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B OF A PAYING $7.65 MILLION TO SETTLE SEC CHARGES OF VIOLATING INTERNAL CONTROLS AND RECORD-KEEPING LAWS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

09/29/2014 11:25 AM EDT

The Securities and Exchange Commission today charged Bank of America Corporation with violating internal controls and recordkeeping provisions of the federal securities laws after it assumed a large portfolio of structured notes and other financial instruments as part of its acquisition of Merrill Lynch.


Bank of America agreed to pay a $7.65 million penalty to settle the charges stemming from regulatory capital overstatements that it made due to its internal accounting control deficiencies and books and records failures.


Regulatory capital refers to the amount of capital that a bank must hold under applicable rules, and it is intended to provide a buffer against adverse market conditions.  According to the SEC’s order instituting a settled administrative proceeding, at the time of its Merrill Lynch acquisition, Bank of America permissibly recorded the inherited notes at a discount to par.  Bank of America was required to realize losses on the notes as they matured because it redeemed the notes at par.  For the purposes of calculating and reporting its regulatory capital, applicable rules required Bank of America to deduct the realized losses as they occurred.


However, according to the SEC’s order, by the time 90 percent of the notes had matured as of March 31, 2014, Bank of America had yet to deduct any of the realized losses from its regulatory capital.  Therefore, with each passing fiscal quarter and fiscal year since 2009 as more and more notes matured, Bank of America overstated its regulatory capital by greater and greater amounts in its regulatory filings, eventually reaching billions of dollars.  Bank of America internally discovered the regulatory capital overstatements in mid-April 2014.  After analyzing the issue, it disclosed the overstatements in a Form 8-K filing on April 28, 2014.  Besides correcting its regulatory capital figures in its Form 8-K filing, Bank of America cooperated with SEC staff during the investigation and voluntarily took steps to remediate the insufficiencies that led to the regulatory capital overstatements.


“Bank of America self-reported its regulatory capital overstatements, remediated the issues quickly, and cooperated in our investigation,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “This penalty reflects credit for that cooperation, which allowed us to conduct our investigation efficiently and effectively.”


Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, added, “The federal securities laws require all public companies to maintain accurate books and records as well as a system of internal accounting controls sufficient to assure transactions are recorded as necessary.  Bank of America violated these legal requirements, which are specifically geared to ensure the integrity and accuracy of information that eventually is disclosed to investors.”


In addition to the $7.65 million penalty, the SEC’s order requires Bank of America to cease and desist from committing or causing any violations or future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.


The SEC’s investigation was conducted by Tony Frouge and supervised by Michael Osnato, Reid Muoio, and Daniel Michael.  The SEC appreciates the assistance of the Board of Governors of the Federal Reserve System and the Public Company Accounting Oversight Board.

OHIO RESIDENT CHARGED BY CFTC WITH COMMODITY POOL FRAUD

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Ohio Resident Glen Galemmo with Commodity Pool Fraud in a Multi-Million Dollar Ponzi Scheme

CFTC alleges that Galemmo solicited at least $116 million from pool participants and only deposited approximately $4.7 million of the funds into futures accounts

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement Complaint against Defendant Glen Galemmo of Cincinnati, Ohio, charging him with operating a multi-million dollar Ponzi scheme through his firm, QFC, LLC, from February 18, 2010 through at least July 17, 2013.

According to the Complaint filed on September 15, 2014, Galemmo, among other things, made material misrepresentations to commodity pool participants, including the misrepresentation that the pool generated returns of 17 percent to 40 percent from 2008 through 2012. The Complaint also alleges that Galemmo failed to disclose that he failed to trade pool participants’ funds from at least 2003 through May 2011. As alleged, beginning in April 2011, Galemmo only deposited approximately $4.7 million of over $116 million solicited from pool participants into futures accounts that he controlled and sustained total trading losses of approximately $1.2 million. Galemmo also allegedly withdrew or caused to be withdrawn $2.7 million in pool participants’ funds from these futures accounts.

The Complaint further alleges that Galemmo misappropriated pool participant funds for personal and other business uses, and to conceal his fraudulent scheme and misappropriation, Galemmo issued or caused to be issued false account statements to pool participants.

The Complaint also notes that on January 15, 2014, Galemmo formally pleaded guilty in a related criminal case. See United States v. Glen Galemmo, Case No. 1:13-cr-00141-HJW (S.D. Ohio).

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

CFTC Division of Enforcement staff members responsible for this case are Eugene Smith, Peter M. Haas, Dmitriy Vilenskiy, and Paul G. Hayeck.

SEC OBTAINS ASSET FREEZE AGAINST COMPANY BEHIND PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Asset Freeze Against Company in Turks and Caicos Islands Behind South Florida-Based Ponzi Scheme

09/16/2014 04:30 PM EDT

The Securities and Exchange Commission announced an emergency asset freeze against a company located in Turks and Caicos Islands in connection with its operation of a South Florida-based Ponzi scheme.

The SEC’s request for the emergency asset freeze against Abatement Corp. Holding Company Limited was granted in the U.S. District Court for the Southern District of Florida last week.  The SEC’s complaint alleged that Abatement Corp. and its now-deceased principal Joseph Laurer – who commonly used the name Dr. Josef V. Laurer – falsely promised investors safe, guaranteed returns while engaging in an offering fraud and Ponzi scheme from November 2004 until Laurer’s death on May 15, 2014.

The SEC’s complaint also names Laurer’s widow Brenda Davis and another Laurer-controlled company International Balanced Fund as relief defendants because they received investor funds.

“Unknowing investors were led to believe that Abatement Corp. and Laurer were watching out for their financial best interests when, in fact, they were callously stealing their hard-earned money,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

The SEC’s complaint alleges that Laurer, through Abatement Corp., raised more than $4.6 million from approximately 50 investors residing primarily in South Florida.  Laurer, who was a member of the City of Homestead’s General Employee Pension Board and president of the South Dade chapter of AARP, convinced investors to give him money through false claims that he would put their money into Abatement Corp.’s purported bond fund that invested in triple-A rated corporate and government bonds.  Laurer also told investors that the fund would pay a guaranteed fixed return, with no risk to principal because of insurance from either or both the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation.

The SEC alleges that by at least 2007, Laurer was operating a full-fledged Ponzi scheme and putting virtually no new investor money into securities, instead using investor funds to pay returns to investors, fund investor withdrawals, and pay personal expenses.  At the time of Laurer’s death, approximately $900,000 remained in Abatement Corp.’s bank account in the Turks and Caicos Islands, and another $82,000 remains in a domestic bank account held by International Balanced Fund.  The SEC further alleges that Laurer used investor funds for the benefit of his wife, including paying premiums with investor funds on a half million dollar life insurance policy she received upon his death.

The court order issued on September 12 temporarily freezes the assets of Abatement Corp. and International Balanced Fund and sets a hearing for September 22.  Davis agreed to a temporary freeze of certain assets of hers until November 6, pending a determination of the SEC’s claim against Davis for disgorgement.  If the SEC and Davis have not resolved the claims against her or agreed to an extension of the temporary asset freeze by October 22, then the court will hold a hearing on the SEC’s motion against Davis on October 24.

The SEC’s complaint charges Abatement Corp. with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  In addition to seeking an asset freeze, the SEC also seeks an order directing Abatement Corp. and the relief defendants to pay disgorgement with prejudgment interest and provide a sworn accounting of all proceeds received and an order directing repatriation of any funds held at any offshore bank or other financial institution not subject to the jurisdiction of the court.

The SEC’s investigation was conducted by Terence M. Tennant and Mark S. Dee under the supervision of Elisha L. Frank in the SEC’s Miami Regional Office.  They were assisted by Anson Kwong, Debra E. Williamson, George Franceschini, Nicholas A. Monaco and John C. Mattimore of the Miami office’s examination program.  The SEC’s litigation is being led by Andrew Schiff.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Turks and Caicos Islands Financial Services Commission.

LAW FIRM IT EMPLOYEE CHARGED WITH INSIDER TRADING AHEAD OF MERGER ANNOUNCEMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges IT Employee at Law Firm With Insider Trading Ahead of Merger Announcements

09/16/2014 01:40 PM EDT

The Securities and Exchange Commission today charged an employee in an international law firm’s IT department with insider trading ahead of several mergers and acquisitions involving firm clients being advised on the deals.

