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Saturday, February 28, 2015


Remarks of Timothy G. Massad before the Coalition for Derivatives End-Users
February 26, 2015

Thank you for inviting me today, and I thank Governor Engler for that kind introduction. I am very pleased to be here today.

I am also pleased to have had the opportunity to meet with many of you individually and to hear your concerns. And since June, when two other commissioners and I took office, we have all been doing a lot of listening. Through individual meetings. Through our Commission open meetings. And through our advisory committee meetings. Today in fact, we have the first meeting of our Energy and Environmental Market Advisory Committee since we took office.

Those meetings, like the name of your organization, remind us of why we have derivatives markets in the first place. They enable end-users – businesses of all types – to hedge risk. In the six years since the financial crisis began, there’s been a lot of talk about derivatives. For most Americans, the word is probably associated with a vague notion of bad behavior by big banks that got us into trouble. They may not immediately associate the word with a utility company hedging the cost of fuel. Or a manufacturer locking in prices for metal supplies. Or an exporter managing foreign currency risk. But as you well know, the core function of the derivatives markets is to enable businesses to hedge price, production and other types of risk they routinely face. And therefore anyone in my position has to ask himself, well, are we making the markets better for the businesses that need them? Are we making sure they operate with integrity and without fraud? Can businesses use them effectively and efficiently?

The global financial crisis, however, taught us that this is not the only thing we must think about. The crisis showed us how excessive risk in the over-the-counter derivatives market could contribute to systemic risk. The damage to our financial system and our economy from the global financial crisis is well known: eight million jobs lost, millions of homes foreclosed, many businesses shuttered, many retirements and college educations deferred. I spent five years working to help our nation recover from that crisis. And so as we seek to make sure these markets function well for the businesses that need them, we must at the same time make sure they do not create excessive risk to our financial system or our economy generally.

If you look at what we have been doing since June, you will see that we are addressing both those goals. It has been a busy and productive time. We have been active in a number of areas. We have been addressing the specific concerns of end-users in a number of areas. We have been continuing the work to bring the over-the-counter swaps market out of the shadows and implement the needed regulatory reforms mandated by Congress. We have also continued to carry out our traditional responsibilities of surveillance, compliance, and enforcement. And we have been addressing new developments and challenges in our markets, particularly those created by technological development.

The agency is fortunate to have a talented staff. The progress we have made is a credit to their hard work and dedication. My fellow commissioners each bring valuable experience and judgment. I commend my fellow commissioners in particular for their efforts to reach out and make sure we are all well informed by a diversity of views, and for their willingness to collaborate and work constructively together. I believe all of us are working in good faith to carry out the CFTC’s responsibilities.

Today I want to review some of the things we have done over the last eight months, and discuss some of the things we will be doing in the upcoming months.

Making Sure the Markets Work for Commercial End-Users

Over the last 8 months, we have made it a priority to address concerns of commercial end-users. An important part of this effort has been fine-tuning our rules. This is, of course, a natural process for any regulatory agency, but it is particularly appropriate in our case. That is because the CFTC’s responsibilities were increased dramatically as a result of the worst financial crisis this country has faced since the Great Depression. As you know, the agency was given the responsibility to implement a new regulatory framework for the over-the-counter swaps market, a $400 trillion market in the U.S., measured by notional amount.

To fulfill that responsibility, the CFTC developed and published many new rules. With reforms as significant as these, it is inevitable that there will be a need for some adjustments. And that is what we have been doing.

Last September, for example, the Commission amended its rules so that local, publicly-owned utility companies could continue to effectively hedge their risks in the energy swaps market. These companies, which keep the lights on in many homes across the country, must access these markets efficiently in order to provide reliable, cost-effective service to their customers. The Commission unanimously approved a change to the swap dealer registration threshold for transactions with special entities which will make that possible.

In November, the Commission proposed to modify one of our customer-protection related rules to address a concern of many in the agricultural community and many smaller customers regarding the posting of collateral. These rules had been unanimously adopted in the wake of MF Global’s insolvency and were designed to reduce the risk of similar failures and to protect customers in the event of such a failure. Market participants asked that we modify one aspect of the rules regarding the deadline for futures commission merchants to post “residual interest,” which, in turn, can affect when customers must post collateral. I expect that we will finalize this rule change in the near future.

We have taken a number of other steps as well. We have proposed to clarify when forward contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price – will be excluded from being considered swaps so that commercial companies can continue to conduct their daily operations efficiently. We have proposed to revise certain recordkeeping requirements to lessen the burden on commercial end-users and commodity trading advisors. The Commission staff has taken action to make sure that end-users can use the Congressional exemption given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.

CFTC staff also recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts, recognizing that immediate reporting can undermine a company’s ability to hedge.

In sum, we have been very focused on fine-tuning the rules to make sure they work for commercial end-users, and we will continue to do so. For example, I know several of your companies are working on submitting Form TO to report trade option positions before the March 1st deadline. I’ve asked the CFTC staff to look at the usefulness of this information and we will consider changes to reduce the reporting currently required for trade options.

Implementing the New Swap Framework

Congress recognized the importance of addressing the needs of commercial end-users in creating a regulatory framework for the over-the-counter swaps market. In the Dodd-Frank Act, Congress specifically exempted commercial end-users from the requirement to trade swaps on regulated exchanges and the requirement to clear swap transactions through central counterparties. Congress recognized that the activities of commercial end-users in the derivatives markets do not create the same types or degree of risk as with large financial institutions, and so Congress provided these exemptions to minimize the potential cost impacts of necessary regulatory reform on commercial end-users. And last December, Congress took further action to make it clear that end-users are to be exempted from the requirement to post margin in connection with swaps that are not cleared.

Now, the actions we are taking with respect to the proposed rule on margin for uncleared swaps reflect this Congressional direction. Indeed, the proposed rule on margin for uncleared swaps reflects three of the most important priorities facing the Commission: first, this rule is one of the most important steps we need to take to finish the work of bringing the swaps market out of the shadows and addressing the potential for excessive risks coming out of that market; second, we are implementing this rule in a way that addresses the needs of end-users to make sure they can continue to use the derivatives markets effectively; and third, we are trying to harmonize our proposed rule as much as possible with the rules on margin for uncleared swaps of other jurisdictions. So let me take a few minutes to discuss where we are with the proposed rule on margin for uncleared swaps.

First, this rule is important because uncleared transactions will continue to be an important part of the swaps market. It was critical that we mandated clearing of standardized swaps at centralized counterparties, and we have made great progress in implementing that mandate. But not all transactions will or should be cleared. Sometimes, commercial risks cannot be hedged sufficiently through swap contracts that are available for clearing. Certain products may lack sufficient liquidity to be centrally risk managed and cleared. This may be true even for products that have been in existence for some time. And there will and always should be innovation in the market, which will lead to new products that lack liquidity.

That is why the rule on margin for uncleared swaps is important. Margin will continue to be a significant tool to mitigate the risk of default and, therefore, the potential risk to the financial system as a whole.

The second issue is the end-user concern. The rule we proposed last September on margin for uncleared swaps exempted commercial end-users from the requirement to post margin. This was also true of the original rule we proposed in 2011. Most recently, we worked with the bank regulators, who must also write margin rules, so as to harmonize our rules with theirs as much as possible, and I am pleased that their latest rules also exempt end-users. And in light of the passage of the margin provisions in the TRIA bill, we are working to implement these statutory end-user margin protections quickly through an interim final rule, as Congress intended.

In addition to harmonizing with the U.S. bank regulators, I also think it is very important that our rules be as similar as possible with the rules that Europe and Japan are looking to adopt. For that reason, we have spent considerable time in discussions with our international counterparts. In this regard, I am willing to consider some changes to our proposed rule in order to ensure greater consistency. For example, the threshold for when margin is required is currently lower in our proposed rule than in the proposals in Europe and Japan, and I believe we should harmonize those even if it means increasing ours. I would expect us to finalize a rule by the summer, and I expect that we will incorporate a slight delay in the implementation timetable for the rule.

With regard to cleared transactions, we have made significant progress and continue to move forward. Today, the percentage of transactions that are centrally cleared in the markets we oversee is about 75 percent, up from about 15 percent at the end of 2007. Clearing through central counterparties is now required for most interest rate and credit default swaps. As directed by Congress, our rules specifically exempt commercial end-users. Clearing mandates are also coming on line in other jurisdictions.

Of course, clearing does not eliminate the risk that a counterparty to a trade will default. Instead, it provides us with strong tools to manage that risk, and mitigate adverse effects should a default occur. For central clearing to work well, active, ongoing oversight is critical. So we are very focused on ongoing surveillance of clearing member risk. We are focused on examinations of clearinghouses, so that we make sure clearinghouses have the financial, operational and managerial resources, and all the necessary systems and safeguards, to operate in a fair, transparent, and efficient manner. We must also make sure that contingency plans for clearinghouse recovery are sufficient, and we will be holding a roundtable in early March to discuss these issues. I am looking forward to gathering feedback from a variety of market participants, including commercial end-users.

