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

Sunday, November 30, 2014

SEC CHARGED UNREGISTERED BROKER WITH STEALING INVESTOR FUNDS IN DAY TRADING INVESTOR SCHEME

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 
11/18/2014 05:30 PM EST

The Securities and Exchange Commission today charged an unregistered broker living outside Tampa, Fla., with stealing investor funds as part of a fraudulent day trading scheme.

The SEC alleges that Albert J. Scipione and his business partner solicited investors to establish accounts at their company called Traders Café for the purposes of day trading, which entails the rapid buying and selling of stocks throughout the day in hope that the stock values continue climbing or falling for the seconds to minutes they own them so they can lock in quick profits.  Scipione touted Traders Café’s software trading platform and made a series of false misrepresentations to investors about low commissions and fees, high trading leverage, and safety of their assets.  More than $500,000 was raised from investors who were assured that funds invested with Traders Café would be segregated and used only for day trading or other specific business purposes.  However, many customers encountered technical service problems that prevented them from trading at all, and Scipione and his business partner squandered nearly all of the money in investor accounts for their personal use.  Meanwhile, Traders Café was never registered with the SEC as a broker-dealer as required under the federal securities laws.

“Scipione portrayed Traders Café as a broker-dealer for customers interested in day trading, but it became merely a depository from which he stole investor funds for himself,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

The SEC previously charged Scipione’s business partner Matthew P. Ionno, who agreed to settle the case and has been barred from the securities industry.  Financial penalties will be decided by the court at a later date.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida today announced that Scipione has pleaded guilty to criminal charges.  The U.S. Attorney’s Office previously brought a criminal case against Ionno.

According to the SEC’s complaint filed against Scipione in federal court in Tampa, customers across the country deposited approximately $367,000 with Traders Café from December 2012 to October 2013 with the intention of opening day trading accounts.  Traders Café also received approximately $150,000 from an investor who invested directly in Traders Café’s business. Customers encountered problems with Traders Café from the outset, and many of them cancelled their accounts and requested refunds of their remaining account balances.  Scipione and Ionno tried to cover up their fraudulent scheme by offering excuses and delays for why customers could not get refunds.  Eventually less than $1,200 remained in Traders Café’s accounts primarily due to the repeated misuse of investor funds by Scipione and Ionno.

The SEC’s complaint against Scipione alleges that he violated Section 17(a) of the Securities Act of 1933 as well as Section 15(a) and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The SEC seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctive relief to enjoin Scipione from future violations of the federal securities laws.

The SEC’s investigation was conducted by D. Corey Lawson and Tonya T. Tullis, and the SEC’s litigation is being led by Christopher E. Martin.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Middle District of Florida, the Federal Bureau of Investigation, and the Florida Office of Financial Regulation.

Friday, November 28, 2014

SEC CHARGES CANADIAN CO. IN ALLEGED PUMP-AND-DUMP SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION PUMP-AND-DUMP, SECURITIES FRAUD
Litigation Release No. 23135 / November 19, 2014

Securities and Exchange Commission v. Forum National Investments Ltd., et al., Civil Action No. 5:14-cv-02376 (C.D. Cal., filed November 18, 2014)

SEC Charges Canadian Life Settlement Company in Pump-And-Dump Scheme

On November 18, 2014, the Securities and Exchange Commission ("Commission") charged a Canadian life settlement company, its CEO, and three other individuals for engaging in a pump-and-dump scheme that misled investors and artificially inflated the price of the company's stock. According to the Commission's complaint, filed in the United States District Court for the Central District of California, Daniel Clozza, the CEO of Forum National Investments Ltd., and one of his associates, Robert Logan Dunn, hired two penny stock promoters, William Anguka and Alex Ghaznawi, to create and publish promotional materials about Forum during the summer of 2012. These materials, which Anguka and Ghaznawi posted on the internet under fake and assumed names, made false and misleading statements about Forum, fabricated quotes and "buy" recommendations from stock analysts who did not cover the company, and claimed that a fictitious entity named "Welsson Financial Media" funded the promotion. At the same time, the complaint alleges, Clozza caused Forum to issue press releases that made false and misleading statements about the company, including the launch and success of a non-existent bond offering. The defendants' scheme caused significant increases in the trading volume and price of Forum stock - from $0.36 per share on a volume of 15,000 shares to $1.90 on a volume of 254,000 shares - from which Clozza's relatives and associates, including Dunn, profited by selling more than one million shares in the public markets.

The Commission's complaint alleges that Forum, Clozza, Dunn, Anguka, and Ghaznawi violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, that Anguka and Ghaznawi violated Section 17(b) of the Securities Act of 1933 and that Dunn aided and abetted those violations, and that Forum violated Section 13(a) of the Securities Act and Rule 13a-1 thereunder. The complaint seeks permanent injunctions and financial penalties against each defendant, disgorgement with prejudgment interest and penny stock bars against the individual defendants, and an officer-and-director bar against Clozza.

Also on November 18, the Commission also instituted public administrative proceedings against Forum pursuant to Section 12(j) of the Exchange Act in order to determine whether to suspend or revoke the registration of the company's securities as a result of its failure to comply with the reporting provisions of the Exchange Act.

Wednesday, November 26, 2014

SEC SUSPENDS TRADING IN EBOLA RELATED COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
11/20/2014 10:30 AM EST

The Securities and Exchange Commission suspended trading in four companies that claim to be developing products or services in response to the Ebola outbreak, citing a lack of publicly available information about the companies’ operations.

The SEC simultaneously issued an investor alert warning about the potential for fraud in microcap companies purportedly involved in Ebola prevention, testing, or treatment, noting that scam artists often exploit the latest crisis in the news cycle to lure investors into supposedly promising investment opportunities.

The SEC Enforcement Division and its Microcap Fraud Task Force work to proactively identify microcap companies that are publicly disseminating information that appears inadequate or potentially inaccurate.  The SEC has authority to issue trading suspensions against such companies.  The companies whose trading was suspended today are Patchogue, N.Y.-based Bravo Enterprises Ltd., Monrovia, Calif.-based Immunotech Laboratories Inc., Toronto-based Myriad Interactive Media Inc., and Anaheim, Calif.-based Wholehealth Products Inc.

“We move quickly to protect investors when we see thinly-traded stocks being promoted with questionable information that make them ripe for pump-and-dump schemes,” said Elisha Frank, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “Fraudsters are constantly exploiting issues of public concern to tout a penny stock company supposedly in the business of addressing the latest crisis.”

Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.  More information about the trading suspension process is available in an SEC investor bulletin on the topic.

According to the SEC’s investor alert, similar to how natural disasters such as Hurricane Katrina and Hurricane Sandy have given rise to investment schemes for companies purportedly involved in cleanup efforts, con artists may perpetrate investment scams related to Ebola prevention or treatment efforts.  The alert suggests that investors be wary about promises or guarantees of high investment returns with little or no risk, avoid solicitations with pressure to “buy RIGHT NOW,” and beware of unsolicited investment offers through social media.

Tuesday, November 25, 2014

CFTC DMO RULE ENFORCEMENT REVIEWS ISSUED FOR CBOT, COMEX, CME, NYME

FROM:  U.S.COMMODITY FUTURES TRADING COMMISSION 
November 24, 2014

CFTC DMO Issues Rule Enforcement Reviews of the Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc. and New York Mercantile Exchange, Inc.

Washington, DC — The U.S. Commodity Futures Trading Commission’s Division of Market Oversight (Division) today issued three separate rule enforcement reviews of certain Designated Contract Markets (DCMs).

The Division’s reviews assessed compliance with Commodity Exchange Act Core Principles for DCMs and related regulations with respect to: (1) the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) audit trail program; (2) the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX) trade practice surveillance program; and (3) the CBOT, CME, COMEX, and NYMEX (collectively, the Exchanges) disciplinary program.

Overall, the Division found the Exchanges’ respective programs to be generally in compliance with the assessed DCM core principles and Commission regulations. However, the Division’s reviews identified certain deficiencies – areas where an exchange is not in compliance with a Commission regulation and must take corrective action, and recommendations – areas where an exchange should improve its compliance program. The deficiencies and recommendations identified in the reviews are summarized below.

CBOT and CME Audit Trail Program

Deficiencies:

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must ensure that their program for reviewing front-end audit trail data is effective and the reviews are conducted in a timely manner.

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must develop a program to at least annually review and enforce the assignment process of user IDs to automated trading models, algorithms, programs, and system in order to enforce the CBOT and CME’s user ID (Tag 50) policy.