The SEC alleges that Dimitry Braverman, a senior information technology professional at Wilson Sonsini Goodrich & Rosati, had access to nonpublic information in the firm’s client-related databases and garnered more than $300,000 in illicit profits by trading in advance of merger announcements.  Braverman began by insider trading in accounts in his own name, but shifted course when a lawyer at his firm was charged by the SEC and criminal authorities in an entirely separate insider trading scheme.  After immediately liquidating the remaining securities that he had purchased on the basis of nonpublic information, Braverman waited about 18 months and then continued his insider trading in a brokerage account held in the name of a relative living in Russia.  His concealment efforts failed, however, when SEC investigators were able to dissect a suspicious pattern of trades and trace them back to Braverman.

“Insider trading by employees of law firms and other professional organizations is an important enforcement focus for us,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “We’ve enhanced our detection capabilities and we’re refining our investigative approaches to enable us to more easily identify those who abuse their positions of trust and confidence.”

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

According to the SEC’s complaint filed in federal court in Manhattan, Braverman began his scheme in 2010 by using nonpublic information to trade the stock or stock options in one of the companies involved in an upcoming merger or acquisition.  He typically sold his stock or exercised his options shortly after the deals were made public.  In advance of two deals, Braverman tipped his brother, who consequently made approximately $1,800 in profits.

The SEC alleges that Braverman conducted insider trading in four companies prior to the separate insider trading charges against the Wilson Sonsini lawyer in 2011, and four more companies after he opened a brokerage account in late 2012 in the name of Vitaly Pupynin, a relative who that summer had visited Braverman’s home in San Mateo, Calif., during a trip to the U.S. from Russia.  The e-mail address associated with the account was same one that Braverman had used twice before to open other brokerage accounts.  However, Braverman later created a new e-mail address using Pupynin’s first name and changed the e-mail address associated with the brokerage account to that address instead.  After Pupynin left the U.S. in October 2012, Braverman used the account to continue insider trading and profiting on the basis of material nonpublic information that he obtained.  Braverman continued his insider trading through 2013.

“Believing he could conceal his trades by hiding them in a relative’s account, Braverman abused Wilson Sonsini’s trust by repeatedly using confidential information about the law firm’s clients to reap insider trading profits,” said Joseph G. Sansone, Co-Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit.  “SEC staff methodically identified the trades and traced a trail of evidence back to Braverman, who must now face the consequences of his actions.”          

The SEC’s complaint charges Braverman with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 14(e) of the Exchange Act and Rule 14e-3.  Pupynin is named as a relief defendant in the SEC’s complaint for the purposes of recovering Braverman’s ill-gotten gains in the trading account held in Pupynin’s name.

The SEC’s investigation, which is continuing, has been conducted by Charu A. Chandrasekhar and John Rymas of the Market Abuse Unit and Jordan Baker and Thomas P. Smith Jr. of the New York Regional Office.  The case has been supervised by Mr. Hawke and Mr. Sansone, and the litigation will be led by Preethi Krishnamurthy and Ms. Chandrasekhar.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

FEED COMPANY SETTLES ACCOUNTING FRAUD CASE AND WILL PAY $18 MILLION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Tennessee-Based Animal Feed Company Agrees to Pay $18 Million to Settle Accounting Fraud Case

09/15/2014 03:35 PM EDT

The Securities and Exchange Commission today announced that a Tennessee-based animal feed company has agreed to pay back $18 million in illicit profits from an accounting fraud that resulted in an SEC enforcement action earlier this year.

AgFeed Industries, which is currently in Chapter 11 bankruptcy, was charged by the SEC in March along with top company executives for repeatedly reporting fake revenues from the company’s China operations in order to meet financial targets and prop up AgFeed’s stock price.  The company obtained illicit gains in stock offerings to investors at the inflated prices resulting from the accounting scheme.  The SEC also alleged that U.S. managers learned of the accounting fraud, but failed to take adequate steps to investigate and disclose it to investors.

The $18 million to be paid by AgFeed to settle the SEC’s case will be distributed to victims of the company’s fraud.  Details of the settlement were presented to the bankruptcy court in Delaware earlier today, and the settlement is subject to court approval by the bankruptcy court as well as the district court in Tennessee where the case was filed.

The SEC’s case continues against five former company executives and a former audit committee chair.

“This settlement holds AgFeed accountable for its accounting fraud and deprives the company of ill-gotten gains,” said Julie Lutz, Director of the SEC’s Denver Regional Office.  “This provides the most expedient and effective way to provide a substantial recovery to victims of AgFeed’s fraud while the company remains in bankruptcy.”

Under the proposed settlement, AgFeed also agrees to the entry of a permanent injunction enjoining it from the antifraud, periodic reporting, and recordkeeping and internal control provisions of the federal securities laws.  AgFeed neither admits nor denies the charges in the settlement.

The SEC’s investigation has been conducted by Michael Cates, Donna Walker, and Ian Karpel of the Denver Regional Office.  The court litigation is being led by Gregory Kasper and Nancy Ferguson while the bankruptcy aspects of the case are being handled by Alistaire Bambach, Patricia Schrage, and Neal Jacobson of the New York Regional Office.

SEC CHARGES FORMER HEDGE FUND MANAGER WITH TAKING EXCESSIVE FEES TO REMODEL HOME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a former hedge fund manager accused of fraudulently taking excess management fees from the accounts of fund clients and using their money to remodel his multi-million dollar home and buy a Porsche.

An SEC Enforcement Division investigation found that Sean C. Cooper improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm WestEnd Capital Management LLC.  While WestEnd disclosed to clients the withdrawal of annual management fees of 1.5 percent of each investor’s capital account balance, Cooper actually withdrew amounts that far exceeded that percentage.  He then transferred the money to personal bank accounts so he could spend it freely.  Cooper’s misconduct occurred for a two-year period until he ceased misappropriating fund assets when the SEC began an examination of WestEnd in April 2012.

WestEnd, which expelled Cooper and reimbursed the hedge fund once it became aware of his scheme, is being charged separately by the SEC for failing to effectively supervise him.  The firm agreed to pay a $150,000 penalty to settle the SEC’s charges.

“Cooper betrayed the hedge fund’s investors by lining his own pockets with fund assets that he had not earned,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “His fraud went undetected because WestEnd had no internal controls to limit Cooper’s ability to withdraw excessive amounts from the fund.”

According to the SEC’s order instituting a litigated administrative proceeding against Cooper, he began indiscriminately withdrawing money from the hedge fund – WestEnd Partners L.P. – in March 2010.  Cooper mischaracterized the withdrawals as management fees in the fund’s books and records, but they bore no relation to the actual amount of fees that WestEnd had earned.  The SEC Enforcement Division alleges that, in reality, Cooper simply was using the hedge fund as his own private bank.  He had sole authority to transfer money out of the fund, and there were no controls in place at the firm to prevent him from making improper withdrawals.  Once he routed the money into his personal accounts, Cooper purchased a $187,000 Porsche amid other lavish spending.

The SEC Enforcement Division alleges that Cooper, a resident of New Orleans, willfully violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.  Cooper is charged with aiding, abetting and causing WestEnd’s violations of Section 206(4) and Rule 206(4)-7.

According to the SEC’s order instituting a settled administrative proceeding against WestEnd, Cooper operated the hedge fund with little to no supervision from others at WestEnd, and he had sole discretion to calculate and wire out money that he claimed the fund owed to WestEnd.  Besides its failure to adopt any policies or procedures that imposed the necessary internal controls, WestEnd also failed to maintain several required books and records relating to its finances, including the management fees it collected from the fund.  

WestEnd consented to the entry of the order finding that it violated Sections 204, 206(4), and 207 of the Advisers Act and Rules 204-2(a)(1), (2), (6), and (7) and 206(4)-7.  The order also finds that WestEnd failed to reasonably supervise Cooper within the meaning of Section 203(e)(6) of the Advisers Act.  In addition to the financial penalty, WestEnd agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings.  The settlement also requires the firm to retain a compliance consultant.