We are also continuing to work with the European Commission on cross-border recognition of clearinghouses.

We are also working on two other rules regarding capital and position limits. Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that commercial end-users can continue to engage in bona fide hedging. We have received substantial public input on the position limits rule. It is important that we consider these comments carefully. Commission staff is also considering next steps on the rule for capital for swap dealers, which is another rule where we are working together with other regulators. As with the rule on margin for uncleared swaps, we will take the time necessary to get these rules right.

New Challenges and Risks

We are also doing all we can to address new challenges and risks in our markets, which can directly impact participants, including commercial end-users. We have been very focused on the increased use of automated trading strategies, for example, and their impact on the derivatives markets.

Cybersecurity is perhaps the single most important new risk to market integrity and financial stability. The risk is apparent. The examples from within and outside the financial sector are all too frequent and familiar: Anthem, JP Morgan, Sony, Home Depot, and Target among others. Some of our nation’s exchanges have also been targeted or suffered technological problems that caused outages or serious concerns. And because of the interconnectedness of financial institutions and market participants, an attack at one institution can have significant repercussions throughout the system.

Because critical parts of the plumbing of the financial system are under our jurisdiction, there is no question that cybersecurity must be a priority for us. The question is how can we be most effective in this area? After all, many financial institutions are spending more on cybersecurity than our entire budget. One bank recently told me they had a cyber operations budget, and a cyber change budget, and each was a multiple of our budget. There were news reports recently that one financial institution is hiring 1,000 people dedicated to digital security. We have about 2/3 of that number in total. And there are many government agencies who have built up great expertise on cybersecurity.

So we are addressing it in the following ways: first, cyber concerns are now part of the core principles that trading platforms and clearinghouses must meet. Second, we have required these entities to develop and maintain risk management programs and recovery procedures that meet certain standards. Third, we are focusing on these issues in our examinations. We are looking at whether the institution is following best practices. Is the board of directors focused on the issue? Is there a culture in which cybersecurity is given priority? Has the entity not only adopted good policies on cybersecurity, but are those policies being observed and enforced?

Another issue we will focus on is whether the private companies that run the core infrastructure under our jurisdiction –the major exchanges and clearinghouses for example – are doing adequate testing themselves of their cyber protections. We do not have the resources to do independent testing, but they do. So are they doing it? And what are the best practices they should follow in doing testing? We intend to hold a roundtable on this issue next month.


While we have made substantial progress over the last 8 months, there is much more we should be doing. Not only do we now have responsibility for the swaps market, but our traditional markets have grown in size and complexity. To do so we must have resources that are proportionate to our responsibilities, and we must use them wisely.

In my view, the CFTC’s current budget still falls short. We cannot be as responsive to your concerns as we wish to be. We cannot do as much to prevent fraud and manipulation, and to engage in the surveillance that helps insure our markets operate with integrity. Simply stated, without additional resources, our markets cannot be as well supervised; participants and their customers cannot be as well protected; market transparency and efficiency cannot be as fully achieved.


The United States has the best derivatives markets in the world – the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity, in large part because they have attracted participants and served the needs of commercial end-users who depend on them. I look forward to working with all of you to make sure that they continue to do so in the years ahead.

Thank you for inviting me. I would be happy to take some questions.

Last Updated: February 26, 2015

Friday, February 27, 2015


Thursday, February 26, 2015
California Financier Charged in Alleged Ponzi Scheme
Former CEO and Corporate Counsel of Financial Services Marketing Company Previously Pleaded Guilty

A California man and purported billionaire financier was taken into federal custody today for his role in an alleged Ponzi scheme in which investors lost $2.5 million, announced Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and Inspector in Charge Gary Barksdale of the U.S. Postal Inspection Service’s Criminal Investigations Group.

Kenneth Brewington, 50, of Corona, California, was indicted on Feb. 24, 2015, by a federal grand jury in the District of Colorado for conspiracy to commit wire and mail fraud, mail fraud and six counts of wire fraud.

According to allegations in the indictment, from September 2009 until 2011, Brewington and his co-conspirators sold promissory notes to investors through a financial services marketing company based in Denver called Compass Financial Solutions (CFS).  The indictment alleges that Brewington and his co-conspirators falsely represented to investors that Brewington held millions of Euros in overseas bank accounts, and that the proceeds raised from investors would be used to obtain the release of his overseas funds.  To conceal the scheme, Brewington and his co-conspirators allegedly had investors wire their funds to an attorney trust account.  The funds from that account, however, were then allegedly sent to Brewington and his co-conspirators.  Brewington and his co-conspirators allegedly used the investors’ money for their own personal benefit.

The former corporate counsel for CFS, William E. Dawn, 77, of Denver, and the former CEO of CFS, Brian G. Elrod, 58, of Lakewood, Colorado, previously pleaded guilty for their roles in the scheme.  Sentencing hearings are scheduled for May 29, 2015, and May 22, 2015, respectively.

The charges contained in an indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

The case was investigated by the U.S. Postal Inspection Service, and is being prosecuted by Trial Attorneys Henry P. Van Dyck and Jennifer G. Ballantyne of the Criminal Division’s Fraud Section.  The Securities and Exchange Commission has provided substantial assistance in this matter.

Thursday, February 26, 2015 | Readout of SEC Chair Mary Jo White’s Meeting with European Union Financial Services Commissioner Jonathan Hill | Readout of SEC Chair Mary Jo White’s Meeting with European Union Financial Services Commissioner Jonathan Hill



Opening Statement of Commissioner J. Christopher Giancarlo Before the First Meeting of the CFTC’s Energy and Environmental Markets Advisory Committee

February 26, 2015

Good morning and welcome to the inaugural meeting of the CFTC’s reconstituted Energy and Environmental Markets Advisory Committee (EEMAC). Congress created the EEMAC as part of the Dodd-Frank Act because it recognized the critical need for a forum in which “exchanges, firms, end users and regulators” could advise the Commission of their concerns regarding “energy and environmental markets and their regulation by the Commission.”1 Congress was so concerned that the Commission know the effects its rules and policies have on energy and environmental markets that it mandated the EEMAC hold at least two public meetings each year.2 Disappointingly, no EEMAC meetings have been held since the Dodd-Frank Act was signed into law.

As a new Commissioner and the sponsor of the EEMAC, I take the Dodd-Frank mandate seriously. I am pleased to convene the first of what I hope are many productive EEMAC meetings to maintain a healthy dialogue between the Commission and the energy and environmental market participants. That dialogue is especially crucial in the wake of the Dodd-Frank Act because Commission policies have a significantly more profound impact on energy markets than they ever have, and at the same time, the energy and environmental markets are undergoing the most sweeping technological and structural changes in a generation.

In my limited time as a CFTC Commissioner, I have met with coal miners in Kentucky, oil refiners in Texas, and natural gas pipeline operators in Louisiana. They all impressed upon me their deep concern over the form and substance of the Commission’s proposed position limits regime on energy derivatives.3 The CFTC has already held two public events to solicit feedback from market participants on these proposals during my time at the Commission. I believe the Commission will greatly benefit from a similar session dealing with the energy sector.

Energy production in the U.S. has changed significantly in the last decade, with production of oil and natural gas increasing dramatically as a result of horizontal drilling and hydraulic fracturing, among other factors.4 And in the last few months, we have all noticed a dramatic fall in energy prices, with gas falling to, as low as, $2.00 per gallon at the pump. In view of the dramatic changes in U.S. energy markets, a further session exploring the unique concerns of energy market participants regarding the position limits proposals will ensure that the Commission has a complete picture of the consequences of these proposals on all aspects of the energy and environmental markets.

The purpose of today’s meeting is to have a lively dialogue on three important topics of concern.

Panel I: What Does the Data Show?

First and foremost is an examination of the research and data supporting the proposed position limits rules. In 2011, when the Commission voted on its first proposal to implement the new Dodd-Frank federal position limits regime, former Commissioner Mike Dunn registered his belief that price volatility in physical commodities is primarily driven by changes in supply and demand.5 Commissioner Dunn explained that “to date[,] CFTC staff has been unable to find any reliable economic analysis to support either the contention that excessive speculation is affecting the market[s] we regulate or that position limits will prevent excessive speculation.”6 Fast forwarding to the present day, the CFTC’s current position limits proposal is primarily reliant on studies of two major market events dating from 1979 and 2006 to conclude that position limits are necessary to diminish, eliminate or prevent excessive speculation.7 I hope that our first panel – and subsequent Federal Register comments – augments the Commission’s assessment of the need for, and efficacy of position limits, especially in light of the current conditions in the U.S. energy markets.

