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

Sunday, May 31, 2015

SEC ALLEGES CO-OWNERS OF BROKERAGE FIRM USED INVESTOR FUNDS INAPPROPRIATELY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
05/20/2015 01:00 PM EDT
The Securities and Exchange Commission today announced fraud charges against the co-owners of a Manhattan-based brokerage firm.

The SEC alleges that as Arjent LLC and its UK-based affiliate Arjent Limited were approaching insolvency, chairman and CEO Robert P. DePalo attempted to keep the firms afloat and maintain his extravagant lifestyle by selling shares in a holding company called Pangaea Trading Partners.  DePalo along with managing director and co-owner Joshua B. Gladtke allegedly misrepresented to investors the value of Pangaea’s assets and how their money would be used – transferring the first $2.3 million raised in the offering directly to his own bank accounts and using it for his personal benefit.  DePalo also allegedly transferred investor funds to Gladtke, and sought to cover up their fraud by making misrepresentations to SEC examiners.

“We allege that DePalo and Gladtke sold overvalued interests in Pangaea and then raided investor funds for their own personal benefit,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “They later allegedly falsified records in an effort to cover up their scheme.”

In a parallel action, the New York County District Attorney’s Office today announced criminal charges against DePalo and Gladtke.

The SEC’s complaint filed in federal court in Manhattan charges DePalo and Gladtke with violating the antifraud and books-and-records provisions of the federal securities laws.  Also charged in the SEC’s complaint are Pangaea, the Arjent entities, and another entity owned and controlled by DePalo called Excalibur Asset Management.  The SEC also charged another principal at Arjent LLC named Gregg A. Lerman, who agreed to settle the charges.  Subject to court approval, Lerman is enjoined from future violations with any disgorgement and financial penalty amounts to be determined by the court at a later date.

The SEC’s investigation was conducted by Andrew Dean, Kerri Palen, Nathaniel Kolodny, Bennett Ellenbogen, and Lara Mehraban in the New York Regional Office.  The case was supervised by Amelia A. Cottrell, and the SEC’s litigation will be led by Michael Birnbaum and Mr. Dean.  The examination that preceded the investigation was led by Steven Vitulano, Terrence Bohan, Doreen Piccirillo, and Frank Sze of the New York office.  The SEC appreciates the assistance of the New York County District Attorney’s Office, Financial Industry Regulatory Authority, Financial Conduct Authority in the United Kingdom, City of London Police, and Northumbria Police.

Friday, May 29, 2015

DEFENDANT IN INSIDER TRADING CASE INVOLVING AMATEUR GOLFERS PLEADS GUILTY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23264 / May 18, 2015
Securities and Exchange Commission v. Eric McPhail, et al., Civil Action No. 1:14-cv-12958 (District of Massachusetts, Complaint filed July 11, 2014)
United States v. Eric McPhail and Douglas Parigian, 1:14-cr-10201-DJC (District of Massachusetts filed July 9, 2014).
Defendant in SEC Insider Trading Case Involving Group of Amateur Golfers Pleads Guilty to Criminal Charges

The Securities and Exchange Commission announced that, on May 13, 2015, Douglas Parigian pleaded guilty to criminal charges of conspiracy and securities fraud for his role in an insider trading ring involving trading in the stock of Massachusetts-based American Superconductor Corporation. The criminal charges against Parigian arose out of the same fraudulent conduct alleged by the Commission in a civil securities fraud action filed against Parigian and others in July 2014.

On July 9, 2014, the U.S. Attorney's Office for the District of Massachusetts indicted Parigian and another defendant, Eric McPhail, for conspiracy and securities fraud and, for Parigian only, lying to FBI agents. The U.S. Attorney charged that McPhail had a history, pattern and practice of sharing confidences with a senior executive at American Superconductor. Between 2009 and 2011, the senior executive provided McPhail with material, nonpublic information concerning the company's quarterly earnings and other business activities (the "Inside Information") with the understanding that it would be kept confidential. Instead, McPhail used email and other means to provide the Inside Information to his friends, including Parigian, with the intent that they profit by buying and selling American Superconductor stock and options. Parigian used the Inside Information to profit on the purchase and sale of American Superconductor stock and options.

On July 11, 2014, the Commission filed a civil injunctive against Eric McPhail and six of his golfing buddies, including Parigian, alleging that McPhail repeatedly provided them with material nonpublic information about American Superconductor. According to the Commission's Complaint, McPhail's source of the information was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend. The Complaint further alleged that, from July 2009 through April 2011, the executive told McPhail about American Superconductor's expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential. McPhail instead misappropriated the information and tipped his friends, who improperly traded on the information. Without admitting or denying the allegations, four defendants settled the SEC's charges by consenting to the entry of judgments permanently enjoining them from violating the antifraud provisions of the Securities Exchange Act of 1934, paying disgorgement and civil penalties. The SEC's case against Parigian, McPhail and another individual, Jamie Meadows, is ongoing.