The SEC’s investigation was conducted by Eric Brooks and Erin E. Schneider of the Asset Management Unit in the San Francisco Regional Office.  The SEC’s litigation against Cooper will be led by Sheila O’Callaghan and Mr. Brooks.  The SEC examination that led to the investigation was conducted by Ed Haddad, John Chee, Karah To, and Arturo Hurtado of the San Francisco office’s investment adviser/investment company examination program.

SEC CHARGES HIGH FREQUENCY TRADING FIRM WITH VIOLATING NET CAPITAL RULE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

09/17/2014 10:00 AM EDT

The Securities and Exchange Commission charged a New York-based high frequency trading firm with violating the net capital rule that requires all broker-dealers to maintain minimum levels of net liquid assets or net capital.  The firm’s former chief operating officer is charged with causing the extensive violations.

An SEC investigation found that Latour Trading LLC operated without maintaining its required minimum net capital on 19 of 24 reporting dates during a two-year period, and the firm missed the mark by large amounts ranging from $2 million to $28 million.  During this period, Latour’s trading at times accounted for as much as 9 percent of the trading volume in equity securities for the entire U.S. market.

To settle the SEC’s charges, Latour agreed to pay a $16 million penalty, the largest ever for violations of the net capital rule.  The previous high was $400,000 in an enforcement action in 2004.  Nicolas Niquet, Latour’s chief operating officer when the series of violations began, agreed to pay a $150,000 penalty to settle the charges against him.

“This record sanction reflects the seriousness of Latour’s violations of the net capital rule, which is a critical broker-dealer financial responsibility requirement,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “We also will aggressively pursue executives who cause the violations.”

According to the SEC’s order instituting a settled administrative proceeding, a crucial step for a broker-dealer when calculating its net capital is to take percentage deductions referred to as “haircuts” from the firm’s proprietary securities and other positions.  The purpose of these haircut deductions as prescribed in the net capital rule is to account for the market risk inherent in a firm’s positions and create a buffer of liquidity to protect against other risks associated with the securities business.  A failure to calculate proper haircuts can inflate a broker-dealer’s net capital.

The SEC’s order finds that Latour repeatedly miscalculated its net capital amounts in 2010 and 2011 by failing to make proper haircut deductions from the market value of its proprietary securities positions and other positions.  Latour incorrectly used hypothetical positions that the firm did not actually hold to create hedges and capitalize qualified stock baskets.  Latour also used inaccurate index composition data for certain international exchange-traded funds that the firm traded.  Latour’s combined use of hypothetical positions and inaccurate index composition data resulted in haircuts that were generally far too low when calculating the firm’s net capital.  Latour also failed to calculate minimum capital charges on all of its futures positions, and excluded some positions from taking any haircut at all due to a computer programming error.  Niquet designed the processing code that facilitated Latour’s haircut calculations and caused its net capital violations.

According to the SEC’s order, Latour’s net capital violations also resulted in violations of the books and records and financial reporting provisions of the federal securities laws.

The SEC’s order finds that Latour violated Sections 15(c)(3) and 17(a)(1) of the Securities Exchange Act of 1934 and Rules 15c3-1, 17a-3(a)(11), 17a-4(f), and 17a-5(a).  The order finds that Niquet caused Latour’s violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-1, 17a-3(a)(11), and 17a-5(a).  The order censures Latour.  Without admitting or denying the findings, Latour and Niquet agreed to pay the financial penalties as well as cease and desist from committing or causing any future violations of the securities laws.

The SEC’s investigation, which is continuing, has been conducted by Leslie Kazon, Alexander Vasilescu, Osman Nawaz, and Christopher Mele.  The examination of the firm that led to the investigation was conducted by Ashok Ginde, Tamara Heller, Ilan Felix, Ronald Sukhu, and Jennifer Grumbrecht.  The Enforcement Division collaborated with the SEC’s Division of Trading and Markets as well as Ms. Heller, Mr. Ginde, and Michael Fioribello of the National Exam Program.

SEC CHARGES 8 INDIVIDUALS FOR ROLES IN PUMP-AND-DUMP SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a ring of eight individuals for their roles in an alleged pump-and-dump scheme involving a penny stock company based in California that has repeatedly changed its name and purported line of business over the past several years.

The SEC alleges that the scheme was orchestrated by Izak Zirk de Maison, who was named Izak Zirk Engelbrecht before taking the surname of his wife Angelique de Maison.  Both de Maisons are charged by the SEC in the case along with others enlisted to buy, sell, or promote stock in the company now called Gepco Ltd.  Zirk de Maison installed some of these associates as officers and directors of Gepco while he secretly ran the company behind the scenes.  Collectively, they amassed large blocks of shares of Gepco common stock while the de Maisons manipulated the market to create the appearance of genuine investor demand, allowing an associate to sell his stock at inflated prices to make hundreds of thousands of dollars in illicit profits.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Ohio and the Cleveland Division of the Federal Bureau of Investigation today announced criminal charges against Zirk de Maison.

The SEC has obtained an emergency court order to freeze the assets of the de Maisons and others who profited illegally through the alleged scheme.

“Microcap fraud is a scourge on our markets, and we are aggressively pursuing scurrilous penny stock schemers who make their living by preying upon innocent investors,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Zirk de Maison has secretly controlled the shell company now known as Gepco since its incorporation in 2008 under a different name.  During the next five years, he caused the company to enter into a number of reverse mergers and its reported business evolved from equipment leasing to prepaid stored value cards related to electronic devices until the company eventually became known as WikiFamilies and claimed to own and operate a social media website.  The company name changed to Gepco in 2013, and after a failed attempt to merge it into a private mixed martial arts company, de Maison created his own private company purportedly in the high-end diamond business and merged Gepco into it.

“Zirk de Maison concocted an array of reverse mergers and company name changes on his way to gaining control of the vast majority of Gepco stock in order to conduct a multi-faceted manipulation scheme,” said Amelia A. Cottrell, an Associate Director in the SEC’s New York Regional Office.  “To help avoid the pitfalls of microcap fraud, it’s important to check the histories of companies and determine their legitimacy before deciding whether to invest in them.”

The SEC alleges that the de Maisons, who reside in Redlands, Calif., brought at least six others into the fold to coordinate various components of the scheme.  They each are charged in the SEC’s complaint:

Jason Cope of Gates Mills, Ohio, is a longtime associate of Zirk de Maison and has a past record of securities fraud with a court judgment against him in a previous SEC enforcement action.  On Cope’s behalf, Louis Mastromatteo of Bay Village, Ohio, allegedly dumped more than 2.5 million shares of Gepco stock through a nominee into the public market for hundreds of thousands of dollars in illicit profits that were kicked back to Cope.

Trish Malone, who lives in Santee, Calif., serves as Gepco’s president, CFO, and secretary.  She allegedly used Gepco to issue stock to Zirk de Maison and others so that they could conduct two unregistered and illegal distributions of the securities.

Peter Voutsas, who lives in Santa Monica, Calif., and owns a jewelry store in Beverly Hills, serves as Gepco’s CEO and chief investment officer even though Zirk de Maison runs the company behind the scenes.  Along with Angelique de Maison, Voutsas allegedly made a materially misleading statement about Gepco to the public while the de Maisons manipulated the market for Gepco’s stock.
Ronald Loshin of San Anselmo, Calif., served as Gepco’s chief creative officer and allegedly failed to make required regulatory filings to report his transactions in Gepco stock as an insider.  Furthermore, Loshin enabled de Maison to deceptively hide his own trading by allowing him to use a brokerage account held in Loshin’s name.

Kieran Kuhn of Port Washington, N.Y., allegedly promoted Gepco stock through his firm Small Cap Resource Corp. and inflated the stock value to help the scheme succeed.  He then conducted one of the unregistered and illegal distributions of Gepco-related securities for Zirk de Maison’s benefit.
According to the SEC’s complaint, Zirk de Maison exchanged e-mails and text messages with many of his co-conspirators as they openly discussed coordinating their promotional activities and manipulative trading in Gepco’s stock in order to create a false impression of market activity.  They stood to earn exponentially more illicit profits given that they continue to beneficially own tens of millions of shares of Gepco stock, so the SEC today suspended trading in Gepco securities in order to prevent any further manipulation or dumping of the stock.

