” investment in which, unlike typical annuities, investors could withdraw principal and earned interest with no penalty after 10 years while still enjoying annuity-like guaranteed annual returns of 6 to 7 percent.  Snisky emphasized the safety of the investment, calling himself an institutional trader who could secure government-backed agency bonds at a discount and save middleman fees.  Snisky’s sales pitch was so convincing that even one of his salespeople personally invested retirement funds in Arete.

The SEC alleges that Snisky created and provided all of the written documents that the hired salespeople used as offering materials to solicit investors.  Snisky also showed salespeople fraudulent investor account statements purporting to show earnings from Arete’s investment activity.  Following an initial influx of investors, Snisky organized at least two seminars where he met with investors and salespeople.  He introduced himself as the institutional trader behind Arete’s success, and encouraged investors to spread the word.  Snisky hand-delivered fraudulent account statements to investors attending the seminars to mislead them into believing their investments were performing as promised.

The SEC’s complaint against Snisky seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a financial penalty.

The SEC’s investigation, which is continuing, has been conducted by John C. Martin, Kerry M. Matticks, and James A. Scoggins of the Denver office.  The SEC’s litigation will be led by Polly A. Atkinson.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Colorado, Internal Revenue Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service.

Sunday, November 24, 2013


Former Rochdale Securities Broker Sentenced to 30 Months' Imprisonment for Rogue Trades

The Securities and Exchange Commission announced today that on November 19, 2013, the Honorable Robert N. Chatigny of the United States District Court for the District of Connecticut sentenced David Miller, 41, of Rockville Center, New York, to 30 months imprisonment, followed by three years of supervised release, for his role in a fraudulent scheme to place a series of unauthorized purchases of more than 1.6 million shares of Apple, Inc. stock on October 25, 2012 while employed as an institutional sales trader for Rochdale Securities LLC ("Rochdale") of Stamford, Connecticut. Judge Chatigny also ordered Miller to make full restitution to Rochdale, which suffered a loss of $5,292,202.50 and ceased all business operations as a result of Miller's actions. Miller was arrested on December 4, 2012, and on April 15, 2013 he pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud, and one count of wire fraud.

On April 15, 2013, the Commission filed a partially settled civil injunctive action against Miller in federal court in Connecticut arising out of the same conduct. To settle the Commission's charges, Miller consented to be enjoined from future violations of the antifraud provisions of the federal securities laws. The amount of a civil monetary penalty will be determined at a later date. In related administrative proceedings that the Commission separately instituted on April 25, 2013, Miller consented to a Commission Order barring him from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and barring him from participating in any offering of penny stock.

Saturday, November 23, 2013



The Securities and Exchange Commission announced charges against two Tampa-area investment advisers accused of committing fraud by failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments despite substantial risks and red flags.

The advisers also are charged with contributing to violations of the “custody rule” that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.

The SEC’s Enforcement Division alleges that Gregory J. Adams and Larry C. Grossman solicited and directed clients of their investment firm Sovereign International Asset Management to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo, who the SEC charged in a separate enforcement action last year.  Grossman and Adams failed to inform clients about the conflict of interest in recommending these investments as Battoo was paying them millions of dollars in compensation for steering investors to his funds.

“Investment advisers have a fiduciary duty to act in utmost good faith when recommending investments, and they must fully disclose all of the relevant facts to their clients,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Adams and Grossman breached this duty when they misstated their compensation and failed to disclose serious conflicts of interest.”

According to the SEC’s order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams received $1 million in the undisclosed compensation arrangements.  Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients who were often retirees.  However, Battoo’s funds were in fact risky, lacked diversification, and lacked independent administrators and auditors.  Grossman and Adams also failed to investigate – and in some cases wholly disregarded – numerous red flags surrounding Battoo and his funds.

The SEC’s Enforcement Division alleges that Grossman and Adams aided and abetted Sovereign’s violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity.  Grossman and Adams pooled clients’ money in this bank account before investing it in Battoo’s offshore funds.  Sovereign failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets.

According to the SEC’s order, Grossman and Adams willfully violated Section 17(a)(2) of the Securities Act of 1933, Section 15(a) of the Securities Exchange Act of 1934, and Sections 206(1), 206(2), 206(3) and 207 of the Investment Advisers Act of 1940.  They willfully aided and abetted violations of Section 15(a) of the Exchange Act and Section 206(4) of the Advisers Act and Rules 204-3 and 206(4)-2.

The SEC’s investigation was conducted by Andre J. Zamorano, Sunny H. Kim, and Kathleen Strandell in the SEC’s Miami office.  The case was supervised by Thierry Olivier Desmet, and the litigation will be led by Patrick R. Costello.  The SEC examination of Sovereign that led to the investigation was conducted by Roda A. Johnson and Jean M. Cabot under the supervision of John C. Mattimore.

Friday, November 22, 2013


Wednesday, November 20, 2013
Three Investment Advisors Sentenced in California for $1 Billion High-yield Investment Fraud

Three former investment advisers were sentenced on Nov. 19, 2013 for their roles in attempting to defraud a wealthy investor of $1 billion through a high-yield investment fraud scheme.

Acting Assistant Attorney General Mythili Raman of the Criminal Division and U.S. Attorney Andre Birotte Jr. of the Central District of California made the announcement.

William J. Ferry, a former stock broker and investment advisor; Dennis J. Clinton, a former real estate investment manager; and Paul R. Martin, a former senior vice president and managing director of Bankers Trust, were convicted on July 31, 2012, of conspiracy, mail fraud and wire fraud.   The investor they attempted to defraud was, in reality, part of an undercover FBI team that posed as wealthy investors and investment managers to stop fraudsters before they actually harmed victims.

Ferry, 71, of Newport Beach, Calif., was sentenced to serve 15 months in prison.  Clinton, 65, of San Diego, Calif., was sentenced to serve 30 months in prison.   Martin, 64, of New Jersey, was sentenced to 30 months in prison.            

Evidence at trial established that from February to December 2006, Ferry, Clinton, Martin and others conspired to promote a high-yield investment fraud scheme that promised an extremely high return at little or no risk to principal.   The defendants claimed their investment program was a “Fed Trade Program” that was regulated by the Federal Reserve Bank, that they had to follow strict Fed guidelines, and that a Fed trade administrator administered their program, with compliance duties handled by a Fed compliance officer.

Investors also were told that once the investment program passed compliance, it would become registered in Washington, D.C., with the Fed.   The defendants falsely represented to FBI undercover agents that they would arrange for them to meet a Federal Reserve official and/or the chairman of the board of a major U.S. bank to confirm the existence of the defendants’ investment program.   The defendants falsely claimed that these Fed investment programs existed primarily to generate funds for project funding and humanitarian purposes, such as Hurricane Katrina relief.   The promised profits from investing in a Fed program had to be divided in equal amounts, with one portion going to some humanitarian purpose, another portion to some kind of project financing and the remainder to the investor.   The defendants represented to the undercover agents that the agents’ offshore bank account would be managed by a Swiss banker who was already managing billions of dollars for the defendants.

Throughout the scheme, Ferry acted as an underwriter and member of the compliance team; Martin acted as a banking expert; and Clinton acted as a trouble shooter during the compliance phase and transfer of funds to the Swiss banker.
Another conspirator, Brad Keith Lee, of California, who acted as the contact with the Swiss banker, pleaded guilty to conspiracy and wire fraud on April 13, 2009, and was sentenced to 24 months in prison on Jan. 11, 2010.   Oregon resident John Brent Leiske, who acted as a trader during the scheme, pleaded guilty in the District of Oregon to conspiracy, mail fraud and wire fraud on Jan. 24, 2012, and was sentenced to 120 months in prison on Feb. 14, 2013.

This continuing investigation is being conducted by the FBI.   This case is being prosecuted by Senior Litigation Counsel David Bybee and Trial Attorney Fred Medick of the Criminal Division’s Fraud Section.

Thursday, November 21, 2013


November 19, 2013
Federal Court Sanctions David Prescott for Forex Pool Fraud
Prescott Ordered to Pay Restitution and a Civil Monetary Penalty Totaling More than $1.8 Million

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained $455,098 in restitution for defrauded off-exchange foreign currency (forex) customers and a $1,365,294 civil monetary penalty in a federal court default judgment Order against Defendant David Prescott, individually and doing business as Cambridge Currency Partners (Cambridge). The court’s Order stems from a CFTC civil Complaint filed on April 30, 2013, charging Prescott with fraudulently soliciting individuals to invest in Cambridge’s forex pool and then misappropriating their monies (see CFTC Press Release 6581-13).