• As required by Commission regulation § 38.553(b), CBOT and CME must ensure that the minimum summary fine amount for electronic trading audit trail deficiencies on each exchange is “meaningful” and “sufficient to deter recidivist behavior.” This minimum summary fine amount should be published in the Exchanges’ rules.

NYMEX and COMEX Trade Practice Surveillance Program

Deficiency:

• As required by Commission regulation § 38.158(b), NYMEX and COMEX must complete investigations in one year or less, absent mitigating circumstances.

Recommendations:

• NYMEX and COMEX should implement a system which would enable Market Regulation staff to efficiently track connections between related trade practice matters (complaints, research files, and cases) and thereby identify the source of time delays.

• NYMEX and COMEX should continue to develop strategies to detect spoofing.

• NYMEX and COMEX should reduce the time they take to complete pre-investigative trade practice matters (research files and complaints).

CBOT, CME, COMEX, and NYMEX Disciplinary Program

Deficiency:

• As required by Commission regulation § 38.701, the Exchanges must maintain sufficient enforcement staff to promptly prosecute possible rule violations.

Recommendation:

• The Exchanges should take appropriate measures to ensure that internal deliberations do not interfere with the prompt resolution of disciplinary matters.

Copies of the reports are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21st Street N.W., Washington, DC 20581, 202-418-5080, or by accessing the Commission’s website at www.cftc.gov.

Last Updated: November 24, 2014

Monday, November 24, 2014

SEC CHARGED PENNY STOCK CO. CEO IN ALLEGED PUMP-AND-DUMP SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23134 / November 17, 2014
Securities and Exchange Commission v. Joseph A. Noel, Civil Action No. 3:14-CV-5054
SEC Charges San Francisco-Based Penny Stock Company CEO for Defrauding Investors in Pump-And-Dump Scheme

The Securities and Exchange Commission today charged a San Francisco-based penny stock company CEO with defrauding investors by issuing false and misleading press releases portraying his purported marketing and infomercial company as a successful venture in order to drive the stock price up while he covertly sold millions of shares into the public market for more than $300,000 in illicit profits.

According to the SEC's complaint filed against Joseph A. Noel in federal district court in San Francisco, the deceptive press releases about his company YesDTC Holdings touted exclusive distribution rights, licensing agreements, and certain products purportedly certified by the government. Noel's promotional campaigns based on such false information caused a spike in YesDTC's thinly-traded stock and enabled him to dump millions of his own shares for a profit. To conceal his sales, Noel sold the shares through a company he created in his teenage daughter's name without disclosing as required that he was actually selling the shares.

The SEC also suspended trading in YesDTC stock today, and instituted an administrative proceeding to revoke its registration.

The SEC's complaint charges Noel with violating antifraud and registration provisions of the federal securities laws. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest and a financial penalty as well as a permanent injunction. The SEC also is seeking an officer-and-director bar and a penny stock bar against Noel.

The SEC's investigation was conducted by Heather E. Marlow and David Berman of the San Francisco Regional Office, and the case is supervised by Tracy Davis. The SEC's litigation will be led by Aaron Arnzen and Ms. Marlow. The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of California and the Federal Bureau of Investigation.

Sunday, November 23, 2014

Statement at Open Meeting on Regulation Systems Compliance and Integrity

Statement at Open Meeting on Regulation Systems Compliance and Integrity

Statement at Open Meeting Regarding Regulation SCI

Statement at Open Meeting Regarding Regulation SCI

SEC CHARGES REAL ESTATE COMPANY OWNER WITH "OFFERING FRAUD" AND MISUSE OF INVESTOR FUNDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged the owner of a Maryland-based real estate company with conducting an offering fraud and spending investor money on such personal expenses as his mortgage, country club dues, and season tickets to the Baltimore Ravens.  The agency also charged a former stockbroker for participating in the scheme.

The SEC alleges that Wilfred T. Azar III sold investors purported bonds in his company Empire Corporation, which he touted as a successful and profitable business with the resources to pay promised annual returns of 10 percent.  Along with Joseph A. Giordano, Azar and his company raised more than $7 million by making these and other false and misleading statements exaggerating the safety and low risk of the bonds.  However, Empire Corporation was functionally insolvent in reality, and despite saying investor funds would be used for various corporate purposes, Azar used the money to pay personal expenses as well as thousands of dollars in compensation to Giordano for participating in the fraud.  Giordano also steered a mutual fund that he managed into purchasing the bonds despite knowing the company was nearly broke.  The scheme collapsed when they were unable to recruit new investors to fund Empire Corporation’s operations and repay existing investors, who did not receive their promised returns and lost substantially all of their investments.

In a parallel case, the U.S. Attorney’s Office for the District of Maryland today announced criminal charges against Azar.

“As alleged in our complaint, investors in Empire Corporation were fraudulently sold worthless bonds after Azar and Giordano misled them entirely about the profitability of the company,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.  “Giordano also violated the trust of his customers by entangling them in what he knew was a bad investment.”

The SEC’s complaint filed in federal court in Baltimore charges Empire Corporation, Azar, and Giordano with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint also charges Giordano with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 as well as Section 34(b) of the Investment Company Act of 1940.  The SEC seeks disgorgement plus prejudgment interest and penalties as well as permanent injunctions.  The agency is seeking an officer-and-director bar against Azar.

The SEC’s investigation, which is continuing, has been conducted by Michael F. McGraw and Dustin Ruta and supervised by Brendan P. McGlynn in the Philadelphia Regional Office.  The SEC’s litigation will be led by Nuriye C. Uygur.  The investigation followed an examination conducted by Andrea Dittert, Peter J. DiMartino, Kevin P. Logue, and Hope A. Santo of the Philadelphia office under the supervision of Frank A. Thomas.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Maryland.

Thursday, November 20, 2014

CFTC COMMISSIONER GIANCARLO MAKES ANTI-REFORM REMARKS BEFORE U.S. CHAMBER OF COMMERCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Remarks of CFTC Commissioner J. Christopher Giancarlo before the U.S. Chamber of Commerce

Re-Balancing Reform: Principles for U.S. Financial Market Regulation In Service to the American Economy

November 20, 2014

Introduction

Thank you for that kind introduction and for the opportunity to speak to you today. It is an honor to address the U.S. Chamber of Commerce. I have enormous admiration and respect for this institution.

Let me start by saying that my remarks reflect my own views and do not necessarily constitute the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow CFTC Commissioners, or the hardworking CFTC staff.

Just a few years ago in the aftermath of the financial crisis and the rollout of the TARP program, the U.S. Chamber stood strong and dauntless in defense of American free enterprise and capital markets. The U.S. Chamber held the line though surrounded by fierce critics of American finance and capital formation. The U.S. Chamber’s CEO, Tom Donahue, took a very simple but symbolic action when he hung one word in giant letters from the rafters of this building: J-O-B-S.

By posting the word that is at the heart of what really matters to American voters, their jobs, Donahue was reminding our political leadership that, despite all the challenges it faced, the litmus test by which it would be judged would be job creation. Donahue knew that Americans – just as they always have been – were ready once again to work hard to bring our economy back from the brink provided barriers were not placed in their way.

Donahue was also reminding us that free enterprise remains the best path to job creation. Free enterprise and democratic capitalism remain the backbone of the American republic. They have always been and will always be the route to American prosperity.

Sadly, the job creation prowess of democratic capitalism is still baffling to many who should know better. One well-known, perennial Presidential candidate recently said, “Don’t let anybody tell you that corporations and businesses create jobs.”1 That may be true, under the current Administration, which has made private sector hiring much more expensive and burdensome.

Yet, this political statement is flatly incorrect as a matter of economic science. It is emblematic of a fundamental misunderstanding of basic economics from college campuses, to Hollywood, to Washington, DC. I believe it is the duty of all of us to help the public better understand the benefits of capital markets and the American industries they support. It is our duty to promote, rather than denigrate, financial markets for their health and service to the American economy. They are the key to American economic growth and job creation. We cannot have a prosperous U.S. economy without them.

The 2008 Financial Crisis: There is no question that the 2008 financial crisis presented an enormous challenge for American capital markets. In September of that year, Lehman Brothers filed for Chapter 11 bankruptcy protection. Lehman’s failure was a consequence of the bursting of a double bubble of housing prices and consumer credit as lenders anticipated a fall in home values and the inability of homeowners to repay mortgages. A full “run on the bank” ensued with rapidly falling asset values, preventing U.S. and foreign lenders from meeting their cash obligations. The 2008 financial crisis was devastating for far too many American businesses and families.

I remember the crisis very well. I was a senior executive of a U.S. wholesale brokerage firm that operated trading platforms for over-the-counter swaps transactions. I remember the panic in the eyes of bank executives and the tremor in the voices of financial regulators.