The SEC’s complaint, which additionally charges several companies connected to the scheme, alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 9 and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks a permanent injunction and disgorgement of ill-gotten gains along with prejudgment interest, financial penalties, and penny stock bars.  The SEC also seeks officer-and-director bars against the de Maisons and Malone.

The SEC’s investigation, which is continuing, has been conducted by John O. Enright, James E. Burt IV, Thomas Feretic, and Leslie Kazon.  The case was supervised by Amelia A. Cottrell, and the litigation will be led by Howard Fischer and Mr. Enright.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Ohio, the Cleveland Division of the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

SEC FILES CIVIL ACTIONS AGAINST PERSONS INVOLVED IN BOILER ROOM SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Ddbo Consulting, Inc., Calpacific Equity Group, LLC, and Principals with Fraud and Registration Violations

The Securities and Exchange Commission (Commission) announced that on July 24, 2014, it filed civil actions in U.S. District Court against individuals and companies behind a boiler room scheme that hyped a company whose new technology was purportedly to be used in the Super Bowl. The SEC previously charged the operators of the scheme based in the South Florida and Los Angeles areas. Seniors and other investors were pressured into purchasing stock in Thought Development Inc. (TDI), an unaffiliated Miami Beach-based company that stated its signature invention is a laser-line system that generates a green line on a football field for a first-down marker visible not only on television but also to players, officials, and fans in the stadium.

The SEC charged four executives who helped make the scheme possible and three companies they operate - DDBO Consulting, Inc., DBBG Consulting, Inc., and CalPacific Equity Group, LLC. Approximately $1.7 million was raised through these companies from more than 110 investors who were told that an initial public offering (IPO) in TDI was imminent and that their money would be used to develop the ground-breaking technology. Instead, the SEC alleges that the IPO was not forthcoming as promised, and at least 50 percent of the offering proceeds were merely retained by these companies or paid to sales agents through undisclosed commissions and fees. Certain executives, their sales agents and their companies lured investors by misrepresenting that TDI's technology was about to be used by the National Football League (NFL). One investor even made an additional $75,000 investment on top of an initial $2,500 investment after being told that NFL Commissioner Roger Goodell purchased TDI's technology for use in the 2013 Super Bowl. In fact, there was no such arrangement.

In addition to the their companies, the SEC's complaints charge brothers Dean R. Baker of Coral Springs, Fla., and Daniel R. Baker of Valley Village, Calif., along with Bret A. Grove of Delray Beach, Fla., and Demosthenes Dritsas of Newhall, Calif. The SEC's complaints allege violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The defendants all agreed to settle the SEC's charges. In parallel actions, the U.S. Attorney's Office for the Central District of California announced criminal charges against Daniel Baker and Dritsas, and the U.S. Attorney's Office for the Southern District of Florida announced criminal charges against Dean Baker and Grove.

Statement at Open Meeting Regarding Money Market Fund Reform

Statement at Open Meeting Regarding Money Market Fund Reform

Remarks to the Practicing Law Institute, Hedge Fund Management Seminar 2014

Remarks to the Practising Law Institute, Hedge Fund Management Seminar 2014

SEC CHARGES OF ACCOUNTING AND DISCLOSURE FRAUD AGAINST DELAWARE BANK HOLDING COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

September 11, 2014

The Securities and Exchange Commission announced accounting and disclosure fraud charges against a Delaware-based bank holding company for failing to report the true volume of its loans at least 90 days past due as they substantially increased in number during the financial crisis.

An SEC investigation found that as the real estate market declined in 2009 and 2010 and its construction loans began to mature without repayment or completion of the underlying project, Wilmington Trust Company did not renew, extend, or take other appropriate action for 90 days or more on a material amount of its matured loans.  Instead of fully and accurately disclosing the amount of these accruing loans as required by accounting guidance, Wilmington Trust improperly excluded the matured loans from its public financial reporting.

Wilmington Trust, which was acquired by M&T Bank in May 2011, has agreed to pay $18.5 million in disgorgement and prejudgment interest to settle the SEC’s charges.

“Improper application of accounting principles by Wilmington Trust had the effect of misleading investors about a key credit quality metric during a time of significant upheaval and financial distress for the bank,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors must know when banking institutions are unable to recover on material amounts of outstanding loans, which means those institutions must carefully adhere to relevant accounting rules.”

Andrew M. Calamari, Director of the SEC’s New York Regional Office, added, “By failing to fully disclose the actual volume of accruing loans past due 90 days or more, Wilmington Trust prevented investors from learning the full scope of the troubles in its commercial real estate loan portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Wilmington Trust omitted from its disclosures in the third and fourth quarters of 2009 approximately $338.9 million and $330.2 million, respectively, in matured loans 90 days or more past due.  Instead, it disclosed just $38.7 million in such loans for the third quarter and only $30.6 million in its annual report following the fourth quarter.  Wilmington Trust also materially misreported this category of loans in the first and second quarters of 2010.  Furthermore, Wilmington Trust failed to accurately disclose during the second half of 2009 the amount of non-accruing loans in its portfolio, and materially understated its loan loss provision and allowance for loan losses during this same period.

Wilmington Trust consented to the entry of the order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  In addition to the monetary sanctions, Wilmington Trust agreed to cease and desist from committing or causing any violations and any future violations of these provisions.

The SEC’s investigation, which is continuing, has been conducted by Margaret Spillane, James Addison, and Michael Osnato of the New York Regional Office.  The SEC appreciates the assistance of the U. S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

WHAT WE HAVE HERE IS A FAILURE TO SUPERVISE*

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Zulutrade Inc. to Pay $150,000 Penalty and Disgorge Profits of $80,000 to Settle Charges of Failure to Supervise Activities Relating to Its Business as a CFTC Registrant

Zulutrade is a CFTC-registered Introducing Broker located in Piraeus, Greece

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Zulutrade, Inc., a CFTC-registered Introducing Broker located in Piraeus, Greece, for failure to diligently supervise activities relating to its business as a CFTC registrant. Specifically, the CFTC’s Order found that for at least a three-year period from October 2010 to October 2013, Zulutrade failed to follow its procedures for screening for accountholders from the U.S. Department of the Treasury’s Office of Foreign Assets Control’s (OFAC) targeted countries. The Order requires Zulutrade to pay a $150,000 civil monetary penalty and disgorge $80,000 in commissions and fees it earned from accounts that were related to the supervisory failure.

OFAC administers and enforces economic and trade sanctions against targeted foreign countries based on U.S. foreign policy and national security goals. U.S. persons and entities are generally prohibited from doing business with persons and entities from OFAC targeted countries. During the relevant period, Zulutrade had a procedure to screen for potential accountholders from OFAC targeted countries. That procedure provided that Zulutrade could delegate implementation of OFAC screening to third party service providers or agents provided Zulutrade had a written agreement with the service provider outlining the third party’s responsibilities, and that Zulutrade would actively monitor the delegation to assure that the procedures are being conducted in an effective manner.

However, Zulutrade failed to ensure that it had written agreements with all such entities. Consequently, Zulutrade opened approximately 400 accounts for accountholders from OFAC targeted countries (primarily Iran, Sudan, and Syria). All of the accounts opened for accountholders from targeted countries were from service providers with which Zulutrade did not have written agreements.

CFTC Division of Enforcement staff members responsible for this matter are Jennifer Diamond, David Terrell, Joy McCormack, Elizabeth M. Streit, Scott R. Williamson, and Rosemary Hollinger. The Division worked closely with staff from OFAC in this matter and wishes to thank OFAC for its assistance. OFAC has concluded a settlement with Zulutrade arising out of the same pattern of conduct.
*Aluding to the quote "What we have here is a failure to communicate," from the movie "Cool Hand Luke."

CFTC REPORTS OTC DERIVATIVES REGULATORS ISSUES REPORT TO G-20

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

OTC Derivatives Regulators Issue Report to the G20

Washington, DC — The Over-the-Counter (OTC) Derivatives Regulators Group (ODRG), which is made up of authorities with responsibility for the regulation of OTC derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland, and the United States, issued a report today that provides an update to the G20 on further progress in resolving OTC derivatives cross-border implementation issues and identifies a cross-border issue that may call for legislative change.

The ODRG provided an update regarding two areas in which it is working to develop approaches to address cross-border issues: (i) potential gaps and duplications in the treatment of branches and affiliates; and (ii) treatment of organized trading platforms and implementation of the G20 trading commitment.