Panel II: Designated Contract Market Experience with Position Limits and Trading Liquidity.

The second panel will examine a critical attribute of position limits: liquidity. Congress expressed an explicit concern that the Commission set position limits in a way that maintains liquidity for hedgers.8 Although we must be attentive to liquidity issues in the spot month, liquidity takes on even greater importance outside of the spot month because that is where liquidity is often the hardest to find. In addition, as I have noted in other contexts, liquidity is the vital component of healthy and vibrant derivatives markets. The Commission should heed the prescription of Dodd-Frank and carefully analyze the effects of its rules on available liquidity to avoid systemic risk.9

This second panel will consider the experiences of the two major U.S. futures exchanges in balancing position limits and trading liquidity. Before the Commission makes any final determination of the necessity of position limits, it must make doubly sure that any rules enacted preserve liquidity for hedgers and do not unduly reduce the liquidity that is critical to well-running, orderly markets. Hearing from folks with decades of front-line experience administering position limits for energy markets is a good place to start.

Panel III: Bona Fide Hedging.

And last, but certainly not least, our third panel will tackle a critical component of the position limits rules: the bona fide hedging exemption. Congress instructed the Commission to write rules exempting bona fide hedges from any position limits rules.10 Crafting proper bona fide hedge exemptions has long been a challenging proposition for the Commission, with several commissioners on both sides of the aisle expressing concerns that the Commission’s definitions of bona fide hedging are too narrow.11 The Commission has proposed a significant reorganization of its bona fide hedging policy, which eliminates the possibility of any unenumerated hedges. The Commission has instead proposed a multi-part definition of bona fide hedging, which includes common requirements for all hedges, special requirements for hedges of a physical commodity, separate categories of enumerated hedges, and additional restrictions on the use of cross-commodity hedges.12 The Commission proposes to interpret these provisions with a series of 14 pre-approved examples. Staff guidance is available for other transactions, but such transactions carry risk of non-approval as a bona fide hedge, which could leave market participants in peril of having positions over the applicable limit.13

I and others have expressed concern that bona fide hedging rules structured in this way impose federal regulatory edicts in place of business judgment in everyday commercial risk management. This panel should give us a greater understanding of the background and evolution of Commission hedging policy, as well as an understanding of the real world implications that the proposed bona fide hedging rules will have on U.S. energy market participants.

As we get started this morning, I want to extend a special welcome to Administrator Adam Sieminski of the U.S. Energy Information Administration, who will give an update on the current conditions in the U.S. energy markets. Thank you also to the other witnesses who have prepared thoughtful presentations. In addition, I want to thank all of the Commission staff who worked so hard to arrange this meeting. And of course, I would like to thank all of the Members and Associate Members of the EEMAC for volunteering their time and expertise. We are all grateful for your service.

Since the EEMAC has no statutory Chairman, each meeting will be chaired by a different member of the Committee. I am pleased to announce that Jim Allison, an EEMAC member, has agreed to chair today’s meeting. Thanks, Jim. I would like to recognize Chairman Massad and the other commissioners to make their opening remarks.

1 Dodd Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010) (“Dodd-Frank”) § 751; see also 7 U.S.C. §2(a)(15)(A).

2 7 U.S.C. § 2(a)(15)(B)(i).

3 See Position Limits for Derivatives, 78 Fed. Reg. 75680 (Dec. 12, 2013); Aggregation of Positions, 78 Fed Reg. 68946 (Nov. 15, 2013).

4 See Administrator Adam Sieminski, Energy Information Agency, U.S. Department of Energy, Statement Before the U.S. Senate Committee on Energy and Natural Resources (July 16, 2013), available at; see also Scott Nyquist and Susan Lund, “Shale Revolution: Opportunity to Jump-Start Economic Growth,” Forbes (Nov. 19, 2014), available at

5 Open Meeting on the Ninth Series of Proposed Rulemakings Under the Dodd-Frank Act, Transcript (Jan. 13, 2011) at 7-9.

6 Id. at 9.

7 See 78 Fed. Reg. at 75685-96.

8 7 U.S.C. § 4a(a)(3)(B)(iii).

9 See, e.g., J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, (Jan. 29, 2015) at 52-54.

10 See generally, 7 U.S.C. § 4a(c)(1).

11 See, e.g., Open Meeting on Two Final Rule Proposals Under the Dodd-Frank Act, Transcript (Oct. 18, 2011) at 19 (Comm’r Sommers explaining that Commission unnecessarily narrowed the bona fide hedge exemptions beyond what was required by the Dodd-Frank Act); id. at 26 (Comm’r Chilton agreeing with some of Commissioner Sommers’ concerns on bona fide hedging).

12 See 78 Fed. Reg. at 75706, 75823-24 (proposed Rule 150.1 defining bona fide hedges).

13 78 Fed. Reg. at 75835-39 (proposed Appendix C to Part 150).

Last Updated: February 26, 2015 | Conflicts, Conflicts Everywhere – Remarks to the IA Watch 17th Annual IA Compliance Conference: The Full 360 View | Conflicts, Conflicts Everywhere – Remarks to the IA Watch 17th Annual IA Compliance Conference: The Full 360 View

Setting Forth Goals for 2015: Address to Practising Law Institute’s SEC Speaks in 2015 Program

Setting Forth Goals for 2015: Address to Practising Law Institute’s SEC Speaks in 2015 Program

Wednesday, February 25, 2015


02/19/2015 11:00 AM EST

The Securities and Exchange Commission charged a New York City-based brokerage firm and its CEO with fraudulently deceiving other market participants while conducting auctions to liquidate collateralized debt obligations (CDOs).

An SEC investigation found that VCAP Securities and Brett Thomas Graham improperly arranged for a third-party broker-dealer to secretly bid at these same auctions on behalf of their affiliated investment adviser in order to acquire certain bonds to benefit the funds it managed.  Under engagement agreements with the CDO trustees, VCAP and its affiliates were prohibited from bidding while serving as liquidation agent for these auctions.  VCAP had access to all of the confidential bidding information as the liquidation agent, and Graham exploited it to ensure their third-party bidder won the coveted bonds at prices only slightly higher than other bidders.  VCAP’s investment adviser affiliate then immediately bought the bonds from its secret bidder.

VCAP and Graham agreed to pay nearly $1.5 million combined to settle the SEC’s charges, and Graham is barred from the securities industry for at least three years.

“Graham abused a position of trust by playing the roles of both conductor and bidder during CDO liquidation auctions to the detriment of other participants,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.  “The settlement requires Graham and VCAP to give up fees they obtained while conducting these unfair liquidations that landed certain bonds in their fund manager’s portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Graham and VCAP made material misrepresentations to the trustees of the various CDOs for which VCAP served as liquidation agent.  After Graham had discussed bidding arrangements with the third-party broker-dealer, VCAP and Graham falsely represented in engagement agreements that they and their affiliates would not bid in the auctions or misuse confidential bidding information.  VCAP provided the various trustees with documents that did not disclose that its investment adviser affiliate was actually the winning bidder.  VCAP’s scheme enabled the investment adviser affiliate to obtain a total of 23 bonds during five auctions.

The SEC’s order finds that VCAP and Graham violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599 while Graham agreed to pay disgorgement and prejudgment interest of $127,733 plus a penalty of $200,000.  The SEC’s order censures VCAP and requires the firm and Graham to cease and desist from committing or causing any future violations of Section 10(b) of the Exchange Act and Rule 10b-5.  VCAP and Graham consented to the SEC’s order without admitting or denying the findings.

The SEC’s investigation was conducted by the Complex Financial Instruments Unit and led by Sarra Cho and Christopher Nee with assistance from Kapil Agrawal and Alfred Day.  The case was supervised by Andrew Sporkin and Mr. Osnato.

Tuesday, February 24, 2015

Opening Remarks on SEC Investor Education and Advocacy to Military Service Men and Women at Ft. Hood

Opening Remarks on SEC Investor Education and Advocacy to Military Service Men and Women at Ft. Hood


02/19/2015 03:20 PM EST

The Securities and Exchange Commission announced insider trading charges against a former Fortune 500 company executive and his brother-in-law whom he allegedly tipped with nonpublic information ahead of the company’s merger.

The SEC alleges that while serving as vice president of construction operations at Baton Rouge-based The Shaw Group, Scott Zeringue traded company securities based on confidential information he learned on the job about an impending acquisition by Chicago Bridge & Iron Company.  In the weeks leading up to the public announcement of the merger, Zeringue purchased 125 shares of Shaw common stock and asked his brother-in-law Jesse Roberts III, a dentist who lives in Ruston, La., to also purchase Shaw stock on his behalf.

