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

Monday, March 31, 2014

MORGAN STANLEY SMITH BARNEY LLC SETTLES CFTC CHARGES RELATED TO SEGREGATED AND SECURED FUNDS ALLEGED RULE VIOLATIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Morgan Stanley Smith Barney LLC to Pay $490,000 to Settle Charges Relating to Rules and Regulations Pertaining to Segregated and Secured Amount Funds

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Morgan Stanley Smith Barney LLC (MSSB), a registered Futures Commission Merchant (FCM), for violating CFTC rules governing secured funds of foreign futures and option customers, commingling customer and firm funds, failing to prepare accurate daily computations of its segregated and secured funds, failing to properly title account statements for four customer segregated accounts, and failing to diligently supervise its employees handling of matters related to its business as a CFTC registrant. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires MSSB to pay a $490,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC Regulations, as charged.

Specifically, the CFTC’s Order finds that on April 8, 2013, MSSB erroneously transferred approximately $16 million from a customer secured funds bank account resulting in a deficiency in MSSB’s secured funds of approximately $9.27 million. MSSB discovered the error the next day and cured the deficiency, the Order finds. After its secured deficiency in April 2013, MSSB independently engaged KPMG LLP to review its policies and procedures with respect to segregated and secured accounts. KPMG subsequently issued a report recommending changes to MSSB’s policies and procedures, which MSSB has substantially implemented, according to the Order.

The CFTC’s Order also finds that for approximately a six-month period in 2012, MSSB commingled customer segregated and firm funds in a customer segregated bank account.

In addition, for approximately an eight-month period in 2012, MSSB failed to prepare accurate daily computations of its segregated and secured funds, according to the Order. None of the errors caused MSSB to fall below its required segregated or secured funds; however, MSSB was required to refile 120 daily statements as a result of the errors, the Order finds.

Finally, the CFTC’s Order finds that during several months in 2012, account statements for four MSSB segregated accounts were improperly titled as customer secured accounts.

CFTC Division of Enforcement staff responsible for this matter are Allison Passman, David Terrell, Joseph J. Patrick, Ava Gould, Scott R. Williamson, and Rosemary Hollinger. The Division thanks the Commission’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

Sunday, March 30, 2014

DEFENDANTS ORDERED TO PAY $2.2 MILLION FOR INVOLVEMENT IN FOREIGN CURRENCY PONZI SCHEME

FROM:  COMMODITY FUTURES TRADING COMMISSION 
An Ohio Federal Court Rules against Defendants in CFTC Fraud Action and Orders Patrick Cole and Global Strategic Marketing, Inc. to Pay over $2.2 Million in Sanctions in Connection with Foreign Currency Ponzi Scheme

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that Judge David D. Dowd Jr. of the U.S. District Court for the Northern District of Ohio granted summary judgment and issued a Memorandum Opinion, a Judgment Entry, and a permanent injunction Order (collectively Order) against Defendants Patrick Cole of Ontario, Canada, and his company, Global Strategic Marketing, Inc. (GSM) in a CFTC enforcement action and finds that the Defendants committed fraud in connection with a multi-million dollar off-exchange foreign currency (forex) Ponzi scheme (see CFTC Release 5921-10, October 7, 2010).

The court’s Order, issued February 26, 2014, imposes disgorgement of $1,146,399 and also requires Cole and GSM to pay civil monetary penalties of $1,146,399. The Order further imposes permanent trading and registration bans on Cole and GSM, and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

Specifically, the court’s Order finds that in marketing a fraudulent forex investment program offered by another Defendant, Complete Developments, LLC (CDL), GSM recklessly made repeated false statements including claims about low risk of loss; guaranteed return of principal; high rates of return on investment; and purported experience of CDL’s forex trading team. The Order further finds that GSM made the false statements based on information from CDL principal, Defendant Kevin Harris, and that GSM did not independently verify the accuracy of that information. The Order also finds that GSM made false statements about its own conduct, including telling potential investors that GSM had done its “homework” regarding CDL, when in fact GSM had not verified the accuracy of its representations to potential investors.

The Order finds that GSM’s misrepresentations to potential investors were false, misleading, and material and that GSM’s conduct, including not conducting adequate due diligence about GSM and ignoring investor complaints, establishes that GSM acted with reckless disregard as to whether its statements to potential investors were true. The Order also finds that Cole is liable for GSM’s violations because he controlled GSM and “had actual knowledge of all of GSM’s activities at all levels with respect to CDL, and was the decision-maker regarding GSM’s activities upon which the primary violation of the Act is based.”

In May 2013, the court entered a Judgment requiring Defendants CDL, its principals and controlling persons Kevin Harris, Keelan Harris, and Karen Starr, and Defendant Investment International Inc., to pay over $23 million in civil monetary penalties and restitution in connection with this fraudulent forex Ponzi scheme

Saturday, March 29, 2014

SUMMARY JUDGEMENT OBTAINED IN MARKET MANIPULATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Summary Judgment Against Defendant Jonathan Curshen in Market Manipulation Case

The Securities and Exchange Commission announced that on March 21, 2014, the Honorable Paul G. Gardephe, United States District Court Judge for the Southern District of New York, granted the Commission's motion for summary judgment against defendant Jonathan Curshen, permanently enjoining Curshen from future violations of Sections 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Court also: (i) held Curshen jointly and severally liable with Defendant Bruce Grossman for $76,000 in disgorgement, plus $18,599.86 in prejudgment interest; (ii) ordered Curshen to pay a $65,000 civil penalty; and (iii) permanently barred Curshen from participating in an offering of penny stock.

On November 13, 2012, the Court entered a final judgment by consent against Defendant Bruce Grossman. The final judgment permanently enjoined Grossman from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act. and Rule 10b-5 thereunder, and ordered Grossman jointly and severally liable with Curshen for disgorgement of $76,000, which liability was deemed fully satisfied by Grossman's criminal forfeiture order in United States v. Grossman, 09-cr-136 (PGG) (SDNY). The final judgment also barred Grossman from participating in an offering of penny stock.

On September 10, 2008, the SEC filed its complaint against Bruce Grossman and Jonathan Curshen (collectively, the "Defendants") alleging that from at least June 2008, the Defendants engaged in a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Industrial Biotechnology Corp. The complaint alleges that the Defendants engaged in an undisclosed kickback arrangement with an individual who claimed to represent a group of registered representatives with trading discretion over the accounts of wealthy customers.

For further information, please see Litigation Release Number 20712 (September 11, 2008) [SEC Charges Two Stock Promoters with Market Manipulation] and Litigation Release Number 22532 (November 16, 2012) [Court Enters Final Judgment by Consent against SEC Defendant Bruce Grossman]

Friday, March 28, 2014

Keynote Address at the 2014 Angel Capital Association Summit

Keynote Address at the 2014 Angel Capital Association Summit

CFTC FILES CHARGES FOR OPERATING PONZI SCHEME AGAINST TWO SOUTH CAROLINA RESIDENTS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges South Carolina Residents Robert S. and Amy L. Leben with Commodity Pool Fraud for the Operation of a Multi-Million Dollar Ponzi Scheme

Federal Court Issues Emergency Order Freezing Defendants’ Assets and Protecting Books and Records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that, on March 14, 2014, Judge Terry L. Wooten of the U.S. District Court for the District of South Carolina issued an emergency Order freezing assets under the control of Robert S. Leben and Amy L. Leben (Lebens) of Columbia, South Carolina, in connection with a commodity pool called Structured Finance Group Corporation (SFG).  The Order also prohibits the Lebens from destroying books and records and allows the CFTC immediate access to those records.