The experience confirmed my support, which has not waivered, for the core tenets of Title VII of the Dodd-Frank Act. I support more central counterparty clearing of swaps and reporting trades to centralized data repositories. I also support sensible regulation of swaps intermediaries to raise trading standards and bring swaps markets in line with regulation of intermediaries in other capital markets, like equities and futures.

However, I am also a firm believer that vibrant, open, and competitive markets are essential to a strong U.S. economy. Proper regulatory oversight can go hand-in-hand with open and competitive markets. But, if excessive regulation artificially increases the cost of risk management and stymies the legitimate use of derivatives, the overall economy will suffer – and American jobs will be lost.

My experience in the financial crisis also started me down a long path that led me to government service at the CFTC. I am one of three new commissioners sworn in this past spring. Chairman Timothy Massad, Commissioner Sharon Bowen, and I all come from law firm backgrounds outside of the futures industry. Along with existing Commissioner Mark Wetjen, I believe we bring to the Commission something of the collegial spirit of partners in a law firm. We may not always agree, but I am hopeful that we will engage in less of the internal warfare that characterized the Commission over the recent past. I am cautiously optimistic that we can change the tone at the Commission.

In fact, I believe the Commission has the opportunity to begin a new era in federal regulation. Over the past few years, the federal government has had a crisis-driven, headlong rush into law and regulation reaching deeply into the everyday affairs of all Americans, from the process of obtaining a home mortgage to visits with family doctors. As I will explain, this regulatory reach even extends to the price of cereal on the grocery shelves. Some of these regulatory actions serve a useful purpose. Others are unworkable. Some impede economic growth.

What is needed is a more thoughtful, steady, and less hectic approach to regulation. What is needed is a more careful weighing of the balance between regulatory benefit and economic cost. What is needed is greater respect for the impact of Washington’s mandates on the lives of everyday Americans. I believe the CFTC can take this more measured approach to regulation of the derivatives markets.

In this regard, today, I would like to lay out a set of principles that I will follow as I serve on the Commission. I believe these principles are well suited for financial market regulation in a new, more balanced regulatory era.

Six Principles for Financial Market Regulation

Regulation must:

1. Not Restrain the U.S. Economy;

2. Not Threaten American Jobs;

3. Be Impartial and Balanced;

4. Be Competent;

5. Be Accountable; and

6. Not Create the Next Crisis.

Principle One: Regulation Must Not Restrain the U.S. Economy.

In Washington recently, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde, dubbed current economic conditions as the “New Mediocre.”2 That is actually a mild description for what is the worst U.S. recovery from any recession since the Great Depression. U.S. economic growth has averaged 2 percent in the New Mediocre, compared to 3.3 percent for most of the period since post-World War II.3

The U.S. has recovered from eleven other recessions before the current recovery. In those recessions, the economy took a little over a year to recover to the level of gross domestic product it had prior to the recession.4 But, in the current New Mediocre, it has us taken four years, to reach that point.5

Federal regulations have become a major drag on the U.S. economy. Regulations now cost the U.S. more than 12 percent of gross domestic product, or $2 trillion annually.6 The average manufacturing firm spends almost $20,000 per employee per year on complying with federal regulations. For manufacturers with fewer than fifty employees, the per-employee cost rises to almost $35,000.7 With this level of regulatory cost, it is no wonder that U.S. economic growth is so meager. In a recent, major survey of CEOs of American companies, over-regulation was overwhelming cited as a barrier to capital investment that would otherwise stimulate job creation and wage growth.8

Let’s look at regulation in my area of derivatives. Some of you know how the derivatives markets work, but I think a basic example will be useful. Let’s start with your local grocery store. We all take for granted an abundance of food on the shelves week after week, year after year. We never have to wonder how the weather is affecting the growing season or if it was a bountiful or lean harvest in thousands of rural counties all across our country.

Yet, visitors to America from the developing world are amazed by the constant bounty of food at relatively stable prices in our grocery stores. In many parts of the world, plentiful food depends on a good harvest. A bad harvest means there is little to eat. With little to no income from a bad harvest, farmers are unable to plant the next year causing further hunger and misery.

The use of risk hedging instruments, namely commodity futures and other derivatives, is one of the important reasons Americans have an abundance of food on the shelves. Many of our agricultural producers hedge their prices and costs of production in America’s futures markets. It is the same reason we usually can rely on enough electricity to run our homes and gasoline to fuel our cars. The health and efficiency of U.S. futures and derivatives markets have a direct impact on the price and availability of the food we eat, the warmth of our homes, and the energy needed to power our factories.

In keeping with the principle of not restraining the economy, I recently voted against a CFTC rule proposal that did not do enough to ease an unnecessary burden on participants in America’s futures markets. That proposal was a well-intentioned, but insufficient attempt to provide relief from unworkable CFTC data recording and recordkeeping requirements. Rather than facilitating the collection of useful records to use in investigations and enforcement actions, the rule imposes senseless costs that fall especially hard on small intermediaries between American farmers, manufacturers, and U.S. futures markets.

These intermediaries are known as futures commission merchants (FCMs). Their services are used by America’s farmers and producers to control costs of production. Yet, today we have around half the number of FCMs serving our farmers than we did a few years ago. FCMs, particularly smaller ones, are being squeezed by the current environment of low interest rates and increased regulatory burdens. They are barely breaking even.

We should not be squeezing them further with increased compliance costs if we can avoid it and still effectively oversee the markets. The stated purpose of the Dodd-Frank Act was to reform “Wall Street.” Instead, we are burdening “Main Street” by adding new compliance costs onto our farmers, grain elevators, and small FCMs. Those costs will surely work their way into the everyday costs of groceries and winter heating fuel for American families, adding an additional drag on the U.S. economy.

Principle Two: Regulation Must Not Threaten American Jobs.

The official U.S. unemployment rate has fallen steadily during the past few years. Yet, this recovery has created the fewest jobs relative to the previous employment peak of any prior recovery.9 The labor force participation rate recently hit a thirty-six-year low of 62.7 percent.10 The number of Americans NOT in the labor force recently hit a record high of 92.6 million.11 Part-time work and long-term unemployment are still well above levels from before the financial crisis.12

Worse, middle class incomes continue to fall during this recovery, losing even more ground than during the recession.13 The number in poverty has also continued to soar to about fifty million Americans.14 That is the highest level in the more than fifty years that the census has been tracking poverty.15 Income inequality has risen more in the past few years than at any recent time.16

Recently, my fellow New Jerseyan, Governor Chris Christie, pointed out that the bigger problem today is not income inequality, it is opportunity inequality.17 He is right. The opportunity in this country to work in a full-time job has been diminished over the past few years in the New Mediocre economy.

Unfortunately, federal regulators are not helping matters. One particular CFTC action poses a serious threat to jobs in the U.S. financial services industry in cities across the country. In November 2013, the CFTC issued a benign sounding “Staff Advisory,” which imposed complex U.S. trading requirements on swaps trades between non-U.S. businesses whenever anyone on U.S. soil “arranged, negotiated or executed” the trade.18 It is causing many trading firms to consider cutting off all activity with U.S.-based trade support personnel.

This Staff Advisory was hurriedly issued a year ago by agency staff without a vote of the full Commission. My fellow Commissioner and former Acting Chairman, Mark Wetjen, even said its issuance was not the “right decision.” The Staff Advisory jeopardizes the role of bank sales personnel in U.S. financial centers from New York and New Jersey, to Boston, Charlotte, and Chicago. It will likely have a ripple effect on technology staff supporting U.S. electronic trading systems, along with the thousands of jobs tied to the vendors who provide food services, office support, custodial services, and transportation needs to the U.S. financial services industry.

This CFTC Staff Advisory is a threat to American jobs. In September, I called for its withdrawal. Just last week the CFTC delayed it for the fourth time.19 When a regulatory action needs four delays, I think we all can admit that it is not workable and needs to be scrapped. With tens of millions of Americans falling back on part-time work, it is not in our economic interest for Washington regulators to cause good-paying full-time jobs to be eliminated.

Principle Three: Regulation Must Be Impartial and Balanced.

Early in 2009, while global capital markets were reeling, a new Administration was settling in. It brought with it a governing philosophy best expressed by Rahm Emanuel, then White House Chief of Staff. He told a conference of business leaders: “You never want a serious crisis to go to waste…. This crisis provides the opportunity for us to do things that you could not do before.”20

This crisis exploitation methodology was the catalyst for a whole slew of new legislation, from the gargantuan stimulus package to cash for clunkers to Obamacare, and, of course, the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act. Crisis exploitation was a theme not only of the White House and Congress, but was also prevalent in many federal regulatory agencies, including the CFTC.

