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

Friday, January 31, 2014

MARKET VOLATILITY FRAUDSTERS RECEIVE COURT JUDGEMENT AGAINST THEM

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Court Enters Judgment Against Three Wall Street Brokers for Defrauding Customers

The Securities and Exchange Commission announced today that, on January 14, 2014, pursuant to settlement agreements, The Honorable John F. Keenan of the United States District Court for the Southern District of New York entered judgments against defendants Marek Leszczynski, Benjamin Chouchane, and Henry Condron in the SEC’s fraud case, SEC v. Leszczynski, at al., Civil Action No. 1:12-cv-07488 (S.D.N.Y.). The judgments permanently enjoin Leszczynski, Chouchane, and Condron from violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In the judgments, Leszczynski was ordered to disgorge $1,500,000; Chouchane was ordered to disgorge $2,007,408 plus prejudgment interest of $442,169; and Condron was ordered to disgorge $168,336 plus prejudgment interest of $39,339. The Court has reserved the issue of whether to impose a civil penalty on the defendants pending their continued cooperation with the SEC. Acknowledging the facts to which they have admitted as part of their guilty pleas in parallel criminal cases, Leszczynski, Chouchane, and Condron consented to the entry of these judgments.

The SEC charged these brokers, who formerly worked on the cash desk at a New York-based broker-dealer, with illegally overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades. The brokers made their scheme difficult for customers to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers. The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period.

The SEC further alleged that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price.

The SEC’s litigation has been conducted by John V. Donnelly III and G. Jeffrey Boujoukos of the Philadelphia Regional Office. The SEC’s investigation was conducted by A. Kristina Littman and Kingdon Kase, under the supervision of Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit and Director of the Philadelphia Regional Office.

Thursday, January 30, 2014

INVESTMENT ADVISOR CONCEALS LOSSES AND GETS SANCTIONED

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced sanctions against a California-based investment adviser for concealing investor losses that resulted from a coding error and engaging in cross trading that favored some clients over others.

Western Asset Management Company, which is a subsidiary of Legg Mason, agreed to pay more than $21 million to settle the SEC’s charges as well as a related matter announced today by the U.S. Department of Labor.

According to an SEC order instituting settled administrative proceedings, Western Asset serves as an investment manager primarily to institutional clients, many of which are ERISA plans.  Western Asset breached its fiduciary duty by failing to disclose and promptly correct a coding error that caused the improper allocation of a restricted private investment to the accounts of nearly 100 ERISA clients.  The private investment that was off-limits to ERISA plans had plummeted in value by the time the coding error was discovered, and Western Asset had an obligation to reimburse clients for such losses under the terms of its error correction policy.  Instead, Western Asset failed to notify its ERISA clients until nearly two years later, long after the firm had liquidated the prohibited securities out of those client accounts.  

“When the coding error was discovered, Western Asset put its own interests above its clients and avoided telling investors what had caused losses in their accounts,” said Michele W. Layne, director of the SEC’s Los Angeles Regional Office.  “By concealing the error, Western Asset avoided reimbursing clients for their losses.”

In a separate order involving a different set of client accounts, the SEC finds that Western Asset engaged in a type of cross trading that was illegal.  Cross trading is the practice of moving a security from one client account to another without exposing the transaction to the market, and when done appropriately it can benefit both clients by avoiding market and execution costs.  However, cross trading also can pose substantial risks to clients due to the adviser’s inherent conflict of interest in obtaining best execution for both the buying and the selling client.

The SEC’s order finds that during the financial crisis, Western Asset was required to sell mortgage-backed securities and similar assets into a sharply declining market as registered investment companies and other clients sought account liquidations or were no longer eligible to hold these securities after rating agency downgrades.  Instead of selling the securities at prices that Western Asset believed did not represent their long-term value, it arranged for certain broker-dealers to purchase the securities from the Western Asset selling clients and sell the same security back to different Western Asset clients with greater risk tolerance in prearranged sale-and-repurchase cross trades.  Because Western Asset arranged to cross these securities at the bid price rather than a price representing an average between the bid and the ask price, the firm improperly allocated the full benefit of the market savings on the trades to buying clients and denied the selling clients approximately $6.2 million in savings.

“Cross trades serve a legitimate purpose and benefit both parties when done appropriately,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “But by moving securities across client accounts in prearranged, dealer-interposed transactions, Western Asset unlawfully deprived its selling clients of their share of the savings.”

The SEC’s orders find that Western Asset violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7, and aided and abetted and caused violations of Sections 17(a)(1) and 17(a)(2) of the Investment Company Act of 1940.  Without admitting or denying the findings, the firm agreed to be censured and must cease and desist from committing or causing any further such violations.  For the disclosure violations related to the coding error, Western Asset must distribute more than $10 million to harmed clients and pay a $1 million penalty in the SEC settlement and a $1 million penalty in the Labor Department settlement.  For the cross trading violations, Western Asset must distribute more than $7.4 million to harmed clients and pay a $1 million penalty in the SEC settlement and a $607,717 penalty in the Labor Department settlement.  An independent compliance consultant must be retained to internally address both sets of violations.

The SEC’s investigation of the disclosure violations was conducted by Diana K. Tani and DoHoang T. Duong of the Los Angeles office.  An examination that led to the investigation was conducted by Charles Liao, Yanna Stoyanoff, and John Lamonica.  The SEC’s investigation of the cross trading violations was conducted by Asset Management Unit staff Valerie A. Szczepanik and Luke Fitzgerald of the New York office.  An examination identifying the cross trading issues was conducted by Margaret Jackson and Eric A. Whitman.  The SEC appreciates the assistance of the Labor Department and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which assisted with the SEC and Labor Department investigations.

Wednesday, January 29, 2014

SEC CHAIR WHITE'S SPEECH AT ANNUAL SECURITIES REGULATION INSTITUTE

The SEC in 2014

 Chair Mary Jo White
41st Annual Securities Regulation Institute
Coronado, Calif.
Jan. 27, 2014
This keynote address is named in honor of Alan B. Levenson. Alan was a co-founder of this Institute and a true legend of the securities bar. He served with great distinction as a private practitioner, academic and, from 1970 to 1976, as the SEC’s sixth Director of the Division of Corporation Finance. It was his vision to bring the best of the private bar and SEC staff together yearly on the West Coast to share perspectives, rightly believing that talking face-to-face would result in a better understanding of the need and optimal way to protect investors and enable our capital markets to safely thrive. This Institute is a living tribute to Alan Levenson and I am privileged to speak to you today in his honor.
It is great to be back at the Institute. I was scheduled to be here last year for the enforcement panel, as I have been for about ten years, but I was called to Washington where the President announced my nomination as the 31st Chair of the Securities and Exchange Commission. It seemed like a good enough reason to cancel – well, it did at the time.
My first appearance at the Institute was in 1998 when I was also asked to give the keynote address. I was the United States Attorney for the Southern District of New York at the time and the title of my remarks was “White Collar Crime: No Place for Timidity.” In 2001, I was asked again to make the keynote address and spoke about the importance of companies’ compliance programs.
Fast forward to today and I am now privileged to return to the Institute and occupy the seat that David Ruder so successfully held from 1987 to 1989, as Chairman of the SEC. While I talk about a lot of other things these days, I still also talk about the importance of strong enforcement and robust compliance programs. One might say the more things change the more they stay the same – or do they?
For nearly 80 years, the Securities and Exchange Commission has been playing a vital role in the economic strength of our nation. Year after year, the agency has steadfastly sought to protect investors, make it possible for companies of all sizes to raise the funds needed to grow, and to ensure that our markets are operating fairly and efficiently.
That is our three-part mission.
But, while commitment to this mission has remained constant and strong over the years, the world in which we operate continuously changes, sometimes dramatically.
When the Commission’s formative statutes were drafted, no one was prepared for today’s market technology or the sheer speed at which trades are now executed. No one dreamed of the complex financial products that are traded today. And, not even science fiction writers would have bet that individuals would so soon communicate instantaneously in so many different ways.
It is because we operate in this vast, fast, and ever-evolving securities market that the Commission, as the regulator of that market, must constantly adapt in order to continue to be effective.
With that in mind, I thought I would speak this morning about some of the transformative changes at the SEC in 2014 and, while doing that, also preview a few of the specific rulemakings and other initiatives that I expect to be on our 2014 agenda.