The report also addressed four areas in which it was working to implement understandings reached previously: (i) equivalence and substituted compliance; (ii) clearing determinations; (iii) risk mitigation techniques for non-centrally cleared derivatives transactions (margin); and (iv) data in trade repositories and barriers to reporting to trade repositories.

The ODRG anticipates that it will submit its next report in preparation for the G20 Leaders Summit in November 2014.

MORTGAGE-BACKED SECURITIES DEALER SENTENCED TO PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Connecticut-Based Broker-Dealer Representative Sentenced to Two Years in Prison for Defrauding Investors in Mortgage-Backed Securities

SEC's Enforcement Division Institutes Proceedings to Determine Whether to Bar Him From Securities Industry

The Securities and Exchange Commission announced today that Jesse Litvak, a former managing director of Jefferies & Co., Inc. (Jefferies), a New York-based broker-dealer, was sentenced to 24 months in prison followed by three years of supervised release and a fine of $1,750,000 following his conviction on 10 counts of securities fraud, one count of Troubled Asset Relief Program (TARP) fraud, and four counts of making false statements. The judgment of conviction was entered against Litvak on July 25, 2014. Based on that judgment, the SEC's Enforcement Division instituted administrative proceedings against Litvak on September 2, 2014 to determine what, if any, remedial action is appropriate in the public interest against Litvak. Such action could include a bar from the securities industry.

The SEC had also charged Litvak separately in a civil action with making misrepresentations and engaging in misleading conduct while he sold mortgage-backed securities (MBS) in the wake of the financial crisis. The Commission's civil action against Litvak remains pending. In its civil complaint filed in District Court for the District of Connecticut on January 28, 2013, the SEC alleged that Litvak, a senior trader on Jefferies' MBS Desk who worked at Jefferies' office in Stamford, Connecticut, bought and sold MBS from and to his customers. According to the SEC's civil complaint, on numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, those customers about the price at which Jefferies had purchased the MBS before selling it to another customer and the amount of his firm's compensation for arranging the trades. The SEC alleged that, on some occasions, Litvak also misled his customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies' inventory. According to the SEC's civil complaint, Litvak also misled customers about how much money they were paying in compensation to Jefferies. The customers included investment funds established by the United States government in the wake of the financial crisis to help support the market for MBS as well as other investment funds, including hedge funds.

The SEC's complaint charged Litvak with violating the antifraud provisions of the federal securities laws, particularly Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The SEC's action has been stayed pending the outcome of the criminal proceedings.

CFTC CHAIRMAN MASSAD'S TESITMONY BEFORE U.S. SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

FROM:  COMMODITY FUTURES TRADING COMMISSION

Testimony of Chairman Timothy Massad before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Washington, DC

September 9, 2014

Thank you Chairman Johnson, Ranking Member Crapo and members of the Committee. I am pleased to testify before you today on behalf of the Commission. This is my first official hearing as Chairman of the CFTC. It is truly an honor to serve as Chairman at this important time.

I met and spoke with several members of this Committee during the confirmation process, and I appreciated hearing your thoughts and suggestions during that time. I look forward to this Committee’s input going forward.

During the last five years, we have made substantial progress in recovering from the worst financial crisis since the Great Depression. The Dodd-Frank Act was a comprehensive response, and much has been accomplished in implementing it. The CFTC has largely completed the rulemaking stage of Dodd-Frank implementation. However, much work remains to finish the job Congress has given us.

I look forward to working together with you, as well as my colleagues at the CFTC and others around the globe to ensure that our futures, swaps and options markets remain the most efficient and competitive in the world, and to protect the integrity of the markets.

The Significance of Derivatives Market Oversight

Very few Americans participate directly in the derivatives markets. Yet these markets profoundly affect the prices we all pay for food, energy, and most other goods and services we buy each day. They enable farmers to lock in a price for their crops, utility companies or airlines to hedge the costs of fuel, and auto companies or soda bottlers to know what aluminum will cost. They enable exporters to manage fluctuations in foreign currencies, and businesses of all types to lock in their borrowing costs. In the simplest terms, derivatives enable market participants to manage risk.

In normal times, these markets create substantial, but largely unseen, benefits for American families. During the financial crisis, however, they created just the opposite. It was during the financial crisis that many Americans first heard the word derivatives. That was because over-the-counter swaps – a large, unregulated part of these otherwise strong markets – accelerated and intensified the crisis like gasoline poured on a fire. The government was then required to take actions that today still stagger the imagination: for example, largely because of excessive swap risk, the government committed $182 billion to prevent the collapse of a single company – AIG – because its failure at that time, in those circumstances, could have caused our economy to fall into another Great Depression.

It is hard for most Americans to fathom how this could have happened. While derivatives were just one of many things that caused or contributed to the crisis, the structure of some of these products created significant risk in an economic downturn. In addition, the extensive, bilateral transactions between our largest banks and other institutions meant that trouble at one institution could cascade quickly through the financial system like a waterfall. And, the opaque nature of this market meant that regulators did not know what was going on or who was at risk.

Responding to the Crisis – Enactment and Implementation of the Dodd-Frank Act

The lessons of this tragedy were not lost on the leaders of the United States and the G-20 nations. They committed to bring the over-the-counter swaps market out of the shadows. They agreed to do four basic things: require regulatory oversight of the major market players; require clearing of standardized transactions through regulated clearinghouses known as central counterparties or CCPs; require more transparent trading of standardized transactions; and require regular reporting so that we have an accurate picture of what is going on in this market.

In the United States, these commitments were set forth in Title VII of the Dodd-Frank Act. Responsibility for implementing these commitments was given primarily to the CFTC. I would like to review where we stand in implementing the regulatory framework passed by Congress to bring the over-the-counter swaps market out of the shadows.

Oversight

The first of the major directives Congress gave to the CFTC was to create a framework for the registration and regulation of swap dealers and major swap participants. The agency has done so. As of August 2014, there are 104 swap dealers and two major swap participants provisionally registered with the CFTC.

We have adopted rules requiring strong risk management. We will also be making periodic examinations to assess risk and compliance. The new framework requires registered swap dealers and major swap participants to comply with various business conduct requirements. These include strong standards for documentation and confirmation of transactions, as well as dispute resolution processes. They include requirements to reduce risk of multiple transactions through what is known as portfolio reconciliation and portfolio compression. In addition, swap dealers are required to make sure their counterparties are eligible to enter into swaps, and to make appropriate disclosures to those counterparties of risks and conflicts of interest.

As directed by Congress, we have worked with the SEC, other US regulators, and our international counterparts to establish this framework. We will continue to work with them to achieve as much consistency as possible. We will also look to make sure these rules work to achieve their objectives, and fine-tune them as needed where they do not.

Clearing

A second commitment of Dodd-Frank was to require clearing of standardized transactions at central counterparties. The use of CCPs in financial markets is commonplace and has been around for over one hundred years. The idea is simple: if many participants are trading standardized products on a regular basis, the tangled, hidden web created by thousands of private two-way trades can be replaced with a more transparent and orderly structure, like the spokes of a wheel, with the CCP at the center interacting with other market participants. The CCP monitors the overall risk and positions of each participant.

Clearing does not eliminate the risk that a counterparty to a trade will default, but it provides us various means to mitigate that risk. As the value of positions change, margin can be collected efficiently to ensure counterparties are able to fulfill their obligations to each other. And if a counterparty does default, there are tools available to transfer or unwind positions and protect other market participants. To work well, active, ongoing oversight is critical. We must be vigilant to ensure that CCPs are operated safely and deliver the benefits they are designed to provide.

The CFTC was the first of the G-20 nations’ regulators to implement clearing mandates. We have required clearing for interest rate swaps (IRS) denominated in US dollars, Euros, Pounds and Yen, as well as credit default swaps (CDS) on certain North American and European indices. Based on CFTC analysis of data reported to swap data repositories, as of August 2014, measured by notional value, 60% of all outstanding transactions were cleared. This is compared to estimates by the International Swaps and Derivatives Association (ISDA) of only 16% in December 2007. With regard to index CDS, most new transactions are being cleared – 85% of notional value during the month of August.