In just one example – and there are many – the CFTC took advantage of the crisis to amend its rules to assert jurisdiction over hundreds of previously excluded registered investment companies engaged in commodity trading activity above particular thresholds. Up until that point, mutual funds and other investment companies that manage American’s retirement and other investments had long been largely exempt from CFTC oversight. Instead, they were and continue to be comprehensively regulated by the Securities and Exchange Commission (SEC). Nevertheless, the CFTC narrowed the previous exclusion and required these SEC-registered investment companies to also register with the CFTC as commodity pool operators. This triggered burdensome reporting and disclosure requirements that are sometimes duplicative and, in other places, inconsistent with the reporting and disclosure requirements under the SEC’s rules.

In asserting jurisdiction over these investment companies, the CFTC claimed it was acting “consistent with the tenor” of the Dodd-Frank Act, which had given the agency “a more robust mandate to manage systemic risk and to ensure safe trading practices by entities involved in the derivatives markets.”21 Yet, nothing in the Dodd-Frank Act directed the CFTC to narrow the exclusions for SEC-registered investment companies. It was just regulatory opportunism by the CFTC. The CFTC’s burdensome requirements on registered investment companies means that higher costs are being passed onto the 401(k) plans and other retirement savings of millions of ordinary Americans. Never let a good crisis go to waste.

I believe the American people have grown wary of this regulatory explosion. They want all branches and agencies of the federal government to do their jobs well and without overreach.

Principle Four: Regulation Must Be Competent.

In 2008, President Obama undertook to provide a highly competent form of government that would be “cool again” as an “agent of change.”22 Yet, a constant stream of scandals has called into question the competence of many federal government agencies, including such previously esteemed institutions as the Secret Service, the Veterans Administration, and the Centers for Disease Control and Prevention.

These scandals have had an impact. Public trust in the federal government is at an all-time low according to a recent poll.23 Just 13 percent of Americans say that the government can be trusted to do what is right always or most of the time.24 That 13 percent compares to 36 percent during the Watergate crisis forty years ago.25

I believe there is a direct link between a government trying to do too much and a government doing things incompetently. In 2011 and 2012, respectively, MF Global and Peregrine Financial Group failed, causing huge losses for American agriculture producers who use futures to manage the everyday risk associated with farming and ranching. The failure of MF Global and Peregrine was a “black eye” for the CFTC and resulted in enormous political pressure to “do something.”

In October of last year, the CFTC responded with a misnamed, “customer protection” rule with the ostensible purpose of preventing another MF Global or Peregrine.26 While some aspects of the rule were needed and widely welcomed by market participants, the rule also required FCMs to pay futures clearinghouses at the start of trading on the next business day. The rule caused an outcry of opposition as it became clear that it would result in farmers and ranchers having to prefund their futures margin accounts. They argued that the CFTC rule would ensure that they would lose more of their hard-earned money, not less, the next time an FCM failed the way MF Global did. The rule would likely drive many small and medium-sized agricultural producers out of the marketplace along with the smaller FCM community that serves them.

The futility of the CFTC’s “customer protection” rule has now been partially addressed through a proposed rule amendment unanimously adopted by the new Commission a few weeks ago.27 Still, it stands as an example of flawed regulation rushed through in the wake of a crisis “to do something” without adequate analysis of its impact on those it is meant to help.

In my work at the CFTC, I want to make sure the rules we put forward actually solve real problems, not invented ones. I have developed an analysis formula contained in a simple mnemonic: “SMART-REG.”

It stands for:

S             Solve for real problems, not anecdotes of bad behavior;
M            Measure success through a rigorous cost benefit analysis;
A             Advance innovation and competition through flexible rules;
R             Represent the best approach among alternative courses of action;
T             Take into account evidence, rather than assumptions;


R             Realistically set compliance deadlines;
E             Encourage employment of American workers;
G             Grounded in law.    
My staff and I will to use this SMART REG standard to help evaluate whether rules are truly in service to the U.S. economy and the American markets.

Principle Five: Regulation Must Be Accountable.

I am sure most of you have now heard of a very talkative MIT Professor who claims that a “lack of transparency” was necessary to pass Obamacare.

As financial regulators, we at the CFTC seek increased transparency and accountability from our derivatives markets and from participants in those markets. The Commission must live up to the same standard. Yet, that has not been the case at the CFTC over the past few years.

A recent study by the Mercatus Center of George Mason University takes a thorough look at the way in which the CFTC went about implementing much of the Dodd-Frank regulatory framework.28 It shows how the CFTC failed to consistently employ a transparent, deliberative rulemaking process under the direction of the five commissioners with substantial input from all affected parties, oversight by Congress, and clear avenues for judicial review.29 Instead, it used a confusing, ad hoc rulemaking process that excluded important viewpoints, foiled oversight efforts, and aggravated regulatory compliance burdens.30 This ad hoc process included the issuance of an extraordinary number of no-action and other staff letters.31 None of these no-action and other staff letters – including 110 staff letters just in the first eight months of 2014 – benefitted from any cost benefit analysis. None were put through ordinary public notice and comment. None were voted on by the Commission. The Mercatus study argues persuasively that these failures eroded not only the public’s confidence in the CFTC as a regulator, but the CFTC’s ability to establish a compliance culture in the industry it regulates.32

I believe that such regulatory short-cuts must be curtailed. Regulation must not be produced in a vacuum with no oversight.

Fifty years ago, Ronald Reagan said: “This is the issue…: Whether we believe in our capacity for self-government, or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capitol can plan our lives for us better than we can plan them ourselves.”33

Two weeks ago, the American people reasserted their preference to plan their own lives without dictates and opacity from Washington.

Principle Six: Regulation Must Not Create the Next Crisis.

I began my remarks today by recalling the times just after the financial crisis when many shrill voices were blaming American capital markets for the financial crisis. I noted that there has been little in the way of acknowledgement for the federal government’s role in the crisis. That includes the misbegotten policies that resulted in an unprecedented number of risky mortgages and other lending that was at the center of massive and unchecked housing and credit bubbles. There is still little acknowledgement today, let alone reform, of Freddie Mac and Fannie Mae, major agencies of those dangerous government policies.

Instead, we have had a shifting in attitude on how U.S. capital and financial markets should function. The arguments are that markets need to be made less risky. A large number of coordinated and uncoordinated initiatives are in place to limit market activity, from the Dodd-Frank Act’s Volcker Rule and swaps push-out provisions to the Federal Reserve’s rule imposing margin on uncleared swaps to increased capital requirements imposed by the Basel Committee on Banking Supervision.

The result is that financial institutions are building up large capital reserves. To do so, they have curtailed putting their capital to work on behalf of clients and economic growth. It has reached such a level that the IMF recently issued a report discussing the need for more not less economic risk-taking to help global recovery.34 The report calls on banks to revamp their business models to once again become engines of growth. Yet, it neglects to call out regulators for restricting the banks’ ability to put their capital to work efficiently.

The CFTC has put forth its share of bad rules in the name of market risk reduction. Those include a series of swaps “transaction level” rules based on the wrong template of the U.S. futures markets, including a host of peculiar and unprecedented swaps trading restrictions that are tangential to their stated purpose of shielding the U.S. from counterparty risk. I will soon be issuing a White Paper proposing improvements to these rules.

The CFTC then coupled the rules with “interpretative guidance” and “staff advisories” on their cross-border reach based on market participants’ U.S. personhood and employee location. The global response to the CFTC swaps trading regime has been swift and dramatic. Since the rules went into effect in October 2013, and accelerating thereafter, global swaps markets have divided into separate trading and liquidity pools between those in which U.S. persons are able to participate and those in which U.S. persons are effectively shunned. According to a survey conducted by the International Swaps and Derivatives Association, the market for U.S. and euro interest rate swaps, two of the most widely used products for hedging, has split into two over the past 12 months.35

Fragmentation of global swaps markets between U.S. person and non-U.S. person means smaller and disconnected liquidity pools and less efficient and more volatile pricing for market participants and their end-user customers. Fragmentation also means greater risk of market failure in the event of economic crisis. Market fragmentation increases the very systemic risk that the Dodd-Frank Act was predicated on reducing.

An American economy that is just starting to show signs of recovering from the “Great Recession” cannot bear the reduction in global trade in financial services and increased systemic risk that is a looming possibility.

In trying to stamp out risk, we are harming trading liquidity. The last crisis was one of counterparty credit risk. I fear that the next crisis could well be a liquidity crisis – a crisis in which capital-constrained banks and other market makers have little choice in a panic but to limit their exposure to increasingly fragmented markets. Such a pullback would leave America’s farmers, ranchers, and manufacturers without the means to fund their operations or hedge their operational risks. We are still fighting the last crisis. We must consider whether our regulations will land us in the next one.