Evolving with Market Technology

While there have been many significant changes since the SEC’s inception, few have had as much impact on our markets as the advances in technology. The manual trades on the exchange floor of the 1930s have given way to trading that is high-tech, high-speed, and widely dispersed among many different venues, some of which did not even exist when I last gave this address, but which now occupy significant parts of the market landscape.
And that landscape changes and evolves further every day.
It is not only our job to keep pace with this rapidly changing environment, but, where possible, also to harness and leverage advances in technology to better carry out our mission.
And, despite significant resource challenges, we are doing precisely that across the agency. Let me give you a few examples.

NEAT

Our Quantitative Analytics Unit in our National Exam Program has, for example, developed a revolutionary new instrument called “NEAT,” which stands for “National Exam Analytics Tool.”
With NEAT, our examiners are able to access and systematically analyze massive amounts of trading data from firms in a fraction of the time it has taken in years past. In one recent exam, our exam team used NEAT to analyze in 36 hours literally 17 million transactions executed by one investment adviser.
Among its many uses, NEAT can search for evidence of potential insider trading by comparing a database of significant corporate activity like mergers against the companies in which a registrant is trading and analyze how the registrant traded at the time of those significant events. NEAT can review all the securities the registrant traded and quickly identify the trading patterns of the registrant for suspicious activity.
In 2014, our examiners will be using the NEAT analytics to identify signs of not only possible insider trading, but also front running, window dressing, improper allocations of investment opportunities, and other kinds of misconduct.

MIDAS

This past year, we also brought on-line another transformative tool that enables us to collect and sift through massive amounts of trading data across markets instantaneously, an exercise that once took the staff weeks or months. We call this technology MIDAS – the Market Information Data Analytics System.
Every day, MIDAS collects one billion records of trading data, time-stamped to the microsecond. Previously, only sophisticated market participants had access to this type and amount of trading data and even fewer were able to process it. At the SEC of 2014, we are aggregating this data and presenting it on our website along with a wide range of analyses. We have made these analyses readily accessible on your computer or even your tablet, with data available in clear, easy-to-read charts and graphs.
MIDAS is already revealing some important, data-based realities that may resolve some of the speculations about behavior in today’s market structure. Just earlier this month, for example, the SEC staff published an analysis showing that for the most part the advent of public transparency for “odd lot” trades does not seem to correspond with a decline in such trades.[1] The staff noted that this result suggests that a lack of transparency may not have been one of the drivers for breaking trades into odd lots, which some observers have suggested is a technique to hide trading activity.
In the coming weeks, we are expecting to post further staff analysis of off-exchange trading, a review of research on high-frequency trading, and a data series on depth-of-book liquidity. I encourage you, after my remarks, to take a look at all of this – right on sec.gov.[2] This is not your father’s SEC – or your mother’s or even your older brother or sister’s. In this rapidly changing environment, we must stay on top of advances in technology. NEAT and MIDAS are important tools that will help us keep pace with evolving technology.

Operational Integrity

Our approach to technology in 2014, however, is not limited to building systems like these for us to keep pace with the evolving technology of the markets. We are also focused on ensuring that the technology used by exchanges and other market participants is deployed and used responsibly in a way that reduces the risk of market disruptions that can harm investors and undermine confidence in the integrity of our markets.
Most recently, following the interruption of trading in Nasdaq-listed securities last August, I met with the leaders of the equities and options exchanges. At my urging, they pledged to work toward enhancing the integrity of market systems, including the critical market infrastructures that can prove to be “single points of failure,” such as public feeds of quotes and trades.[3]
They have since been working hard to develop and implement such measures, and I expect more to be done to address these vulnerabilities in 2014.
In addition, I anticipate that the Commission’s 2014 rulemaking agenda will include consideration of the adoption of Regulation SCI – which stands for Systems Compliance and Integrity.[4] As some of you know, Regulation SCI would put in place new, stricter requirements for the use of technology by exchanges, large alternative trading systems, clearing agencies, and securities information processors. Regulation SCI can be – and should be – the market-side counterpart to the intermediary-focused Market Access Rule adopted by the Commission in 2010 to better regulate how broker-dealers manage the technological and other risks associated with direct access to markets.[5]

Evolving with New Financial Products

OTC Derivatives

It is not just technology that has changed over the life of the agency. So too have the financial products that investors, businesses, and other market participants use.
In 1990, for instance, few people would have heard of a credit default swap or any of a number of the other products that make up today’s over-the-counter derivatives market. Yet two decades later, such derivatives comprise a multi-trillion dollar market.
The Dodd-Frank Act directed the SEC – for security-based swaps – and the CFTC – for all other swaps – to create an entirely new regulatory regime for this massive market.[6] Once this regime is fully in place, many over-the-counter derivatives will be traded and cleared on venues accessible by a wide range of market participants, with trade data made readily available to regulators and disseminated to the public. What was once an opaque, bilateral market will largely become a transparent, centrally cleared market.
The Commission has proposed substantially all of the rules required to implement this new regulatory framework.[7] With our proposal for the cross-border application of this framework last year,[8] I expect the Commission in 2014 to move forward with finalizing and implementing these rules.

Money Market Funds

Even when a product is not as new as an over-the-counter derivative, the use of the product may reveal previously unanticipated risks that suggest an evolution in our regulatory approach is warranted. The recent financial crisis provided an unwelcome laboratory for a number of these products.
Money market funds, for example, have for decades been an important part of the financial marketplace. As we saw in the financial crisis, however, they can be exposed to substantially heightened redemptions if investors believe that a fund is about to lose value. The resulting instability in their value can harm investors as well as the entities that turn to money market funds for financing.
In 2010, the SEC took a first step to address this heightened redemption risk by making the funds more resilient. The rule amendments adopted by the Commission in 2010 were designed to reduce the interest rate, credit, and liquidity risks of money market fund portfolios. The Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation is warranted.[9]
Currently, the Commission is considering two significant proposals for additional reform that were put out for comment last June.[10] One is a floating NAV for prime institutional money market funds – the type of fund that experienced problems during the financial crisis. The other proposal would require money market funds under certain circumstances to impose a liquidity fee and permit the imposition of redemption gates. This proposal is designed to stop a “run” and limit the resulting instability. These proposals could be adopted alone or together.
We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely. Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014.