Zeringue, Roberts, and others subsequently tipped by Roberts allegedly made nearly $1 million in combined illicit profits after the merger announcement caused the price of Shaw stock to increase by more than 55 percent.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Louisiana today announced criminal charges against Roberts.  Zeringue previously pled guilty to criminal charges and has agreed to settle the SEC’s charges by paying disgorgement of his ill-gotten trading profit of $32,006 plus a penalty of $64,012.  He will be prohibited from serving as an officer or director of a publicly-traded company for 10 years.  The settlement is subject to court approval.

“As charged in our complaint, Zeringue betrayed his duty to his company and its shareholders by tipping his brother-in-law with nonpublic information,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement.   “Armed with this inside knowledge, Roberts loaded up on option contracts that he knew would earn him a huge but illegal profit.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Louisiana, the insider trading occurred in the summer of 2012.  Roberts reaped more than $765,000 through his illicit trading of call option contracts, and others made more than $154,000 from trading based on his tips.  Roberts rewarded Zeringue for the original tip by giving him $30,000 in cash in November 2013.  The SEC’s complaint charges Zeringue and Roberts with violations of the antifraud provisions of the federal securities laws.

The SEC’s continuing investigation is being conducted by Louis J. Gicale Jr. and Roger Paszamant under the supervision of Melissa A. Robertson.  The SEC’s litigation against Roberts will be led by Derek Bentsen.  The SEC appreciates the assistance of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Middle District of Louisiana as well as the U.S. Secret Service, Internal Revenue Service Criminal Investigation, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.

Sunday, February 22, 2015


Litigation Release No. 23191 / February 6, 2015
Securities and Exchange Commission v. Joseph A. Kostelecky, Civil Action No. 1:15-cv-00017-CSM (D.N.D.)
SEC Charges Sales Executive in North Dakota for Enabling Financial Fraud

The Securities and Exchange Commission today charged a former senior sales executive living in North Dakota for his role in a financial fraud that occurred at a Canadian oil-and-gas services company Poseidon Concepts Corp.

The SEC alleges that Joseph A. Kostelecky, who was the company's only senior executive in the U.S., was among those responsible for Poseidon's fraudulent reporting of approximately $100 million in revenues for contracts that were either non-existent or uncollectable. Poseidon's business in the U.S. was focused on renting above-ground fluid storage tanks for oil-and-gas hydraulic fracturing operations. According to the SEC's complaint filed in federal court in North Dakota, Kostelecky directed Poseidon's accounting staff to record revenues for inadequately documented transactions and made false assurances to several members of Poseidon's management in Canada that transactions with U.S. customers were valid and collectible. Poseidon consequently issued three quarterly financial statements from January to November 2012 with materially inflated revenues while its stock was trading in the U.S. and Canada. The magnitude of the overstatements was substantial, comprising approximately 64 to 72 percent of total revenues reported over the first three fiscal quarters of 2012.

When Poseidon later announced publicly that it would need to restate its financials due to the inflated revenues, its stock price collapsed and the company eventually filed for bankruptcy. Poseidon was based in Calgary and operated a subsidiary with offices in Denver and Dickinson, N.D., where Kostelecky still resides.

Kostelecky agreed to settle the SEC's charges by paying a $75,000 penalty and being barred from serving as an officer or director of a U.S. publicly-traded company. Without admitting or denying the SEC's allegations, Kostelecky consented to a final judgment enjoining him from violations of Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC's action against Kostelecky was filed in conjunction with an enforcement proceeding by the Alberta Securities Commission against Poseidon's senior management, including Kostelecky.

The SEC's investigation was conducted by Lee Robinson, Donna Walker, and Ian Karpel in the Denver Regional Office. The SEC appreciates the assistance of the Alberta Securities Commission.

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Friday, February 20, 2015

Effective Disclosure for the 21st Century Investor

Effective Disclosure for the 21st Century Investor


Litigation Release No. 23197 / February 13, 2015
Securities and Exchange Commission v. Mozzam "Mark" Malik and American Bridge Investment Group, LLC, d/b/a Wolf Hedge LLC, Civil Action No. 15-1025 (RJS)
SEC Charges Hedge Fund Manager Mark Malik With Stealing Investor Funds

The Securities and Exchange Commission filed an emergency enforcement action to halt an ongoing fraud by Moazzam "Mark" Malik, a Pakistani citizen and New York City resident. The SEC charged Malik and his hedge fund with stealing money from his investors.

The SEC alleges that Moazzam "Mark" Malik falsely claimed to be operating a hedge fund with approximately $100 million in assets under management, and he solicited investors with promises of consistently high returns. Although he raised $840,774 from investors, his fund never made real investments and never held more than $90,177 in assets as Malik continually withdrew the cash and spent it as his own. Despite repeated demands from investors for the return of their money, Malik has flatly refused or delayed the bulk of their redemption requests. He allegedly went so far as to create a fictitious fund employee who sent one investor an e-mail claiming that Malik had died.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Malik has been continuing to solicit investors amid the redemption requests. His fund has changed its name several times since he created it in 2010. Malik initially called it Wall Street Creative Partners before changing it to Seven Sages Capital LP and then American Bridge Investment Group LLC. Most recently it has been known as Wolf Hedge LLC. Malik described his fund as "a privately held Global Investment Management firm dedicated to the individuals and institutions around the world."

The SEC alleges that Malik created a fictitious "Amanda Ebert" who was identified with a title of "Investor Relations, Wolf Hedge LLC" in e-mail communications with several investors. Malik included in the e-mails a purported photograph of Ebert that he copied off the Internet. The real-life woman in the photo does not know Malik and never authorized the use of her image in the e-mails.

The SEC's complaint charges Malik and American Bridge with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and charges Malik with violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC is seeking a temporary restraining order to freeze their assets and prohibit them from committing further violations of the federal securities laws. The SEC seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties.

Wednesday, February 18, 2015



The Securities and Exchange Commission announced charges against an Atlanta resident accused of insider trading in the stock of a technology company by exploiting nonpublic information he learned from the friend of a company executive.

The SEC’s Enforcement Division alleges that Charles L. Hill Jr. made approximately $740,000 in illicit profits by trading in Radiant Systems stock on the basis of confidential inside information about an impending tender offer by NCR Corporation to buy the company.  Hill was aware that his friend who shared this nonpublic information also was a friend of a Radiant Systems executive.  Hill purchased approximately 100,000 Radiant Systems shares that were valued at nearly $2.2 million on the last trading day before the acquisition was publicly announced in July 2011.  Hill had not purchased equity securities in the previous four years, and had never before bought Radiant Systems stock.

“The SEC has rules designed to protect against misuse of nonpublic tender offer information.  We will take action against individuals who acquire such information from insiders and exploit it for their own trading benefit,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta office.

The SEC’s Enforcement Division alleges that Hill violated Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

Monday, February 16, 2015


Litigation Release No. 23195 / February 11, 2015
Securities and Exchange Commission v. Caledonian Bank Ltd., et al., Civil Action No. 15-CV-00894

The Securities and Exchange Commission has charged five offshore entities with offering and selling unregistered penny stocks into the public markets.

According to the SEC's complaint filed on February 6, 2015, Cayman Islands-based, Caledonian Bank Ltd. and Caledonian Securities Ltd., Belize-based, Clear Water Securities, Inc. and Legacy Global Markets S.A., and Panama-based, Verdmont Capital S.A. (collectively, the "Defendants") conducted unregistered sales of securities, reaping over $75 million in illegal sales proceeds. Simultaneous with filing its complaint, the SEC obtained an emergency court order freezing assets of the Defendants located in the United States.

The SEC alleges that the Defendants sold penny stocks in unregistered distributions from their U.S. brokerage accounts of four shell company issuers, namely, Swingplane Ventures, Inc., Goff Corp., Norstra Energy Inc. and Xumanii, Inc. Each of the unregistered distributions took place through virtually the same scheme. The issuers first filed with the Commission bogus Forms S-1 that purported to register sales of securities to public investors when, in fact, no bona fide sales occurred because the securities purportedly sold remained in the control of the issuers and their affiliates. In the sham offerings, the issuers pretended to sell securities to investors residing in such places as Serbia, Mexico, Ireland, Norway, Panama, and Jamaica, while the issuers or their affiliates maintained control and possession of the stock certificates in a scheme where: (1) restricted stock was passed off as "free trading" unrestricted stock; (2) the share certificates issued were subsequently transferred, without restrictive legends, to the Defendants; and (3) the Defendants deposited the shares into their U.S. brokerage accounts and sold the shares to the public.