Our rules for clearing swaps were patterned after the successful regulatory framework we have had in place for many years in the futures market. We do not require that clearing take place in the United States, even if the swap is in U.S. dollars and between U.S. persons. But we do require that clearing occurs through registered CCPs that meet certain standards – a comprehensive set of core principles that ensures each clearinghouse is appropriately managing the risk of its members, and monitoring its members for compliance with important rules.

Fourteen CCPs are registered with the CFTC as derivatives clearing organizations (DCOs) either for swaps, futures, or both. Five of those are organized outside of the United States, including three in Europe which have been registered since 2001 (LCH.Clearnet Ltd.); 2010 (ICE Clear Europe Ltd); and 2013 (LCH.Clearnet SA). In some cases, a majority of the trades cleared on these European-based DCOs are for U.S. persons.

At the same time, the CFTC has specifically exempted most commercial end-users from the clearing mandate. We have been sensitive to Congress’s directive that these entities, which were not responsible for the crisis and rely on derivatives primarily to hedge commercial risks, should not bear undue burdens in accessing these markets to hedge their risk.

Of course, central clearing by itself is not a panacea. CCPs do not eliminate the risks inherent in the swaps market. We must therefore be vigilant. We must do all we can to ensure that CCPs have financial resources, risk management systems, settlement procedures, and all the necessary standards and safeguards consistent with the core principles to operate in a fair, transparent and efficient manner. We must also make sure that CCP contingency planning is sufficient.

Trading

The third area for reform under Dodd-Frank was to require more transparent trading of standardized products. In the Dodd-Frank Act, Congress provided that certain swaps must be traded on a swap execution facility (SEF) or other regulated exchange. The Dodd Frank Act defined a SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.” The trading requirement was designed to facilitate a more open, transparent and competitive marketplace, benefiting commercial end-users seeking to lock in a price or hedge risk.

The CFTC finalized its rules for SEFs in June 2013. Twenty-two SEFs have temporarily registered with the CFTC, and two applications are pending. These SEFs are diverse, but each will be required to operate in accordance with the same core principles. These core principles provide a framework that includes obligations to establish and enforce rules, as well as policies and procedures that enable transparent and efficient trading. SEFs must make trading information publicly available, put into place system safeguards, and maintain financial, operational and managerial resources to discharge their responsibilities.

Trading on SEFs began in October of last year. Beginning February 2014, specified interest rate swaps and credit default swaps must be traded on a SEF or other regulated exchange. Notional value executed on SEFs has generally been in excess of $1.5 trillion weekly.

It is important to remember that trading of swaps on SEFs is still in its infancy. SEFs are still developing best practices under the new regulatory regime. The new technologies that SEF trading requires are likewise being refined. Additionally, other jurisdictions have not yet implemented trading mandates, which has slowed the development of cross-border platforms. There will be issues as SEF trading continues to mature. We will need to work through these to achieve fully the goals of efficiency and transparency SEFs are meant to provide.

Data Reporting

The fourth Dodd-Frank reform commitment was to require ongoing reporting of swap activity. Having rules that require oversight, clearing, and transparent trading is not enough. We must have an accurate, ongoing picture of what is going on in the marketplace to achieve greater transparency and to address potential systemic risk.

Title VII of the Dodd-Frank Act assigns the responsibility for collecting and maintaining swap data to swap data repositories (SDRs), a new type of entity necessitated by these reforms. All swaps, whether cleared or uncleared, must be reported to SDRs. There are currently four SDRs that are provisionally registered with the CFTC.

The collection and public dissemination of swap data by SDRs helps regulators and the public. It provides regulators with information that can facilitate informed oversight and surveillance of the market and implementation of our statutory responsibilities. Dissemination, especially in real-time, also provides the public with information that can contribute to price discovery and market efficiency.

While we have accomplished a lot, much work remains. The task of collecting and analyzing data concerning this marketplace requires intensely collaborative and technical work by industry and the agency’s staff. Going forward, it must continue to be one of our chief priorities.

There are three general areas of activity. We must have data reporting rules and standards that are specific and clear, and that are harmonized as much as possible across jurisdictions. The CFTC is leading the international effort in this area. It is an enormous task that will take time. We must also make sure the SDRs collect, maintain, and publicly disseminate data in the manner that supports effective market oversight and transparency. Finally, market participants must live up to their reporting obligations. Ultimately, they bear the responsibility to make sure that the data is accurate and reported promptly.

Our Agenda Going Forward

The progress I have outlined reflects the fact that the CFTC has finished almost all of the rules required by Congress in the Dodd-Frank Act to regulate the over-the-counter swaps market. This was a difficult task, and required tremendous effort and commitment. My predecessor, Gary Gensler, deserves substantial credit for leading the agency in implementing these reforms so quickly. All of the Commissioners contributed valuable insight and deserve our thanks. But no group deserves more credit than the hardworking professional staff of the agency. It was an extraordinary effort. I want to publicly acknowledge and thank them for their contributions.

The next phase requires no less effort. I want to highlight several areas going forward that are critical to realizing the benefits Congress had in mind when it adopted this new framework and to minimizing any unintended consequences.

Finishing and Fine-tuning Dodd-Frank Regulations

First, as markets develop and we gain experience with the new Dodd-Frank regulations, I anticipate we will, from time to time, make some adjustments and changes. This is to be expected in the case of a reform effort as significant as this one. These are markets that grew to be global in nature without any regulation, and the effort to bring them out of the shadows is a substantial change. It is particularly difficult to anticipate with certainty how market participants will respond and how markets will evolve. At this juncture, I do not believe wholesale changes are needed, but some clarifications and improvements are likely to be considered.

In fine-tuning existing rules, and in finishing the remaining rules that Congress has required us to implement, we must make sure that commercial businesses like farmers, ranchers, manufacturers, and other companies can continue to use these markets effectively. Congress rightly recognized that these entities stand in a different position compared to financial firms. We must make sure the new rules do not cause inappropriate burdens or unintended consequences for them. We hope to act on a new proposed rule for margin for uncleared swaps in the near future. On position limits, we have asked for and received substantial public comment, including through roundtables and face-to-face meetings. This input has been very helpful enabling us to calibrate the rules to achieve the goals of reducing risk and improving the market without imposing unnecessary burdens or causing unintended consequences.

Cross-Border Regulation of the Swaps Market

A second key area is working with our international counterparts to build a strong global regulatory framework. To succeed in accomplishing the goals set out in the G-20 commitments and embodied in the Dodd-Frank Act, global regulators must work together to harmonize their rules and supervision to the greatest extent possible. Fundamentally, this is because the markets that the CFTC is charged to regulate are truly global. What happens in New York, Chicago, or Kansas City is inextricably interconnected with events in London, Hong Kong and Tokyo. The lessons of the financial crisis remind us how easy it is for risks embedded in overseas derivatives transactions to flow back into the United States. And Congress directed us to address the fact that activities abroad can result in importation of risk into the United States.

This is a challenging task. Although the G-20 nations have agreed on basic principles for regulating over-the-counter derivatives, there can be many differences in the details. While many sectors of the financial industry are global in nature, applicable laws and rules typically are not. For example, no one would expect that the laws which govern the selling of securities, or the securing of bank loans, should be exactly the same in all the G-20 nations. While our goal should be harmonization, we must remember that regulation occurs through individual jurisdictions, each informed by its own legal traditions and regulatory philosophies.

Our challenge is to achieve as consistent a framework as possible while not lowering our standards simply to reach agreement, thus triggering a “race to the bottom.” We must also minimize opportunities for regulatory arbitrage, where business moves to locales where the rules are weaker or not yet in place.

The CFTC’s adoption of regulations for systemically important CCPs is a useful model for success. Our rules were designed to meet the international standards for the risk management of systemically important CCPs, as evidenced by the Principles for Financial Market Infrastructures (PFMIs) published by the Bank of International Settlement’s Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, to which the Commission was a key contributor.

Since the day I joined the CFTC, I have been focused on cross-border issues. In my first month in office I went to Europe twice to meet with my fellow regulators, and I have been engaged in ongoing dialogue with them.

Robust Compliance and Enforcement

A third major area is having robust compliance and enforcement activities. It is not enough to have rules on the books. We must be sure that market participants comply with the rules and fulfill their obligations. That is why, for example, several weeks ago we fined a large swap dealer for failing to abide by our data reporting rules.