Securitization

The financial crisis also revealed how another product – asset-backed securities – could create undue risks to market integrity and investors. Shortly after the financial crisis, the Commission proposed a new set of disclosure rules for asset-backed securities, which have evolved with the Dodd-Frank Act.[11] Finalizing these new disclosure rules remains an important priority for the Commission in 2014.
A related effort is the rules we are required to adopt jointly with several other agencies governing the retention of a specified amount risk by the sponsor of an asset-backed security. We re-proposed those rules late last year, and finalizing them will be a priority for 2014.[12]

Evolving with New Paths to Capital Formation

Just as we have seen market technology and products evolve over time, we also have seen massive change in the ease and speed with which information and capital flows. This, in turn, has led companies, investors, Congress, the SEC and others to reconsider how companies can seek capital and communicate with potential investors. Indeed, we are at the start of what promises to be a period of transformative change in capital formation.
In 2013, according to our estimates, capital raised in public offerings totaled $1.3 trillion, as compared to $1.6 trillion raised in offerings not registered with the SEC, with over 65% raised in new and ongoing Rule 506 offerings.[13] So the private offering markets already rival the public markets in terms of capital raised.
And, in 2012, Congress passed the JOBS Act, directing the Commission to implement rules that will have a significant impact on the private offering markets. I know you will be hearing a fair amount about this subject on your panels today, so let me provide just a brief overview of what the SEC will be working on in this space in 2014.
In July, the Commission adopted rules implementing the JOBS Act mandate to lift the ban on general solicitation, and the rules became effective on September 23, 2013.[14] Although existing Rule 506 continues to be a popular method for capital raising, issuers are taking advantage of the new rule. Preliminary information collected by our Division of Economic and Risk Analysis shows that through December 31, approximately 500 offerings were conducted, raising approximately $5.8 billion.
Then, in October and December of last year, the Commission proposed rules to implement the JOBS Act mandates with respect to crowdfunding and Regulation A.[15] While the final framework of these two exemptions is yet to be determined by the Commission, if the enthusiasm for them is any indication, I expect strong interest in raising capital through these mechanisms.
Together, these changes should provide new and expanded ways for companies of all sizes, but particularly smaller companies, to raise capital. The final implementation of crowdfunding and an updated Regulation A is an important priority in 2014, and I expect that the Commission, after thorough consideration of all comments, will move expeditiously to finalize these rules.
These rule changes for the private offering market are just the start of the Commission’s efforts. For the changes demand that the Commission stay focused on the ongoing implementation of the exemptions, what market practices develop, how much capital is being raised, how investors are impacted, and whether fraud or other misconduct is occurring in these markets.
So, staff from across the agency is also set to monitor the developments in the markets following all of these changes. An agency-wide working group has been formed to monitor offering practices and other developments in the Rule 506 market. I have also directed the staff to form similar working groups for both crowdfunding and the new Regulation A.
One key step in the effort to improve our monitoring of Rule 506 offerings will be the adoption of final rules – also proposed in July – relating to amendments to Regulation D, Form D and Rule 156.[16] I know that you have a session later today during which you will discuss these proposed amendments, and I know, from the comment file, what many of you think. We are considering those comments very carefully. Advancing these important rules, after due consideration of the comments we have received, is another important priority for me in 2014.

Disclosure Reform

As we move to complete our rulemaking in the private offering area, it is important for the SEC not to lose focus on the public markets.
I recently spoke about some of my ideas about disclosure reform[17] and in December the staff issued a report mandated by the JOBS Act that gives an overview of Regulation S-K and the staff’s preliminary recommendations as to how to update our disclosure rules.[18] I have asked the staff to begin an active review of our disclosure rules.
We can all probably identify particular disclosure requirements that we might eliminate or modify, but that is not the kind of review and reform I am primarily focused on – and it certainly is not the kind of thoughtful and comprehensive review that I think our disclosure rules demand. I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.
I have asked the staff to seek input from issuers, investors, and other market participants in 2014 as part of this effort, and I encourage all of you to share your views and ideas. The ultimate objective is for the Commission to improve the disclosure regime for the benefit of both companies and investors.

Vigorous Enforcement in 2014

The agency’s evolution in response to a rapidly changing market is not confined to rulemaking or market oversight. We have also found it necessary to adapt our policies, priorities, and approach with respect to enforcement as well. And no discussion of the SEC in 2014 would be complete without my touching on some of these changes and giving you some idea of what to expect this year. The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.

Admissions

As you know, for many years, the SEC, like virtually every other civil law enforcement agency, typically did not require entities or individuals to admit wrongdoing in order to enter into a settlement. This no admit/no deny settlement protocol makes a great deal of sense and has served the public interest very well. More and quicker settlements generally mean that investors receive as much (and sometimes more) compensation than they would after a successful trial – and without the litigation risk or the inevitable delay that comes with every trial. Settlements also can achieve more certain and swifter civil penalties, and bars of wrongdoers from the industry or from serving as officers or directors of public companies – all very important remedies for deterrence and the public interest.
So, why modify the no admit/no deny protocol at all? It is not a new question and one that many of you continue to ask. Even before my arrival as Chair, the Enforcement Division decided to require admissions where parallel criminal or other regulatory cases were brought with admissions.[19] Why? Because admissions can achieve a greater measure of public accountability, which can be important to the public’s confidence in the strength and credibility of law enforcement and the safety of our markets. It is not surprising that there has also been renewed public and media focus on the accountability that comes with admissions following the financial crisis, where so many lost so much.
And it should be no surprise that my views on admissions were formed long before recent events and were shaped by my time as United States Attorney. In the criminal realm, guilty pleas are accompanied by admissions of guilt, which eliminate any doubt about the conduct of the defendant and provide additional accountability for the crime.
As United States Attorney, I made the decision that companies should, in certain circumstances, admit their wrongdoing, even if they were not criminally charged, but where there was a special need for public accountability and acceptance of responsibility. That is why, when I negotiated the first deferred prosecution for a company, back in 1994, I required an admission of wrongdoing, and I brought that mindset to the SEC when I became Chair last April.
After studying and discussing the issue with the staff and my fellow Commissioners, I decided to modify the SEC’s protocol to demand admissions in an expanded category of settlements. That change occurred in June and you have begun to see it play out in a number of cases. When we first announced the change in approach, we outlined broad parameters of the types of cases in which we will consider requiring admissions as part of any settlement. And now, we have a number of cases with admissions that illuminate those categories.
So, for example, we have said we will consider admissions in cases involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes. Just last month, we required three brokerage subsidiaries to admit to a scheme in which they repeatedly deceived their customers about their compensation on securities transactions – and in some cases even provided falsified trading data to their customers in an effort to avoid detection.[20] The conduct was egregious and harmed many investors, thereby justifying admissions.
Similarly, we demanded that a bank admit that its internal controls were deficient in failing to detect and prevent, and then disclose to its board and investors, massive losses by some of its traders, thereby putting millions of shareholders at risk and resulting in inaccurate public filings.[21]
To be sure there was no ambiguity about the misconduct of a defendant who was continuing to deal with investors, we required a hedge fund adviser to not only agree to a bar from the securities industry for five years, but to also admit to misuse of more than one hundred million dollars of fund assets in order to pay his personal taxes through a personal loan that was not timely disclosed to investors.[22]
As we go forward in 2014, you will see more cases involving admissions. When and how we decide to require admissions will continue to evolve and be subject to further articulation in the cases we bring and as we discuss it publicly.

Financial Fraud

This year will likely see us complete our docket of major investigations stemming from the financial crisis. As we do, our focus and resources will naturally turn to other priorities. This shift has already begun.
Last fall, the Enforcement Division formed a Financial Reporting and Audit Task Force. This dedicated group has very talented accountants and attorneys who will broaden and thereby improve the way we look at financial reporting misconduct.
The Task Force is pursuing a number of goals, including building a deep understanding of the state of financial reporting fraud – not just why it happens, because there is plenty of learning on that question, but how it happens and in what specific areas.
As you would expect, we look closely at the auditors in every financial reporting case, but we are also closely focusing on senior executives for possible misconduct warranting charges. The message is that critical accounting issues are the responsibility of all those involved in the preparation and review of financial disclosures.