This court’s emergency Order arises out of a CFTC enforcement action filed under seal on March 12, 2014, charging the Lebens with fraudulently soliciting and/or accepting at least $3.2 million from pool participants in connection with their operation of the SFG commodity pool from August 2008 to the present.  The CFTC Complaint also charges the Lebens with misappropriating pool participant funds and failing to register with the CFTC as Commodity Pool Operators in connection with their operation of SFG.  In addition, the complaint charges Amy Leben with improper operation of the pool.

The Lebens allegedly misappropriated at least $1.77 million for their personal use

According to the Complaint, the Lebens misappropriated at least $1.77 million of pool participant funds for their personal use, including to purchase their residence and a swimming pool, among other things.  The Complaint also charges Robert Leben with fraudulently guaranteeing pool participants’ principal investment against risk of loss, guaranteeing annual returns of 14 percent, and bolstering these guarantees by issuing written false statements to pool participants.  In addition, to perpetuate their fraud, the Lebens operated SFG as a Ponzi scheme through which they used pool participant funds to pay other pool participants a total of approximately $1 million as purported profits, according to the Complaint.

In its continuing litigation, the CFTC seeks a permanent injunction from future violations of federal commodities laws, permanent registration and trading bans, full restitution to defrauded pool participants, disgorgement of any ill-gotten gains, and civil monetary penalties.

The CFTC appreciates the cooperation of the South Carolina Attorney General’s Office, the U.S. Marshals Service, and the Office of the U.S. Attorney for the District of South Carolina in this matter.

CFTC Division of Enforcement staff members responsible for this case are Amanda Harding, Elizabeth Davis, Michael Loconte, Erica Bodin, Richard Foelber, and Rick Glaser.

Thursday, March 27, 2014

SEC CHAIR WHITE'S OPENING STATEMENT AT ROUNDTABLE MEETING ON CYBERSECURITY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
PUBLIC STATEMENT
 Opening Statement at SEC Roundtable on Cybersecurity
 SEC Chair Mary Jo White
March 26, 2014

Good morning.  Welcome to today’s roundtable on cybersecurity.

Cybersecurity threats come from many sources: criminal and hired hackers, terrorists, state-sponsored intruders, and even misguided computer experts to see what they are able to penetrate.

Cyber threats also pose non-discriminating risks across our economy to all of our critical infrastructures, our financial markets, banks, intellectual property, and, as recent events have emphasized, the private data of the American consumer.

This is a global threat.  Cyber threats are of extraordinary and long-term seriousness.  They are first on the Division of Intelligence’s list of global threats, even surpassing terrorism. And Jim Comey, director of the FBI, has testified that resources devoted to cyber-based threats are expected “to eclipse” resources devoted to terrorism.[1]

What emerges from this arresting view of the cybersecurity landscape is that the public and private sectors must be riveted, in lockstep, in addressing these threats.

The President’s 2013 Cybersecurity Executive Order and the Cybersecurity Framework issued in 2014 by the National Institute of Standards and Technology are reflective of the compelling need for stronger partnerships between the government and the private sector.

The SEC’s formal jurisdiction over cybersecurity is directly focused on the integrity of our market systems, customer data protection, and disclosure of material information.  But it is incumbent on every government agency to be informed on the full range of cybersecurity risks and actively engage to combat those risks in our respective spheres of responsibility.

This roundtable is one aspect of the SEC’s efforts to better inform ourselves, the marketplace, our fellow agencies, and the private sector as to what the risks are and how best to combat them.

As you know, we at the SEC have been focused on cybersecurity-related issues for some time.  In connection with public company disclosures, in October 2011, our  Division of Corporation Finance issued guidance on existing disclosure obligations related to cybersecurity risks and incidents to assist public companies in framing disclosures of cybersecurity issues.  That guidance makes clear that material information regarding cybersecurity risks and cyber incidents is required to be disclosed.

Since we issued that guidance, our staff has continued to study the important and challenging issues that cybersecurity presents to public companies, market participants, and investors, including the intersection of our investor-focused disclosure requirements and the types of information those with national security responsibility need in order to better protect our critical infrastructure.  I am looking forward to hearing the views on this.

Cybersecurity for SROs and large alternative trading systems also is a very important area of focus for our staff.  Part of this focus involves the Commission’s proposed rule on Regulation Systems, Compliance and Integrity, which would require an entity covered by the rule to test its automated systems for vulnerabilities, test its business continuity and disaster recovery plans, notify the Commission of cyber intrusions, and recover its clearing and trading operations within specified time frames.  I expect the Commission to move ahead with Regulation SCI this year.

We also have focused on cybersecurity risk issues for registered investment advisers, broker-dealers, and funds, including, for example, data protection and identity theft vulnerabilities.

In this area, the Commission last year adopted Regulation S-ID, which requires certain regulated financial institutions and creditors to adopt and implement identity theft programs.[2]  Regulation S-ID builds upon the SEC’s existing rules for protecting customer data, in particular Regulation S-P.[3]

I want to thank all of our panelists for participating today and sharing their views on these critical issues.  There is no better way to proceed than by assembling the right people in the same room to discuss and share information, points of view, and best practices.

Each panel consists of a very impressive group of professionals who bring a great deal of expertise and a range of relevant perspectives.

In addition to our panelists, we are joined today by many others who are here in person or watching online. And, of course, we welcome your views as well.  We have set up a comment file on our website for the public to submit views on cybersecurity issues or respond to the questions addressed and the views expressed by our panelists. And I especially look forward to hearing the public’s ideas and input.  Your views are important to us. We and the others here today will benefit immensely from hearing them as we study these issues.

Thank you and enjoy the roundtable.


[1] Homeland Threats and Agency Responses, The Honorable James B. Comey, Jr., Statement of the Federal Bureau of Investigation Before the Committee on Homeland Security and Governmental Affairs, United States Senate (November 14, 2013).

[2] See Identity Theft Red Flags Rules, Release No. 34-69359 (April 10, 2013), available at http://www.sec.gov/rules/final/2013/34-69359.pdf.

[3] See Final Rule: Privacy of Consumer Financial Information (Regulation S-P) (November 13, 2000), available at http://www.sec.gov/rules/final/34-42974.htm

Wednesday, March 26, 2014

SEC OFFICIAL'S SPEECH ON REGULATION OF FINANCIAL INDUSTRY

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SPEECH
 “People Handling other Peoples’ Money”
 Andrew Bowden
Director
Office of Compliance Inspections and Examinations
Arlington, VA
March 6, 2014

Good morning, and thank you, Scott [Weisman], for that kind introduction.  Before I begin, I’ll remind you that the Securities and Exchange Commission disclaims responsibility for any statement or private publication by any of its employees, including me.  The views expressed here are my own and do not necessarily reflect the views of the Commission, the Commissioners or of other members of the staff.

I’m really pleased to be here with you today.  It’s not long ago that I participated in this conference as an attendee.  As some of you may know, I worked in or around the industry for 24 years before joining the SEC.  Like you, I enjoyed working with colleagues in a highly competitive, rapidly changing, business … trying to help our clients, employees, and owners achieve their objectives.  I was also regularly examined by the SEC … but that’s a story for another occasion.