The Order, entered by the Honorable Charles N. Clevert, Jr. of the U.S. District Court for the Eastern District of Wisconsin on October 31, 2013, requires Prescott to pay the restitution and civil monetary penalties, and permanently bars Prescott from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC.

Specifically, the Order finds that, from at least June 2010 through April 2013, Prescott fraudulently solicited individuals to invest in Cambridge’s off-exchange forex pool and misappropriated $455,098 of pool participants’ monies, using some of those funds for air travel, hotel accommodations, and gambling. According to the Order, Prescott defrauded pool participants and prospective pool participants by misrepresenting the risks involved in forex trading and executing demand promissory notes in their favor that promised the repayment of the note amount and monthly interest payments, knowing or recklessly disregarding that he could not make those payments by his forex trading.

The Order also finds that Prescott failed to inform participants and prospective participants that, under the name of David Weeks, he previously had been convicted of conspiracy to commit securities fraud, mail fraud and wire fraud, and perjury, had been ordered to pay restitution of over $1 million to defrauded investors, and was permanently enjoined from violating the anti-fraud provisions of the Securities Exchange Act.

CFTC Division of Enforcement staff members responsible for this case are Diane M. Romaniuk, Ava M. Gould, Mary Beth Spear, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.

Wednesday, November 20, 2013



The Federal Deposit Insurance Corporation (FDIC) as Receiver for six failed banks has announced a $515.4 million settlement with JPMorgan Chase & Co. and its affiliates (JPMorgan) of the receiverships' federal and state securities law claims based on misrepresentations in the offering documents for 40 residential mortgage-backed securities (RMBS) purchased by the failed banks. The settlement funds will be distributed among the receiverships for the failed Citizens National Bank, Strategic Capital Bank, Colonial Bank, Guaranty Bank, Irwin Union Bank and Trust Company, and United Western Bank. As part of the settlement, JPMorgan has agreed to waive any claims for indemnification from the FDIC in its corporate capacity or its capacity as Receiver for the failed Washington Mutual Bank based on any part of JPMorgan's $13 billion settlement with the United States Department of Justice and other government entities of claims relating to the sale of RMBS, including the $515.4 million settlement with the FDIC.

FDIC Chairman Martin J. Gruenberg said, "The settlement announced today will provide a significant recovery for the six FDIC receiverships. It also fully protects the FDIC from indemnification claims out of this settlement. The FDIC will continue to pursue litigation where necessary in order to recover as much as possible for FDIC receiverships, money that is ultimately returned to the Deposit Insurance Fund, uninsured depositors and creditors of failed banks."

As receiver for failed financial institutions, the FDIC may sue professionals and entities whose conduct resulted in losses to those institutions in order to maximize recoveries. From May 2012 to September 2012, the FDIC as Receiver for five of the failed banks filed ten lawsuits against JPMorgan, its affiliates, and other defendants for violations of federal and state securities laws in connection with the sale of RMBS. As of October 30, 2013, the FDIC has authorized lawsuits based on the sale of RMBS to a total of eight failed institutions and has filed 18 lawsuits seeking damages for violations of federal and state securities laws.

Citizens National Bank and Strategic Capital Bank were each placed into receivership on May 22, 2009; Colonial Bank was placed into receivership on August 14, 2009; Guaranty Bank was placed into receivership on August 21, 2009; Irwin Union Bank and Trust Company was placed into receivership on September 18, 2009; and United Western Bank was placed into receivership on January 21, 2011.

Tuesday, November 19, 2013


Remarks of Chairman Gary Gensler at Swap Execution Facility Conference: Bringing Transparency and Access to Markets
November 18, 2013

Thank you, Shawn, for that kind introduction. I’m pleased to be back for my third Swap Execution Facility (SEF) Conference. I’m particularly pleased to be here now that SEFs are up and running.

For the first time, all swaps market participants have access to compete. For the first time, all – and that means dealers and non-dealers alike – benefit from transparency.

Since the time of Adam Smith and The Wealth of Nations, economists have consistently written that transparency and open access to markets benefits the broad public and the overall economy.

When markets are open and transparent, markets are more efficient, competitive, and liquid, and costs are lowered for companies and their customers.

President Roosevelt understood this when he asked Congress during the Great Depression to bring transparency, access and competition to the commodities and securities markets.

The reforms of the 1930s transformed markets. They helped establish the foundation for the U.S. economic growth engine for decades.

The swaps market emerged nearly 50 years later, but remained dark and closed until just last year. Lacking transparency and common-sense rules of the road, the swaps market contributed to the 2008 crisis.

Thus, just as President Roosevelt did in the 1930s, President Obama and Congress passed comprehensive financial reform. They brought the $400 trillion swaps market out of the shadows and opened access to all participants.

With the completion of nearly all of the agency’s rulemaking and the initial major compliance dates behind us, the marketplace has been transformed.

Bright lights now are shining on the swaps market. Transparency is shining both prior to and after a trade.

Real-time clearing also is now a reality with 99 percent of swaps clearing within 10 seconds and 93 percent actually doing so within three seconds. Approximately 70 percent of newly entered interest rate swaps and over 60 percent of credit index swaps are being cleared.

The playing field has been leveled through transparency, impartial access, central clearing and straight-through processing. Asset managers, pension funds, insurance companies, community banks and all market participants are gaining benefits that until recently only swap dealers had.

It’s been a remarkable journey these past five years – and all of you have been part of this. Your hundreds of comments, meetings and questions have been critical to CFTC’s efforts. You worked hard – with real costs and against deadlines – to implement these reforms to bring us to a new marketplace.

Open Access

With 18 temporarily registered SEFs, we now have more than a quarter-of-a-trillion dollars in swaps trading occurring on average per day. That is a big number by any measure.

Congress said that SEFs are to provide market participants with impartial access to the market.

Consistent with Congress’ direction, the Commission’s final SEF rules, completed six months ago, are clear. Impartial access is about allowing market participants to “compete on a level playing field.”

Last week, CFTC staff issued guidance reminding SEFs of this core responsibility: the Commission’s regulations require SEFs to provide all its market participants – dealers and non-dealers alike – with the ability to fully interact on order books or request-for-quote (RFQ) systems.

SEFs are required to provide dealers and non-dealers alike the ability to view, place or respond to all indicative or firm bids and offers, as well as to place, receive, and respond to RFQs.

All market participants should feel confident that their bids or offers are being communicated to the rest of the market.

Further, SEFs must provide to all eligible contract participants (ECPs) market services, including quote screens and similar pricing data displays.

Last week’s guidance, spoke directly to some questions that market participants had brought to our attention as contrary to impartial access.

First, any discriminatory treatment for swaps intended to be cleared, such as “enablement mechanisms,” that prevents market participants from viewing bids or offers on a SEF is inconsistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and the Commission’s regulations.

Second, requiring swaps traded on a SEF that are intended to be cleared to have pre-execution agreements, such as breakage agreements, is inconsistent with the Dodd-Frank Act and the Commission’s regulations.

Third, requiring a market participant to be a swap dealer or a clearing member to respond to an RFQ is inconsistent with the Dodd-Frank Act and the Commission’s regulations.

Dodd-Frank reforms truly are about bringing greater access to these markets. Reforms really are about allowing multiple market participants to meet and transact with multiple market participants.

This does mean a paradigm shift from the business models of the past.

Thus, SEF registration was not meant to be just business as usual.

Bringing access to the entire marketplace means platforms will no longer be just dealer to dealer or dealer to customer.

Through reform, all market participants who meet the standard of an ECP must be given impartial access.


Congress was also clear that transparency must shine on the swaps market both before and after a trade.

When light shines on a market, the economy and public benefit.

Post-Trade Transparency

With reform, post-trade transparency has become a reality in the swaps market.

The price and volume of each swap transaction can be seen as it occurs. This post-trade transparency spans the entire market, regardless of product, counterparty, or whether it’s a standardized or customized transaction.

This information is available, free of charge, to everyone in the public. The data is listed in real time – like a modern-day tickertape – on the websites of each of the three swap data repositories.

Regulators also gained transparency into the details on each of the 1.8 million transactions and positions now in data repositories. The data repositories, swap dealers and SEFs, though, need to do more to ensure that the data flowing into the data repositories is accurate; consistent; and able to be readily sorted, filtered, and aggregated.

Pre-Trade Transparency

Reform also is about shining light before a trade happens.