Market Integrity

As I have discussed, technology has worked a fundamental shift in the way securities are priced and traded – a shift that has only accelerated in the past several years. In the last two years, we have tried to send a strong enforcement message to the exchanges and alternative trading systems that play critical roles in securities market transactions that they must operate fairly, within the rules and with a close eye on their responsibilities to safeguard their technology. Cases have been brought against an exchange that inadequately tested its IPO systems and was therefore unable to handle a highly anticipated IPO and then did not follow its own rules in the aftermath;[23] against a different exchange for compliance failures that gave certain customers an improper head start on trading information;[24] and against a dark pool for failing to protect the confidential trading information of its subscribers.[25]When technology presents new opportunities for innovation, changes must be deployed responsibly, after careful testing, and within the rules and parameters of the trading environment. Market structure integrity actions will remain a priority in 2014.
As you will hear when Andrew Ceresney, our Director of Enforcement speaks to you over the coming days, there are many other enforcement priorities for 2014 that you should be aware of. These include, but are by no means limited to, FCPA, insider trading, and microcap fraud. It will, in short, be a very busy year in enforcement.

Conclusion

I hope I have given you a sense of some of the things we will be doing in 2014 and a flavor for how dramatically and vibrantly things have changed at the SEC as our world and markets have changed. There is more, of course, we will be doing and considering in the coming year, both on our own initiative and as required by the Dodd-Frank and JOBS Acts – equity market structure, duties of brokers-dealers and investment advisers, the management and responsibilities of clearing agencies and credit rating agencies, Dodd-Frank executive compensation, target date funds, systemic risk issues, broker-dealer financial responsibility, and more.
It is a constant, but always exciting, challenge to keep pace and indeed to accurately see around the next corner for the newest market developments or another innovative variant of, or new venue for, fraud. I now am privileged to have an up-close and personal role in all of this. And it is my strong conviction that the women and men of the SEC are, as has always been true, more than up to these challenges. As Alan Levenson said in January 2003, almost eleven years to the day when he spoke about the strength of the SEC: “It was the creativity of the staff… [they] had a drive and a genuine interest in protecting investors and the public interest….”[26]The challenges and tools change, but creativity, drive, and commitment to the mission continue unchanged at the SEC in 2014. Alan Levenson, I think, would be very proud.
Thank you for listening.


[1] “Odd Lot Rates in a Post-Transparency World,” Data Highlight 2014-01 (Jan. 9, 2014), available at http://www.sec.gov/marketstructure/research/highlight-2014-01.html.
[2] The MIDAS web site and interactive tools are available athttp://www.sec.gov/marketstructure/.
[3] SEC Chair White Statement on Meeting with Leaders of Exchanges (Sept. 12, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539804861.
[4] Regulation Systems Compliance and Integrity, Release No. 34-69077 (Mar. 8, 2013) [78 FR 18083 (Mar. 25, 2013)], available athttp://www.sec.gov/rules/proposed/2013/34-69077.pdf.
[5] Risk Management Controls for Brokers or Dealers with Market Access, Release No. 34-63241 (Nov. 3, 2010) [75 FR 69792 (Nov. 15, 2010)], available athttp://www.sec.gov/rules/final/2010/34-63241.pdf.
[6] For an interactive chart of the current state of the regulatory regime for security-based swaps, see http://www.sec.gov/swaps-chart/swaps-chart.shtml.
[7] For the list of proposals issued by the Commission and the associated comment files, see Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Release No. 34-69491 (May 1, 2013) [78 FR 30800 (May 23, 2013)], available athttp://www.sec.gov/rules/proposed/2013/34-69491.pdf.
[8] Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Release No. 34-69490 (May 1, 2013) [78 FR 30967 (May 23, 2013)], available athttp://www.sec.gov/rules/proposed/2013/34-69490.pdf.
[9] Money Market Fund Reform, Release No. IC-29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (see Section I, “Background”), available athttp://www.sec.gov/rules/final/2010/ic-29132.pdf. As a study conducted by staff in the SEC’s Division of Economic and Risk Analysis (DERA) stated, “[N]o fund would have been able to withstand the losses that The Reserve Primary Fund incurred in 2008 without breaking the buck, and nothing in the 2010 reforms would have prevented The Reserve Primary Fund’s holding of Lehman Brothers debt.” Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a report by staff of the Division of Risk, Strategy, and Financial Innovation, “Executive Summary” (Nov. 30, 2012), available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
[10] Money Market Fund Reform; Amendments to Form PF, Release No. IC-30551(Jun. 5, 2013) [78 FR 36833 (Jun. 19, 2013)], available athttp://www.sec.gov/rules/proposed/2013/33-9408.pdf.
[11] Asset-Backed Securities, Release No. 33-9117 (Apr. 5, 2010) [75 FR 23328 (May 3, 2010)], available at http://www.sec.gov/rules/proposed/2010/33-9117.pdf and Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment, Release No. 33-9244 (Jul. 26, 2011) [76 FR 47948 (Aug. 3, 2011)], available at http://www.sec.gov/rules/proposed/2011/33-9244.pdf.
[12] Credit Risk Retention, Release No. 34-70277 (Aug. 28, 2013) [78 FR 57927 (Sept. 20, 2013)], available at http://www.sec.gov/rules/proposed/2013/34-70277.pdf.
[13] To make these estimates, staff from DERA used the Securities Data Corporation’s (SDC) New Issues database (Thomson Financial), the Mergent database, and Asset-Backed Alert to obtain data regarding public and private offerings. Data on Rule 144A offerings and asset-backed securities offerings was available for part of 2013 and the estimates were made by extrapolating through the end of 2013. Data on Regulation D offerings was collected from all Form D filings (new filings and amendments) in EDGAR. Subsequent amendments to a new Form D filing were treated as incremental fundraising. If an issuer filed only amended filings in 2013, and those reference a pre-2013 sale date, these amended filings were treated as incremental fundraising.
[14] Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)], available at http://www.sec.gov/rules/final/2013/33-9415.pdf.
[15] Crowdfunding, Release No. 33-9470 (Oct. 23, 2013) [78 FR 66428 (Nov. 5, 2013)], available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf and Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, Release No. 33-9497 (Dec. 18, 2013) [79 FR 3926 (Jan. 23, 2014)], available at http://www.sec.gov/rules/proposed/2013/33-9497.pdf.
[16] Amendments to Regulation D, Form D and Rule 156, Release No. 33-9416 (Jul. 10, 2013) [78 FR 44806 (Jul. 24, 2013)], available athttp://www.sec.gov/rules/proposed/2013/33-9416.pdfSee also Re-opening of Comment Period for Amendments to Regulation D, Form D and Rule 156, Release No. 33-9458 (Sept. 27, 2013) [78 FR 61222 (Oct. 3, 2013)], available athttp://www.sec.gov/rules/proposed/2013/33-9458.pdf.
[17] The Path Forward on Disclosure, remarks at the National Association of Corporate Directors Leadership Conference 2013 (Oct. 15, 2013), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370539878806.
[18] Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013),available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.
[19] Statement by Robert Khuzami (Jan. 7, 2012) available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1365171489600.
[20] See Press Release No. 2013-266, “SEC Charges ConvergEx Subsidiaries With Fraud for Deceiving Customers About Commissions” (Dec. 18, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540521484.
[21] See Press Release No. 2013-187, “JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges” (Sept. 19, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965.
[22] See Press Release No. 2013-159, “Philip Falcone and Harbinger Capital Agree to Settlement” (Aug. 19, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539780222.
[23] See Press Release No. 2013-95, “SEC Charges NASDAQ for Failures During Facebook IPO” (May 29, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575032.
[24] See Press Release No. 2012-189, “SEC Charges New York Stock Exchange for Improper Distribution of Market Data” (Sept. 14, 2012), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484740.
[25] See Press Release No. 2012-204, “SEC Charges Boston-Based Dark Pool Operator for Failing to Protect Confidential Information” (Oct. 3, 2012), available athttps://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485204.
[26] Securities and Exchange Commission Historical Society, Interview with Alan B. Levenson Conducted on January 14, 2003, by Richard Rowe, pp. 5-6, available athttp://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/oral-histories/levenson011404Transcript.pdf .