Wednesday, May 27, 2015

DEUTSCHE AGREES TO PAY $55 MILLION TO SETTLE SEC CHARGES IT FILED MISSTATED FINANCIAL REPORTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
05/26/2015 11:25 AM EDT

The Securities and Exchange Commission today charged Deutsche Bank AG with filing misstated financial reports during the height of the financial crisis that failed to take into account a material risk for potential losses estimated to be in the billions of dollars.

Deutsche Bank agreed to pay a $55 million penalty to settle the charges.

An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of “Leveraged Super Senior” (LSS) trades through which the bank purchased protection against credit default losses.  Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction (approximately 9 percent) of the $98 billion total in purchased protection.  This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral, and the sellers could decide to unwind the trade rather than post additional collateral in that scenario.  Therefore, Deutsche Bank was protected only up to the collateral level and not for the full market value of its credit protection.  Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions.

According to the SEC’s order instituting a settled administrative proceeding, when the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk. Each change in methodology reduced the value assigned to the gap risk until Deutsche Bank eventually stopped adjusting for gap risk altogether.  For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its LSS positions as though the market value of its protection was fully collateralized.  According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.

“At the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”

In addition to the $55 million penalty, the SEC’s order requires Deutsche Bank to cease and desist from committing or causing any violations or future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-16.  Deutsche Bank neither admits nor denies the SEC’s findings in the order.

The SEC’s investigation was conducted by Amy Friedman, Michael Baker, Eli Bass, and Kapil Agrawal.  The case was supervised by Scott Friestad, Laura Josephs, Ms. Friedman, and Dwayne Brown.  The SEC appreciates the assistance of the German Federal Financial Supervisory Authority and the United Kingdom Financial Conduct Authority.

Tuesday, May 26, 2015

MICROSOFT EMPLOYEE AND FRIEND RESOLVE ALLEGATIONS OF INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation ReleaSe No. 23261 / May 14, 2015
Securities and Exchange Commission v. Brian D. Jorgenson, et al., Civil Action No. 13-cv-02275 (W.D. Wash.)
Former Microsoft Employee and His Friend Resolve Insider Trading Case

The Securities and Exchange Commission today announced that a former Microsoft employee and his friend have agreed to settle insider trading charges filed in 2013 alleging that they unlawfully traded based on material nonpublic information misappropriated from Microsoft.

In consent judgments approved by the U.S. District Court for the Western District of Washington, Brian D. Jorgenson, a former Senior Portfolio Manager in Microsoft's corporate finance and investments division, and Sean T. Stokke, Jorgenson's long-time friend and business partner, admitted their unlawful conduct and consented to the entry of orders holding them jointly and severally liable for over $400,000 in ill-gotten gains realized from their illegal trading as well as prejudgment interest. Both men are enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Jorgenson is also barred from acting as an officer or director of a public company.

Both men previously pled guilty to criminal charges arising out of the same conduct. Jorgenson was sentenced to 24 months in jail and Stokke was sentenced to 18 months in jail.

The SEC's litigation has been led by John V. Donnelly III and G. Jeffery Boujoukos of the SEC's Philadelphia Regional Office. The SEC's investigation was conducted by Brendan P. McGlynn, Patricia A. Paw, John S. Rymas, and Daniel L. Koster.

The SEC appreciates the assistance of the US Attorney's Office for the Western District of Washington, Federal Bureau of Investigation, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.

Monday, May 25, 2015

Effective Regulatory Oversight and Investor Protection Requires Better Information

Effective Regulatory Oversight and Investor Protection Requires Better Information

SEC CHARGES BHP BILLITON WITH VIOLATING FOREIGN CORRUPT PRACTICES ACT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today charged global resources company BHP Billiton with violating the Foreign Corrupt Practices Act (FCPA) when it sponsored the attendance of foreign government officials at the Summer Olympics.

BHP Billiton agreed to pay a $25 million penalty to settle the SEC’s charges.

An SEC investigation found that BHP Billiton failed to devise and maintain sufficient internal controls over its global hospitality program connected to the company’s sponsorship of the 2008 Summer Olympic Games in Beijing.  BHP Billiton invited 176 government officials and employees of state-owned enterprises to attend the Games at the company’s expense, and ultimately paid for 60 such guests as well as some spouses and others who attended along with them.  Sponsored guests were primarily from countries in Africa and Asia, and they enjoyed three- and four-day hospitality packages that included event tickets, luxury hotel accommodations, and sightseeing excursions valued at $12,000 to $16,000 per package.

“BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “BHP Billiton recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk.

According to the SEC’s order instituting a settled administrative proceeding, BHP Billiton required business managers to complete a hospitality application form for any individuals they sought to invite to the Olympics, including government officials.  However, the company did not clearly communicate to employees that no one outside the business unit submitting the application would review and approve each invitation.  BHP Billiton failed to provide employees with any specific training on how to complete forms or evaluate bribery risks of the invitations.  Due to these and other failures, a number of the hospitality applications were inaccurate or incomplete, and BHP Billiton extended Olympic invitations to government officials connected to pending contract negotiations or regulatory dealings such as the company’s efforts to obtain access rights.

“A ‘check the box’ compliance approach of forms over substance is not enough to comply with the FCPA,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “Although BHP Billiton put some internal controls in place around its Olympic hospitality program, the company failed to provide adequate training to its employees and did not implement procedures to ensure meaningful preparation, review, and approval of the invitations.”

The SEC’s order finds that BHP Billiton violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.  The settlement, in which the company neither admits nor denies the SEC’s findings, reflects BHP Billiton’s remedial efforts and cooperation with the SEC’s investigation and requires the company to report to the SEC on the operation of its FCPA and anti-corruption compliance program for a one-year period.

The SEC’s investigation was conducted by Dmitry Lukovsky and Devon Leppink Staren, and the case was supervised by Alec Koch.  The SEC appreciates the assistance of the Department of Justice’s Fraud Section, the Federal Bureau of Investigation, and the Australian Federal Police.



Sunday, May 24, 2015

SEC ALLEGES INVESTMENT PRO COMMITTED FRAUD AND SELF-DEALING WHILE AT VENTURE CAPITAL FIRM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23260 / May 13, 2015
Securities and Exchange Commission v. Ifitikar Ahmed, et al., Civil Action No. 3:15-cv-00675-JBA (D.Ct., filed May 6, 2015)

SEC Charges Connecticut-Based Investment Professional with Fraud and Self-Dealing

The Securities and Exchange Commission today announced it has obtained an asset freeze and other emergency relief against a Greenwich, Connecticut, investment professional charged with fraud and self-dealing at the venture capital firm where he was employed, Oak Investment Partners.

In a complaint filed in U.S. District Court in Connecticut on last Wednesday and unsealed today, the SEC alleges that Iftikar Ahmed illegally profited by having funds managed by Oak Investment Partners pay inflated prices for two e-commerce investments and by failing to disclose his beneficial interest in a company that the fund transacted with. The complaint alleges that Ahmed transferred approximately $27.5 million in illegal profits to accounts under his control at the expense of investors in the Oak funds, including public pension investors.

According to the SEC's complaint, Ahmed had Oak funds pay $20 million for a $2 million stake in an Asian e-commerce joint venture in December 2014, pocketing the $18 million difference for himself. It alleges that in another investment in August 2014, an Oak fund overpaid for shares in a China-based e-commerce company, allowing Ahmed to pocket $2 million. In a third transaction, the complaint alleges that in 2013, Ahmed advised an Oak fund to invest $25 million in a U.S.-based e-commerce company without disclosing his interest in I-Cubed Domains LLC, which had a significant stake in the same company. The following year, at Ahmed's advice, the Oak fund paid $7.5 million to I-Cubed to buy shares in the company that I-Cubed had acquired for $2 million. The complaint alleges that Ahmed again failed to disclose his ties to I-Cubed, violating his duty to act in the best interest of the Oak fund investors and avoid self-dealing.

The SEC's complaint charges Ahmed with violating federal antifraud laws and related SEC antifraud rules. The SEC is seeking a preliminary injunction to continue the freeze of Ahmed's assets and seeks to have Ahmed return his allegedly ill-gotten gains with interest and pay civil monetary penalties. The complaint names two firms allegedly controlled by Ahmed, Iftikar Ali Ahmed Sole Prop and I-Cubed Domains LLC, as relief defendants for the purpose of recovering allegedly ill-gotten gains.

The emergency court order obtained by the SEC freezes up to $55,089,446 million of Ahmed's assets, prohibits him from destroying evidence and orders expedited discovery.