Today, I stand before you on the other side of the podium, having spent the last 2 ½ years examining the market from a regulator’s perspective, hopefully about to say something that will set the stage for the next two days or otherwise be of some use or interest to you.

My recent experience with the Commission has confirmed the complexity and adaptability of the market … a complexity and rate of change that can be fascinating, exhilarating, challenging, or frustrating … but that can also cause us to forget our fundamentals and to lose the forest for the trees.  We can get lost in the many regulatory agencies, laws, rules, and regulations.  Am I dealing with the SEC, the Fed, the OCC, the CFTC, the FCA, or others?  How can I take advantage of SEC Rule 506(c) without losing my exemption under CFTC Rule 4.13(a)(3)?

We can also get lost in the accelerating pace of technological change.  I received my first computer 7 years after graduating from law school, a time when e-mail wasn’t widely used for business communications; financial advisors completed order tickets with a pen; and stocks traded in fractions.  Today, just 20 years later, technology has transformed the industry … and you best not blink, or you may fall far behind.  Market participants now clamor to receive news releases only hundredths of a second before their peers.  We recently rolled out in OCIE a new trade analytic tool that will enable our examiners to quickly subject years’ worth of your trading data to a battery of more than 50 tests.

Even though the complex and changing rulebooks, regulations, algorithms, and fiber-optic cables (going to lasers now) shaping the market today are interesting and important, they’re not what I want to address today.  I want to go old school.  I want to go back to basics.  I want to talk about people.  More specifically, I want to talk about people handling other peoples’ money.  For, at its most simple, isn’t that what the financial services industry is all about? … people handling other peoples’ money?

Good People Trying to Do the Right Thing
I’ll start by emphasizing that my time with the Commission has reinforced my understanding on the day I was sworn in: the overwhelming majority of the people in the industry … including, I suspect, everyone in this room … are trying to do the right thing by their clients, colleagues, owners, and … even, regulators.  That’s why you’re here today.

It’s not an easy task.  Indeed, it’s a very difficult task given some of the complexities and innovations we’ve touched on already.  Yet, when OCIE staff engages with business leaders, lawyers, and compliance officers and identifies deficiencies or weaknesses in controls … whether we’re addressing issues generally across the entire market or those specific to a firm … most make a good-faith attempt to remediate on their own.

We in OCIE therefore spend a lot of our time and resources trying to help the good people get it right.  We are transparent.  For the last two years, we’ve published our examination priorities to let you know the areas we’ll be examining so you have the opportunity to self-evaluate and remediate.  We have also been publishing Risk Alerts to flag areas where we have found noncompliance across firms, again giving you the opportunity to look into these issues preemptively in your organizations.  We are hosting increasing numbers of outreach and “in-reach” events, where we share with you what we are seeing and what the law requires.

From Chair Mary Jo White on down throughout OCIE, the goal is not to play “gotcha!”  We in OCIE are much more interested in seeing the many good people in the industry self-correct and succeed.

It is in this spirit — the spirit of helping good people do the right thing — that I want to continue and to speak with you about the three most common activities in which people engage when handling other peoples’ money that may result in them having serious interaction with the Commission (not to mention clients and their lawyers, other regulators, and criminal authorities).

What are they?  In trying to focus OCIE resources on the root causes of harm to investors and our markets, I’ve reviewed most exam results and enforcement actions in the investment advisor area for the last several years and beyond … and concluded that almost all of the serious problems we address arise because: (1) some people lie, cheat, and steal; (2) some people act recklessly; and (3) some people don’t see, think, or act clearly or fairly because their judgment is clouded … or contaminated … by conflicts of interest.

And, like Rod Serling, I “present for your consideration,” whether your legal, compliance, risk, and audit programs will be enhanced if you implement them to identify and deal effectively with these people and the problems they present within your organizations … whether you are a firm of 3, 30, 300, or 300,000.

Liars, Cheaters, and Thieves

We can dispense with the first vice quickly.  The ways and means of man are many, but the methods used by some people to separate their brethren from their money are relatively unchanged.  They lie, cheat, and steal.

I’m going to use some examples from Enforcement cases — not to be heavy-handed, but I’m limited in what I can say about examinations, which are non-public.

You may have seen that the Enforcement Division recently charged a Los Angeles-based attorney as the alleged architect of a fraudulent scheme that raised money through a boiler room operation.  It is alleged that high-pressure salespeople persuaded more than 60 investors nationwide to invest a total of $1.8 million in a movie first titled Marcel and later changed to The Smuggler.  Investors were allegedly falsely told that actors ranging from Donald Sutherland to Jean-Claude Van Damme would appear in the movie when in fact they were never even approached.  Instead of using investor funds for movie production expenses as promised, the defendants are charged with spending most of the money on themselves.  The SEC press release states that the investor funds that remain aren’t enough to produce a public service announcement let alone a full-length motion picture capable of securing the theatrical release promised to investors.

While I believe that liars, cheaters, and thieves are a very small minority of the industry, the SEC spends a significant amount of time and resources trying to detect their bad behavior and to prevent them from harming investors.

You must also.  From the moment you hire your second employee, or your 20th, or your 2,000th, the odds increase that you have employed someone who will resort to bad acts to separate other people from their money.

My first boss in the industry ran our legal and compliance department, which oversaw well over one thousand employees.  In a memorable, but earthy, metaphor, he used to declare, “We have it good.  We get to work with smart people in an interesting business.  We help our clients achieve their financial goals.  Our employees make a good living and provide for their families.  This is a great company.  We (and here he was talking about the leadership of the firm, not just the compliance team) are like lifeguards at the community pool, watching the swimmers’ heads bob in the water.  Most are having fun, following the rules of the pool, but you just know that someone may be out there, peeing in the pool, ruining it for everyone.  Our job is to find that person.”

Indeed, this may be where our interests are most closely aligned.  No one wants liars, cheaters, or frauds in their firms or in the industry.

Reckless People
OCIE also sees people who behave recklessly.  They forget that they are fiduciaries and caretakers of their clients’ money.

For example, you may have seen that the Division of Enforcement recently brought a settled case[1] against a firm that adopted practices that gave the firm’s 60 employees total control of clients’ funds without implementing any appropriate safeguards.  The firm enabled its employees to access and to transfer client funds through the use of (1) pre-signed letters of authorization; (2) cutting and pasting client signatures on LOAs; (3) and retaining logins and passwords to access their clients’ outside accounts.

Let me pause here and say, “I get it.”  The firm was likely trying to provide a service to its clients by enabling them to easily transfer funds.  But, importantly, the record is devoid of any facts indicating that the firm had adopted reasonable controls to ensure that disbursements of client funds by pre-signed LOAs, or cut-and-pasted signatures, or remote log-in were actually authorized by the client.  It was an accident waiting to happen.

It could have been a problem employee with a drug, alcohol, or gambling problem who was tempted to misappropriate client funds … or it could have been a client who tried to stick it to the firm and falsely claim that a withdrawal or series of withdrawals were unauthorized and there would be no record of the authorization.  Someday, somehow, the absence of controls was going to bite the firm.