The complaint further alleges that the issuers or their affiliates directed the transfers of restricted securities to the Defendants, often through various offshore nominee entities intended to conceal beneficial ownership of the securities. Once the shares, which were controlled throughout by the issuers or its affiliates, were held in names of the Defendants, the shell company issuers announced a reverse-merger or business combination with a purportedly operating enterprise. The Defendants then offered and sold into the public markets hundreds of millions of shares of the four issuers in unregistered distributions simultaneously with aggressive and extensive promotion campaigns. Each of the four stocks lost virtually all of their market value within months of the unregistered sales. In doing so, the complaint alleges that the Defendants operated as affiliates, dealers, sales outlets and underwriters by offering and selling the penny stocks from brokerage accounts in the United States.

The SEC's complaint, which was filed in the U.S. District Court for the Southern District of New York, seeks, among other things, to permanently enjoin the Defendants from violating Section 5(a) and 5(c) of the Securities Act of 1933, prohibiting the Defendants from participating in an offering of penny stock, the disgorgement of all proceeds obtained in the unregistered distributions, and civil penalties.

Following the SEC's complaint, the Cayman Islands Monetary Authority issued a public notice on February 10, 2015 advising that it appointed two Controllers to assume control of the affairs of Caledonian Securities Limited and Caledonian Bank Limited. That same day, Caledonian Bank's shareholders voted to place the bank into voluntary liquidation.

The SEC's investigation, which is continuing, is being conducted by Ernesto Amparo and supervised by Anita B. Bandy. The SEC's litigation will be led by Richard E. Simpson and A. David Williams. The SEC appreciates the assistance of Financial Industry Regulatory Authority, the Cayman Islands Monetary Authority, the Quebec Autorité de Marchés Financiers, and the Republic of Serbia Securities Commission.

Sunday, February 15, 2015


Litigation Release No. 23188 / February 5, 2015
Securities and Exchange Commission v. Total Wealth Management, Inc., et al., Civil Action No. 15-CV-0226-BAS-DHB
SEC Obtains Emergency Relief Against San Diego Investement Advisor Charged with Wrongfully Taking Client Funds

The Securities and Exchange Commission today announced charges and an emergency temporary restraining order and asset freeze against a Utah resident and his San Diego, Calif. investment advisory firm.

The SEC alleges that Jacob Keith Cooper and Total Wealth Management Inc. wrongfully took at least $150,000 from clients in order to partially fund the potential settlement of an administrative proceeding previously instituted against them in 2014 by the SEC's Division of According to the SEC's complaint, filed yesterday in the U.S. District Court for the Southern District of California, the Division of Enforcement had reached a tentative settlement with Cooper and Total Wealth in the previously-instituted administrative proceeding that required Cooper to escrow $150,000. However, after learning that Cooper intended to pay this amount using funds misappropriated from clients, the Division terminated this settlement and the agency brought this emergency action in federal district court. Cooper's use of investor funds for his settlement with the SEC was never disclosed to or authorized by clients, and was a breach of Total Wealth's and Cooper's fiduciary duty to their clients. According to the complaint, Cooper admitted to taking $150,000 in investor monies to fund his escrow settlement, although he claims that it was a "loan."

According to the complaint, Cooper has also admitted that he and Total Wealth have used investor monies to pay unspecified legal expenses related to the Division of Enforcement's previously-instituted administrative proceeding as well as a private class action lawsuit filed in California state court. The complaint alleges that Total Wealth has been charging investors unexplained, inflated "administrative fees" to pay those expenses and that Total Wealth and Cooper have failed to provide any accounting or meaningful explanation for the fees to investors, despite investors' repeated requests.

The Honorable Cynthia Bashant for the U.S. District Court for the Southern District of California issued an order temporarily enjoining Cooper and Total Wealth from future violations of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940, and rule 206(4)-8 thereunder, as well as orders (1) freezing Cooper's and Total Wealth's assets; (2) appointing a temporary receiver; (3) prohibiting the destruction of documents, (4) expediting discovery; and (5) requiring accountings. Cooper and Total Wealth stipulated to the entry of the court orders without admitting or denying the SEC's allegations. The SEC also seeks preliminary and permanent injunctions, return of ill-gotten gains with prejudgment interest, and financial penalties against Cooper and Total Wealth.

A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for February 13, 2015.

Friday, February 13, 2015



The Securities and Exchange Commission  charged an investment adviser to several alternative mutual funds for maintaining millions of dollars of the funds’ cash collateral at broker-dealer counterparties instead of the funds’ custodial bank.  The violations were uncovered during an SEC examination of the firm and the funds it manages.

Water Island Capital LLC agreed to pay a $50,000 penalty to settle the SEC’s charges.

According to the SEC’s order instituting a settled administrative proceeding, an investment company that maintains its securities and similar investments in the custody of a qualified bank must likewise keep in the bank’s custody other cash assets of the investment company.  The SEC’s order finds that Water Island Capital did not ensure that roughly $247 million in cash collateral held by broker-dealer counterparties was maintained with the funds’ custodial bank.  The cash collateral related to the funds’ investments in certain total return and portfolio return swaps.  

“Mutual funds must ensure that all fund assets are properly protected,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Water Island Capital failed to implement the required policies and procedures to ensure all cash collateral was held in the custody of the funds’ bank.”

The SEC’s order finds that in addition to causing violations of the custody requirements of Section 17(f)(5) of the Investment Company Act, Water Island Capital caused violations of Section 12 and Rule 12b-1(h) due to its failure to implement the funds’ directed brokerage policies and procedures, which required the firm to create and maintain an approved list of executing brokers for the funds as well as to monitor with documentation the funds’ compliance with the directed brokerage requirements.  Water Island Capital failed to create the list and failed to maintain documentation reflecting monitoring of the funds’ compliance pursuant to the funds’ policies and procedures.  The SEC’s order further finds that Water Island Capital caused the funds’ violations of Rule 38a-1 under the Investment Company Act.        

Water Island Capital consented to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC’s investigation was conducted by Celeste Chase and Osman Nawaz of the New York office, and the case was supervised by Amelia A. Cottrell.  The examination that led to the investigation was conducted by Joy Best, Melissa Dahle, William Maldonado, Edward Moy, and Dawn Blankenship of the New York office’s investment adviser/investment company examination program.

Wednesday, February 11, 2015

Joint Dissenting Statement Concerning Modifications to Previously-Adopted Regulation SBSR

Joint Dissenting Statement Concerning Modifications to Previously-Adopted Regulation SBSR


02/05/2015 12:45 PM EST

The Securities and Exchange Commission today charged a stock research analyst, a corporate insider, and two others involved in a California-based insider trading ring that generated nearly $750,000 in illegal profits by trading in advance of four corporate news announcements.

The SEC alleges that John Gray, then an analyst at Barclays Capital, and his friend Christian Keller traded on confidential merger information that Keller learned while working in finance at two Silicon Valley-based public companies.  Gray and Keller attempted to conceal the trades by placing them in a brokerage account held in the name of Gray’s friend Kyle Martin.  Gray also tipped a fourth participant, Aaron Shepard, with nonpublic information so he could trade in advance of some of the corporate announcements.
Gray, Keller, Martin, and Shepard have agreed to settle the SEC’s charges by paying more than $1.6 million combined.

“Gray and Keller tried to evade detection by trading in another person’s name, using prepaid disposable phones, and making structured cash withdrawals to share profits,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Despite their careful planning, we were able to detect the suspicious trading and effectively use our cooperation program to expose their nefarious scheme.”

According to the SEC’s complaint filed in federal court in the Northern District of California, Gray was primarily responsible for placing the trades in Martin’s account.  Gray and Martin also placed additional trades in other accounts based on Keller’s confidential information that Gray shared with Martin.  Gray provided Keller kickbacks in cash from the trading profits.

The SEC alleges that Gray and Keller first traded on confidential merger information that Keller learned while employed as a financial analyst at Applied Materials Inc.  They illegally traded ahead of the company’s acquisitions of Semitool Inc. in 2009 and Varian Semiconductor Equipment Associates in 2011.  Keller left Applied Materials and joined Rovi Corporation in 2012 as a vice president for investor relations and finance.  The scheme continued as they used confidential information that Keller learned as an insider to profitably trade Rovi securities ahead of negative news announcements by the company about its 2012 first and second quarter financial results.

Gray, Keller, Martin, and Shepard agreed to make the following payments to settle the case, without admitting or denying the allegations.  The settlements are subject to court approval.
  • Gray agreed to pay disgorgement of $287,487.55, prejudgment interest of $21,836.88, and a penalty of $448,876.03.  Gray also agreed to be barred from the securities industry and from participating in penny stock offerings.
  • Keller agreed to pay disgorgement of $52,000, prejudgment interest of $4,002.03, and a penalty of $417,468.73, which represents the total profits from the secret trades placed in Martin’s brokerage account.  Keller also agreed to be barred from serving as an officer or director of a public company for 10 years.
  • Martin agreed to pay disgorgement of $243,276.10 plus prejudgment interest of $21,404.28, and Shepard agreed to pay disgorgement of $161,388.36 plus prejudgment interest of $9,633.07.  They are not being assessed additional penalties due to their significant cooperation during the SEC’s investigation.
The SEC’s investigation was conducted by Jennifer J. Lee and supervised by Steven Buchholz of the San Francisco Regional Office with assistance from John Rymas of the Market Abuse Unit of the Philadelphia Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

Monday, February 9, 2015

Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures

Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures



The Securities and Exchange Commission imposed sanctions against four China-based accounting firms that had refused to turn over documents related to investigations of potential fraud.  The China-based firms are members of large international networks associated with the “Big Four” accounting firms and registered with the Public Company Accounting Oversight Board (PCAOB).