A strong compliance and enforcement function is vital to maintaining public confidence in our markets. This is critical to the participation of the many Americans who depend on the futures and swaps markets – whether they are farmers, oil producers or exporters. And even though most Americans do not participate directly in the futures and swaps markets, our enforcement efforts can help rebuild and maintain public confidence and trust in our financial markets.

We must aggressively pursue wrongdoers, big or small, and vigorously fulfill our responsibility to enforce the regulations governing these markets. Our pursuit of those who have manipulated benchmarks like LIBOR, a key global benchmark underlying a wide variety of financial products and transactions, is a prime example of this principle in practice. So is our successful litigation against Parnon Energy and Arcadia, two energy companies that systematically manipulated crude oil markets to realize illicit profits.

Dodd-Frank provided the Commission with a number of new statutory tools to ensure the integrity of our markets, and we have moved aggressively to incorporate these tools into our enforcement efforts. Our new anti-manipulation authority gives us enhanced ability to go after fraud-based manipulation of our markets. We have put that authority to good use in a host of cases and investigations, including actions against Hunter Wise and a number of smaller firms for perpetrating precious metals scams. Congress also gave us new authority to attack specific practices that unscrupulous market participants use to distort the markets, such as "spoofing," where a party enters a bid or offer with the intent to move the market price, but not to consummate a transaction. We used this new anti-spoofing provision to successfully prosecute Panther Energy for its spoofing practices in our energy markets.

Going forward, protecting market integrity will continue to be one of our key priorities. Market participants should understand that we will use all the tools at our disposal to do so.

Information Technology and Data Management

It is also vital that the CFTC have up to date information technology systems. Handling massive amounts of swaps data and effective market oversight both depend on the agency having up-to-date technology resources, and the staff – including analysts and economists, as well as IT and data management professionals – to make use of them. The financial markets today are driven by sophisticated use of technology, and the CFTC cannot effectively oversee these markets unless it can keep up.

Cyber-security is a related area where we must remain vigilant. As required by Congress, we have implemented new requirements related to exchanges’ cyber-security and system safeguard programs. The CFTC conducts periodic examinations that include review of cyber-security programs put in place by key market participants, and there is much more we would like to do in this area. Going forward, the Commission’s examination expertise will need to be expanded to keep up with emerging risks in information security, especially in the area of cyber-security.

Resources and Budget

All of these tasks represent the significant increases in responsibility that came with Dodd Frank. They require resources. But the CFTC does not have the resources to fulfill these tasks as well as all the responsibilities it had – and still has – prior to the passage of Dodd Frank. The CFTC is lucky to have a dedicated and resourceful professional staff. Although I have been at the agency a relatively short time, I am already impressed by how much this small group is able to accomplish. Still, as good as they are, the reality of our current budget is evident.

I recognize that there are many important priorities that Congress must consider in the budgeting process. I appreciate the importance of being as efficient as possible. I have also encouraged our staff to be creative in thinking about how we can best use our limited resources to accomplish our responsibilities. We will keep the Teddy Roosevelt adage in mind, that we will do what we can, with what we have, where we are.

But I hope to work with members of Congress to address our budget constraints. Our current financial resources limit our ability to fulfill our responsibilities in a way that most Americans would expect. The simple fact is that Congress’s mandate to oversee the swaps market in addition to the futures and options markets requires significant resources beyond those the agency has previously been allocated. Without additional resources, our markets cannot be as well supervised; participants cannot be as well protected; market transparency and efficiency cannot be as fully achieved.

Specifically, in the absence of additional resources, the CFTC will be limited in its ability to:

Perform adequate examinations of market intermediaries, including systemically important DCOs and the approximately 100 swap dealers that have registered with the Commission under the new regulatory framework required by Dodd-Frank.

Use swaps data to address risk in a marketplace that that has become largely automated, and to develop a meaningful regulatory program that is required to promote price transparency and market integrity.

Conduct effective daily surveillance to identify the buildup of risks in the financial system, including for example, review of CFTC registrant activity reports submitted by Commodity Pool Operators and banking entities, as well as to monitor compliance with rules regarding prohibitions and restrictions on proprietary trading.

Investigate and prosecute major cases involving threats to market integrity and customer harm and strengthen enforcement activities targeted at disruptive trading practices and other misconduct of registered entities such as precious metals schemes and other forms of market manipulation.
Conclusion

A few core principles must motivate our work in implementing Dodd-Frank. The first is that we must never forget the cost to American families of the financial crisis, and we must do all we can to address the causes of that crisis in a responsible way. The second is that the United States has the best financial markets in the world. They are the strongest, most dynamic, most innovative, most competitive and transparent. They have been a significant engine of our economic growth and prosperity. Our work should strengthen our markets and enhance those qualities. We must be careful not to create unnecessary burdens on the dynamic and innovative capacity of our markets. I believe the CFTC's work can accomplish these objectives. We have made important progress but there is still much to do. I look forward to working with the members of this Committee and my fellow regulators on these challenges.

Thank you again for inviting me today. I look forward to your questions.

Last Updated: September 9, 2014

SEC CHARGES RESIDENTIAL REAL ESTATE DEVELOPERS WITH INSIDER TRADING BASED ON TIP FROM ACCOUNTANT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged two residential real estate developers with insider trading in the stock of a restaurant company based on a tip from their accountant in advance of a tender offer announcement.

The SEC alleges that accountant Donald S. Toth disregarded his fiduciary duty to a client when he illicitly purchased stock in O'Charley's Inc. — which operates or franchises restaurants under the brands O'Charley's, Ninety Nine Restaurant, and Stoney River Legendary Steaks - after the client revealed to him in a tax-planning meeting that Fidelity National Financial was planning to purchase the company. Toth contacted his financial advisor within the hour after this meeting with the O'Charley's board member and began making plans to purchase 5,000 shares of O'Charley's stock. Toth also tipped two other clients, including Blair G. Schlossberg. Schlossberg tipped his business partner Moshe Manoah and they jointly invested in O'Charley's stock using a brokerage account held in the name of Manoah's wife.

According to the SEC's complaint filed in federal court in Tampa, Fla. against Schlossberg and Manoah, when the tender offer was publicly announced approximately two months later, the price of O'Charley's stock closed 42 percent higher than the previous trading day. Schlossberg and Manoah's insider trading activity garnered illegal profits of more than $90,000.

The two have agreed to pay a combined total of more than $190,000 to settle the SEC's charges.

Schlossberg and Manoah are charged with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. Without admitting or denying the allegations, they consented to the entry of judgments permanently enjoining them from violating these provisions of the securities laws. The settlements are subject to court approval.

Schlossberg, who lives in Holmes Beach, Fla., agreed to pay disgorgement of $46,358.50 in trading profits plus prejudgment interest of $2,981.02 and a penalty of $46,358.50 for a total of $95,698.02.

Manoah, who lives in Davie, Fla., agreed to pay disgorgement of $46,358.50 in trading profits plus prejudgment interest of $2,981.02 and a penalty of $46,358.50 for a total of $95,698.02.

The SEC's investigation was conducted by Elizabeth P. Skola with assistance from Aaron W. Lipson and Robert Schroeder in the Atlanta Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

CFTC ORDERS ORDERS PRECIOUS METALS TRADING COMPAMY AND OWNERS TO PAY $2.9 MILLION

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders S.J. Woods, Inc., Peter Blanco, and Paul Proscia to Pay over $2.9 Million in Restitution and Permanently Bars Them from the Commodities Industry

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) issued an Order filing and settling charges against S.J. Woods, Inc. (SJW) and its owners, Peter Blanco and Paul Proscia (together Respondents), involving their participation in illegal, off-exchange financed transactions in precious metals with retail customers. The Order requires Respondents jointly to pay restitution totaling $2,971,992.23 to their customers, imposes permanent trading bans against them, and prohibits them from violating the Commodity Exchange Act, as charged. SJW’s principal place of business is Holbrook, New York. Blanco is a resident of Brightwaters, New York, and Proscia is a resident of Sayville, New York.