The SEC's investigation, which is continuing, has been conducted by Jay A. Scoggins and Jeffrey E. Oraker of the Market Abuse Unit in the Denver Regional Office. The case has been supervised by Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit, and Joseph G. Sansone, Co-Deputy Chief of the Market Abuse Unit. Nicholas P. Heinke and Mark L. Williams of the Denver Regional Office will lead the SEC's litigation. The SEC appreciates the assistance of the U.S. Attorney's Office in Boston, the U.S. Attorney's Office in Connecticut, and the Federal Bureau of Investigations.

Saturday, May 23, 2015

SEC CHARGED FATHER AND SON WITH CONDUCTING SERIAL INSIDER TRADING VIA GOLF DISCUSSIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
05/14/2015 03:40 PM EDT

The Securities and Exchange Commission today charged a father and son in New York with conducting a serial insider trading scheme involving tips of key nonpublic information in coded e-mail messages disguised as discussions about golf.

The SEC alleges that Sean R. Stewart, currently a managing director at a prominent investment bank, routinely tipped his father Robert K. Stewart with confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years.  The elder Stewart, a certified public accountant and CFO of a technology company, cashed in on the tips by placing and directing highly profitable securities trades ahead of at least a half-dozen merger and acquisition announcements.  The scheme generated approximately $1.1 million in illicit proceeds in a four-year period.

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

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Robert Stewart recruited a trading partner to help him hide his illegal trading and the connection to his son as the source of the nonpublic information about investment bank clients.  Trades were conducted in the partner’s account, and the illicit profits were shared in the form small cash payments to Robert Stewart to avoid creating a clear paper trail of the kickbacks.  They also spread trades over numerous stock options series in an attempt to avoid raising red flags with regulators.

“Serial insider traders assume a huge risk that we will detect their pattern of trading and connect them to their source of confidential information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.  “We have integrated new technological tools to quickly and easily identify relationships among traders and spot suspicious trading across multiple securities.”

According to the SEC’s complaint, there were additional ways that Robert Stewart and his fellow trader attempted to conceal the scheme and evade detection when sharing nonpublic information obtained from Sean Stewart about investment bank clients.  They primarily met in-person or used coded e-mail messages to discuss the scheme and trading plans.  Among examples of e-mail text using golf terminology were “saw local story about high cost of golf reservations since a foreign company purchased all- even more expensive than imagined” and “might have an opportunity to play golf- but would need to book the reservation as soon as the office opens Tuesday morning.”

The SEC’s complaint charges Sean and Robert Stewart with violations of the antifraud provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Kelly L. Gibson, David W. Snyder, and John S. Rymas of the Market Abuse Unit in the Philadelphia Regional Office.  The case has been supervised by Mr. Hawke and Joseph G. Sansone, Co-Deputy Chief of the Market Abuse Unit.  The litigation will be led by David L. Axelrod, Regional Trial Counsel, and Catherine E. Pappas, Senior Trial Counsel, in the Philadelphia office.  The SEC appreciates the assistance of the U.S. Attorney’s Office in the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

Friday, May 22, 2015

Remarks at Veterans Committee Program: Wrapping Up Panelist Tribute to John P. Wheeler, III and Introducing the 2015 Winner of the John P. Wheeler Veterans Charity Award

Remarks at Veterans Committee Program: Wrapping Up Panelist Tribute to John P. Wheeler, III and Introducing the 2015 Winner of the John P. Wheeler Veterans Charity Award

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates

SEC ALLEGES ITT EDUCATIONAL SERVICES CONCEALED POOR PERFORMANCE FROM INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23259 / May 13, 2015
Securities and Exchange Commission v. ITT Educational Services, Inc., Kevin M. Modany, and Daniel M. Fitzpatrick, Civil Action No. 1:15-cv-00758 (S.D. Indiana, Indianapolis Division, filed May 12, 2015)

SEC Announces Fraud Charges Against ITT Educational Services

On May 12, 2015, the Securities and Exchange Commission filed fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick.

The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT's investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. ITT formed both of these student loan programs, known as the "PEAKS" and "CUSO" programs, to provide off-balance sheet loans for ITT's students following the collapse of the private student loan market. To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT's guarantee obligations were triggered and began to balloon. Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT's exposure to these programs was much more limited. Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments ITT would need to make on the guarantees, ITT's stock price declined dramatically, falling by approximately two-thirds.

The SEC's complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT's guarantee obligations for the PEAKS and CUSO programs. For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice. ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact. ITT further failed to consolidate the PEAKS program in ITT's financial statements despite ITT's control over the economic performance of the program. ITT and the executives also misled and withheld significant information from ITT's auditor.

The SEC's complaint alleges that this conduct violated the antifraud, reporting, books and records, internal controls, lying to auditors and false certification provisions of the federal securities laws. The SEC's complaint also alleges that Modany and Fitzpatrick failed to comply with Section 304 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil monetary penalties. With respect to Modany and Fitzpatrick, the SEC also seeks officer-and-director bars and reimbursement pursuant to Section 304 of Sarbanes-Oxley.