As part of the settlement, the Commission censures the firms, which eventually began providing the documents, and requires them to perform specific steps to satisfy SEC requests for similar materials over the next four years.  Under the settlement, the firms each agreed to pay $500,000 and admit that they did not produce documents before the proceedings were instituted against them in 2012.  They agreed to the settlement without admitting or denying other findings in the order.

“As we repeatedly have stated throughout this litigation, obtaining an audit firm’s workpapers is critical to enforcement staff’s ability adequately to protect investors from the dangers of accounting fraud,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “This settlement recognizes the SEC’s substantial recent progress in obtaining those documents from registered firms in China.  The settlement also holds four of the firms accountable for previously violating U.S. rules, and makes clear that should production of documents cease, the SEC can restart the administrative proceeding.”

In January 2014, after a 12-day hearing the previous summer, an administrative law judge issued an initial decision finding that the four firms – Deloitte Touche Tohmatsu Certified Public Accountants Limited, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited Company – willfully refused to provide the SEC with workpapers and related documents in connection with their audit work for nine China-based companies that had securities registered in the U.S.  The initial decision found that the firms willfully violated Section 106 of the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide such workpapers to the SEC upon request.

After the hearing, the SEC received multiple productions of workpapers from the firms through assistance provided by the China Securities Regulatory Commission (CSRC).  As these productions were being made, the four firms petitioned the Commission to review the January 2014 initial decision.  The SEC’s Enforcement Division also sought review of aspects of that decision.  

“The settlement is an important milestone in the SEC’s ability to obtain documents from China.  Of course, we hope that it is an enduring milestone,” said Antonia Chion, Associate Director of the Enforcement Division.  “The settlement provides a path forward for obtaining productions and enhanced future cooperation from the Big Four firms.”

Under the settlement, if future document productions fail to meet specified criteria, the Commission retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.  Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or the resumption of the current proceeding against all four firms.

The proceeding continues against a fifth China-based accounting firm, Dahua CPA Ltd.

The Enforcement Division’s litigation has been led by David Mendel and assisted by Jan Folena, Amy Friedman, Marc E. Johnson, and Douglas Gordimer.  The litigation has been supervised by Matthew Solomon, Antonia Chion, and Kara Brockmeyer.

Sunday, February 8, 2015


Litigation Release No. 23187 / February 3, 2015
Securities and Exchange Commission v. Joel J. Epstein, Civil Action No. 15-cv-0506
SEC Charges Pennsylvania Man with Insider Trading

The Securities and Exchange Commission today charged Joel J. Epstein of Huntingdon Valley, Pennsylvania with insider trading based on material nonpublic information that Epstein misappropriated from his son regarding Nationwide Mutual Insurance Company's merger with Harleysville Group, Inc. On the morning of September 29, 2011, Nationwide and Harleysville, a Pennsylvania-based insurance provider, announced that Nationwide would acquire all publicly-traded shares of Harleysville for $60 per share. At the end of trading on September 29, Harleysville's stock price closed at $58.96, approximately 87% higher than the previous day's close. Epstein has agreed to settle the matter. The settlement is pending final approval by the court.

According to the SEC's complaint filed in the U.S. District Court for the Eastern District of Pennsylvania, Epstein's son learned about the impending Harleysville merger from his long-time girlfriend who was a legal assistant at a law firm that was advising Harleysville on the transaction. On or before September 2, 2011, Epstein's son told him the information he learned from his girlfriend. The complaint further alleges that, between September 2 and September 28, 2011, in breach of a duty of trust and confidence owed to his son, Epstein misappropriated the information that he received from his son and purchased 4,000 shares of Harleysville stock. Epstein sold the shares after the public announcement of the acquisition, realizing ill-gotten gains of $113,503.

The SEC's complaint also alleges that Epstein tipped four people who each purchased 1,000 shares of Harleysville stock between September 21 and September 26, 2011. All four tippees sold their shares on the day of the public announcement, realizing total ill-gotten gains of $123,511.

Epstein has consented to the entry of a final judgment permanently enjoining him from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and requiring him to pay disgorgement of $237,014, the amount of his and his tippees' ill-gotten gains, plus prejudgment interest of $21,599, and a civil penalty of $237,014.

The SEC's investigation, which is continuing, has been conducted by Kelly L. Gibson, Assunta Vivolo and John Rymas of the SEC's Market Abuse Unit along with John V. Donnelly of the Philadelphia Regional Office. The case has been supervised by Daniel M. Hawke, Chief of the Market Abuse Unit, and G. Jeffrey Boujoukos. The SEC appreciates the assistance of the U.S. Attorney's Office for the Eastern District of Pennsylvania, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

Saturday, February 7, 2015


February 3, 2015
CFTC Charges California Residents Christopher Valois and Cynthia Wong and Their Companies with Fraud and Registration Violations

Husband and wife team allegedly stole more than $300,000 of the $750,000 their customers invested

Federal court enters emergency Order freezing Defendants’ assets and protecting books and records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Cormac J. Carney of the U.S. District Court for the Central District of California entered an emergency restraining Order freezing assets and prohibiting the destruction or concealment of books and records of Defendants Christopher Valois, Cynthia Wong, and their companies, Bertram Trade LLC (Bertram) and Churchhill Commodities Trading LLC (Churchhill), all of Orange County California. The judge set a hearing date for February 12, 2015.

The court’s Order arises from a CFTC Complaint filed on January 28, 2015, charging the Defendants with precious metals and futures fraud, misappropriation, engaging in illegal off-exchange precious metals transactions, and registration violations, in violation of the Commodity Exchange Act and CFTC Regulations from October 2011 to the present.

According to the Complaint, husband and wife Valois and Wong, acting by and through Bertram and Churchhill, fraudulently solicited approximately $450,000 from six customers, some of whom were senior citizens, to purchase precious metals or engage in futures trading. The Complaint states that the precious metals transactions offered by Valois and Wong and their companies were illegal off-exchange instruments and alleges that Valois and Wong misappropriated more than $300,000 of customer money to pay their personal expenses.

The Complaint also alleges that Valois and Wong acted as Commodity Trading Advisors by trading another $300,000 of at least four members of the general public in futures contracts and receiving advisory fees for such futures trading, even though they were not registered with the CFTC, as required. In fact, Valois previously had been banned from the futures industry for cheating and defrauding customers, according to the Complaint.

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

The CFTC appreciates the cooperation of the National Futures Association in this matter.

CFTC Division of Enforcement staff members responsible for this case are Camille Arnold, Joseph Patrick, Robert Howell, Scott Williamson, and Rosemary Hollinger.

Wednesday, February 4, 2015


Litigation Release No. 23182 / January 29, 2015
Securities and Exchange Commission v. Loren W. Holzhueter, et al., Case No. 15-cv-00045
SEC Charges Wisconsin-Based Insurance Broker with Conducting Ponzi Scheme

The Securities and Exchange Commission today announced fraud charges against a Wisconsin-based insurance brokerage firm and its president for conducting a Ponzi scheme with money they solicited for investment purposes. The Court entered a temporary restraining order yesterday freezing assets and prohibiting continuing violations of the securities laws.

In its complaint, filed on January 21 in federal district court in the Western District of Wisconsin, the SEC alleges that Loren W. Holzhueter and his firm Insurance Service Center (ISC) raised at least $10.4 million from approximately 120 investors since January 2008 who were misled to believe their investments would be placed in separate investment accounts at ISC or would be used to expand ISC's business by acquiring other insurance agencies.

The complaint alleges that ISC instead deposited investor funds directly into its general accounts. Holzhueter and ISC siphoned investor money to fund ISC's payroll and general operations as well as to pay off existing bank debts. ISC paid some investor money to Holzhueter and entities under his control. ISC also used money raised from newer investors to make interest and principal payments to earlier investors.

According to the SEC's complaint, Holzhueter and his firm hid critical pieces of information from investors, including that ISC's records had been seized by the IRS pursuant to a search warrant.

The complaint alleges that, based on this conduct, Holzhueter and ISC violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933.

The Court entered a temporary restraining order that, among other things, freezes Holzhueter's assets, prohibits the defendants from raising new investor funds, and requires the parties to submit a joint plan for independent oversight of ISC.