Tuesday, January 28, 2014

DISGORGEMENT AND FINES ORDERED FOR COMMODITY TRADING SYSTEM PROMOTERS

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders California Defendants CTI Group, LLC, Cooper Trading, Stephen Craig Symons, and James David Kline to Pay Over $29 Million in Disgorgement and Fines for Fraudulent Sale of Automated Trading Systems

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York entered a Consent Order for Permanent Injunction (Order) against Defendants CTI Group, LLC, a California limited liability company, Cooper Trading, a California corporation (collectively, CTI), Stephen Craig Symons of Corona del Mar, California, and James David Kline, who was a resident of Van Nuys, California, for fraudulent sales practices in connection with the sale of two automated trading systems (Trading Systems), known as Boomer and Victory.

The court’s Order stems from a CFTC Complaint filed on May 11, 2012, that charged the Defendants with the fraudulent solicitation of clients to subscribe to the Boomer and Victory Trading Systems, which were used by clients to trade E-mini Standard and Poor’s 500 Stock Index futures contracts in managed accounts (see CFTC Press Release 6266-12 and Complaint).

The Order, entered on January 22, 2014, requires Defendants CTI Group and Cooper Trading to pay $10.175 million in disgorgement and a $10 million civil monetary penalty, Symons to pay over $3.150 million in disgorgement and a $4.5 million civil monetary penalty, and Kline to pay over $275,000 in disgorgement and a $1 million civil monetary penalty. The Order further imposes permanent trading and registration bans on the Defendants and prohibits them from violating the anti-fraud and disclosure provisions of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The CFTC’s Complaint also named as Relief Defendants California companies Snonys, Inc. and Dragonfyre Magick Incorporated, which, according to the Complaint, were owned or operated by Symons and Kline, respectively. The Order provides for the disgorgement of Relief Defendants’ funds frozen pursuant to a court order that was previously entered on May 14, 2012.

The Order further finds that, since at least in or around August 2009, CTI and its agents and employees made false and misleading statements and omitted material information when soliciting clients to purchase subscriptions to CTI’s Trading Systems, including (1) how long CTI had been in business, (2) CTI’s experience developing and marketing Trading Systems, (3) the identities and professional experience of CTI’s personnel (who used fictitious names when communicating with clients), (4) the track record of CTI’s Trading Systems, (5) the past profitability of CTI’s Trading Systems, (6) the transaction costs associated with trading via CTI’s Trading Systems, and (7) the risks associated with trading futures contracts via CTI’s Trading Systems.

CTI’s salespeople, including Kline, made false statements to clients and prospective clients about CTI’s purported money-back guarantee, and Symons and Kline are liable for all of CTI’s violations because they controlled CTI and actively participated in CTI’s unlawful conduct, according to the Order.

According to the Order, funds were transferred to the Relief Defendants from CTI as a result of the Defendants’ violations of the CEA and CFTC regulations, and the Relief Defendants do not have a legitimate claim to or interest in those funds.

The CFTC thanks the National Futures Association for its assistance.

CFTC Division of Enforcement staff members responsible for this case are R. Stephen Painter, Jr., Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

CFTC Fraud Awareness Advisories & Customer Protection Information

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including an Advisory covering Commodity Trading Systems Sold on the Internet. This Advisory states that the CFTC has seen an increase in websites that fraudulently promote commodity trading systems and advisory services and provides information designed to help customers identify this potential swindle before they invest.

Customers can file a tip or complaint to report suspicious activities or other information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or an online form.

Monday, January 27, 2014

MAN SENTENCED TO PRISON FOR ROLE IN PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

Massachusetts Resident Steven Palladino Sentenced to 10-12 Years in Prison for Role in Multi-Million Dollar Ponzi Scheme

The Securities and Exchange Commission announced today that, on January 21, 2014, a Massachusetts state court judge sentenced Massachusetts resident Steven Palladino to a prison term in a criminal action filed by the Suffolk County (Massachusetts) District Attorney.  The criminal action against Palladino and his company, Massachusetts-based Viking Financial Group, Inc., was initially filed in March 2013 and involves the same conduct alleged in a civil securities fraud action brought by the Commission in April 2013.  Suffolk Superior Court Judge Janet Sanders sentenced Palladino, of West Roxbury, Massachusetts, to serve a prison term of 10-12 years, followed by a probationary period of five years, and to pay restitution to victims, for crimes that he committed in connection with a Ponzi scheme perpetrated through Viking.  At the same hearing, Palladino pled guilty to criminal charges that included conspiracy, being an open and notorious thief, larceny, and larceny from elderly person(s).  Viking also pled guilty to related charges and was sentenced to a probationary period of five years and ordered to pay restitution to victims.  The Court set a further hearing for March 7, 2014 to determine, among other things, the amount of restitution to be paid to victims.

The Commission previously filed an emergency action against Viking and Palladino (collectively, “Defendants”) in federal district court in Massachusetts.  In its complaint, the Commission alleged that, since April 2011, Defendants misrepresented to at least 33 investors that their funds would be used to conduct the business of Viking – which was purportedly to make short-term, high interest loans to those unable to obtain traditional financing.  The Commission also alleged that Palladino misrepresented to investors that the loans made by Viking would be secured by first interest liens on non-primary residence properties and that investors would be repaid their principal, plus monthly interest at rates generally ranging from 7-15%, from payments that borrowers made on loans.  The complaint alleged that, in truth, Defendants made very few real loans to borrowers, and instead used investors’ funds largely to pay earlier investors and to pay for the Palladino family’s substantial personal expenses, including cash withdrawals, gambling debts, vacations, luxury vehicles and tuition.

The Commission first filed this action on April 30, 2013, seeking a temporary restraining order, asset freeze, and other emergency relief – which the Court granted.  On May 15, 2013, the Court also issued an escrow order, which ordered Defendants to deposit all funds and assets in their possession into an escrow account.  The asset freeze and escrow order have remained in effect at all times since April 30, 2013 and May 15, 2013, respectively.  On July 15, 2013, the Court held that Defendants’ conduct violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933.  On November 18, 2013, the Court entered orders that enjoined Defendants from further violations of the antifraud provisions of the securities laws and ordered them to pay disgorgement of $9,701,738, plus prejudgment interest of $122,370.

On September 4, 2013, the Commission filed a motion for contempt against Palladino for violations of the asset freeze and the escrow order.  The motion alleged that Palladino violated the asset freeze by transferring three vehicles that he owned (solely or jointly with his wife) into his wife’s name and using the vehicles as collateral for new loans – effectively cashing out the equity in these vehicles.  The motion also alleged that Palladino violated the escrow order by failing to deposit all cash in his possession into the escrow account.  On November 15, 2013, the Court held Palladino in contempt and ordered that he restore ownership of the vehicles that he had transferred into his wife’s name.  Subsequently, Palladino restored ownership of two of the vehicles but has failed to restore ownership of one vehicle.  As a result, the Court refused to dismiss the contempt finding against him at hearings on December 3, 2013 and January 17, 2014.  The Court has set a further hearing date of February 20, 2014 to address, among other things, whether Palladino remains in contempt.