Such pre-trade transparency gives anyone looking to compete in the swaps market the ability to see prices of available bids and offers prior to making a decision on a transaction.

This lowers costs for investors, businesses and consumers, as it shifts information from dealers to the broader public.

Our final rules provided significant flexibility in achieving this pre-trade transparency.

All SEFs are required to provide for an order book to all its market participants. In addition, SEFs have the flexibility to offer trading through RFQs.

Further, as long as certain minimum functionality is met, SEFs can conduct business through any means of interstate commerce, such as the Internet, telephone, and the mail – or, if one chooses, carrier pigeons.

The final rules were technology neutral.

Trade Execution Requirement

To benefit the public, broaden competition, and promote transparency, Congress required that certain standardized swaps must be executed on a SEF or designated contract market (DCM). The trade execution requirement covers all swaps that are subject to mandatory clearing and made available to trade.

Four SEFs already have made filings for a wide range of interest rate and credit index swaps to be determined made available for trading.

With 90 registered swap dealers, including the world’s largest financial institutions, I believe sufficient liquidity exists across the entire interest rate swap curve to support SEFs making these swaps available for trading.

The major dealers already quote markets across the entire curves, including for so-called benchmarks as well as non-benchmarks.

I anticipate that by next February there will be a trade execution requirement for a significant portion of the interest rate and credit index swap markets. The significant flexibility built into SEFs’ minimum trading protocols – including order books, RFQs and crossing rules – will enable the markets to adjust to this new mandatory trading environment.

Futures Block Rule

Earlier this year, the Commission finalized a block rule for swaps. To preserve the pre-trade transparency that has been a longstanding hallmark of the futures market, I believe that it is critical do so for futures as well.

This is important so that we do not allow for arbitrage between the swaps market that now has a block rule and the futures market that does not have a formal block rule. Thus, it is my hope that the CFTC staff’s recommendation to publish a futures block rule for public comment be on the agenda for our next open Commission meeting in December.

SEF Registration

Requiring trading platforms to be registered and overseen by regulators was central to the swaps market reform President Obama and Congress included in the Dodd-Frank Act. They expressly repealed exemptions, such as the so-called “Enron Loophole,” for unregistered, multilateral swap trading platforms.

They did so based on a long public debate.

In fact, then-Senator Obama in June 2008 called for fully closing the “Enron Loophole.”

Last week, CFTC staff issued guidance with regard to SEF registration. If a multilateral trading platform is a U.S. person, or it is located or operating in the U.S., it should register.

Consistent with the cross-border provisions of Dodd-Frank, a multilateral swaps trading platform located outside the United States that provides U.S. persons or persons located in the U.S. (including personnel and agents of non-U.S. persons located in the United States) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, will register as a SEF or DCM.

This will trigger some SEF registrations for foreign-based platforms that are already registered with their home country. For instance, one Australian platform is going to register with the CFTC, and we’re working with the Australian home country regulators. We’re prepared to figure out where we might defer to those home country regulators.

In addition, we have been asked by a number of swap dealers and SEFs about how our rules apply to foreign swap dealers operating in the United States.

Last week, CFTC staff issued an advisory addressing this question.

If a foreign-based swap dealer has personnel in New York and they regularly arrange, negotiate, or execute swaps in the United States, then the transactions come under Dodd-Frank requirements. As the advisory stated, these activities are “core, front-office activities” of a swap dealer’s dealing business.

In other words, a U.S. swap dealer on the 32nd floor of a New York building and a foreign-based swap dealer on the 31st floor of the same building, have to follow the same rules when arranging, negotiating or executing a swap.

One elevator bank … one set of rules.

Moving Forward

The CFTC now largely has moved beyond rulewriting and initial compliance dates.

We have now moved on to reviewing registered entities and registrants to ensure they fully come into compliance.

As we have done for many years, we are doing this through examinations, surveillance, enforcement and issuing guidance and advisories. To smooth implementation, we will continue to work with market participants as needed.

We know the markets are undertaking a significant effort to ensure a smooth transition, including steps to incorporate guidance and advisories. We will continue working with market participants, but when there is a question, the best thing to do is to come into compliance with all of the CFTC’s rules and guidance.

CFTC Resources

To ensure for a well-functioning futures and swaps market, the public needs a well-funded CFTC.

To ensure that transparency and access are a reality and not something just in the rulebooks, the public needs a well-funded CFTC.

To ensure that the markets are free of fraud, manipulation and other abuses, the public needs a well-funded CFTC.

Though this small and effective agency was able to complete 67 rulemakings, orders and guidances to transform a marketplace, this should not be confused with the agency having sufficient people and technology to oversee the markets.

With 670 people, we are only 36 people more than 20 years ago, and we’ve got a whole lot more to do. We have a vast $400 trillion swaps market to oversee, in addition to the $30 trillion futures market that we historically have overseen.

The overall branding of these markets is dependent on investors and customers having confidence in using them.

It’s also critical that we have the resources for the timely reviews of applications, registrations, petitions and answers to market participants’ questions.

The President has asked for $315 million for the CFTC. This year we’ve been operating with only $195 million.

Worse yet, as a result of continued funding challenges, sequestration, and a required minimum level Congress set for the CFTC’s outside technology spending, the CFTC already has shrunk 6 percent, and was forced to notify employees of an administrative furlough for up to 14 days this fiscal year.

I believe that the CFTC is a good investment for the American public. It’s a good investment for transparent, well-functioning markets.


Let me close by thanking all of you. These last five years have been a remarkable journey, and the result is a transformed marketplace.

I want to thank you for all that we’ve achieved together.

I look forward to answering your questions.

Monday, November 18, 2013


Friday, November 15, 2013
Former Miami Mortgage Broker and Real Estate Agent Sentenced for Role in Multimillion-Dollar Mortgage Fraud Scheme

A former Florida-licensed real estate associate and mortgage broker was sentenced to serve 135 months in prison for his role in a $2.4 million mortgage fraud scheme.

Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division made the announcement.

Jose Armando Alvarado, 64, of Miami, was found guilty on Sept. 9, 2013, of eight counts of wire fraud and six counts of bank fraud and was sentenced on Nov. 14, 2013, by U.S. District Judge William J. Zloch of the Southern District of Florida.  In addition to his prison term, Alvarado was ordered to serve three years of supervised release.

Two of Alvarado’s co-conspirators previously convicted at the same trial of various counts of wire and bank fraud were also sentenced on Nov. 14, 2013.  Alberto Morejon, 27, of Miami, a former loan closer and title agent, was sentenced to serve 36 months in prison.  Alvarado’s sister, Reyna Orts, 58, of Miami, a former mortgage broker and the mother of Morejon, was sentenced to serve 50 months in prison.

According to court documents and evidence presented at trial, Alvarado, along with his co-conspirators, operated a mortgage fraud scheme by controlling and operating three real estate entities in the Miami area: South Florida Realty; American Mortgage Lending, a mortgage broker; and Royal Atlantic Title, a title insurance agency.  From February 2004 through November 2009, Alvarado and his co-conspirators used their control over these three companies to falsify and misrepresent important facts provided to financial institutions in order to fraudulently secure loans totaling more than $2.4 million.  The loans were often obtained through submitting falsified supporting documentation, such as false tax returns, W2 forms, bank statements and employment verifications.

Evidence at trial showed that Alvarado and his co-conspirators subsequently enriched themselves by diverting loan proceeds, collecting brokerage fees and inflating real-estate commissions generated by the sales of the properties.  Alvarado and his co-conspirators obtained control of multiple properties during the real estate market boom with the intent to flip and sell them for a profit or control them as rental properties.  The defendants used their knowledge and experience in the real estate industry to conceal the scheme by executing quit-claim deeds and failing to record, and falsely recording, mortgage deeds and other documentation with the State of Florida.

The case was investigated by the FBI’s Miami Field Office and the Miami-Dade Police Department.  The case was prosecuted by Trial Attorney Nathan Dimock of the Criminal Division’s Fraud Section.

Sunday, November 17, 2013


“Reasonable Responsibilities”

Speech of Commissioner Bart Chilton before the Ouachita Speakers Series

November 7, 2013


Good evening! Thank you, Wilbur (Smither), for the invitation and for the introduction. It’s great to be with all of you tonight. I’m excited for a few reasons, one of which is to break out of my often very specific issue-oriented agenda.