Conclusion

I have set out six principles for financial market regulation in this post-post-financial crisis era. I believe that many Americans earlier this month expressed their dissatisfaction with Washington’s hasty and flawed regulations that seek to exploit crises and blame markets, while expanding the federal government’s reach to every aspect of American life.

Instead, I believe Americans want regulators to:

1. Promote and Boost the U.S. Economy;

2. Encourage the Creation of American Jobs;

3. Be Impartial and Balanced;

4. Be Competent (for goodness sake);

5. Be Accountable and Transparent; and

6. Not Create the Next Crisis.

It is now six years since the 2008 financial crisis. It is time we moved away from punishing U.S. financial markets. It is the job of market regulators like the CFTC to promote U.S. hedging markets with smart regulations rather than impede them with crisis-exploiting complexity. U.S. financial markets have long been the most fair, transparent, efficient, and innovative in the world. We must keep them so. Our goal in this new era must be the health of U.S. financial markets and the regeneration of the spirit of American enterprise that rekindles some of our lost prosperity and puts our people back to work. Yes, JOBS!

Thank you very much for your time. I look forward to taking a few questions.

Media Contact:
Jason Goggins
(202) 418-5713
jgoggins@cftc.gov

1 Maggie Haberman, Hillary Clinton clarifies jobs comment, Politico, Oct. 27, 2014, available at http://www.politico.com/story/2014/10/hillary-clinton-jobs-comment-112225.html.

2 Op-Ed, The New Mediocre, Wall Street Journal, Oct. 16, 2014, available at http://online.wsj.com/articles/the-new-mediocre-1413415600.

3 Peter Ferrara, What Obama's Growth Recession Is Stealing From Your Wallet, Forbes, May 2, 2014, available at http://www.forbes.com/sites/peterferrara/2014/05/02/what-obamas-growth-recession-is-stealing-from-your-wallet/.

4 Peter Ferrara, How Does President Obama's Economic Recovery Compare To Those Of Other Presidents?, Forbes, Aug. 4, 2013 (“Ferrara: How Does Recovery Compare”), available at http://www.forbes.com/sites/peterferrara/2013/08/04/how-does-president-obamas-economic-recovery-compare-to-those-of-other-presidents/.

5 Id.

6 W. Mark Crain and Nicole V. Crain, The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business, National Association of Manufacturers, at 1, Sep. 10, 2014, available at http://www.nam.org/Data-and-Reports/Cost-of-Federal-Regulations/Federal-Regulation-Full-Study.pdf.

7 Id. at 2-3.

8 PricewaterhouseCoopers LLP, “Good to Grow” 2014 Annual Global CEO Survey, at 4.

9 Ferrara: How Does Recovery Compare.

10 Steve Moore, Under Obama: One Million More Americans Have Dropped Out Of Work Force than Have Found a Job, Forbes, Oct. 6, 2014, available at http://www.forbes.com/sites/stevemoore/2014/10/06/under-obama-one-million-more-americans-have-dropped-out-of-work-force-than-have-found-a-job/.

11 News Release, The Employment Situation – September 2014, Bureau of Labor Statistics, at Summary Table A, Oct. 3, 2014, available at http://www.bls.gov/news.release/archives/empsit_10032014.pdf. It was reported that this number was a record high.

12 Id.

13 Ferrara: How Does Recovery Compare.

14 Id.

15 Id.

16 Id.

17 Interview with Governor Chris Christie, Fox News Sunday (Oct. 26, 2014).

18 CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.

19 CFTC Letter No. 14-140 (Nov. 14, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-140.pdf.

20 Gerald F. Seib, In Crisis, Opportunity for Obama, Wall Street Journal, Nov. 21, 2008, available at http://online.wsj.com/articles/SB122721278056345271.

21 Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012).

22 Interview with President Obama, Reno Gazette-Journal (Jan. 16, 2008), cited in Stephen F. Hayes, Failure Upon Failure: The disintegration of the Obama presidency, The Weekly Standard, Oct. 20, 2014, available at http://www.weeklystandard.com/articles/failure-upon-failure_810899.html.

23 Doug Mataconis, Public trust in government hits new lows, The Christian Science Monitor, Aug. 8, 2014, available at http://www.csmonitor.com/USA/DC-Decoder/Decoder-Voices/2014/0808/Public-trust-In-government-hits-new-lows.

24 Id.

25 Id.

26 Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, 78 FR 68506 (Nov. 14, 2013).

27 Residual Interest Deadline for Futures Commission Merchants, 79 FR 68148 (proposed Nov. 14, 2014).

28 Hester Peirce, Regulating through the Back Door at the Commodity Futures Trading Commission, Mercatus Center, George Mason University, Nov. 2014, available at http://mercatus.org/sites/default/files/Peirce-Back-Door-CFTC.pdf.

29 Id.

30 Id.

31 Id. at 22 (167 no-action and other staff letters in 2012 and 2013).

32 Id. at 68-72.

33 Ronald Reagan, A Time for Choosing, Oct. 1, 1964, available at http://reagan2020.us/speeches/A_Time_for_Choosing.asp.

34 IMF Global Financial Stability Report, Policymakers Should Encourage Economic Risk Taking, Keep Financial Excess Under Control, Oct. 8, 2014, available at http://www.imf.org/external/pubs/ft/survey/so/2014/POL100814B.htm.

35 ISDA Research Note, Revisiting Cross-Border Fragmentation of Global OTC Derivatives: Mid-year 2014 Update, July 2014, available at http://www2.isda.org/functional-areas/research/research-notes/.

Last Updated: November 20, 2014

Wednesday, November 19, 2014

Statement at Open Meeting on Regulation SCI

Statement at Open Meeting on Regulation SCI

SEC ANNOUNCES ARREST OF MAN FOR ROLE IN INSIDER TRADING CASE INVOLVING A TIP

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23131 / November 14, 2014
USA v. Robert H. Bray, Case No. 1:14-MJ-5119-JGD in the United States District Court for the District of Massachusetts
USA v. John Patrick O'Neill, Case No. 1:14-cr-10317-WGY in the United States District Court for the District of Massachusetts
Securities and Exchange Commission v. J. Patrick O'Neill and Robert H. Bray, Civil Action No. 1:14-cv-13381 (District of Massachusetts, Complaint filed August 18, 2014)
Boston-Area Defendant in SEC Insider Trading Case Faces Criminal Charges

The Securities and Exchange Commission announced that on November 12, 2014, Robert H. Bray ("Bray") was arrested by the Federal Bureau of Investigation and charged by a criminal complaint with participating in an insider trading conspiracy for trading in the stock of Wainwright Bank & Trust Company ("Wainwright") based on a tip he received from a friend.

The Commission previously charged Bray and J. Patrick O'Neill ("O'Neill") with insider trading in a civil action filed on August 18, 2014. The criminal charges are based on the same conduct underlying the SEC's action. The SEC's complaint alleged that O'Neill, a former senior vice president at Eastern Bank Corporation, learned through his job responsibilities that his employer was planning to acquire Wainwright. According to the SEC's complaint, O'Neill tipped Bray, a friend and fellow golfer with whom he socialized at a local country club. In the two weeks preceding a public announcement about the planned acquisition, Bray sold his shares in other stocks to accumulate funds he used to purchase 31,000 shares of Wainwright. After the public announcement of the acquisition caused Wainwright's stock price to increase nearly 100 percent, Bray sold all of his shares during the next few months for nearly $300,000 in illicit profits.

The Commission also announced that on October 31, 2014, the United States Attorney's Office for the District of Massachusetts filed a criminal Information against O'Neill. The criminal Information charges O'Neill with one count of conspiracy to commit securities fraud. O'Neill was initially charged by a criminal complaint when he was arrested in August 2014.

The SEC's action, which is pending, seeks injunctions against each of the defendants from further violations of the charged provisions of the federal securities laws, disgorgement of ill-gotten gains, and civil penalties.

Tuesday, November 18, 2014

SEC CHARGES THAT CEO ISSUED "FALSE AND MISLEADING PRESS RELEASES"

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a San Francisco-based penny stock company CEO with defrauding investors by issuing false and misleading press releases portraying his purported marketing and infomercial company as a successful venture in order to drive the stock price up while he covertly sold millions of shares into the public market for more than $300,000 in illicit profits.

According to the SEC’s complaint filed against Joseph A. Noel in federal district court in San Francisco, the deceptive press releases about his company YesDTC Holdings touted exclusive distribution rights, licensing agreements, and certain products purportedly certified by the government.  Noel’s promotional campaigns based on such false information caused a spike in YesDTC’s thinly-traded stock and enabled him to dump millions of his own shares for a profit.  To conceal his sales, Noel sold the shares through a company he created in his teenage daughter’s name without disclosing as required that he was actually selling the shares.