The Commission acknowledges the continued assistance of Suffolk County (Massachusetts) District Attorney Daniel F. Conley’s Office, whose office referred Palladino’s and Viking’s conduct to the Commission.

Sunday, January 26, 2014

FINAL JUDGEMENT ENTERED AGAINST HEDGE FUND MANAGER

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Final Judgments Entered Against Former Hedge Fund Manager and His Company

The Securities and Exchange Commission announced today that on January 22, 2014, the Honorable Paul G. Gardephe of the United States District Court for the Southern District of New York, entered final judgments against Berton M. Hochfeld ("Hochfeld") and his wholly-owned entity Hochfeld Capital Management, L.L.C. ("HCM"), in SEC v. Hochfeld et al., 12-CV-8202. The SEC filed an emergency action in November 2012, charging Hochfeld and HCM with securities fraud for misappropriating assets and making material misstatements to investors in the Heppelwhite Fund L.P., a now defunct hedge fund. The Court previously entered judgments against Hochfeld and HCM that ordered, among other relief, injunctions and an asset freeze, and granted the Commission's motion to create a Fair Fund to compensate defrauded investors. In October 2013, the Fair Fund made initial distributions, totaling more than $6 million, to 35 former Heppelwhite investors, which represented approximately 70% of each investor's prior capital balance in the hedge fund. Pursuant to a Distribution Plan, the Fair Fund will make a second round of distributions to investors from additional funds collected, including proceeds from the sale of Hochfeld's personal assets.

The final judgments against Hochfeld and HCM enjoin them from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 203 and 206 of the Investment Advisers Act of 1940, and order disgorgement of $1,785,332, which will be deemed satisfied by the criminal forfeiture order entered against Hochfeld in a parallel criminal case filed by the U.S. Attorney's Office for the Southern District of New York. In the criminal case, United States v. Hochfeld, 13-CR-021, Hochfeld pled guilty to securities fraud and wire fraud. The Court sentenced Hochfeld to a two-year prison term, which he is now serving, and ordered him to pay forfeiture and restitution totaling approximately $2.9 million.


The SEC thanks the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.

Saturday, January 25, 2014

CFTC ANNOUNCES TRADE EXECUTION MANDATE FOR ADDITIONAL INTEREST RATE SWAPS

FROM:  COMMODITY FUTURES TRADING COMMISSION

The Commodity Futures Trading Commission’s Division of Market Oversight Announces Trade Execution Mandate for Additional Interest Rate Swaps

trueEX, LLC’s Available-to-Trade Determinations Are Deemed Certified

Washington, DC — The Commodity Futures Trading Commission’s (CFTC or Commission) Division of Market Oversight (Division) today announced that trueEX, LLC’s (trueEX) self-certification of available-to-trade determinations (MAT Determinations) for certain interest rate swap contracts is deemed certified.

This self-certification includes certain interest rate swap contracts made available to trade via an earlier determination that was deemed certified on January 16, 2014, as well as additional swap contracts. Under Commission regulations, the additional swaps in this MAT Determination, whether listed or offered by trueEX or any other designated contract market (DCM) or swap execution facility (SEF), will become subject to the trade execution requirement under section 2(h)(8) of the Commodity Exchange Act 30 days after certification, on February 21, 2014.

All transactions involving swaps that are subject to the trade execution requirement must be executed through a DCM or a SEF. To the extent swaps subject to the trade execution requirement are executed on a SEF, they must be executed in accordance with the execution methods prescribed by Commission regulations.

Friday, January 24, 2014

INVESTMENT BUSINESS FOUNDER ARRESTED FOR NOT COMPLYING TO SUBPOENAS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Subject of SEC Investigation Held in Contempt of Court and Arrested for Failing to Comply with Subpoenas

The Securities and Exchange Commission today announced that a Staten Island man who is the subject of an agency investigation has been held in contempt of court and arrested for failing to comply with subpoenas requiring him to produce documents and give testimony.

The SEC filed a subpoena enforcement action in federal court in Manhattan on Nov. 4, 2013, against Anthony Coronati, the founder of a business known as Bidtoask.com, which has an office in Staten Island.  According to court documents, entities controlled by Coronati solicited investments relating to the securities of sought-after private companies such as Facebook that investors hoped would later hold initial public offerings.  The SEC is investigating, among other things, whether Coronati commingled investor funds with other money in an account he controlled and used it to pay personal expenses.  Despite two SEC investigative subpoenas in 2013, Coronati has neither produced documents nor appeared for testimony.

A court order issued on Nov. 7, 2013, required Coronati to comply with the SEC subpoenas.  A court order issued on Jan. 17, 2014, found Coronati in civil contempt for ignoring the prior court order.  The contempt order requires Coronati, who repeatedly attempted to evade service, to pay $4,812 to the SEC to reimburse the agency for its costs of serving him with court papers in this proceeding.

The U.S. Marshals Service arrested Coronati today.  At a hearing held before the Honorable William H. Pauley III, the court ordered Coronati released on $50,000 bond and restricted his travel to the Southern and Eastern Districts of New York.  The court ordered a further hearing on Feb. 6, 2014.


Thursday, January 23, 2014

SEC ANNOUNCES FORMER PORTFOLIO MANAGER BARRED FROM INDUSTRY OVER MISREPRESENTATIONS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
01/22/2014 09:56 AM EST

The Securities and Exchange Commission today announced that a former Oppenheimer & Co. portfolio manager has agreed to be barred from the securities industry and pay a $100,000 penalty for making misrepresentations about the valuation of a fund consisting of other private equity funds.

The SEC announced administrative proceedings against Brian Williamson last August based on allegations that he disseminated information falsely claiming that the reported value of the fund’s largest investment came from the portfolio manager of the underlying fund.  Williamson, who managed the fund of funds, actually had valued the investment himself at a significant markup to the value estimated by the underlying fund’s portfolio manager.  Williamson sent marketing materials to potential fund investors reporting a misleading internal rate of return that failed to deduct the fund’s fees and expenses.  Williamson also made false and misleading statements to investor consultants and others in an effort to cover up his fraud.

“Investors rely on truthful and complete disclosures about valuation methodologies and fund fees and expenses, especially when committing to a long-term private equity investment,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Williamson misled prospective investors by marking up the fund’s interim valuations and concealing his role in enhancing its reported performance.”

Last year, Oppenheimer agreed to pay $2.8 million in a settlement of related charges.

The SEC’s order against Williamson finds that he willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Without admitting or denying the findings, Williamson consented to the order requiring him to pay a $100,000 penalty and barring him from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization for at least two years.

The SEC’s investigation was conducted by Panayiota K. Bougiamas, Joshua M. Newville, and Igor Rozenblit of the Asset Management Unit along with Jack Kaufman and Lisa Knoop of the New York Regional Office.  The case was supervised by Valerie A. Szczepanik.  The SEC’s litigation was handled by Mr. Kaufman, Mr. Newville, and Charu Chandrasekhar.

Wednesday, January 22, 2014

SEC COMMISSIONER AGUILAR'S SPEECH AT LATINOS ON FAST TRACK SYMPOSIUM

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Making A Difference Through Public Service
 Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Latinos on Fast Track (LOFT) Symposium Hispanic Heritage Foundation Washington, DC

Jan. 15, 2014

Thank you for that kind introduction.  I am honored to be here today.  I have had the privilege of speaking at prior Latinos on Fast Track events and I’m always impressed by the quality of the participants.  Today is no exception.  Before I begin my remarks, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC”), my fellow Commissioners, or members of the staff.