Thank you for the shout out in the introduction regarding my book Ponzimonium: How Are Scam Artists Are Ripping Off America; it was written as an educational piece, to help folks appreciate the enormous number of scam artists out there working 24-7-365 to rip people off. I wrote about con artists that over the years impacted tens of thousands of people by stealing hundreds of millions of dollars. We will talk about a range of characters tonight, but the folks in the book are particularly slick fraudsters, masters of illusion and deception and outright criminals. They are not the topic of tonight’s speech, but suffice it to say, they live on—even right here in River City—and I simply felt a responsibility to share with folks some simple things they could do to help identify a swindle. We can talk more about that in the Q&A period if folks would like.

Fortunate Fellow

One thing Wilbur did not tell you in his introduction is that I am one very fortunate fellow. You see, I’m told a large inheritance from a distant relative that I didn’t even know I had, is coming my way. Also, my email address won a lottery worth several million (although I’ve not entered any contest). It is a good thing I’ll be getting all that cash because a woman wrote about her botched surgery in Peru. Now that I’m newly rich, there’s an obligation to help her out. She’s in tremendous pain and needs cash to have another surgery and get healthy. She says she will be “forever indebted” to me once I help out, so it sounds like a good trade! I thought these and other emails seemed suspicious, and I had a reasonable responsibility to check them out, but as it turns out, I’m also a beneficiary of a scam fraud fund for folks who have been robbed by schemers of one sort or another. They just need a bunch of personal information and my bank account numbers and I’ll get the money due to me. So, I’ve got that going for me.

I hope to have a bit of fun this evening and cover a good bit of substance. We will talk a little about government and politics, about business and technology, and about what we all can do that might be a little different, to help rebuild a civil society. So, let’s do the Barry White, and “…get it on”.


Some of you may have seen this recently. An NBC News/Wall Street Journal poll found that 60 percent of Americans say every Member of Congress should be fired—fired. Did anyone see that? Who said we don’t need Donald Trump in government! “You’re fired!”

The polls aren’t treating President Obama much more kindly either. His job approval ratings are only 41 percent as of this week, one point off his all-time low of 40 percent in 2011. His disapproval rating is a record high 52 percent, 1 point short of his highest disapproval rating of 53 percent. If you want to contrast and compare or look at more details, go to Gallup’s website at For example, the lowest job approval for President George W. Bush (43) was 25 percent. The highest was 90 percent. Anyone want to guess when he hit 90 percent approval? Yep, just following 9/11.

We had a unified, shared vision after 9/11: We were determined to survive, to find the perpetrators and to be stronger than before because of the experience. U.S.A., USA, USA! Oh, and we pretty much agreed that terrorists are despicable, there is that. But, we were really into the Proud To Be An American, Born In The U.S.A. patriotism.

It would be awesome if we could have that shared vision again, maybe even get behind our politicians and think that the large majority of time they were doing a respectable job. We could look upon them, regardless of political party, as leaders. Ah, to return, “…now to the thrilling days of yesteryear!” That would be “grrreat!”

While we can’t go back, it seems perfectly reasonable to expect more decorum, more respect, more grace and courage under fire. And we should expect and demand more collaboration and teamwork on behalf of the nation, because it is “grrreat!”

We need more strong, accountable leaders. I’m fortunate, as many of you are, to have seen some terrific leaders—leaders of all political stripes, leaders who enjoyed the trust of the American People.

Fairness Doctrine & Reasonable Responsibility

So, let’s talk about it. Today, certainly, it seems like constant bickering, doesn’t it? In “fairness” it’s from all sides. And, the media plays a significant role in the present quagmire. Some of you may recall the Fairness Doctrine, which has a history dating back more than 60 years. For the majority of years in our lives, it was the law of the land and appropriately led us to conclude that we could “trust” what we saw on TV. It required all holders of broadcast licenses (radio and television) to present controversial issues of public important in a manner that was—in the opinion of the Federal Communications Commission (FCC)—“honest, equitable and balanced.” The goal was to assure that folks heard competing sides of an issue from news segments, editorials or public affairs shows.

What many people don’t realize is the FCC stopped enforcing that reasonable responsibility requirement in 1987, and a little over two years ago, removed all the language regarding the Fairness Doctrine from its books. So, all taglines and branding efforts aside, “fair and balanced” are self-ascribed values these days. “News” can now be a three-ring circus of entertainment. “Hurry, Hurry, Hurry, see the silver-tongued-devil speak out of both sides of the mouth, all the while not losing the smile.”

And it is nonstop! No more “Oh say can you see, by the dawn’s early light” at 1 a.m. Today’s 24-hour television programming has bred embellished rhetoric. That war of words is worrisome because it creates intolerance. The line between advocate and thespian has been so badly blurred most Americans are in a fuzz about what is actually taking place.

As a result, many of those on the right see the left as wimpy weasels weakening the fiber and footing of our founding fathers. On the left, many see the right as self-righteous swine, swigging 80-proof bottles of patriotism and behaving badly. They have one thing in common. A lot of them hate each other. They hate each other. It is sad state of affairs that so many Americans dislike other Americans and have little tolerance for diverse opinions.

I’ve watched the discourse deteriorate dramatically in my own 30 years in politics and public service. I witness it today in Technicolor and Dolby Surround Sound, travelling and speaking with people all across the nation. Plus, I receive a lot of email from people who are very angry. (Although to be fair, in the last two days, I’ve never received more nice emails from people.) But I’ve received many emails from folks who are irritated with me, or my Agency, at the government, the banks or just plain distraught in general. And think about the emails that say this or that dreadful thing about politicians. Some may be true. However, many of them seem crazy, because they are crazy. But, many people believe them.

It seems like a reasonable responsibility that when people receive an email that seems really bizarre, they check it out, certainly before they forward it to anyone and potentially perpetuate false information. I’m not suggesting that will get any president or Congress to a 90 percent job approval, but it can’t hurt the state of affairs. “Come on and dream, dream along.” What have we got to lose by fact-checking?


There are a couple of places folks can go to do this very easily. Here’s the one I like best: They will call foul on anyone for incorrect information. They are nonpartisan and not-for-profit and serve a real consumer advocacy function. They are my sort of peeps. They monitor TV ads, debates, speeches, interviews and news releases in order to reduce the dishonesty and confusion and increase clarity in American politics.

Another place to go is PolitiFact at They use a “truth-o-meter.” If you really are not telling the truth, they term it “pants-on-fire.” For example, the chain email which stated that “Congressional lawmakers earn their salaries ‘FOR LIFE,’ which for House Minority Leader Nancy Pelosi would add up to $803,700 Dollars (sic) a year for LIFE including FREE medical care.” That’s pants-on-fire false. Undoubtedly it contributed to the average blood pressure reading that week, but nonetheless pants-on-fire false.

Ann Coulter, the political commentator said, “No doctors who went to an American medical school will be accepting Obamacare.” A blogger posted “Obama Declares November National Muslim Appreciation Month.” Betsy McCaughey, a former Lieutenant Governor of New York said, “Obamacare will question your sex life.” Those are all pants-on-fire falsehoods. Yet, people repeat these things, and it increases intolerance—as well as ignorance.

Here’s another two from right here in Arkansas. Congressman Tom Cotton says Senator Pryor voted for “special subsidies” for lawmakers and staff in Congress so they’re protected from Obamacare. He also said, “The health care marketplaces have no privacy protections.” Both statements are false, according to PolitiFact.

And before anyone thinks I’m here as an evangelist for the Democratic Party, I will voluntarily adhere to the Fairness Doctrine. Van Jones is a host of CNN's Crossfire; he’s on the left. He said that only “1 percent of candidates that (the National Rifle Association) endorsed in 2012 won”. That’s false. Congresswoman Debbie Wasserman Schultz said the United States “stood alone in the war in Iraq”. Pants-on-fire false. President Obama said, “We have doubled the distance our cars will go on a gallon of gas”. That too, is false. Secretary of Health and Human Services Kathleen Sebelius said, “If I have affordable coverage in my workplace, I’m not eligible to go into the marketplace…It’s illegal.” That is Democrat pants-on-fire false, according to PolitiFact.

Anyway, you get the picture. There is a war of words in American politics and a few of the folks out there shoot blanks sometimes, some more than others. So, let’s hope people look to unbiased sources to get to the truth, not those with an agenda—hidden or otherwise. We can’t take responsibility for the nutty things folks say, but it is certainly reasonable that we take responsibility for what we say or pass along. We can, as a valued friend says, be “system busters” and stop, or at least slow, the war of words by the politicians.