The Illegal Transactions

The CFTC Order finds that from July 2011 through February 2013, Respondents solicited retail customers, generally by telephone, to buy and sell physical precious metals, such as gold and silver, in off-exchange, leveraged transactions. According to the Order, customers paid as little as 25 percent of the purchase price for the metals, and Respondents purportedly financed the remainder of the purchase price, while charging customers interest on the amount borrowed.

The CFTC Order states that financed, off-exchange transactions with retail customers have been illegal since July 16, 2011, when certain amendments of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 became effective. As explained in the Order, financed transactions in commodities with retail customers like those engaged in by Respondents must be executed on, or subject to, the rules of a CFTC-approved board of trade. Since Respondents’ transactions were done off-exchange, with customers who were not eligible contract participants, they were illegal, the Order finds.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this matter are Boaz Green, Kara Mucha, James H. Holl, III, and Rick Glaser.

SEC CHARGES MAN OF TRADING AHEAD OF NEWS ANNOUNCEMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23074 / August 26, 2014

Securities and Exchange Commission v. Michael Anthony Dupre Lucarelli, Civil Action No. 14-Civ-6933 (NRB) (S.D.N.Y.)

The U.S. Securities and Exchange Commission charged a director of market intelligence at a Manhattan-based investor relations firm with insider trading ahead of impending news announcements by more than a dozen clients. The charges were filed against Michael Anthony Dupre Lucarelli, who garnered nearly $1 million in illicit profits.

An SEC investigation and ongoing forensic analysis of Lucarelli's work computers uncovered that he repeatedly accessed clients' draft press releases stored on his firm's computer network prior to public announcements. The SEC alleges that Lucarelli, who had no legitimate work-related reason to access the draft press releases, routinely purchased stock or call options in advance of favorable news and sold short or bought put options ahead of unfavorable news.

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

According to the SEC's complaint filed in federal court in Manhattan, Lucarelli traded in securities belonging to companies that his firm was advising in advance of announcing their earnings or other significant events such as a merger or clinical drug trial result. Lucarelli began taking a position in a client's securities in the days immediately preceding the announcement, although in a few instances he began making his purchases weeks in advance. Lucarelli started divesting himself of his position immediately after the announcement in order to reap instant profits.

The SEC further alleges that Lucarelli attempted to hide his illicit behavior by lying to brokerage firms where he set up his trading accounts. Lucarelli purposely omitted listing his investor relations firm employment on account-opening applications and instead falsely stated that he was self-employed or retired.

The SEC's complaint charges Lucarelli, who lives in Manhattan, with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 14(e) of the Exchange Act and Rule 14e-3.

SEC OBTAINS FINAL JUDGEMENT IN PENNY STOCK REGISTRATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Obtains Final Consent Judgments Against Four Individuals and Certain Entity Defendants in Securities Registration Case

The Securities and Exchange Commission announced today that on August 12, 2014, the Honorable Shira A. Scheindlin of the United States District Court for the Southern District of New York approved settlements and entered final judgments against all the individual defendants, Danny Garber, Michael Manis, Kenneth Yellin, Jordan Feinstein, and certain entity defendants in SEC v. Garber et al., 12-cv-9339 (SAS) (S.D.N.Y.). The SEC's Second Amended Complaint alleges that the defendants violated Section 5 of the Securities Act of 1933, from at least 2007 through 2010, by purchasing over a billion unregistered shares in dozens of penny stock companies and reselling the shares to the investing public without complying with the registration provisions of the securities laws.

Without admitting or denying the allegations, Garber, Manis, Yellin and Feinstein have each agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act and require them to pay a $25,000 civil penalty. The final judgment against Garber also includes a permanent penny stock bar, permanently enjoins him from participating in unregistered offerings and requires him to pay disgorgement of $862,000 plus prejudgment interest of $113,000. The final judgments against Manis, Yellin and Feinstein permanently enjoin them from participating in any offering made pursuant to Rule 504 of Regulation D, require Manis to pay disgorgement of $862,000 plus prejudgment interest of $113,000, and require Yellin and Feinstein to each pay disgorgement of $314,550 plus prejudgment interest of $41,419. The entity defendants Coastal Group Holdings, Inc., the OGP Group LLC, Rio Sterling Holdings LLC, Slow Train Holdings LLC, and Spartan Group Holdings LLC have agreed to final judgments that enjoin them from any future violations of Section 5 of the Securities Act.

CFTC ORDERS MAN TO PAY $344,000 FOR ROLE IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders New York Resident Jacob N. Stein to Pay More than $344,000 in Restitution and Civil Monetary Penalty for Commodity Pool Fraud and Misappropriation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Jacob N. Stein of Hankins, New York, individually and doing business as TEPdesign, Inc., to pay restitution of $244,400 to defrauded customers and a $100,000 civil monetary penalty, for committing fraud and misappropriation in connection with a commodity pool that traded leveraged or margined off-exchange foreign currency contracts (forex). Neither Stein nor TEPdesign, Inc. has ever been registered with the CFTC.

According to the CFTC’s Order, from about January 2010 through September 2012, Stein, without registering with the CFTC as a Commodity Pool Operator, solicited and obtained approximately $524,000 from at least 17 investors (Pool Participants) to participate in a commodity pool for the purpose of trading leveraged or margined forex. Stein used approximately $83,000 of the funds solicited to trade forex, of which over $80,000 was lost in forex trading, the Order states. Instead of reporting these losses to the Pool Participants, Stein created and distributed to the Pool Participants false account statements indicating that Stein was earning profits for the Pool Participants through forex trading. The Order also finds that the remaining funds, approximately $441,000, were misappropriated by Stein to pay fabricated “profits” and returns of principal to Pool Participants and for Stein’s personal expenses, such as car payments and retail purchases. Ten Pool Participants are still owed approximately $244,400 in principal, the Order finds.

In addition to ordering restitution and imposing a civil monetary penalty, the CFTC Order also requires Stein to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and imposes permanent bans on Stein’s trading, registration, and certain other CFTC-regulated activities.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

CFTC Division of Enforcement staff members responsible for this case are Patrick Daly, Xavier Romeu-Matta, Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

SEC CHARGES HOUSTON ADVISORY FIRM WITH FRAUD FOR NOT DISCLOSING CONFLICT OF INTEREST TO CLIENTS

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges against a Houston-based investment advisory firm accused of recommending that clients invest in particular mutual funds without disclosing a key conflict of interest: the firm was in turn receiving compensation from the broker offering the funds.

An SEC Enforcement Division investigation found that Robare Group Ltd. received a percentage of every dollar that its clients invested in certain mutual funds through an undisclosed compensation agreement with the brokerage firm.  Therefore, unbeknownst to investors, Robare Group and its co-owners Mark L. Robare and Jack L. Jones Jr. had an incentive to recommend these funds to clients over other investment opportunities and generate additional revenue for the firm.  Robare Group ultimately received approximately $440,000 in such payments from the brokerage firm during an eight-year period.    

“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”

The Asset Management Unit has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers.  For example, the SEC previously charged an Oregon-based investment adviser for failing to disclose revenue sharing payments and other conflicts of interest to clients.

According to the SEC’s order instituting administrative proceedings against Robare Group and its co-owners, the firm revised its Form ADV in December 2011 to disclose the compensation agreement, but this and later disclosures falsely stated that the firm did not receive any economic benefit from a non-client for providing investment advice.  The disclosures also were inadequate because they stated that Robare Group may receive compensation from the broker when in fact the firm was definitively receiving payments.

The SEC Enforcement Division further alleges that Robare Group and the broker entered into a new agreement in late 2012 that provided similar payments.  But it wasn’t until June 2013 that the firm disclosed the conflict of interest associated with its arrangement with the broker, and even then it failed to disclose the incentive to recommend buying and holding certain mutual funds through the broker’s platform or the magnitude of the conflict.  Robare reviewed and approved the Forms ADV, and Jones reviewed and signed all but one of the filings.

The SEC’s Enforcement Division alleges that Robare Group and Robare willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and Jones aided and abetted these violations.  The Enforcement Division further alleges that Robare Group, Robare, and Jones each willfully violated Section 207 of the Advisers Act.     

The SEC’s investigation was conducted by Catherine Floyd and Barbara Gunn of the Fort Worth Regional Office along with John Farinacci.  Ms. Gunn and Mr. Farinacci are members of the Asset Management Unit.  The SEC’s litigation will be led by Janie Frank.