As it turned out, the inadequacy of the firm’s controls was exposed when a hacker gained control of a client’s email account and, posing as the client, emailed instructions for the firm to wire almost $300,000 to a foreign bank account designated by the hacker.  The firm acted upon the hijacked e-mail without question or further inquiry, and the client’s money was gone.

Identifying people behaving recklessly within your firms can be difficult.  Financial services is fiercely competitive.  You are trying to keep up.  Resources are finite.  And, depending on the size of your firm, people can sometimes roam out of your sight and over the hill before you realize they are no longer with the herd.

I therefore implore you to stay current on what’s happening in your business and to continually probe and test to evaluate whether you have people within your organization who are rushing headlong into, or up to their necks in, activities in the absence of the kinds of controls that a fiduciary should have in place.

It could be new products … or new lines of business … or rapid growth … or acquisitions … or contractions and retrenchment … or bending over backwards to serve your clients.  It is critical to identify and remediate any instances within your organization where people are handling other peoples’ money in the absence of reasonable controls.

When OCIE staff and I look out into the industry today, one of the areas where we are beginning to conduct exams to assess the existence and effectiveness of controls is in the alternative mutual fund space.  Increasingly, advisers to mutual funds are establishing and marketing funds that are labeled “alternative” and hold non-traditional investments or engage in complex trading strategies.

Alternative funds are the bright, shiny object.  According to our Risk Analysis and Surveillance team, assets under management in alternative mutual funds rose 63% in the 12 months ending October 31, 2013, from $158 BB to $258 BB.  At least 60 alternative funds launched in 2013, joining the 64 funds launched in 2012, and leaving investors with more than 400 funds labeled “alternative” in one form or another.  At least one consultant estimates that alternative funds will comprise nearly 16% of total fund assets by 2022, up from about 3% in 2011.

There is certainly nothing wrong with alternative investments or alternative investment strategies, per se.  Many investors have benefitted from their inclusion in portfolios.

But … and it’s a big but … the use of hard to value and/or illiquid securities in an open end mutual fund, which requires daily valuation and offers daily liquidity, is fraught with risk.   This is particularly true for advisers that may have experience with alternatives in private funds but are new to implementing them within the strictures of the Investment Company Act … and for advisers that may have experience with the Investment Company Act but are new to alternatives.

In short, daily valuation and daily liquidity require a tremendous amount of control and discipline.  An adviser can invest up to 15% of an open end fund’s assets in illiquid investments.  That’s 15% at cost … not at market.  So, the percentage of a fund invested in illiquid alternatives can fluctuate above 15% … and if the market moves sharply downward … and investors start redeeming their shares en masse … the adviser must sell what it can to meet redemptions, and the percentage of the fund in illiquid investments can move even higher …

You get the picture.  Alternative funds are the bright, shiny object … but they are a sharp object.  If any of you have launched, or are considering launching, a mutual fund that uses alternative investments or strategies, I implore you to evaluate the reasonableness and effectiveness of your controls.

Conflicts of Interest

That brings us to conflicts of interest — the vice that is most difficult for the people within an organization to detect because they are often impaired by it.  OCIE staff and I see instances where otherwise honest, hard-working people are blind to the fact that they are putting their interests ahead of their clients.  We can come into such situations independently and unaffected by the same pressures and incentives as the adviser and see immediately that client money is being handled primarily for the benefit of the adviser, not the client … but the adviser will cling insistently to the notion that its heart and actions are pure.

There’s an apocryphal story about Abraham Lincoln and conflicts of interest during the Lincoln-Douglas debates.  (I remember reading the story some years ago but could not find the original source when preparing these remarks, so I cannot attest that the story is true … but it has the ring of truth.  If there are any Lincoln scholars out there who can point me to the source or confirm that it’s merely legend, I’d appreciate you letting me know.)

At any rate, as you know, Abraham Lincoln and Stephen Douglas engaged in a series of debates in 1858 on the issue of slavery.  They alternated who went first.  The leader was scheduled to speak for 60 minutes, and then the other would take the stage.  One time, Douglas led off and expounded at length on “the great good of slavery.”  When it was Lincoln’s turn to speak, Lincoln sauntered to the stage and simply held two gold coins in front of his eyes.  He said, “You know, it’s sometimes difficult for a man to see clearly with these in front of his eyes.”

Now, I am not comparing conflicts of interest in the financial services industry to the deprivations of slavery, BUT, it does make my point.  If gold was sufficient to blind peoples’ vision to the horrors and injustice of human bondage, then it will certainly suffice to cloud peoples’ vision when it comes to what investment to buy … or where to buy it … or how much to pay … or who, among several clients, gets a piece.

Conflicts are also interesting and insidious, because we see them at an individual, firm, and industry level.  One person, a close group of people, or seemingly everyone in the entire system, can incrementally, over time, through the accretion of justifications, customs, and excuses convince themselves that they are entitled to money and opportunities that fairly belong to their clients.

Take a conflict at an individual level.  In 2012, the Commission charged the founder, majority owner, and CIO of a Los Angeles based adviser[2] (that at its peak managed more than $10 BB) with allegedly unfairly allocating options trades.  The complaint alleged that over a period of more than two years, the principal allocated almost 2,500 option trades more than an hour after their execution, enabling him to routinely cherry pick winning trades and allocate them to favored accounts (including his own).  Even though the firm’s policy manual required employees “to adhere to the highest standards with respect to any potential conflicts of interest with client accounts,” here was not just a potential conflict, but an actual conflict (“Who gets these profitable trades?”) that is alleged to have been consistently resolved in favor of the principal over a 27-month period at the expense of his clients.

OCIE also sees conflicts that appear to ensnare an entire firm’s way of doing business.  In 2012, the Commission settled charges against a Portland, Oregon based firm[3] that was receiving compensation for placing its clients in certain mutual funds.  The firm, which managed nearly $2 BB (not insignificant), offered turn-key asset management services and back-office custodial support to about 60 advisers.  The firm also created and offered proprietary asset allocation models to its advisor clients.  The models used a variety of mutual funds, ETFs, and equity positions.  From time to time, the adviser would change weightings, as well as the funds used, in the models.  If the participating advisors acquiesced, then the changes were made across all of the advisor’s client accounts.

In September 2007, the firm entered into an arrangement with a broker that agreed to pay the firm a percentage of AUM invested in certain funds.  That arrangement included a scaling provision that increased the payout rate to the firm if it achieved higher levels of investment in the funds covered by the agreement.  So, of all the thousands of funds available to the firm, it had a direct financial incentive to use certain funds, and to use them in increasing amounts, in the construction of the models that it offered to its advisory clients.

This actual (not theoretical or potential) conflict of interest was not disclosed to the firm’s advisory clients or, in turn, their clients … leaving me to wonder … what was the firm thinking?  How did they get comfortable with this arrangement?  What rationalizations and justifications were required?  

Incentives and conflicts and the human mind are powerful things.  Indeed, individual and firm-level conflicts can sometimes snowball into “groupthink,” or industry-wide conflicts.