Wall Streeters & the Decade of Deregulation

Let’s move to another area of inquiry—the Wall Streeters. You know: “Some say money is bad for the soul, bad for the rock, bad for the roll, bad for the heart, bad for the brain, bad for damn near everything, of yeah!” (Sammy and Van Halen were on fire.) But, I don’t believe that “…the love of money is the root of all evil,” nope; “Money Makes The World Go Round.”

Some of you may have retired from Wall Street. Others have friends or maybe kids on Wall Street. I deal with these folks all the time. There are very smart people in the financial sector. I know and like many, even most of them. At the same time, there have been some, umm, how do we say it—issues.

The economic collapse in 2008 was due, according to the Financial Crisis Inquiry Commission, to both Wall Streeters and a lack of appropriate laws, rules and oversight by regulators. I call it a Decade of Deregulation promoted by a group of folks called the Free-Marketeers.

Sure, we want free markets, but utterly free markets with no rules or regulation whatsoever don’t work out so well. That’s what took place in 2008. There were hundreds of trillions of dollars being bet that were not regulated whatsoever—zero zippity zilch regulation. Wall Street was making bets upon bets upon bets that bundles of things, like home mortgages, would fail. There was no agreed-upon valuation of what these things were worth. As a result, we saw firms like Lehman Brothers bite the dust. Lehman was over-leveraged 30 to one in their last statement. No economist in the world would think that was reasonably responsible. Then the collapse hit. That was fun . . . not!

In 2010, Congress approved and the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Regulators have made some good progress in implementing the requirements of the law, but there is still more to be done.

Evil Ways

At the same time, we’ve seen more malfeasance in the financial sector than ever before. Hardly a day goes by when we don’t learn about some illegal activity. That’s got to change. Larger fines need to be imposed and when folks do the crime they should do the time, not just pay the fine. There needs to be a culture shift on Wall Street. I’m not so sure all the Wall Streeters got the memo (or that there were enough memos) that told people “You’ve got to change your evil ways, baby . . . This can’t go on, Lord knows you got to change.”

We can’t solve that problem by passing another law or regulation. Government can’t effectively regulate ethics or morals. But, the top executives and the boards of directors can instill in these firms, core values—and reasonable responsibilities—about what they should, and should not do. And if they cannot, we need to go back to our nation’s business schools and start discussing curricula electives versus requirements.

I’m optimistic this is changing, and it’s high time it did.


Without getting too in-the-weeds on how markets have changed, I do want to mention technology.

We know how scary-complex things have become in our own world, with iPhones and droids. It’s tough to keep up with all that technology going on in our personal lives. Sometimes, many folks feel left out as technology surpasses their ability to work with it. Well, that’s taking place in markets too, and regulators can’t keep up. See, you aren’t alone. However, I’d bet it doesn’t make you feel much better that regulators don’t have the same technology as traders and we don’t have enough people keep up with what the tech savvy financial wizards are doing.

I term these market participants called high frequency traders “Cheetahs” because of their incredible speed. They are faster than Speedy Gonzales…because they are Cheetahs, not mice! Here’s how fast they go, they can trade many times per second. A millisecond is 1,000 parts of a single second. That’s fast.

What all that means is that when things go wrong, and we’ve seen things like the Flash Crash of 2010 where the Dow Jones Industrial Average dropped nearly 1,000 points in 20 minutes, they go wrong in a huge honking hurry.

Guess what, these traders aren’t even required to register with our Agency, test their programs, or install kill switches. I’ve been working on those things and hope for changes next year.

I’m reminded of an Albert Einstein statement. He said, “It has become appallingly obvious that our technology has exceeded our humanity.” Think about that, technology has exceeded our humanity.

Technology is a good thing—even grrreat—but it needs to be monitored. Just like when Wall Streeters, after the Decade of Deregulation, were left to their own devices, so too are the Cheetahs. That needs to change before we see another major market meltdown. And I hate to say this, but mark my words, if we don’t do something; there will be another meltdown like the Flash Crash.

Time Machines

Think about how things are so very different than they were 20 years ago. How about 40 years ago? How do you think things will be different in three or five years, or ten 20 or 30 years? It’s actually sort of fun to contemplate if you can let your mind wander and wonder. Try it in bed as you are going to sleep. I’m a big believer in using our dream states for cool things like that. Really, try it. Think about what the world will be like in 20 years. What should people plan for in the future?

Let’s talk specifics so you can see what I’m suggesting. Twenty years ago, we knew computing technology was going to get better, “you better, you better, you bet.” Things would be lighter and have more capacity. We knew information would available on the web. But it wasn’t a reality yet. It was a question of how and when?

Today, we know that climate change is taking place. It will be addressed. It’s sort of like the debt ceiling; there is simply no other reasonably responsible thing to do. So, how will climate change be addressed? I know, I know, there will be worldwide carbon credits being traded in the years to come. It’s already happening in the European Union and other places. Richard Sandor, the father of financial futures in Chicago started an environmental climate exchange years ago. That is, in part, how we addressed acid rain. Anyone hear about problems with acid rain lately? Nope, because a free markets approach—trading acid rain credits—took care of it. Mr. Sandor championed the effort to get a law in place that would move carbon trading forward and take our place as a nation in the endeavor to right the wrongs of the last hundred-plus years of atmospheric degradation. There was bipartisan support for this. Senator McCain was a supporter! Then, however, we just got slowed down, candidly, due to politics in and the aftermath of the 2008 elections.

Like computers and the web, on climate change, we just don’t know exactly when or how it will be addressed. But, it will happen, we have no other option if we want to save the planet.

(And BTW, if you aren’t down with the “climate change is real part,” with all due respect, seriously, go back and read this speech later and follow up on the fact-checking section. Maybe try Thanks for your attention and reasonable responsibility.)

Searching for insight into when changes may occur or how they will be manifested will give us an upper hand on changing its course—faster or slower, this way or that way.


So, how do we deal with the things that are to come, in our dreams or in reality, or both? If we are good, they come in both, right? How do we deal with “Ch-ch-ch-ch-Changes.”

Remember the old Byrds song adapted from the Bible? “To everything—turn, turn, turn, There is a season—turn, turn, turn, And a time for every purpose under heaven.” Let’s talk about change and changes.

It’s so easy to persist in resisting change. People like their routines. Change can mess them up. Think Cheryl Crow singing “A Change” with her great tone, “Hello it’s me, I’m not at home, If you’d like to reach me, leave me alone…” and then the chorus, “A change would do you good.” (She’s fabulous, and has a new country album.)

If we expect change and ready ourselves to adapt to change, that’s a great starting point.

Oscar Wilde, the cultural commentator from the late 1800s said, “To expect the unexpected shows a thoroughly modern intellect”. He made that statement about expecting the unexpected when a lot of stuff was going on. Things were being invented left and right: typewriters, dish and clothes washers, radar, and metal detectors, contact lenses, and escalators. You’d be hit in the face with a new invention if you didn’t watch it. If you didn’t expect incredible things, well, you didn’t have a thoroughly modern intellect. Sorry Charlie.

Well, today is sort of like that. We have this technology and that technology coming at us at seemingly lightning speed. My phone is only one year old, but there are two newer models.

We live in a world of constant and increasing change, and we can either embrace that change or learn to live with it—and indeed, thrive in it—or we can just go crawl under a rock.

So, we too should consider expecting the unexpected. It readies us for change. The change might be with regard to technology, but it also might be with regard to the financial sector, or the environment, or with healthcare, or Washington. And if we’re prepared, we’re in the best position we can be to avoid calamities like the 2008 financial crisis or the 2010 flash crash. But we have to be open to dealing with change.

Regrooving Change Managers

On an individual level, we’ve all experienced it. Whether you call it adaptation or managing change, or coping with the unexpected, sometimes we just need to suck it up, cowboy or cowgirl up, bite the bullet, or whatever your phrase du jour. Regroove those brain cells. Retool our skill sets, behaviors and competencies.

Here’s an example. A friend of mine used to become practically paralyzed at the thought of purchasing and using any new piece of technology. A new DVD player was enough to send her into a tailspin—buying, installing, dealing with technicians—she hated all of it. It made her feel stupid. She realized at some point, however, that changes and improvements in technology was inexorable—it was going to keep moving ahead, with or without her, and unless she developed a different attitude, she would end up perpetually angry. So, she decided to make a change.

She started in a small way, and changed one thing: she decided that she would master texting. Not a big deal, right? But to her it was. And it was a big challenge, at first. She bought a smart phone, spent a lot of time in the store with some very helpful young “geniuses”, and finally, in fits and starts, began texting. It was a bumpy road, but she did it until it became natural for her. It wasn’t a momentous event in the history of the world, but it was a huge change in her brain, in the way she thought. And there were ripple effects.