The SEC's investigation has been conducted by Jen Peltz, Luz Aguilar, and Ariella Guardi and supervised by Paul Montoya of the Chicago office. The litigation is being led by Tim Leiman and Robert Moye.

Monday, February 2, 2015


Litigation Release No. 23184 / January 30, 2015
Securities and Exchange Commission v. Edwin Yoshihiro Fujinaga and MRI International, Inc., et al., Civil Action No. 2:13-CV-1658 JCM (CWH) (D. Nev.)

Judge Orders MRI International Inc. and Its CEO Edwin Fujinaga to Pay More Than $580 Million in Ponzi Scheme Case

On January 27, 2015, the Honorable James C. Mahan, United States District Judge for the District of Nevada, entered a final judgment in favor of the Securities and Exchange Commission against defendants Edwin Fujinaga and MRI International, Inc. The final judgment requires Fujinaga and MRI to pay more than $580 million as the outcome of a civil enforcement action originally filed in September 2013. The SEC brought the case on an emergency basis and obtained a temporary restraining order and an asset freeze at the outset of the litigation.

In its pleadings and other court papers, the SEC alleged that the defendants perpetrated an elaborate Ponzi scheme designed to misappropriate money from investors. The SEC alleged that the defendants raised money from thousands of investors living primarily in Japan under the ruse that MRI was using their funds to buy accounts receivable from medical providers at a discount and subsequently collecting the full value of those receivables from insurance companies. The SEC alleged that defendants used the money for other purposes, including financing Fujinaga's extravagant lifestyle. In October 2014, the court granted the SEC's motion for summary judgment on liability against Fujinaga and MRI on all charges against them, including the following violations of the antifraud provisions of the federal securities laws: Sections 17(a)(1), (2), and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The final judgment, in conjunction with the summary judgment opinion, sets forth findings that form the basis for the sanctions imposed, including that the "defendants engaged in a deceitful Ponzi scheme over several years," and that "such conduct manifested a high degree of scienter." The final judgment finds that the defendants collected hundreds of millions of dollars for purported investments in medical accounts receivable, and that they used these funds to repay earlier investors as well as for their own personal expenses.

The final judgment holds the defendants jointly and severally liable for disgorgement of proceeds in the amount of $442,229,611.70 and for prejudgment interest in the amount of $102,129,752.38. The judgment imposes civil money penalties of $20 million against each defendant. The judgment also provides injunctive relief by permanently enjoining the defendants from further securities violations.

The SEC's case is continuing against multiple relief defendants, who the SEC alleges received and used investors' funds.

For further information, please see Litigation Release Number 22832 (October 3, 2013) [SEC Obtains Asset Freeze and Other Emergency Relief in Ponzi Scheme Targeting Investors in Japan] and Litigation Release Number 23111 (October 10, 2014) [SEC Obtains Summary Judgment Win on Liability in Ponzi Scheme Case].

The SEC appreciates the assistance of the Financial Services Agency of Japan and the Securities and Exchange Surveillance Commission of Japan in this matter.

Sunday, February 1, 2015


Keynote Address by CFTC Commissioner J. Christopher Giancarlo
Commodity Markets Council, State of the Industry Conference
Miami, Florida
End-Users Were Not the Source of the Financial Crisis: Stop Treating Them Like They Were
January 26, 2015

Good afternoon. Thank you for your warm welcome. Thank you for inviting me to speak today. I am delighted to be at the CMC conference that brings together so many important participants in the markets regulated by the Commodity Futures Trading Commission (CFTC).

Let me begin by saying that my remarks reflect my own views and do not necessarily constitute the views of the CFTC, my fellow CFTC Commissioners or of the CFTC staff.

It is an honor to be on a program that includes both Chairmen of the House and Senate Agriculture Committees. Having spent time with both men, I can say that we are all very fortunate to have two experienced friends of agriculture chairing the Committees that oversee the CFTC and the markets we regulate.

I appreciate the opportunity to give this keynote address. I want to discuss a few issues that are important to the commodity and energy markets. These markets and your companies help to feed the globe’s population, heat and power millions of homes, and fuel the trains, planes, ships and trucks that deliver the commodities you produce and trade to the far corners of the world.


I dare say that before the Dodd-Frank Act was signed into law in July of 2010, some of you in the room, particularly in the energy space, did not have many dealings or interactions with the CFTC. There’s no doubt that since then, many of you have become intimately more familiar with the agency.

That was certainly true for me. Before the Dodd-Frank Act, I didn’t pay a lot of attention to the CFTC, but I gained a lot of experience in the global swaps markets. When I first left my law practice in 2000 and entered the swaps industry, I was struck by the fact that swaps brokerage was a regulatorily recognized activity in most overseas trading markets, but NOT in the U.S. I always felt this omission was somewhat detrimental to the ability of the U.S. swaps markets to compete against overseas markets such as London.

In the years before the financial crisis, I came to see that certain reforms would improve the swaps industry. In the mid-2000s, I became a supporter of central counterparty clearing of swaps when I saw how its emergence in the energy swaps markets increased trading and market participation. In 2005, I led an effort to develop a clearing facility for credit default swaps. That initiative ultimately led to the creation of ICE Clear Credit, the world’s leading clearer of credit derivative products.

Six years ago, I saw how the lack of regulatory transparency into swaps counterparty credit risk exacerbated the financial crisis. I remember very well an early morning phone call the second week of September 2008. It was from one of the principle U.S. bank prudential regulators. He was asking about widely gapping credit spreads in bank CDS protection, including Lehman Brothers. The regulator wanted to understand what was going on in trading markets. After a short conversation, I said that I would be glad to explain the current market situation to him face-to-face. He suggested a date in mid-October. I said “sure, but it all may be over by then.” It became clear to me then that regulators needed to have a far more transparent window into swap counterparty credit risk.

So as you can see, by the time Congress began drafting the bills that would become Title VII of the Dodd-Frank Act, I was already a confirmed advocate for its three key pillars of:

Central counterparty clearing;
Swap data reporting; and
Regulated swaps execution.
My support for these reforms is driven by my professional and commercial experience, not academic theory or political ideology. I believe that well-regulated markets are good for American business and job creation. That is why I consider myself pro-reform. That is why I support clearing more swaps through CCPs, reporting swap trades to trade repositories and executing swaps on regulated trading platforms. Unfortunately, many of the rules governing who and how swaps are traded do not conform to marketplace reality.


Unfortunately, caught up in some of the collateral damage surrounding the Dodd-Frank reforms were the traditional commodity and energy markets and the end-users who depend on them for a variety of uses. Yet, end-users were not the source of the financial crisis. That is why Congress undertook to exempt end-users from the reach of swap trading regulation. It is our job at the CFTC to make sure that our rules do not treat them like they were the cause of the crisis.

Proposed Changes to Rule 1.35

In a number of key areas that I will discuss, reforms born from or inspired by Dodd-Frank are overly burdening end-users. For example, in 2012, the CFTC revised Rule 1.35. The revised rule requires the keeping of all oral and written records that lead to the execution of a transaction in a commodity interest and related cash or forward transaction in a form and manner “identifiable and searchable by transaction.” This recordkeeping must be done (with certain carve outs) by futures commission merchants (FCMs), retail foreign exchange dealers, introducing brokers, and members of designated contract markets and swap execution facilities.

As I have said before, the revised rule proved to be unworkable. Its publication was followed by requests for no-action relief and a public roundtable at which entities covered by the rule voiced their inability to tie all communications leading to the execution of a transaction to a particular transaction or transactions. End-user exchange members pointed out that business that was once conducted by telephone had moved to text messaging, so the carve out in the rule for oral communications gave little relief. They pointed out that it was simply not feasible technologically to keep pre-trade text messages in a form and manner “identifiable and searchable by transaction.”

Last fall, I voted against a proposed CFTC rule fix that did not do enough to ease this unnecessary burden on participants in America’s futures markets. That proposal was a well-intentioned, but insufficient attempt to provide relief from unworkable Rule 1.35 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.

Many of the small and medium-sized FCMs are used by America’s farmers and producers to control the costs of production. Unfortunately, today we have around half the number of FCMs serving our farmers than we had 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 further squeezing American Agriculture and manufacturing with increased costs of complying with rules such as 1.35, if we can avoid it. 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, dragging down the U.S. economy.

End-Users Captured As “Financial Entities”

Another example is the Dodd-Frank definition of “financial entity.” It concerns the inadvertent capture of many energy firms as “financial entities.” As we have seen, imposing banking law concepts onto market participants that are not banks and that did not contribute to the financial crisis is not only confusing, but adds more risk to the system. It has the practical effect of preventing these firms from taking advantage of the end-user exemption for clearing or from mitigating certain types of commercial risk. Again, let’s not punish market participants who played no role in the financial crisis.