Let’s roll back the clock to 2003.  The SEC commenced a series of examinations of mutual fund distributors and advisers to ascertain whether the distributors were receiving fund brokerage — compensation via commissions on transactions on the fund’s behalf — as a form of undisclosed compensation for fund sales.  By the end of these exams, a few things were apparent: (1) there were widespread instances in the industry where advisers were directing fund brokerage to distributors to compensate them for sales of fund shares; (2) in doing so, many advisers were not meeting their fiduciary duty to shareholders to allocate trades to attempt to obtain best execution — to the contrary, they were putting their interests ahead of their shareholders’, (3) many advisers were doubly conflicted because they were using the shareholders’ money (in the form of brokerage commissions) to offset or reduce the advisers’ revenue sharing obligations, and if the advisers didn’t direct sufficient brokerage dollars to the distributors, they had to make up the difference out of their own pockets; and (4) these arrangements and payments — which were material and not in the interests of shareholders — were not adequately disclosed (or disclosed at all) to investors or to fund directors.[4]  The examinations resulted in an amendment to Rule 12b-1 in 2004 prohibiting the use of brokerage commissions to finance fund distribution, a number of enforcement actions, reimbursements of nearly $100 million and nearly $20 million in fines.  Looking back on it, it’s hard to conceive how something so malignant grew into a widespread industry practice.[5]

Can it happen again?  When we look out into the industry today, one of the areas where we are actively looking for undisclosed and unmitigated conflicts is the trend among dually registered firms to move their clients’ assets from commission-based brokerage accounts to fee-based wrap accounts that offer advice and no-commission trading for one bundled asset-based fee.

The dual-registrants we examine can pretty quickly explain why the migration to fee-based accounts is good for them.  Their commission-based business is under pressure from decreasing trade volumes and declining commission rates.  They can transform choppy, transaction based-compensation into a steadier, more reliable, and predictable revenue stream.  They no longer have to make a sale to collect a fee.

And there may be compelling and legitimate reasons why the move to a fee-based advisory account is in the best interest of the client.  The client may receive additional planning or consulting services.  The incentive to recommend unsuitable transactions to generate a fee is removed, and the client may value the option to initiate a trade on her own without having to pay a commission.

And there’s nothing wrong with earning a fee where advisers have such a valuable service to provide.  Study after study shows that the average equity investor’s return over long periods lags the broad-based equity index return by several percentage points because of behavioral biases and tendencies.  The average investor sells when she should buy, and buys when she should sell … so guiding investors and helping them employ a disciplined investment strategy can be a valuable service.

But we see instances where the value proposition to clients is not clear:

Securities are purchased, and portfolios are constructed or reconstructed, in commission-paying brokerage accounts at significant expense to the client, and then promptly transferred to a fee-based wrap account in which they could have done the same trades without paying commissions.
Accounts that consist primarily or entirely of cash or cash equivalents earning a few basis points that are transferred into a fee-based wrap account charging up to nearly 3% of AUM … and continue to remain invested in cash.
Accounts that sit in a fee-based account for years without effecting a single transaction, or effecting sell transactions only to generate proceeds to pay the asset-based fee.
I could go on … but suffice it to say the move into fee-based wrap accounts is a widespread practice.  A lot of people have jumped into the pool.  We fear that the rationalization that “everyone is doing it” may be adversely affecting peoples’ thinking about how some of these arrangements are in the best interest of their clients.

If you didn’t see it, the Commission published recently a good investor bulletin on the adverse impact of fees on investor returns over time.[6]  The stakes for investors (and advisers), and the risk that the gold coins are clouding their vision, is high.

Conclusion

Over today and tomorrow, I hope you’ll have the opportunity to examine the market and your business through the window of the many laws, rules, and regulations with which you must comply … and the window of the technological changes sweeping through the industry and your firms that you must navigate.  But I also hope you will get back to basics and spend some time thinking about the people who work in the industry and in your firms.  Most of them are good people, trying to do the right thing by their clients, colleagues, and owners.

But you will occasionally cross paths with someone who is simply trying to separate other people from their money through falsehoods or misappropriation … or who is handling other people’s money recklessly and in the absence of a true fiduciary’s reasonable controls … or whose incentives and thought process has left him (or them … and sometimes a whole bunch of them) conflicted and behaving in ways that put their selfish interests ahead of those they agreed to serve.

When attempting to identify and address these people, particularly people who are conflicted, please, on behalf of your clients, colleagues, and owners, think and act independently, rigorously, and objectively … constantly asking, “How is this product, or account, or course of conduct, in the best interest of our clients, who have given us their money, and whose interests we have agreed to put ahead of our own?”

And if and when you can’t get a square answer to that question, that you can easily understand and explain to others, you’ve done it!  You’ve identified who’s peeing in the pool.

Thank you, and have a great conference!


[1]       In the Matter of GW & Wade, LLC, Release No. 3706 (Oct. 28, 2013), available at: http://www.sec.gov/litigation/admin/2013/ia-3706.pdf.

[2]       SEC v. Aletheia Research and Management, Inc. and Peter J. Eichler, Jr., United States District Court for the Central District of California, Civil Action No. 12-cv-10692-JFW-(RZx), available at: http://www.sec.gov/litigation/complaints/2012/comp22573.pdf.

[3]       In the Matter of Focus Point Solutions, Inc. et al., Release No. 3458 (Sept. 6, 2012), available at: http://www.sec.gov/litigation/admin/2012/ia-3458.pdf.

[4]       See, e.g., In re Massachusetts Fin. Services Co., Advisers Act Release No. 2224 (Mar. 31, 2004), available at: http://www.sec.gov/litigation/admin/ia-2224.htm; see also, e.g., In re PA Fund Management LLC, PEA Capital LLC, AND PA Distributors LLC, Exchange Act Release No. 50384, (Sept. 15, 2004), available at: http://www.sec.gov/litigation/admin/34-50384.pdf.

[5]       “Pressures to distribute fund shares (or to avoid making payments for distribution out of their own assets) have caused advisers to direct more fund brokerage (or brokerage dollars) to selling brokers. The directed brokerage has been assigned explicit values, recorded, and traded as part of increasingly intricate arrangements by which fund advisers barter fund brokerage for sales efforts.”  SEC Release Amending Rule 12b-1, available at: http://www.sec.gov/rules/final/ic-26591.htm.

[6]       “Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio,” dated February 19, 2014, available at: http://investor.gov/news-alerts/investor-bulletins/investor-bulletin-how-fees-expenses-affect-your-investment-portfolio.

Tuesday, March 25, 2014

CFTC ORDERS MORGAN STANLEY CAPITAL GROUP TO PAY $200,000 PENALTY

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Morgan Stanley Capital Group Inc. to Pay $200,000 Penalty for Violating Soybean Meal Futures Speculative Position Limits

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that Morgan Stanley Capital Group Inc. (MSCGI) agreed to pay a $200,000 civil monetary penalty to settle CFTC charges that it exceeded speculative position limits in soybean meal futures contracts trading on the Chicago Board of Trade (CBOT).

The CFTC Order finds that, beginning on January 14, 2013, MSCGI held in its house accounts net long positions in the CBOT soybean meal futures contract in excess of the all-months speculative position limit of 6,500 contracts established by the CFTC. The Order further finds that, on January 15, 2013, MSCGI decreased its net long position in CBOT soybean meal futures, but its position still exceeded the soybean all-months position limit. On January 16, 2013, MSCGI reduced its position below the CBOT soybean meal position limit, according to the CFTC Order.

In addition to imposing the $200,000 civil monetary penalty, the CFTC Order requires MSGCI to cease and desist from further violations of Section 4a(b)(2) of the Commodity Exchange Act and CFTC Regulation 150.2, as charged.