It began to affect the way she looked at other technologies. They weren’t so scary. DVD player? Ah, easy. Smartphone apps? Well, she started to use load and use loads of them, all the time. Bluetooth stereo speakers? A snap.

And then she started to think about applying her new-found techie-talents in different ways. She ended up putting together several different pieces of sound equipment, combined with some smart phone technology, which allowed her to play some terrific music on an old acoustic guitar. And this new sound was delightful to her and she’s playing in bars and at weddings for fun and some pocket change…and the delight of others. It wouldn’t have occurred to her, however, to think about putting together this little system, had she stayed in her technology-hating cocoon. But she “change managed” her techno-aversion, and made something really exciting and good happen.

We have all done something similar in our lives. Been there, done that? For many, in fact most all of us, a change would do us good.


All this talk about the inevitable nature of change brings me to my last point: how we drive cultural and political change on a larger scale. Is there a way we can help get the nation back on the right track? Or do we opt to kick that can on down the road for another generation? Oh wait, there’s that reasonable responsibility thing.

It has been a tremendous honor and privilege to spend 30 years in politics and government service. Not because the pay is great nor because the hours are reasonable, nor because I was able to finish my policy to-do list each day like my colleagues in the private sector have a penchant for doing. I’ve done it because reasonable or otherwise, it was to me, a responsibility.

In light of intensely partisan politics, a flagrant lack of fairness in the media, nagging negativity, and a culture of greed and selfishness, how do we move forward in simply not expecting, but driving change? Not simply manage, cope, deal with, accept, resign, tolerate, handle, but to create and drive that change? There are three thoughts to share and perhaps you will have others.

Number One: Question Authority. Now, now, I am not talking about James Dean in Rebel Without A Cause or John Mellencamp’s Authority Song. After all, in the latter song, “Authority always wins.” No flag or bra burning references. I’m thinking of that old radical balding guy in pantaloons. You know, the one who wrote, “It is the first responsibility of every citizen to question authority.” Yep, founding father Benjamin Franklin. (I’ve been working on his hair style for 25 years now, and about 4 more inches and I think I’ll finally have nailed it).

So yes, question authority and listen carefully. Today and almost always, it’s infinitely more important to understand than to be understood. Seek to fully understand. If it’s a great opportunity posed by a seemingly skilled and adept financial investor, surely could be a Ponzi scheme these days–question authority. A President, even one of your own political persuasions—question authority. A statement by a candidate running for office—question authority. An email from the friend of a friend of a friend, stating thus and such? Question...umm, okay, that might not be authority, which brings me to…

Number Two: Discernment. Judge well. Listen to all sides. Read multiple sources of conflicting points of view. Query, probe, research, look at the big picture. What’s in it for everyone? Who are the stakeholders? What are their myriad agenda? Don’t simply consume the comfort food of politics, listening only to what you want to hear...true or false, right or wrong, accurate or, umm, not so much. We all need protein. We all need veggies. We all need fruits. Enjoy a diverse diet of knowledge and sources, and use discernment to sort out what is honest, equitable and balanced in your view. And…

Number Three: Shared Vision. Seek and create a shared vision to build on common ground. The foundation of every successful change management program is the establishment of shared goals and objectives and a shared vision of where the organization is going. Without primary stakeholders and champions—like elected officials and so called leaders—sharing the same vision, nothing short of bloody revolution will get you there. And similarly, without the workers and implementers on board, well, good luck to you and the Razorbacks.

Yet, here we are as a mass of people living as residents of the same country no longer with a shared vision for our nation, no longer with shared goals and objectives for what we want it to become. We are beginning to agree on what we don’t want. But to be positive, to move forward, we need that vision on what we do want. We need clear leadership, and a balanced media to focus the discussion and be able to raise issues without raising our voices.

The days, weeks and months after 9/11 reminded us of that. We had a shared vision and voice about the nation. We shared strength, resilience, pride, courage, freedom and indomitable spirit. Let’s hope and pray we do not need another ugly event to find common ground. Let’s hope that if we are ready for change; that we seek and embrace change with a Candu enthusiasm by questioning authority, being discerning and seeking common ground. As the late Senator Paul Simon of Illinois often said, “We can do better.” I really believe you Candu, and we Candu better too, don’t you?


It has been a pleasure to be with you tonight. Oops, pardon me; it seems technology does not because that’s an email coming in on my phone. Oh, it seems like an urgent matter. It appears a rich princess is in distress and needs my assistance. I lend her a small amount now and she gives me lots of gold later. She seems nice and calls me “Dear Beloved.” I guess she needs my bank routing number. There are some things that will never change!

Ah, but that would be a different speech.

Thank you for your attention and your interest in helping to make our society a better place in which to live.

Saturday, November 16, 2013



The Securities and Exchange Commission announced insider trading charges against a New York-based investment professional who used nonpublic information about youth clothing company Carter’s Inc. to give the hedge fund where he worked a $3.2 million trading edge.

The SEC alleges that Mark Megalli obtained the inside information through a consulting agreement he had with the former vice president of investor relations at Carter’s, Eric Martin, who the SEC has previously charged among several others in its investigation into insider trading of Carter’s stock.  Martin, who had left Carter’s and started his own consulting firm, maintained contact with at least one company insider and obtained confidential information in advance of market-moving events that he supplied to Megalli so he could trade on it.  Megalli enabled hedge fund Level Global Investors L.P. to avoid approximately $2.4 million in losses and make $853,655 in illicit profits by trading shares ahead of positive or negative news.

“The information was hot enough that Megalli sometimes conducted the trades while he was still on the phone with his source,” said William Hicks, associate regional director of the SEC’s Atlanta Regional Office.  “After one profitable trade, Megalli bragged to his colleagues about being ‘max short’ in advance of negative news without mentioning his inside source.”

In a parallel action, the U.S. Attorney’s Office for the Northern District of Georgia today announced a criminal case against Megalli.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Georgia, Megalli joined Level Global as head of its consumer sector in August 2009 and entered into the consulting agreement with Martin’s firm a month later.  Martin began providing Megalli with confidential information about Carter’s anticipated financial results on the same day the consulting agreement was executed, and Megalli began directing and causing Level Global to trade on that nonpublic information.

The SEC’s complaint alleges that Megalli directed the purchase of 350,000 shares of Carter’s stock from September 14 to 17 based on explicit positive earnings information that he received from Martin.  Megalli’s very first trade in Carter’s shares occurred while he was on the phone with Martin.  On October 23, Martin advised Megalli about an unexpected accounting issue that was uncovered at Carter’s.  While still on the phone with Martin, Megalli immediately ordered the sale of 100,000 shares and instructed Level Global’s trader to continue selling the firm’s entire position in Carter’s.  After Level Global sold its entire position, Carter’s announced on October 27 that it was delaying its earnings release to complete a review of its accounting.  By selling shares prior to the negative announcement, Level Global avoided losses of more than $2.1 million.

The SEC alleges that Megalli also traded ahead of negative news based on nonpublic information from Martin to avoid losses of $268,500 in November 2009.  Megalli’s trading earned illicit profits of $205,000 in December 2009.  During a telephone conversation on July 8, 2010, Martin tipped Megalli that Carter’s earnings for the quarter would be below expectations.  Megalli immediately caused Level Global to begin accumulating a short position in Carter’s, and built up the short position to 300,000 shares by July 19.  Carter’s issued an earnings release on July 29 that contained negative future guidance, and its stock subsequently declined in price.  Level Global covered its entire short position at the lower price, generating profits of $648,655.  After the trading, Megalli boasted to colleagues in instant messages about the “max short” on Carter’s before the negative announcement.  He received hearty congratulations from his colleagues.

The SEC’s complaint charges Megalli with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement with prejudgment interest, and financial penalties.

The SEC’s investigation, which is continuing, has been conducted in the Atlanta Regional Office by Grant Mogan under the supervision of Peter J. Diskin.  The litigation will be led by Graham Loomis and Pat Huddleston.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Georgia and the Financial Industry Regulatory Authority.

Among the other individuals who the SEC has charged in connection with its investigation of insider trading and financial fraud at Carter’s were the company’s former executive vice president Joseph Elles, former president Joseph Pacifico, and a divisional merchandise manager at Kohl’s named Michael Johnson who handled that store’s account with Carter’s.  The SEC entered a non-prosecution agreement with Carter’s in return for the company’s extensive cooperation with the SEC’s investigation.