The SEC also suspended trading in YesDTC stock today, and instituted an administrative proceeding to revoke its registration.

“Noel issued false press releases to pump up the price of the stock and set up a nominee company to dump the shares into the market to unwitting investors,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “We’re always on the lookout for penny stock company CEOs who manipulate the market to line their own pockets.”    

The SEC’s complaint charges Noel with violating antifraud and registration provisions of the federal securities laws.  The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest and a financial penalty as well as a permanent injunction.  The SEC also is seeking an officer-and-director bar and a penny stock bar against Noel.

The SEC’s investigation was conducted by Heather E. Marlow and David Berman of the San Francisco Regional Office, and the case is supervised by Tracy Davis.  The SEC’s litigation will be led by Aaron Arnzen and Ms. Marlow.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Northern District of California and the Federal Bureau of Investigation.

Monday, November 17, 2014

SEC FILES EMERGENCY ACTION IN ALLEGED MILLION DOLLAR MISAPPROPRIATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23130 / November 12, 2014
Securities and Exchange Commission v. Eric W. Johnson, Civil Action No. 1:14-cv-08825

On November 5, 2014, the Securities and Exchange Commission filed an emergency action alleging that from at least 2004 to the present, Eric W. Johnson, of Hinsdale, Illinois, misappropriated at least $1 million from certain of his advisory clients. The SEC's complaint alleged that he did so while affiliated with a Chicago-based broker-dealer and investment adviser. The SEC's complaint further alleged that Johnson admitted to the SEC that he misappropriated the funds by forging his clients' signatures on more than 100 separate wire transfer instructions so that he could funnel cash from his clients' accounts directly into his own personal bank account. The complaint charged Johnson with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) thereunder and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

After a hearing on the matter, the Honorable Edmond E. Chang of the United States District Court, Northern District of Illinois, issued an Order granting injunctive relief, freezing assets and other emergency relief including expedited discovery.

The SEC's investigation in this matter is continuing.

Sunday, November 16, 2014

SEC ANNOUNCES CHARGES AGAINST 2 OPERATORS IN HIGH-YIELD INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND INVESTMENT COMMISSION 

The Securities and Exchange Commission announced charges against two India-based operators of an alleged high-yield investment scheme seeking to exploit investors through pervasive social media pitches on Facebook, YouTube, and Twitter.

The SEC’s Enforcement Division alleges that Pankaj Srivastava and Nataraj Kavuri offered “guaranteed” daily profits as they anonymously solicited investments for their purported investment management company called Profits Paradise.  They invited investors to deposit funds that supposedly would be pooled with money from other investors and traded on foreign exchanges as well as in stocks and commodities.  They created a Profits Paradise website and related social media sites to describe the profits as “huge,” “lucrative,” and “handsome,” and they characterized the risk as “minimal.”

The SEC’s Enforcement Division alleges that the guaranteed returns were false, and that the investments being offered bore the hallmark of a fraudulent high-yield investment program.  Srivastava and Kavuri attempted to conceal their identities by supplying a fictitious name and contact information when registering Profits Paradise’s website address.  They also communicated under the fake names of “Paul Allen” and “Nathan Jones.”  After the SEC began its investigation into the investment offering, the Profits Paradise website was discontinued.

“Srivastava and Kavuri used excessive secrecy in their effort to swindle investors through social media outreach and a website that attracted as many as 4,000 visitors per day,” said Stephen Cohen, Associate Director of the SEC’s Division of Enforcement.  “Our investigation stopped the constant solicitations once the website disappeared, and successfully tracked down the identities of the perpetrators behind those fraudulent solicitations.”

According to the SEC’s order instituting administrative proceedings, Srivastava and Kavuri used the Profits Paradise website and YouTube videos to detail three investment plans with terms of 120 business days.  The first plan purportedly yielded daily interest of 1.5 percent on investments of $10 to $749.  The second plan purportedly yielded 1.75 percent on investments of $750 to $3,499.  And the third plan purportedly yielded 2 percent on investments of $3,500 and above.  Postings on Profit Paradise’s Facebook page promised investors they could “Enjoy Hassle Free Income” and advertised a “5% Referral Commission.”  The scheme also utilized a Profits Paradise Twitter account to steer potential investors to the Profits Paradise website, and Srivastava and Kavuri created a Google Plus page to promote the investment opportunity.

The SEC’s Enforcement Division alleges that Srivastava and Kavuri violated Sections 17(a)(1) and (3) of the Securities Act of 1933, and will litigate the matter before an administrative law judge.

The SEC’s investigation was conducted by Carolyn Kurr and Daniel Rubenstein, and the case was supervised by C. Joshua Felker.  The SEC’s litigation will be led by Kenneth Donnelly.  The SEC appreciates the assistance of the Securities and Exchange Board of India as well as the Autorité des Marchés Financiers in Quebec, the Ontario Securities Commission, and the Securities and Futures Commission in Hong Kong.

The SEC today updated an investor alert educating investors about how social media may be used to promote so-called high-yield investment programs and other fraudulent investment schemes.

“We urge investors to exercise extreme caution if they are approached to invest in a website promising incredible returns with minimal or no risk.  So-called high-yield investment programs are often frauds,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.

Friday, November 14, 2014

SEC INVESTOR ALERT REGARDING SOCIAL MEDIA AND INVESTMENTS

FROM:  U.S. SECURITIES AND EXCHANGE
Updated Investor Alert: Social Media and Investing - Avoiding Fraud

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help investors be better aware of fraudulent investment schemes that may involve social media. U.S. retail investors are increasingly turning to social media, including Facebook, YouTube, Twitter, LinkedIn and other online networks for information about investing. Whether it be for research on particular stocks, background information on a broker-dealer or investment adviser, guidance on an overall investing strategy, up-to-date news, or to simply discuss the markets with others, social media has become a key tool for U.S. investors.

While social media can provide many benefits for investors, it also presents opportunities for fraudsters. Social media, and the Internet generally, offer a number of attributes criminals may find attractive. Social media lets fraudsters contact many different people at a relatively low cost. It is also easy to create a site, account, email, direct message, or webpage that looks and feels legitimate – and that feeling of legitimacy gives criminals a better chance to convince you to send them your money. Finally, it can be difficult to track down the true account holders that use social media. That potential for anonymity can make it harder for fraudsters to be held accountable. As a result, investors need to use caution when using social media and considering an investment.

What You Can Do To Protect Yourself - Tips to Help Avoid Fraud Online

So, what can individual investors do to protect themselves while using social media? The key to avoiding investment fraud on the Internet is to be an educated investor. Below are five tips to help you avoid investment fraud on the Internet:

Be Wary of Unsolicited Offers to Invest

Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards. If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme. Many scams use spam to reach potential victims. For example, with a bulk e-mail program, spammers can send personalized messages to millions of people at once for much less than the cost of cold calling or traditional mail. If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center.

Look out for Common “Red Flags”

Wherever you come across a recommendation for an investment – be it on the Internet or from a personal friend (or both), the following “red flags” should cause you to use extreme caution in making an investment decision:

It sounds too good to be true. Any investment that sounds too good to be true probably is. Compare any promised return with the returns on well-known stock indexes. Any investment opportunity that claims you’ll receive substantially more than that could be highly risky – or be an outright fraud. Be extremely wary of claims on a website that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK” or has “HUGE UPSIDE AND ALMOST NO RISK!” Claims like these are hallmarks of extreme risk or outright fraud.
The promise of “guaranteed” returns. Every investment entails some level of risk, which is reflected in the rate of return you can expect to receive. If your investment is 100% safe, you’ll most likely get a low return. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment is a “can’t miss opportunity.” Don’t believe it.
Pressure to buy RIGHT NOW.  Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.” Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.
Look out for “Affinity Fraud” Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

Be Thoughtful About Privacy and Security Settings

Investors who use social media websites as a tool for investing should be mindful of the various features on these websites in order to protect their privacy and help avoid fraud. Understand that unless you guard personal information, it may be available not only for your friends, but for anyone with access to the Internet – including fraudsters. For more information on privacy and security settings, as well as other guidance regarding setting up on-line accounts with an eye toward avoiding investment fraud, see our Investor Bulletin Social Media and Investing: Understanding Your Accounts.

Ask Questions and Check Out Everything

Be skeptical and research every aspect of an offer before making a decision. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Never rely on a testimonial or take a promoter’s word at face value. You can check out many investments using the SEC’s EDGAR filing system or your state’s securities regulator. You can check out registered brokers at FINRA’s BrokerCheck website and registered investment advisers at the SEC’s Investment Adviser Public Disclosure website. See our publication “Ask Questions” for more about information you should gather before making an investment.