CFTC Division of Enforcement staff members responsible for this action are Karin N. Roth, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

Monday, March 24, 2014

STOCKBROKER, MANAGING CLERK AT LAW FIRM CHARGED WITH INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a stockbroker and a managing clerk at a law firm with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.

The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.

“Law firms are sanctuaries for the confidential treatment of client information, and this scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  “We are continuing to combat serial insider trading schemes, particularly by law firm employees and other professionals who are entrusted with extremely sensitive market-moving information.”

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the insider trading scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks.  When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt.  Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked.  As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius.  Eydelman expressed similar concern about Sirius’ struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm.  Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, “Nice trade.”  The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a “thank you” for the information.  Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro’s behalf based on confidential information that he planned to pass him in the future.

According to the SEC’s complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities.  Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction.  Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired.  Metro also conveyed the approximate price of the transaction and the approximate announcement date.  The middleman then communicated to Eydelman that they should meet.  Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction.  Eydelman watched the middleman chew or eat the tip to destroy the evidence.  Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.

The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company.  He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense.  The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.

“People often try to cover their insider trading tracks by using middlemen, destroying evidence, and creating phony documents.  They should learn that sham cover stories simply don’t work and won’t deter us from finding their schemes,” said Robert A. Cohen, co-deputy chief of the SEC Enforcement Division’s Market Abuse Unit.

According to the SEC’s complaint, Eydelman also traded on inside information in the accounts of more than 50 of his brokerage customers.  Eydelman earned substantial commissions as a result of this trading, and received bonuses from his employers based on his performance driven in large part by the profits garnered through the insider trading scheme.  The middleman’s agreement with Metro resulted in more than $168,000 being apportioned to Metro as his share of profits from the insider trading scheme in addition to his profits from personally trading in advance of at least two transactions.

The SEC’s complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933.  The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Jason Burt and Carolyn Welshhans in the Market Abuse Unit.  John Rymas, Mathew Wong, Daniel Koster, and Leigh Barrett assisted with the investigation.  The case was supervised by Mr. Hawke and Mr. Cohen.  The SEC’s litigation will be led by Stephan Schlegelmilch and Bridget Fitzpatrick.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

Friday, March 21, 2014

LAW FIRM, OTHERS CHARGED IN $5.6 MILLION FOR ROELS IN INSIDER TRADING SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Law Firm Managing Clerk and Stockbroker in $5.6 Million Insider Trading Scheme

The Securities and Exchange Commission today charged a managing clerk at a law firm and a stockbroker with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.

The SEC alleges that Steven Metro and Vladimir Eydelman were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, a managing clerk at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm's computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met with his stockbroker, Eydelman, near the clock at the information booth in Grand Central Station. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. Eydelman bolstered his unlawful profits with commissions from those trades. The middleman allocated a portion of his ill-gotten profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.

In a parallel action, the U.S. Attorney's Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.

According to the SEC's complaint filed in U.S. District Court for the District of New Jersey, the scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks. When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt. Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked. As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius. Eydelman expressed similar concern about Sirius' struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm. Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, "Nice trade." The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a "thank you" for the information. Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro's behalf based on confidential information that he planned to pass him in the future.

According to the SEC's complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction. Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired. Metro also conveyed the approximate price of the transaction and the approximate announcement date. The middleman then communicated to Eydelman that they should meet. Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction. Eydelman watched the middleman chew or eat the tip to destroy the evidence. Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.

The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company. He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.

The SEC's complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by Jason Burt and Carolyn Welshhans in the Market Abuse Unit. John Rymas, Mathew Wong, Daniel Koster, and Leigh Barrett assisted with the investigation. The case was supervised by Mr. Hawke and Mr. Cohen. The SEC's litigation will be led by Stephan Schlegelmilch and Bridget Fitzpatrick. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

Thursday, March 20, 2014

KEYNOTE ADDRESS AT INVESTMENT COMPANY INSTITUTE 2014 MUTUAL FUNDS AND INVESTMENT MANAGEMENT CONFERENCE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SPEECH

Keynote Address at the Investment Company Institute 2014 Mutual Funds and Investment Management Conference

Craig M. Lewis, Chief Economist and Director,
Division of Economic and Risk Analysis
Orlando, FL

March 18, 2014

Encouraging Economic Discourse

Thank you for inviting me here today to deliver the keynote address at this important conference.  I am particularly pleased to be sharing this honor with Norm Champ, the Director of the Division of Investment Management.  As I will touch on today, my Division’s work with him and his staff exemplifies the type of detailed and in-depth economic thinking that I believe currently is – and should continue to be – a hallmark of the SEC’s approach to rulemaking.  Before I go further, however, let me remind you that the remarks I make today are my own and do not necessarily reflect the views of the Commission, Commissioners, or of SEC staff.[1]

The Impact of the Guidance

Two years ago this month – in a memorandum dated March 16, 2012 to be exact – my Division and the Office of the General Counsel laid out what we believed to be best practices in performing economic analysis in support of Commission rulemaking.  That memorandum, now publicly available and entitled Current Guidance on Economic Analysis in SEC Rulemaking – known as “the Guidance” for short – was, on paper at least, limited in its scope.  At its base, the Guidance does just two things.  First, it lays out the basic principles underlying a robust and transparent economic analysis in support of rulemaking.  Second, it states the fundamental precept that economists are part of the rulemaking process from the very start, and thus involved in those crucial policy discussions that occur before words are ever committed to paper.

You can see how in one version of the world the Guidance could have remained a document with a limited purpose, one that provided useful tips on structuring an economic analysis within a rule release and got DERA economists invited to more meetings.  But the Guidance of this world is much more than that.  Let me be clear:  The Commission has always considered the economic effects of its rules and policy choices.   But over the past three years that I have been Chief Economist and the last two that I have overseen my Division’s work with the Guidance, I have come to believe that this seemingly simple document has focused and enhanced how the Commission and its staff approach economic thought and utilize the expert staff of DERA.  Today I’d like to talk about the Guidance a bit, and also consider what it might mean for the public’s engagement with the Commission.

So stepping back for a moment, in case not all of you have committed the Guidance to memory, let me take a few moments to review what the document actually says.  The document emerged from a particular moment in time, when the Commission was reviewing its approach to economic analysis in rulemaking, and Congress and other constituencies were asking questions about the integration of economics into the rulemaking process.  During this time, with the passage of the Dodd-Frank Act, the Commission was responsible for promulgating a large number of rules covering a vast array of topics.  So after months and months of work, my staff and staff in the Office of the General Counsel circulated the Guidance within the Commission.

Clocking in at 17 pages, the Guidance explains the four basic elements of a robust economic analysis.  First, identify the need for the regulatory action.  Second, articulate the “baseline” against which any potential economic effects can be measured.  (In other words, describe what the world looks like today, in the absence of the regulatory action.)  Third, explain alternative approaches to reaching the regulatory goal.  And fourth, lay out the economic impacts, including the costs and benefits, of the regulatory action and its principal regulatory alternatives.  The Guidance concludes with a discussion of the integration of economic analysis into the rulemaking process.  To quote the Guidance, “[DERA] economists should be fully integrated members of the rulewriting team, and contribute to all elements of the rulewriting process.”