Friday, November 15, 2013


The Importance of Trials to the Law and Public Accountability
 Chair Mary Jo White
5th Annual Judge Thomas A. Flannery Lecture
Washington D.C.

Nov. 14, 2013

It is a great honor to have been asked to give the Fifth Annual Judge Thomas A. Flannery Lecture. And it is especially meaningful to be joined tonight by Tom Flannery’s daughter Irene, son Tom, and so many friends, colleagues, and former law clerks who knew and served with him.

I unfortunately did not have the privilege of knowing and working with Judge Flannery. But one of the great benefits of being asked to speak tonight is that it gave me the opportunity to come to know him a little — through learning about his many impressive career accomplishments and through reading his own words and those of others about him. I wish I had known him. He was indeed a remarkable man, lawyer, and judge.

As all here know, Judge Flannery was a highly-respected Assistant United States Attorney, United States Attorney, trial lawyer, and jurist on this court for over 35 years. In fact, he spent most of his life within a few miles of this courtroom.

As part of the Historical Society’s Oral History Project for this Circuit, Judge Flannery gave an interview in 1992. It is a fascinating account of his professional life and the life of this court. Judge Flannery said that his view of the justice system was shaped in great part by watching police court trials here in Washington as a law student.

He also said something else that particularly resonated with me and I am sure with all of you who have served in a United States Attorney’s Office. He said, “I always missed the U.S. Attorney’s office. I missed the excitement … and the action down at the courthouse.” And it is no wonder he felt that way.

By the time he had completed his tenure as an Assistant U.S. Attorney, Tom Flannery had tried over 300 cases. That is an amazing feat and a rare opportunity not available to many lawyers, especially today when the number of both civil and criminal trials has dwindled.

I should confess that I was always envious that the D.C. U.S. Attorney’s Office, given its jurisdiction over local as well as federal crimes, provides such a tremendous opportunity for trying so many cases in both Superior Court and District Court. But 300 trials in 12 years is still a remarkable number even by the standards of that office.

Why Trials Are Important
While not having nearly the trial experience of Judge Flannery, I too found trying cases to be among the most exciting and dramatic parts of my career. There is really no comparable professional moment to standing in a courtroom in a federal court, before a jury, and uttering the words, “I represent the United States.”

It is pretty heady stuff, but mostly it is an awesome responsibility, which demands great humility and focus.

I have now been involved in many trials, first as a trial lawyer and then as a United States Attorney supervising trials. And it is hard to compare other experiences with closely overseeing the trials of dozens of international terrorists while I served as the United States Attorney. Those cases, which involved the Al-Qaeda terrorist organization and named Osama bin Laden as a defendant, were very high stakes and high pressure.

Today, I am again in the enviable position as Chair of the SEC to be working closely with the incredibly skilled lawyers who play a key role in the administration of justice. They investigate securities violations and handle the cases when they go to trial. Pursuing white collar offenses both civilly and criminally is extremely important to our system of justice and a priority championed by Judge Flannery when he was the U.S. Attorney here.

Following a change I made in June to the SEC’s no admit/no deny settlement protocol to require admissions in certain cases, some have predicted that more of our cases will go to trial. And some have asked whether the agency’s trial lawyers are ready to go up against the best of the white collar defense bar. It will probably come as no surprise to you, but my answer is a resounding yes.

So as I thought about what to speak to you about tonight, I had trials and in particular SEC trials on my mind. Learning about Judge Flannery and his trial experience both as a lawyer and as a judge “sealed the deal” on my choice of topic. In my remarks tonight, I’ll make a few observations about the importance of trials and their unique place in our system of justice, and talk a bit about the role they play at the SEC.

The personal and professional satisfaction that any of us gets from a trial, of course, pales in comparison to the greater purpose that trials serve. Simply put, they put our system of justice — the best in the world — on display for all to see. In any given courthouse in America, anyone can walk into a courtroom and watch the strength of our trial system. The public airing of facts, literally in open court, creates accountability for both defendants and the government. How we resolve disputes and how we decide the guilt or innocence of an accused are the true measure of our democracy. Thomas Jefferson once said that he considered “trial by jury as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution.”

Perhaps that is why trials have always captured our imagination.

Beyond the courtroom dramas depicted in our books, movies, and television, our country’s history is replete with real trials that maintain special meaning for us because they represent the passage of judgment by the community on very important matters. Just think back over the years, and the impact of trials on our society becomes obvious: the Rosenbergs, the civil rights trials of the 1960s, the Pentagon Papers, the terrorism trials of the 1990s, the Enron trial. There are many to choose from.

Earl Silbert, also a legendary U.S. Attorney for this District and your Flannery lecturer two years ago, has rightly called trials the “crown jewel” of our system of justice. But what is it about trials that make them so important?

We need to step back from our idealized visions of Atticus Finch or Clarence Darrow thundering away on cross-examination and instead try to distill what, in its essence, happens at trials that gives them such a lofty and hallowed place in our justice system. While I am sure there are many reasons we could each identify, I’d like to focus on just two of the important roles that trials play in our administration of justice: how they foster the development of the law, and perhaps even more importantly how they create public accountability for both defendants and the government through the public airing of charges and evidence.

What Is Lost With the Decline of Trials
I suppose I should start with some unwelcome reality. For all that trials mean to our system of justice, there is no denying that trials have slowly but continuously declined over time. They have indeed become a rare species.

Seventy years ago, 20 percent of all federal civil cases went to trial. By 2009, that percentage had dropped to less than 2 percent and the most recent data suggests this number has remained steady. In terms of actual numbers, we had about 12,000 federal trials in 1985. Twenty-five years later, the number had decreased to just over 3,000. And this drop occurred during a period when the number of civil filings overall was increasing dramatically.

On the federal criminal side, we see a similar pattern. In 1962, 15 percent of the cases found their way into the courtroom. As of 2009, the number was less than 5 percent. And here again, that percentage has remained steady if not decreased somewhat in the last four years.

There are many theories proffered for these declines. Earl Silbert rightly pointed in his Flannery lecture to the federal sentencing guidelines as a major cause. In the face of potentially “draconian” prison terms, many defendants with “triable” offenses choose to plead guilty where the sentence can be known or at least predictable. On the civil side, the push for ADR (arbitrations, mediations, and other alternative dispute resolution mechanisms) including local civil rules that require parties to file ADR statements have had a significant impact.

To be sure, there are obviously benefits of efficiency and resource preservation with the decline in trials and the increase of settlements, guilty pleas, and summary dispositions of cases by motion. But we should always reflect on what we also lose when trials become the exception.

Trials Foster the Development of the Law
Judge Patricia Wald, a beyond legendary jurist of your Circuit Court, has for example cautioned us against the “creeping preeminence” of summary judgment and the case law relying too heavily on pre-trial litigation: “in which law is mostly made on the basis of undisputed facts ‘pleaded,’ ‘stipulated,’ or ‘inferred’ rather than on fuller trial records that may more accurately represent the complexity and ambiguity of life.”

She asks, “Will our jurisprudence craft rules and principles and hand them down fully formed from the netherworld of law school hypotheticals, instead of forging them in the heat of pitched battle and hammering them into shape on the anvil of trials, witnesses, cross-examinations, and live evidence evaluated by ordinary lay persons?”

Her observations as always are “spot on” and capture well the importance of trials to the development of the law. Trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot. And we can all point to cases where trials led to significant legal rulings of greater importance than the facts of the particular case, but rulings nevertheless enhanced by the full trial record of the particular case.

U.S. v. O’Hagan
One example is U.S. v. O’Hagan, which established the “misappropriation” theory of insider trading. In that case, O’Hagan, a partner at a prominent Midwest law firm, learned that his client was trying to acquire another company. He then began trading in securities of the acquisition target and profited greatly when the deal was announced.

The SEC conducted a parallel investigation along with the Department of Justice, and O’Hagan was charged civilly by the SEC and indicted by the DOJ for securities fraud. After his criminal trial, O’Hagan was convicted by a jury on all 57 counts in the indictment and sentenced to 3½ years in prison.

The Supreme Court upheld the conviction and extended securities fraud liability — known as Section 10(b) — to cases where the wrongdoer misappropriates confidential information in violation of a fiduciary duty even if the wrongdoer owes no such duty to the company in whose stock he traded. This misappropriation theory forms the basis for many of the insider trading cases that we bring today. And it is a theory supported by the law established on a fully developed trial record. That has become a luxury that is rare in our current “trial-light” system, and in my view the law often suffers.