I understand that many of you are currently working in a government position, and I want to commend you for having chosen to serve the American public.  There is no nobler cause, and I know that you are already making a positive difference in other people’s lives.  I am truly inspired to see so many bright and dedicated young professionals who are committed to making a difference.  As I look around, I see the future of our country, and it is a bright one.

Today, I would like to spend my time with you discussing:

The important roles that Hispanics and Latinos play in our country’s prosperity; and
The importance of giving back to our communities and country through government service.
The Contributions of Hispanics and Latinos to U.S. Prosperity

Latinos are a heterogeneous and growing group originating from many different parts of the world.  Some of us may be recent immigrants, while others may have had ancestors who lived on American soil even before the founding of the United States.  But all of us share the same strong belief in the “American Dream” and its promise of a better life.

Latinos have a deep appreciation for the freedom, values, and opportunities offered by this great country.  These opportunities are available and they are underscored by data showing that Hispanics have made significant contributions to our economy, among other things, by starting new businesses, creating jobs, and utilizing their purchasing power as consumers.  For example: ­

Nationally, there are over three million Hispanic-owned companies with over $500 billion in revenue;[1]
New Latino entrepreneurs nearly doubled, from 10.5% to 19.5%, between 1996 and 2012;[2]
The numbers of Hispanic firms are growing more than four times faster than the overall number of U.S. firms;[3] and
If it were a nation in itself, the U.S. Hispanic market would be one of the top ten economies in the world.[4]
Clearly, Hispanic and Latino Americans have made significant progress in our country; nonetheless, there are still challenges.  I would like to highlight just a few of these challenges, as well as the progress that has been made.

Challenges Facing Hispanics and Latinos

Hispanics and Latinos continue to bear a disproportionate share of the economic hardships that sometimes destroy the fabric of our daily lives.  While I continue to be optimistic, I remain concerned that more needs to be done to address these challenges.

For example, the recent poverty data released by the U.S. Census Bureau shows that the largest group of poor children in this country are Hispanic, almost six million children in total.[5]  Similarly, last year, the Urban Institute released a report entitled, “Less than Equal: Racial Disparities in Wealth Accumulation”[6] that focused on the wide racial wealth gap between Whites and communities of color—a gap made wider by the impact of the Great Recession.

First, we need to examine the growing racial wealth gap and fully understand why it matters.  The authors of the report described wealth this way:  “Wealth isn’t just money in the bank, it’s insurance against tough times, tuition to get a better education and a better job, savings to retire on, and a springboard into the middle class.  In short, wealth translates into opportunity.”[7]

Regrettably, there is a significant wealth gap between the races.  By 2010, the average wealth of White families was roughly over a half-million dollars higher than the average wealth of Black and Hispanic families.[8]  It is particularly important to note that Blacks and Hispanics are less likely to own homes and have retirement accounts than Whites, so they miss out on these traditionally powerful wealth-building vehicles.

While the recent Great Recession had a devastating impact on all communities, the impacts were much more devastating on communities of color.  Between 2007 and 2010, Hispanic families lost 44% of their average wealth, while African-American families lost 31%, and White families lost 11% of their average wealth.[9]

Lower home values contributed considerably to significant wealth loss among Hispanics.[10]  As described by the Urban Institute:

“[M]any Hispanic families bought homes just before the recession.  Because they started with higher debt-to-asset values, the sharp decline in housing prices meant an even sharper cut in Hispanics’ wealth.  As a result, they were also more likely to end up underwater or with negative home equity.  Between 2007 and 2010, Hispanics saw their home equity cut in half…”[11]

While the Great Recession did not cause the wealth disparities between Whites and minorities, it did exacerbate them.[12]  It is clear that more needs to be done to facilitate basic wealth accumulation in communities of color, especially within the Hispanic community.  This is important because more wealth translates into greater opportunities.

Progress Made by Hispanics

Despite these challenges, however, Hispanics and Latinos have made tremendous progress in this country.  As a group, we may be a minority in this country, but we have made major contributions.  Hispanic and Latino Americans have been leaders of our nation for a very long time.  We take pride in Sonia Sotomayor, the first Latina Supreme Court Justice; Nobel Prize winner Luis Alvarez; and civil rights activist César Chávez;  just to name a few.[13]  During the National Hispanic Heritage Month in 2012, President Barack Obama had this to say about the progress made by Hispanics:

“Hispanics have helped shape our communities and expand our country, from laboratories and industry to board rooms and classrooms.  They have led movements that pushed our country closer to realizing the democratic ideals of America’s founding documents, and they have served courageously as members of our Armed Forces to defend those ideals at home and abroad.  Hispanics also serve as leaders throughout the public sector, working at the highest levels of our government and serving on our highest courts.”[14]

We have indeed served our Nation well.  We must continue this good work and prepare the next generation to do the same.

There is some great news on this front.  The recent data on college enrollment and unemployment rates of Hispanics looks promising.  For example, in 2012, and for the first time, the number of 18- to 24-year-old Hispanics enrolled in college exceeded two million, reaching a record 16.5% share of all college enrollments.[15]  This milestone represents not just population growth, but also increasing high school graduation rates, which this year hit a record 76.3%.[16]  Moreover, a report by the Pew Research Center found that a record 69% of all Hispanic-American high school graduates in the class of 2012 enrolled in a two-year or four-year college that fall.[17]  That is a college enrollment rate higher than that of White high school graduates.[18]  A recent report from the Department of Labor added more good news: the unemployment rate for Hispanics and Latino men and women age 20 years and older has improved since 2012, from 8.1% to 7.9% for men in 2013, and from 10.3% to 8.7% for women.[19]

These achievements represent individual talent, hard work, and determination.  But I also know that, for every young person who worked hard and achieved success, there are many proud parents, brothers and sisters, teachers, and community mentors who offered support, encouragement, and served as positive role models.  Because of this, it is important for all us to give back to our families, communities, and country.  As our country’s next generation of Americans, our Nation’s future is in your hands.  I urge you to continue to contribute to the success of our Nation, as it forges ahead into the future to face the challenges and demands of the 21st Century.[20]

Government Service

Obviously, one way to give back to our country is through government service, and it is encouraging to see so many of you here today who have made that choice.  Indeed, I have made that choice three times—once right after law school, once when President George W. Bush asked me to serve as an SEC Commissioner, and again when President Barack Obama asked me to serve another term as an SEC Commissioner.

My desire to enter public service started a long time ago with my arrival to the United States.  As some of you may know, I was born in Cuba.  I came to this country with my nine-year-old brother when I was only six years old.  Our parents sent us here because they feared for our safety when Fidel Castro seized control of the Cuban government.  Like thousands of Cuban children who arrived in the United States as refugees, we did not have any means of financial support.  I arrived in America with little more than the clothes I was wearing and did not speak a word of English.  But through the generosity that is one of the hallmarks of the American public, and our own determination to meet our challenges, my brother and I not only survived—we thrived.

In my case, I was able to pay my way through college and law school by taking on jobs ranging from being a stock boy in a yarn store to loading baggage and cargo into airplanes at the Miami International Airport.  It is a long way from the hot tarmac of the airport in Miami to the halls of our Nation’s capital, but I carry those experiences with me.  I know how hard Americans work just to survive in this country.

I have now been a lawyer for over 30 years, starting out as a staff attorney at the SEC, later working as a law firm partner in various international law firms, and then as general counsel and executive of one of the world’s largest global asset managers.

However, it’s not just about having a career and making money.  Even when I was focused on building my professional career, I also found it important to give back to my community by becoming involved in many community organizations.  I have found it particularly rewarding to become active with organizations that worked to improve the lives of minorities and the underserved.[21]  I encourage you do to the same.  Giving time and effort to your communities can bring a great deal of personal satisfaction.