A Few Common Investment Scams Using Social Media and the Internet

While fraudsters are constantly changing the way they approach victims on the Internet, there are a number of common scams of which you should be aware. Here are a few examples of the types of schemes you should be on the lookout for when using social media:

“Pump-and-Dumps” and Market Manipulations

“Pump-and-dump” schemes involve the touting of a company’s stock (typically small, so-called “microcap” companies) through false and misleading statements to the marketplace. These false claims could be made on social media such as Facebook and Twitter, as well as on bulletin boards and chat rooms. Pump-and-dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have “inside” information about an impending development or to use an “infallible” combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is “pumped” up by the buying frenzy they create. Once these fraudsters “dump” their shares and stop hyping the stock, the price typically falls, and investors lose their money.

For an example of an actual case, see Securities and Exchange Commission v. Carol McKeown, Daniel F. Ryan, Meadow Vista Financial Corp., and Downshire Capital, Inc., Civil Action No. 10-80748-CIV-COHN (S.D. Fla. June 23, 2010).

Fraud Using “Research Opinions,” Online Investment Newsletters, and Spam Blasts

While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks. Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks – often, but not always, penny stocks. The fact that these so-called “newsletters” may be advertised on legitimate websites, including on the online financial pages of news organizations, does not mean that they are not fraudulent. To learn more, read our tips for checking out newsletters.

For an example of an actual case, see Securities and Exchange Commission v. Wall Street Capital Funding LLC, Philip Cardwell, Roy Campbell, and Aaron Hume, Civil Action No. 11-cv-20413-DLG (S.D. Fla. February 7, 2011).

High-Yield Investment Programs

The Internet is awash in so-called “high-yield investment programs” or “HYIPs.” These are unregistered investments typically run by unlicensed individuals – and they are often frauds. The hallmark of an HYIP scam is the promise of incredible returns at little or no risk to the investor. A HYIP website might promise annual (or even monthly, weekly, or daily) returns of 30 or 40 percent – or more. Some of these scams may use the term “prime bank” program. If you are approached online to invest in one of these, you should exercise extreme caution - they are likely frauds.

Fraudsters may use social media to promote a HYIP website or may encourage investors to use social media to share information about a HYIP website with others. For example, in In the Matter of Srivastava and Kavuri, the respondents allegedly used social media to promote their HYIP website, advertising “huge,” “lucrative,” “handsome,” and “guaranteed” profits with “minimal” risk. They also allegedly encouraged their Twitter followers to “use a referral link and promotional banner on social media, blog, forum, and email to share [the HYIP website] with interested parties.” Additionally, according to the Commission’s Order, they created a Facebook page and YouTube video that promoted the HYIP website and advertised supposed daily returns of 1.5% to 2%.  

Internet-Based Offerings

Offering frauds come in many different forms. Generally speaking, an offering fraud involves a security of some sort that is offered to the public, where the terms of the offer are materially misrepresented. The offerings, which can be made online, may make misrepresentations about the likelihood of a return. For example, in a recent case, Securities and Exchange Commission v. Imperia Invest IBC, the fraudsters allegedly used a website to offer investors a “guaranteed return” of 1.2% per day. Other online offerings may not be fraudulent per se, but may nonetheless fail to comply with the applicable registration provisions of the federal securities laws. While the federal securities laws require the registration of solicitations or “offerings,” some offerings are exempt. Always determine if a securities offering is registered with the SEC or a state, or is otherwise exempt from registration, before investing.

Where can I go for help?

Investors who learn of investing opportunities from social media should always be on the lookout for fraud. If you have a question or concern about an investment, or you think you have encountered fraud, please contact the SEC, FINRA, or your state securities regulator to report the fraud and to get assistance.

U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, DC 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295

Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, MD 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290

North American Securities Administrators Association (NASAA)
750 First Street, NE
Suite 1140
Washington, DC 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571

Wednesday, November 12, 2014

CFTC CHAIRMAN'S STATEMENT ON $1.4 BILLION BANK ENFORCEMENT FINE AND SETTLEMENT

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Tim Massad on today’s Forex Enforcement Announcement
November 12, 2014

Washington, DC – U.S. Commodity Futures Trading Commission Chairman made the following statement on today’s enforcement action against five banks for attempting to manipulate the foreign exchange benchmark rate. The five banks settled with the CFTC and agreed to pay a $1.4 billion fine, and they will be required to implement policies and procedures to prevent this misconduct going forward.

“Integrity of the market place is a paramount concern to the CFTC, and today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” said Chairman Massad. “I want to especially thank the dedicated and hardworking staff of the CFTC’s Enforcement Division, who spent countless hours in order to uncover this egregious behavior and hold those responsible accountable for it.”

Last Updated: November 12, 2014

Monday, November 10, 2014

SEC, FINRA ISSUE ALERT TO INVESTORS REGARDING SHELL COMPANIES BEING SOLD AS PENNY STOCKS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) issued an alert warning investors that some penny stocks being aggressively promoted as great investment opportunities may in fact be stocks of dormant shell companies with little to no business operations.

The investor alert provides tips to avoid pump-and-dump schemes in which fraudsters deliberately buy shares of very low-priced, thinly traded stocks and then spread false or misleading information to pump up the price.  The fraudsters then dump their shares, causing the prices to drop and leaving investors with worthless or nearly worthless shares of stock.

“Fraudsters continue to try to use dormant shell company scams to manipulate stock prices to the detriment of everyday investors,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Before investing in any company, investors should always remember to check out the company thoroughly.”

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, “Investors should be on the lookout for press releases, tweets or posts aggressively promoting companies poised for explosive growth because of their ‘hot’ new product.  In reality, the company may be a shell, and the people behind the touts may be pump-and-dump scammers looking to lighten your wallet.”

The investor alert highlights five tips to help investors avoid scams involving dormant shell companies:

Research whether the company has been dormant – and brought back to life.  You can search the company name or trading symbol in the SEC’s EDGAR database to see when the company may have last filed periodic reports.
Know where the stock trades.  Most stock pump-and-dump schemes involve stocks that do not trade on The NASDAQ Stock Market, the New York Stock Exchange or other registered national securities exchanges.
Be wary of frequent changes to a company's name or business focus.  Name changes and the potential for manipulation often go hand in hand.
Check for mammoth reverse splits. A dormant shell company might carry out a 1-for-20,000 or even 1-for-50,000 reverse split.
Know that "Q" is for caution.  A stock symbol with a fifth letter "Q" at the end denotes that the company has filed for bankruptcy.

Sunday, November 9, 2014

SEC CHARGES GLOBAL WATER MANAGEMENT COMPANY WITH VIOLATING FCPA

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a global water management, construction, and drilling company headquartered in Texas with violating the Foreign Corrupt Practices Act (FCPA) by making improper payments to foreign officials in several African countries in order to obtain beneficial treatment and reduce its tax liability.

After Layne Christensen Company self-reported its misconduct, an SEC investigation determined that the company received approximately $3.9 million in unlawful benefits during a five-year period as a result of bribes typically paid through its subsidiaries in Africa and Australia.  Some payments were funded through cash transfers from Layne’s U.S. bank accounts.

In addition to self-reporting the misconduct, Layne cooperated with the SEC’s investigation by providing real-time reports of its investigative findings, producing English language translations of documents, and making foreign witnesses available.  The company also undertook an extensive remediation effort.  Layne agreed to pay more than $5 million to settle the SEC’s charges.

“Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program.  Those measures were credited in determining the appropriate remedy.”

According to the SEC’s order instituting settled administrative proceedings, Layne’s misconduct occurred from 2005 to 2010.  In addition to favorable tax treatment, the improper payments helped the company obtain customs clearance, work permits, and relief from inspections by immigration and labor officials in various African countries.

Among the findings in the SEC’s order:

Layne paid nearly $800,000 to foreign officials in Mali, Guinea, and the Democratic Republic of the Congo (DRC) to reduce its tax liability and avoid associated penalties for delinquent payment.  The bribes enabled Layne to realize more than $3.2 million in improper tax savings.

Layne made improper payments to customs officials in Burkina Faso and the DRC to avoid paying customs duties and obtain clearance to import and export its equipment.  The bribes were falsely recorded as legal fees and commissions in the company’s books and records.

Layne paid more than $23,000 in cash to police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the DRC to obtain border entry for its equipment and employees.  The bribes also helped secure work permits for its expatriate employees and avoid penalties for non-compliance with local immigration and labor regulations.