Swap Dealer De Minimis Level

Requiring that the Commission take a vote before a major shift in its regulations takes effect seems like a basic tenet of proper administrative law. However, in the CFTC’s final rule defining who would be captured as a “swap dealer,” the Commission abdicated this responsibility. Instead, the rule allows the “de minimis” threshold of $8 billion dollars of swap business per year to automatically lower to $3 billion in only a few short years without any affirmative vote of the Commission. This automatic lowering may occur regardless of the conclusions of a formal study of the matter required by the Commission – even if the study concludes that lowering the threshold is a bad thing to do! This is simply ridiculous.

A few months ago at a CFTC public hearing, I said as much for the official record. Later, I was characterized as “slamming” the particular rule. If calling a bad rule a bad rule is “slamming,” then I guess I did so. But it is merited.

Unquestionably, an arbitrary 60% decline in the swap dealer registration threshold from $8 billion to $3 billion creates significant uncertainty for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers. It will have the effect of causing many non-financial companies to curtail or terminate risk hedging activities with their customers, limiting risk management options for end-users, and ultimately consolidating marketplace risk in only a few large swap dealers. Such risk consolidation runs counter to the goals of Dodd-Frank to reduce systemic risk in the marketplace. The CFTC must not arbitrarily change the swap dealer registration de minimis level without a formal rulemaking process.

Contracts with Volumetric Optionality

Another topic of concern is risk management contracts that allow for an adjustment of the quantity of a delivered commodity. These types of contracts, known as “Forward Contracts with Embedded Volumetric Optionality,” or EVO Forwards, are important to America’s economy. They provide farmers, manufacturers and energy companies with an efficient means of acquiring the commodities they need to conduct their daily business – at the right time and in the right amounts. This includes providing affordable sources of energy to millions of American households. EVO Forwards do not pose a threat to the stability of financial markets. They should not be regulated in the same manner as financial derivatives.

Forwards are expressly excluded from the definition of a “swap” under the Commodity Exchange Act. The CFTC’s original guidance on how to determine when an EVO Forward should also be considered a forward, and thus excluded, using a “Seven-Factor Test” has been burdensome, unnecessary and duplicative. The Commission captured a large swath of transactions that were not and should not be regulated as “swaps,” including EVO Forwards.

Fortunately, the Commission recently proposed through regular order an amended interpretation of the Seven-Factor Test. That proposal is a good start for providing some sensible relief from the problems arising from the test. We are sorting through the many comments we received. I believe the best approach would be a new and more practical product definition. Short of that, my staff and I will listen carefully to industry’s recommendations for a better interpretation.

If not corrected, the regulation of these transactions will actually have the effect of increasing companies’ costs of doing business. It will force some businesses to curtail market activity and thereby consolidate risk in the marketplace rather than transfer and disperse it. That will ultimately raise costs for consumers. Such costly and unnecessary regulation thwarts the intent of Congress under the Dodd-Frank Act. We need your help to get this rule right.

Position Limits

Let me now turn to everyone’s favorite CFTC rule proposal: position limits that was proposed for the second time in November of 2013.

Shortly after I arrived at the Commission this summer, the CFTC staff hosted a public roundtable to hear concerns from market participants on the position limits rule proposal. In preparing for the roundtable I reviewed the underlying legal authority in Congress’ mandate that the CFTC prevent “excessive speculation.” After listening to almost a full day of testimony, I began to form the view that the CFTC was responding to Congress’ mandate to restrict “excessive speculation” the same way that the Transportation Safety Administration (TSA) goes about the task of catching airplane hijackers. That is, the CFTC intended to subject every single market participant to new federal position limits unless they affirmatively qualified for one of several detailed exemptions. The rule would operate the same way the TSA operated when it made every single passenger, including six-year-old boys and 82-year-old grandmothers, take off their shoes and belts and go through metal detectors before boarding a plane.

It struck me that there had to be a better way. There had to be a way to limit excessive speculation that was not so burdensome on America’s energy producers and hedgers, along with its farmers, ranchers and manufacturers.

The Dodd-Frank Act instructed the CFTC on how to define what constitutes a bona fide hedging transaction so those trades would not count towards position limits. The statutory definition states that the reduction of risk inherent to a commercial enterprise is a factor in determining what qualifies as a bona fide hedging transaction.

Instead, the currently proposed CFTC rule contains a number of provisions that will weigh heavily on hedgers, including:

(1) articulating 14 categories of transactions it deems bona fide hedges and requiring staff “guidance” before any other type of transaction qualifies;
(2) for the first time and without adequate explanation, the proposal requires not only a qualitative correlation but also a quantitative correlation of 80% or better between the futures price and the spot price of two commodities before a cross-commodity hedge is considered bona fide; and
(3) the proposal reverses course and eliminates the long-standing, flexible process for obtaining a so-called un-enumerated hedge exemption.

I am very concerned that the effect of the CFTC’s bona fide hedging framework is to impose a federal regulatory edict in place of business judgment in the course of risk hedging activity by America’s commercial enterprises. The CFTC must allow greater flexibility. It must encourage – not discourage – commercial enterprises to adapt to developments and advances in hedging practices.

The CFTC is a markets regulator, not a prudential regulator. The CFTC has neither the authority nor the competence to substitute its regulatory dictates for the commercial judgment of America’s business owners and executives when it comes to basic risk management.

The LAST thing our economy needs is the federal government dictating the conduct of everyday business risk management.

I believe the Commission should carefully consider many of the well-informed comments and suggestions on position limits raised by market participants. These include:

updating and modernizing deliverable supply estimates;
carving out ERISA plans;
modifying or eliminating the limitations on cross-commodity hedging;
restoring bona fide hedging status to anticipatory merchandising hedges; and
creating an aggregation policy that focuses on effective control over trading decisions, rather than primarily on ownership.
The CFTC should work closely with market participants to make sure the enhanced federal rules strike the right balance between regulation and well-functioning markets.

It is worth noting that there is a complete paucity of real Commission generated research or data to justify a sweeping new position limits regime. While we are all familiar with the various academic studies that make conclusions on both sides of the speculation issue, the only CFTC analysis cited in the position limits proposal was generated three decades ago related to the Hunt Brothers. Surely we can do better than that.

Let me be very clear. As a Commissioner, I believe the lack of CFTC analysis of the impact of “excessive speculation” is of fundamental significance to any decision to adopt a final position limits regulation.

Surely the Commission should look at the recent market events surrounding the decline in the price of crude oil over the past six months and determine why gasoline is averaging around two dollars a gallon these days. Even the President commented in the State of the Union address that we now produce more oil at home than we buy from the rest of the world—something that hasn’t happened in almost twenty years.1 Further, the President’s own Energy Information Administration (EIA) has stated repeatedly that the price of oil is directly related to global supply and demand and a recent revolution in American production.2 I cannot understand why this isn’t relevant to consider in any final version of a position limits regime put forward by the Commission.


As a final note, I want to put in a plug for the CFTC’s Energy and Environmental Markets Advisory Committee (EEMAC) that I have been fortunate enough to be asked to sponsor. The EEMAC Committee hasn’t met since 2009, which, ironically, is actually a violation of the Dodd-Frank Act, which requires that EEMAC meet at least twice a year. Since its last meeting, we have had a sea-change in the CFTC’s impact on U.S. energy markets, all while the markets themselves are undergoing the largest technological and structural change in a generation. I am very optimistic the EEMAC will provide an open forum to discuss many of the issues I have mentioned today. I hope the EEMAC will be a catalyst to drive necessary improvements in CFTC rules and regulations. I welcome your participation and support and would like to thank the Commission for approving the membership just this morning.

In closing, I want to tell you how pleased I am to be a Commissioner of the CFTC. It is the highest honor to be nominated by the President and confirmed by the U.S. Senate to serve my country. After 30 years in the private sector advising clients, building businesses and operating trading venues, I have the opportunity to put my swaps knowledge and experience to good use.

I pledge to you today my full engagement on the many complex issues facing U.S. risk hedging markets. I intend to be:

A diligent student of market evolution and structure;
A champion for market efficiency and liquidity;
A protector of end-users’ rightful exemption from overly burdensome rules; and
A proponent for the proper use of U.S. commodity and energy markets in durable service to the American public.
Thank you very much for your time. I look forward to your questions.

1 See President Barack Obama, State of the Union Address, Jan. 28, 2014, available at

2 See Administrator Adam Sieminski, Energy Information Agency, U.S. Department of Energy, Statement Before the U.S. Senate Committee on Energy and Natural Resources, July 16, 2013, available at; See also Sieminski, EIA, Statement Before the U.S. House of Representatives Committee on Energy and Commerce, Dec. 11, 2014, available at

Last Updated: January 26, 2015