It was my need to give back that led me to say “yes” to serving as a Commissioner at the SEC.  Moreover, my professional career had given me a deep respect and admiration for the importance of the SEC.  As many of you know, the SEC is an independent federal agency that oversees our Nation’s capital markets—the world’s largest and most complex market for stocks, bonds, and other types of investment securities.  I expect that most of you, and many people you know, in one way or another, benefit from the work of the SEC.  The SEC’s work is vital because many Americans invest directly in publicly traded companies or put their hard-earned money into pension funds, mutual funds, college savings plans, and 401(k)s.  They do this to support their families, pay for their children’s education, and plan for their retirement.  Because of the importance of the capital markets to the prosperity and security of American families, the SEC’s role as the markets’ “watchdog” is vital to our country’s future.  I have found my work at the SEC to be both rewarding and meaningful.

I expect that many of you feel the same way about your jobs.  No matter what you do in government, I hope that you have a long, proud, and rewarding career.  Let me read you a quote from our late President John F. Kennedy about government service:

“Let every public servant know, whether his post is high or low, that a man’s rank and reputation … will be determined by the size of the job he does, and not by the size of his staff, his office or his budget.  Let it be clear that [we] recognize[] the value of dissent and daring -- that we greet healthy controversy as the hallmark of healthy change.  Let the public service be a proud and lively career.  And let every man and woman who works in any area of our national government, in any branch, at any level, be able to say with pride and with honor in future years: ‘I served the United States Government in that hour of our nation’s need.’”[22]

Conclusion

There’s very little that I can say to top that—so I will end my remarks where I began.  I am delighted to be here.  Organizations like the Hispanic Heritage Foundation—and the LOFT programs—help support and produce the next generation of Hispanic and Latino leaders, and this, in turn, strengthens our families, our communities, and our country.

Hispanic and Latino Americans have faced great challenges living in this great country, but the progress made shows that we have the resolve to achieve the American Dream.  Although I know that it will take a lot of hard work and perseverance, my faith in the American Dream and the boundless opportunities offered by this country make me optimistic that your future—and our future—is bright.

Thank you for everything that you do, and thank you for having me here today.


[1] “The Latino Coalition 2013 Small Business Summit Reaches New Heights and Showcases the Impact of Small Business to the U.S. Economy,” The Wall Street Journal (May 6, 2013), available at  http://online.wsj.com/article/PR-CO-20130506-902461.html?mod=googlenews_wsj .

[2] Robert W. Fairlie, “Kauffman Index of Entrepreneurial Activity 1996-2012,” Ewing Marion Kauffman Foundation (April 2013), p. 9, available at h http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2013/04/kiea_2013_report.pdf .

[3] Id.

[4] The Nielsen Company, “State of the Hispanic Consumer:  The Hispanic Market Imperative” (Quarter 2, 2012), http://es.nielsen.com/site/documents/State_of_Hispanic_Consumer_Report_4-16-FINAL.pdf .

[5] Children’s Defense Fund, Child Poverty in America 2012:  National Analysis (Sept. 17, 2013), available at http://www.childrensdefense.org/child-research-data-publications/data/child-poverty-in-america-2012.pdf .

[6] “Less than Equal: Racial Disparities in Wealth Accumulation,” by Signe-Mary Mckernan, Caroline Ratcliffe. Eugene Steuerle, and Sisi Zhang, Urban Institute (April 2013), available at http://www.urban.org/UploadedPDF/412802-Less-Than-Equal-Racial-Disparities-in-Wealth-Accumulation.pdf . (hereinafter, “Racial Disparities in Wealth Accumulation”).

[7] Id at 1.

[8] Id.

[9] Id.

[10] Hispanic Household Wealth Fell by 66% from 2005 to 2009, The Toll of the Great Recession. Pew Research Hispanic Trends Project (July 26, 2011).

[11] Supra note 6 at 2-3.

[12] Id. at 2.

[13] Hispanic Heritage month, available at  http://hispanicheritagemonth.gov/index.html (last visited Nov. 20, 2013); The Official Web Site of the Nobel Prize, The Nobel Prize in Physics 1968: Luis Alvarez, available at  http://www.nobelprize.org/nobel_prizes/physics/laureates/1968/alvarez-bio.html (last visited Nov. 20, 2013); Cesar Chavez Foundation. About Cesar, available at  http://www.chavezfoundation.org/_page.php?code=001001000000000&page_ttl=About+Cesar&kind=1 (last visited Nov. 20, 2013).

[14] The White House, Office of the Press Secretary, Presidential Proclamation – National Hispanic Heritage Month, 2012 (Sept. 14, 2012), available at http://www.whitehouse.gov/the-press-office/2012/09/14/presidential-proclamation-national-hispanic-heritage-month-2012.

[15] Richard Fry and Mark Hugo Lopez, Hispanic Student Enrollments Reach New Highs in 2011, Pew Hispanic Center (Aug. 20, 2012), p.4, available at http://www.pewhispanic.org/files/2012/08/Hispanic-Student-Enrollments-Reach-New-Highs-in-2011_FINAL.pdf .

[16] Id., p.5 (represents percentage of Hispanic youths, ages 18-24, with a high school diploma or GED).  From 1970 to 2010, high school graduation rates for Hispanic Americans almost doubled (from 32.1% to 62.9%), and four-year college graduation rates more than tripled (from 4.5% to 13.9%). U.S. Census Bureau, Statistical Abstract of the United States: 2012, Table 229 Educational Attainment by Race and Hispanic Origin: 1970 to 2010, available at http://www.census.gov/compendia/statab/2012/tables/12s0229.pdf.

[17] Richard Fry and Paul Taylor, “High School Drop-out Rate at Record Low, Hispanic High School Graduates Pass Whites in Rate of College Enrollment,” PewResearch Hispanic Center (May 9, 2013),  http://www.pewhispanic.org/2013/05/09/hispanic-high-school-graduates-pass-whites-in-rate-of-college-enrollment/ .

[18] Id.

[19] U.S. Department of Labor Bureau of Labor Statistics, Economic News Release:  Table A-3. Employment status of the Hispanic or Latino population by sex and age (Sept. 6, 2013) (last visited Nov. 20, 2013), available at http://www.bls.gov/news.release/empsit.t03.htm.

[20] National Public Radio program broadcast, “College-Bound Latino Students at New High” (Aug. 22, 2012), transcript available at http://www.npr.org/2012/08/22/159777934/college-bound-latino-students-at-new-high .  (James Montoya, College Board:  “… we cannot underestimate the essential role that Latinos in the U.S. will play in reaching our national goal of 55 to 60 percent of young Americans 25 to 34 having a college degree. … to keep the U.S. as a leader in an increasingly global economy …”

[21] I am also concerned about the overall lack of diversity in federal civilian employment.  As of September 2012, the total number of employees in executive branch agencies was about 2.1 million.  However, minorities represented only 34.1% of the employees, with Hispanics representing only 5.8%.  See Office of Personnel Management, Data, Analysis & Documentation, Federal Employment Reports: Executive Branch Employment by Gender and Race/National Origin (Sept. 2002-Sept. 2012), available at http://www.opm.gov/policy-data-oversight/data-analysis-documentation/federal-employment-reports/reports-publications/executive-branch-employment-by-gender-and-racenational-origin/.  The lack of diversity in the federal workforce is resulting in the exclusion of many qualified Hispanics and Latinos.

[22] Annual Message to the Congress on the State of the Union (11), Public Papers of the President: John F. Kennedy (Jan. 30, 1961), available at  http://www.jfklibrary.org/Research/Research-Aids/Ready-Reference/JFK-Quotations.aspx#P .
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