And that’s the recipe for an SEC economic analysis.  Sensible and straight-forward.  But just like with many recipes, there is a secret to the success of the Guidance.  A secret ingredient that isn’t listed.  As you may have heard, my time at the Commission is drawing to a close and with that comes certain freedoms.  And so I’m going to give away that secret.

The truth is that the Guidance would never have been successful without the incredible staff at the Commission.

Of course, I must acknowledge the unwavering support for these efforts that was given by former Chairmen Schapiro and Walter, as well as by Chair White.  Each of the Commissioners also has been crucial in ensuring that our rule releases have complete and even-handed economic analyses.  And senior staff from all Divisions are due credit for consistently emphasizing the importance of the Guidance.

But the people who deserve most of the credit are the staff attorneys and staff economists who do the vast majority of the work to actually implement the Guidance.  These were the individuals who, cloistered in windowless conference rooms, hammered out the narratives that added up into the high-quality economic analyses that the public eventually sees.  I would be remiss if I did not take this opportunity to publicly express my heartfelt admiration for all of those who were and continue to be part of the success of the Guidance.

As a result of all that hard work, I believe our rules are strong, robustly supported, and transparently demonstrate the unparalleled expertise of the Commission and its staff.

But now recall what I said about the scope of the Guidance.  The Guidance by its terms only applies to the development and drafting of rule releases.  While certainly central, rule drafting is only one part of what the Commission does every day.  Indeed, there are many other policy initiatives that are bubbling away on the proverbial stove.  So if the Guidance has this seemingly limited scope, why did I talk in the beginning about its importance to the agency?  To answer that question I need to speak as an economist in the language of economists.  In economic theory, there exists the concept of “spillover effects.”  Wikipedia tells us that these effects are “externalities of economic activity or processes that affect those who are not directly involved.”  In layman’s terms, it’s a secondary effect.

Well, the Guidance has had a rather significant spillover effect.  As DERA became larger and the Guidance became integrated into the rulewriting process, it became natural for DERA to similarly be included in the dozens upon dozens of other initiatives that didn’t directly involve drafting a rule.  We started proposing projects in a variety of spaces and found receptive audiences across the Commission.  To run through the myriad ways that DERA contributes to the mission of the Commission would take all of my time and probably the rest of the day and night, and if I had a captive audience I would be more than happy to regale you with myriad examples.  But in an effort to stay within my allotted time, I’ll refrain.  But I do not think that it is an overstatement to say that ‘economics’ is a common language that we speak at the Commission.  I’ve heard attorneys comfortably and correctly deploy technical terms such as “externalities,” “economic rents,” and “efficient allocation of capital.”  (Of course, I’ve also heard my economists engage in arcane legal discussions, so language barriers are dropping on both sides!)  But nothing brings greater satisfaction than hearing someone simply say, “Just call DERA.”

Of course this means that DERA has had to up its game as well.  It’s all well and good to sit in an ivory tower and talk about economic effects in the abstract.  It’s another matter entirely to translate what we studied in graduate school into grounded and meaningful work that directly responds to the hard questions the Commission faces.  There are a variety of ways in which we can do that.  Most obviously, we can contribute robust analyses to rule proposals and adoptions.  For example, in several releases we have worked very hard to describe in quantitative terms current market conditions.  We have analyzed the types and levels of capital-raising activities in both the public and private markets.  We have performed sophisticated and novel analyses of the credit default swap market.  And when analyzing the potential effect of our rules on efficiency, competition, and capital formation, we have sought to describe, in an even-handed manner, the economic trade-offs that often come with effective regulation.

But that is not the only way that DERA has demonstrated the expertise of its staff.  I oversee a vibrant culture of original research.  By engaging in research on topics of interest in the Commission, my economists stay abreast of the latest techniques and approaches to economic analysis, contribute directly to the intellectual capital of the academic community regarding complex market issues, and showcase the Commission’s sophisticated understanding of the markets it regulates.  The DERA website has many white papers, working papers, and links to published articles and I certainly hope you take a quick moment to take a look.

All of these analyses are public.  And that’s an important theme here.  Encouraging public awareness of and involvement in these economic conversations is central to DERA’s mission.  One way we are seeking to ensure public engagement throughout the rulewriting process is by, when appropriate, making analyses of particular economic issues available to the public as we refine and expand our thinking regarding a particular rule.  To illustrate our efforts in this regard, I will focus on DERA’s work to assist the Commission as it considers further money market fund reform.

The Example of Money Market Fund Reform

As many of you may know, the Commission has been considering the question of what, if any, further reforms to money market funds may be appropriate.  As I’ll describe, this process has been marked with a high level of public engagement with relevant economic issues by DERA.

For example, before any policy choices were even proposed, DERA staff authored a memorandum intended to assist in formulating a well-considered proposal.  That memo contained both a quantitative and qualitative analysis responding to certain questions regarding money market funds raised by Commissioners Aguilar, Paredes, and Gallagher.  Those questions focused on three issues:  (1) What were the determinants of investor behavior and its effect on MMF performance during the 2008 financial crisis; (2) What has been the effect of the 2010 money market fund reforms; and (3) How future reforms might affect the demand for investments in money market fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities, and states that sell their debt to money market funds.[2]  That staff memorandum, which was made public, helped inform the subsequent proposal.

Now let’s turn to the proposal itself.  The proposing release itself exemplifies the way that the Commission, rulewriters, and economists are working closely together to develop rule releases.  The proposal contained a fully integrated qualitative and quantitative analysis.  For example, the release contained an analysis of the economics of money market funds, including the combination of MMF features that may create an incentive for their shareholders to redeem shares in periods of financial stress.  The release considered the economic consequences of a floating NAV and liquidity fees and gates as well as effects on efficiency, competition, and capital formation.  And we examined the potential implications of these proposals on current investments in money market funds and on the short-term financing markets.  The analyses indicated, in part, that the economic implications of the floating NAV and liquidity fees and gates proposals depend on investors' preferences, and the attractiveness of investment alternatives.

DERA also placed additional data analyses into the comment file as part of the proposal process.  For example, one of the many issues that the Commission thought through as part of the proposal is determining the appropriate size of diversification limits in money market funds.  To assist the Commission and to inform the public, DERA staff developed memoranda that quantitatively evaluated the exposure and concentration money market fund portfolios have to the parent companies of guarantors and the parent companies of issuers.[3]  Those memos were included in the public comment file.

Moreover, as I mentioned earlier, DERA has a strong research program designed to focus on issues of importance to the Commission.  Flowing from my work on the money market fund release, I have authored a working paper entitled, The Economic Implications of Money Market Fund Capital Buffers.[4]  That working paper has more recently been included in the public comment file.  I’ll briefly describe its principal findings.  If one considers the possible rationales for employing a capital buffer, which was discussed but ultimately not proposed by the Commission, one possible objective is to protect shareholders from losses related to defaults in concentrated positions, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy.  If complete loss absorption is the objective, a substantial buffer would be required.  For example, it has been suggested that a 3% buffer would accommodate all but extremely large losses.  While such a capital buffer could make a money market fund better able to withstand significant credit events, it would be a costly mechanism from the perspective of the opportunity cost of capital because those contributing to the buffer would deploy valuable scarce resources that are being used elsewhere in presumably more valuable opportunities.