Public Accountability Through Trials
The reduction in the number of trials also carries with it other unfortunate consequences. As Professor Robert Burns has said, “The death of trials would… remove a source of disciplined information about matters of public significance. ... It would mean the end of an irreplaceable public forum and would mean that more of the legal order would proceed behind closed doors. And it would deprive us, as American citizens, of an important source of knowledge about ourselves and key issues of public concern.” I agree.

Like many of you here tonight, I appreciate the near-sacred nature of the courtroom. For it is in places like this — across the country in little towns and big cities — where prosecutors, SEC lawyers, and other litigants are required to meet their burden of proof, and where there is up-close-and-personal accountability for whatever the trial is about.

It is a place where victims and the witnesses have the chance to tell their stories and where the public can hear the facts set forth in open court. And it is a place for public closure on hotly disputed facts and legal issues.

For many of us, the trial is a deeply meaningful process that involves intense preparation, opening and closing statements filled with strong advocacy, and direct testimony and cross examination designed to prove or disprove a case. A trial creates an indelible record of the facts of the case.

Witness after witness is called to testify and provide their version of events, and then are subjected to cross-examination. Sometimes, the witnesses are participants in the wrongdoing, recounting their involvement and the progression of the scheme. Other times, experts are called to provide testimony on the events to help explicate the facts to lay jurors. But by the end of the trial, the full scope of the misconduct is laid before the fact-finder to decide guilt or innocence, liability or no liability.

And each trial culminates in that moment where we await the verdict. It is a gripping yet humbling and often emotional experience.

Those were certainly the feelings I had at my first trial (which, as it happened, was a criminal securities fraud trial). And they were feelings I had at every trial thereafter. I always found myself awed by that moment when the jury passed judgment on a defendant. For it is at that moment when the verdict is read that we determine whether the defendant is to be called to account, or whether we or rather the government has failed to meet its burden.

Once the jury’s judgment has been made, there are often very significant consequences that flow immediately. I can still hear in a courtroom in Foley Square in downtown Manhattan the sound of the handcuffs being clicked closed at the table behind me on the wrists of the defendant after being convicted of a narcotics offense and ordered remanded to custody. The defendant was the wife of a major drug dealer and the mother of their 10-year-old son. The year was 1978. It was my second trial as a prosecutor. That experience powerfully drove home to me the awesome power of the prosecution and the need to exercise that power very carefully.

The scarcity of criminal trials means that the public does not often enough have this kind of public airing and adjudication that trials uniquely provide.

There is, however, at least a fair measure of accountability when defendants plead guilty.

Achieving Accountability Through Admissions
Courts are not permitted to accept a guilty plea without the defendant first acknowledging his understanding of his rights and the charges against him. Assuming satisfactory responses are given, the defendant must then admit to the unlawful conduct in his or her own words.

Anyone who has witnessed a guilty plea understands its significance. It creates a public record of the conduct at issue and demonstrates unequivocally the defendant’s acceptance of responsibility for his or her acts. Not a trial, but an open forum for public accountability.

By contrast, a private or regulatory settlement under the law is not required to include an admission of wrongdoing. As a result, public accountability through settlement is sometimes more elusive even though at least SEC settlements also involve the filing of detailed civil complaints or detailed findings of fact in an administrative case. But is that enough accountability in every case?

As a U.S. Attorney in 1994, I entered into the first-ever deferred prosecution agreement with a company. It involved the payment of a large sum of money ($330 million) into a fund to compensate injured investors and the company’s agreement to extensive compliance and governance enhancements. Back then, there was no requirement in law or policy that an admission be obtained in a deferred prosecution agreement — no protocol or guidance on point. But given the particular facts of the case, I decided it was important even in the absence of a guilty plea that the company admit to certain facts that rendered it guilty. And so I structured the first corporate deferred prosecution agreement to require a public acknowledgement of the unlawful conduct. I believed that was necessary to give the resolution sufficient teeth and ensure greater public accountability. Since then, I believed nearly all deferred prosecution agreements have had such admissions.

And so it was with that backdrop when I arrived at the SEC earlier this year that I decided to review our no admit/no deny settlement practices. After consulting with the Enforcement Division directors and my fellow Commissioners, I decided to alter the SEC’s settlement policy.

Previously, as many of you know, the SEC like most other federal agencies and regulators with civil enforcement powers settled virtually all of its cases on a no-admit/no deny basis. A party would disgorge ill-gotten gains, pay a hefty penalty, and agree to an injunction against future misconduct, but neither admit nor deny the wrongdoing asserted by the SEC.

As I said earlier this fall, in most cases that protocol makes very good sense. The SEC generally settles cases only when we can obtain relief within the range of what we could reasonably expect to achieve after winning at trial. And by settling, the agency is able to eliminate all litigation risk, resolve the case, return money to victims more quickly, and preserve our enforcement resources for other investigations.

It is indeed a very powerful enforcement tool that we will continue to use in most cases. But I altered the policy because I believe that in certain cases, more may be required for a resolution to achieve public accountability and to be, and viewed to be, a sufficient punishment to send a strong message of deterrence. Not a trial, but some extra measure of public accountability.

The Trial Team
Of course, admissions in securities cases can only be secured if the SEC or any government agency can credibly say that it will proceed to trial and prevail if the required admissions are not agreed to by the defendant. A perfect trial record is not required to achieve that credibility. Indeed, if the government won every case, it could mean that our system is flawed or that the government is shying away from the hard cases.

At the time we changed the settlement policy, we recognized that despite the overall trend of declining trials, our new approach could well lead to more trials by parties refusing to admit their wrongdoing. For the reasons we have been discussing, I don’t think that is a bad thing and we welcome the possibility. More trials should mean greater public accountability and more instances of a full factual record of wrongdoing that should foster better development of the law.

But that means we need to be ready for that potential increase in litigation. If litigation is a giant tug of war, the attorneys who try the cases are the anchor of the team. Without a strong, steady, and successful cadre of these professionals, an agency’s ability to administer justice is diminished and any threat to take a defendant to court lacks credibility.

At the SEC, I am glad and proud to say that our attorneys who try our cases are incredibly skilled and effective. Over the past three years, our team has achieved an 80 percent success rate — a rate that may explain why most lawyers counsel their clients against going to trial against the SEC and why we achieve strong settlements in most of our cases.

The agency’s record is impressive, and much more so given the difficulty and complexity of the cases we try. Unlike our colleagues at the DOJ, we most often proceed without the benefit of cooperators, wiretaps, surveillance evidence, and many of the other tools at the disposal of prosecutors. In our cases, we often must rely heavily on circumstantial evidence, hostile witnesses, or on the cross-examination of the defendant in order to prove our case.

Expert testimony is often necessary to prove some of the elements of our offenses. Many of our fraud cases involve highly complex transactions carried out by sophisticated parties who work in multi-layered organizations and are overseen by a host of legal and professional advisers. And proving intent inside the courtroom in white-collar cases is always a difficult challenge.

Civil securities fraud cases are difficult for other reasons too. Before even getting to the question of who engaged in the violation, there is usually the threshold question whether a violation even occurred.

Anyone can see when a company misses its earnings projections or when a stock drops precipitously. But such facts may not necessarily be evidence of wrongdoing, and instead can be argued to have resulted from a bad business decision.

Our trial lawyers also are asked to explain to juries complex financial instruments with densely drafted disclosures and an alphabet soup of industry jargon. They often face a horde of lawyers on the other side. But they have shown that they won’t back down and are very much up to the task.

Just before one of our recent trials as the discovery phase was winding down, our team received an email rather dramatically titled, “Time to surrender.” It was from the defense counsel, who wrote “the time has come for the Division to abandon its claims against [the defendant]. … We are not going to rehash what has transpired during discovery, but it is painfully clear that your claims against [the defendant] are in tatters.”

But we had the strength of our convictions and an experienced trial team in place, and that team recently achieved a major victory after a five-week jury trial.

So in this age of diminishing trials, we at the SEC may be about to reverse the trend a bit. We need to make sure that we are always ready for the challenge, have the resources to do it, and do not in any other way diminish our strong enforcement program.

If, in fact, a result of our change in settlement policy results in more trials, one clear winner will be the administration of justice, which will always fare best in the open for the public to see and to take stock of what a defendant did and what its government is doing. It also would make our lives as lawyers and judges more interesting and, yes, in tribute to Tom Flannery, even more exciting from time to time. Also not a bad thing.

Thank you very much for listening.