The SEC’s order finds that Layne violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act of 1934.  Layne agreed to pay $3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount that reflects Layne’s self-reporting, remediation, and significant cooperation with the SEC’s investigation.  For a period of two years, the settlement requires the company to report to the SEC on the status of its remediation and implementation of measures to comply with the FCPA.  Layne consented to the order without admitting or denying the SEC’s findings.

The SEC appreciates the assistance of the Fraud Section of the Department of Justice and the Federal Bureau of Investigation.

Saturday, November 8, 2014

Statement on Jury Verdict in Case Against Charles Kokesh

Statement on Jury Verdict in Case Against Charles Kokesh

FED BANKING AGENCIES REPORT "SERIOUS DEFICIENCIES IN UNDERWRITING STANDARDS AND RISK MANAGEMENT OF LEVERAGED LOANS"

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
For Immediate Release November 7, 2014 
Credit Risk in the Shared National Credit Portfolio is High; Leveraged Lending Remains a Concern

The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations (FBOs), and nonbanks is generally unchanged in 2014 from the prior year, federal banking agencies said Friday. In a supplemental report, the agencies highlighted findings specific to leveraged lending, including serious deficiencies in underwriting standards and risk management of leveraged loans.

The annual Shared National Credits (SNC) review found that the volume of criticized assets remained elevated at $340.8 billion, or 10.1 percent of total commitments, which approximately is double pre-crisis levels. The stagnation in credit quality follows three consecutive years of improvements. A criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards. The SNC review was completed by the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency.

Leveraged loans as reported by agent banks totaled $767 billion, or 22.6 percent of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7 percent, of criticized SNC assets. Material weaknesses in the underwriting and risk management of leveraged loans were observed, and 33.2 percent of leveraged loans were criticized by the agencies.

The leveraged loan supplement also identifies several areas where institutions need to strengthen compliance with the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor's projections.

Federal banking regulations require institutions to employ safe and sound practices when engaging in commercial lending activities, including leveraged lending. As a result of the SNC exam, the agencies will increase the frequency of leveraged lending reviews to ensure the level of risk is identified and managed.

In response to questions, the agencies also are releasing answers to FAQs on the guidance. The questions cover expectations when defining leveraged loans, supervisory expectations on the origination of non-pass leveraged loans, and other topics. The FAQ document is intended to advance industry and examiner understanding of the guidance, and promote consistent application in policy formulation, implementation, and regulatory supervisory assessments.

Other highlights of the 2014 SNC review:

Total SNC commitments increased by $379 billion to $3.39 trillion, or 12.6 percent from the 2013 review. Total SNC outstanding increased $206 billion to $1.57trillion, an increase of 15.2 percent.

Criticized assets increased from $302 billion to $341 billion, representing 10.1 percent of the SNC portfolio, compared with 10.0 percent in 2013. Criticized dollar volume increased 12.9 percent from the 2013 level.

Leveraged loans comprised 72.9 percent of SNC loans rated special mention, 75.3 percent of all substandard loans, 81.6 percent of all doubtful loans, and 83.9 percent of all nonaccrual loans.

Classified assets increased from $187 billion to $191 billion, representing 5.6 percent of the portfolio, compared with 6.2 percent in 2013. Classified dollar volume increased 2.1 percent from 2013.

Credits rated special mention, which exhibit potential weakness and could result in further deterioration if uncorrected, increased from $115 billion to $149 billion, representing 4.4 percent of the portfolio, compared with 3.8 percent in 2013. Special mention dollar volume increased 29.6 percent from the 2013 level.
The overall severity of classifications declined, with credits rated as doubtful decreasing from $14.5 billion to $11.8 billion and assets rated as loss decreasing slightly from $8 billion to $7.8 billion. Loans that were rated either doubtful or loss account for 0.6 percent of the portfolio, compared with 0.7 percent in the prior review. Adjusted for losses, nonaccrual loans declined from $61 billion to $43billion, a 27.8percent reduction.

The distribution of credits across entity types—U.S. bank organizations, FBOs, and nonbanks—remained relatively unchanged. U.S. bank organizations owned 44.1 percent of total SNC loan commitments, FBOs owned 33.5 percent, and nonbanks owned 22.4 percent. Nonbanks continued to own a larger share of classified (73.6 percent) and nonaccrual (76.7 percent) assets than their total share of the SNC portfolio (22.4 percent). Institutions insured by the FDIC owned 10.1percent of classified assets and 6.7 percent of nonaccrual loans.
The SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. A SNC is any loan or formal loan commitment, and asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments also are participated with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies, and pension funds.

In conducting the 2014 SNC Review, the agencies reviewed $975 billion of the $3.39 trillion credit commitments in the portfolio. The sample was weighted toward noninvestment grade and criticized credits. In preparing the leveraged loan supplement, the agencies reviewed $623 billion in commitments or 63.9 percent of leveraged borrowers, representing 81 percent of all leveraged loans by dollar commitments. The results of the review and supplement are based on analyses prepared in the second quarter of 2014 using credit-related data provided by federally supervised institutions as of December 31, 2013, and March 31, 2014.

Friday, November 7, 2014

SEC ACCUSES BUSINESSMAN AND COMPANY OF MAKING FALSE STATEMENTS TO INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced securities fraud charges accusing a New York businessman and his software company of making false statements to investors while raising more than $3 million to fund operations.

The SEC’s Enforcement Division alleges that Gregory Rorke falsely told investors that he possessed millions of dollars in liquid assets to personally guarantee their purchase of promissory notes issued by Navagate Inc., which claimed to create and sell computer software to help companies automate certain processes in sales and customer relations.  Rorke emphasized that he was an experienced businessman and former professor at Columbia Business School, and he signed and distributed a personal financial statement to investors.  However, virtually all of the liquid assets and real estate he claimed as his own in the financial statement actually belonged solely to Rorke’s wife, who did not pledge any of her assets in connection with the securities offering and had no obligation to make good on Rorke’s personal guarantee.  Ultimately, Navagate defaulted on the notes and Rorke did not adhere to his promise to pay investors under his personal guarantee.

The SEC’s Enforcement Division further alleges that when asked for proof that he owned one of the main pledged assets, Rorke covered up his lie by tampering with an account statement to hide the fact that the account belonged solely to his wife.  Rorke also initially failed to disclose and later materially understated the extent of corporate tax problems at Navagate, which owed at least $1 million in payroll taxes to the IRS for which Rorke was personally liable.  As Rorke faced pressure from investors to pay down this liability, he lied in a sworn affidavit that he had sent the IRS a check for $350,000.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rorke, who lives in Bronxville, N.Y.

“Rorke comforted investors with a personal guarantee to back their investments in Navagate with his own pledged assets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Yet he repeatedly made false statements about his ownership of the pledged assets, even tampering with documents to cover his tracks.”

In a separate administrative proceeding, the SEC’s Enforcement Division filed charges against Gregory Osborn and his New Jersey-based broker-dealer Middlebury Securities LLC, which served as the placement agent in selling Navagate securities.  The SEC’s order states that Osborn and Middlebury Securities repeatedly assured investors that Rorke’s personal guarantee was a good reason to enter into the deal despite knowing or recklessly disregarding that Rorke’s claim was false and he did not solely possess the assets listed in the personal financial statement.  Osborn and Middlebury Securities also orchestrated payments to some earlier Navagate investors by fraudulently using proceeds from additional investors despite knowing or recklessly disregarding that such payments are not permitted.
Osborn and Middlebury Securities agreed to partially settle the case against them with disgorgement and penalties to be determined at a later date.  Osborn agreed to be permanently barred from the securities industry and Middlebury Securities agreed to be censured.  They each consent to the entry of injunctions barring them from violating or causing violations of the federal securities laws.

“Osborn and Middlebury Securities collected significant placement agent fees while boldly highlighting Rorke’s personal guarantee and assuring investors it was a sound investment opportunity,” said Amelia A. Cottrell, Associate Director of the SEC’s New York Regional Office.

The SEC’s orders allege that Rorke, Navagate, Osborn, and Middlebury Securities violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Rorke also is charged with causing Navagate’s violations of those provisions, and Osborn and Middlebury Securities are charged with willfully aiding and abetting and causing Navagate’s violations.

The SEC’s investigation was conducted by Lara Shalov Mehraban, Jorge Tenreiro, Alexander Janghorbani, and Michael Birnbaum in the New York office, and supervised by Ms. Cottrell.  The SEC’s litigation will be led by Mr. Janghorbani and Mr. Tenreiro.  The examination of Middlebury Securities that led to the investigation was conducted by Steve Vitulano, Michael J. McAuliffe, Simone Celio Jr., and Sean M. O’Brien.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the Southern District of New York.
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