Moreover, a basic precept of financial economics is that rational investors demand compensation for bearing risk. Since a capital buffer is designed to absorb the risk associated with credit events, it follows that those investors contributing funds to a capital buffer will demand compensation for bearing this risk.  My paper illustrates that to the extent a capital buffer could insulate money market fund shareholders from adverse credit events, it would have the additional result that money market funds would only be able to offer shareholders returns that mimic those available for government securities, thus effectively converting prime money market funds into “synthetic” Treasury funds.

Looking Ahead to Further Conversations

So now the question is why does any of this matter to you?  Why should you care about a simple memorandum on economic analysis authored two years ago?  Of course, I imagine that some of you might be interested in the outcome of the Commission’s consideration of money market fund reform.  And so at a minimum I hope you can see how much significant, rigorous thought has already gone into that process.  But beyond this single rule, I challenge you to become an active part of the Commission’s engagement with economic thought.

As I have described, the Commission and staff are exploring different ways to demonstrate publicly our thinking on various issues.  We will continue to have robust and transparent analyses in rule proposals.  And importantly, we will continue, as appropriate, to put additional analyses into the comment files.  Thus, the most obvious way you can become part of this is through engagement in the comment process.  I have said this in many settings and I will say it again – I encourage you to submit comment letters that contain robust qualitative and quantitative economic analyses of our rules.

I too often read a comment letter that engages only with the policy discussions in a rule and see a missed opportunity to respond to the entirety of the rule release.  The economic analyses that are crafted as part of the Commission’s rule releases are not simple tabular accountings of costs and benefits that are after-the-fact calculations and monetizations of the effects of our rules.  They are wide-ranging, sophisticated analyses that reflect months (or maybe years) of engagement among DERA, the rulewriting staff, the Office of the General Counsel, and the Commissioners.  They animate and fully explain the Commission’s thinking on particular policy choices.  When commenters offer a rigorous and full engagement with the economic analysis – and I don’t mean with a throw-away line about benefits or burdens – it helps to ensure that the public is fully engaged in the same, economically driven discourse that is flourishing within the walls of the SEC.  And the end results of that conversation can only be positive for investors and our markets.

Again, thank you so much for having me here today.


[1]               The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees.  The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.

[2]               Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (Nov. 30, 2012), available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.

[3]           See The Exposure Money Market Funds have to the Issuers of Parents (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-20.pdf; Clarification on the memo dated July 10, 2013 entitled “The Exposure Money Market Funds Have to the Parents of Issuers” (July 25, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-38.pdf.; and The Exposure of Money Market Funds Have to the Parents of Guarantors (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-21.pdf.  

[4]               Available at http://www.sec.gov/divisions/riskfin/workingpapers/rsfi-wp2014-

Wednesday, March 19, 2014

NEW YORK STATE COMMON RETIREMENT FUND "PAY TO PLAY" DEFENDANTS SETTLE FRAUD CHARGES

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Seven Defendants Settle SEC Fraud Charges in "Pay to Play" Case Involving New York State Common Retirement Fund

On March 3, 2014, the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York, entered final judgments against seven defendants in the pending enforcement action arising from the "pay-to-play" scheme involving the New York State's Common Retirement Fund ("Common Fund"). Starting on March 19, 2009, the Commission filed securities fraud and related charges against several participants in the scheme, including Henry Morris ("Morris"), the top political advisor to former New York State Comptroller Alan Hevesi, and David Loglisci ("Loglisci"), formerly the Deputy Comptroller and the Common Fund's Chief Investment Officer. Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged seventeen defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals. The civil action had been stayed pending the outcome of the New York Attorney General's Office's parallel criminal action against some of the defendants charged by the Commission.

In addition to the judgments entered in the federal court action, administrative orders were issued by the Commission on March 10, 2014 imposing remedial sanctions against Morris, Loglisici and Julio Ramirez ("Ramirez"), a former broker who facilitated certain of the payments made to Morris. The judgments and administrative orders imposed the following relief, to which the defendants consented:

Morris, who previously pled guilty to parallel criminal charges and was sentenced to a multi-year prison term and ordered to forfeit $19 million in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). The Commission's administrative order also bars Morris from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; (ii) participating in any offering of a penny stock; and (iii) appearing or practicing before the Commission as an attorney.

Loglisci, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. The Commission's administrative order also bars Loglisci from appearing or practicing before the Commission as an attorney.

Ramirez, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $289,875 in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. In addition, the Commission's administrative order bars Ramirez from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and (ii) participating in any offering of a penny stock, subject to a right to reapply after three years.

Nosemote LLC and Pantigo Emerging LLC, two shell companies through which payments to Morris were funneled, consented to entry of a judgment in the federal court action that, like Morris, permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.

Tuscany Enterprises LLC and W Investment Strategies LLC, two entities previously associated with defendant Barrett Wissman, against whom a consent judgment was previously entered imposing permanent injunctive relief, consented to entry of a judgment that ordered them to disgorge $3,083,500 in ill-gotten gains and pay $321,272 in prejudgment interest. The judgment also permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.

The Commission's claims against defendant Saul Meyer remain pending. The Commission acknowledges the assistance and cooperation of the New York Attorney General's Office in this matter.

Tuesday, March 18, 2014

SEC ENCOURAGES ISSUERS, UNDERWRITERS OF MUNICIPAL SECURITIES TO SELF-REPORT VIOLATIONS OF SECURITIES LAWS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative.  Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”

Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.

“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”

The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement.  For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.

Monday, March 17, 2014

EMERGENCY ASSET FREEZE ACTION FILED AGAINST MICROCAP STOCK SCALPING PROMOTER

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Emergency Action Against Promoter Behind Microcap Stock Scalping Scheme, Obtains Asset Freeze

The Securities and Exchange Commission yesterday filed an emergency action ex parte against John Babikian, a promoter behind a platform of affiliated microcap stock promotion websites. The Complaint alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively "APS," to commit a brand of securities fraud known as "scalping." The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West's share price and trading volume, which Babikian exploited by unloading shares of America West's stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.

According to documents filed simultaneously with the SEC's complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC's emergency request to preserve these assets by issuing an asset freeze order.

According to the Commission's complaint, America West's stock was both low-priced and thinly traded prior to Babikian's mass dissemination of the APS e-mails promoting it. America West's trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian's e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West's share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.

The court's order, among other things, freezes Babikian's assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the Commission has taken immediate action to freeze Babikian's U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers, the Financial Industry Regulatory Authority, and OTC Markets Group Inc.

The Commission's investigation of this matter is continuing.

Sunday, March 16, 2014

Enhancing the Stability and Safety of Clearing Agencies

Enhancing the Stability and Safety of Clearing Agencies

Statement at Open Meeting Regarding Standards for Covered Clearing Agencies

Statement at Open Meeting Regarding Standards for Covered Clearing Agencies

Statement on Judge's Ruling on Sanctions for Fabrice Tourre

Statement on Judge's Ruling on Sanctions for Fabrice Tourre

SEC CHARGES FORMER ANALYST OF INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.

The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts.  They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.  Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses.

Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.

“Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His actions have cost him the privilege of working in the hedge fund industry ever again.”

According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital.  Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm.  The SEC charged Teeple and two others last year for insider trading in Foundry stock.

The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009.  Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider.  Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock.  Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.”  Dennis responded “you da man!!! I owe you.”

The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company.  Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.

The SEC’s complaint charges Dennis with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.  He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.

The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
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