The SEC's investigation has been conducted by Zachary Carlyle, Jason Casey, and Anne Romero with assistance from Judy Bizu. The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato of the Complex Financial Instruments Unit. The litigation will be led by Nicholas Heinke, Polly Atkinson, and Mr. Carlyle.

Thursday, May 21, 2015

SEC.gov | Remarks Before the Exchequer Club of Washington, D.C.

SEC.gov | Remarks Before the Exchequer Club of Washington, D.C.

FORMER BOA EXEC SENTENCED TO SERVE 26 MONTHS IN PRISON FOR CONSPIRACY AND FRAUD

FROM:  U.S. JUSTICE DEPARTMENT
FORMER BANK OF AMERICA EXECUTIVE SENTENCED TO SERVE
26 MONTHS IN PRISON FOR ROLE IN CONSPIRACY AND FRAUD INVOLVING INVESTMENT CONTRACTS FOR MUNICIPAL BOND PROCEEDS

WASHINGTON — A former Bank of America executive was sentenced today for his participation in a conspiracy and scheme to defraud related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced today.                                                                    

Phillip D. Murphy, the former managing director of Bank of America’s municipal derivatives group from 1998 to 2002, was sentenced to serve 26 months in prison by U.S. District Judge Max O. Cogburn Jr. of the U.S. District Court of the Western District of North Carolina.

On Feb. 10, 2014, Murphy pleaded guilty to participating in multiple fraud conspiracies and schemes with various financial institutions and brokers from as early as 1998 until 2006.  Bank of America and other financial institutions, acting as “providers,” offered a certain type of contract – known as an investment agreement – to state, county and local governments and agencies, and not-for-profit entities, throughout the United States.  These public entities sought to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.  Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

“Individual accountability is the cornerstone of protecting the integrity of our financial markets,” said Deputy Assistant Attorney General Brent Snyder of the Antitrust Division’s Criminal Enforcement Program.  “This sentence is a result of our continued resolve to vigorously prosecute bank executives whose greed and illegal schemes undermine our free and fair financial markets.”

According to court documents, Murphy conspired with employees of Rubin/Chambers Dunhill Insurance Services Inc., also known as CDR Financial Products, a broker of municipal contracts, and others.  Murphy also pleaded guilty to conspiring with others to make false entries in the reports and statements originating from his desk, which were sent to bank management.  Murphy conspired with CDR and others to increase the number and profitability of investment agreements and other municipal finance contracts awarded to Bank of America.  Murphy won investment agreements through CDR’s manipulation of the bidding process in obtaining losing bids from other providers, which is explicitly prohibited by U.S. Treasury regulations.  As a result, various providers won investment agreements and other municipal finance contracts at artificially determined prices.  Murphy also submitted intentionally losing bids for certain investment agreements and other contracts when requested, and, on occasion, agreed to pay or arranged for kickbacks to be paid to CDR and other co-conspirator brokers.

In conjunction with the bid rigging, Murphy and his co-conspirators submitted numerous intentionally false certifications that were relied upon by both municipalities and the Internal Revenue Service (IRS).  These false certifications misrepresented that the bidding process had been conducted in a competitive manner that was in conformance with U.S. Treasury regulations.  These false certifications caused municipalities to award contracts to Bank of America and other providers based on false and misleading information.  The false certifications also impeded and obstructed the ability of the IRS to collect revenue owed to the U.S. Treasury.

“We trust those in positions of leadership and power to do the right thing when it comes to taking care of our money,” said Chief Richard Weber of the IRS’s Criminal Investigation.  “When that trust is broken through these types of criminal activities, than those individuals need to be held accountable.  Today's sentencing reflects our commitment to ensuring fairness for those engaged in these types of investments.”

“By knowingly exploiting vulnerabilities in the bidding process, Murphy ignored policies put in place to allow for the ethical distribution of municipal bond proceeds,” said Assistant Director in Charge Diego Rodriguez of the FBI’s New York Field Office.  “In the end, he brokered a deal that served his own best interests.  Today’s sentence is proof of our continued determination to root out those whose business practices contribute to the deterioration of healthy competition in the municipal bidding process.”

Including Murphy, 17 individuals and one corporation have been convicted or pleaded guilty as a result of the Antitrust Division’s municipal bonds investigation.

The sentence announced today resulted from an investigation conducted by the Antitrust Division’s New York Office, the FBI and IRS-CI.  The division also coordinated its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.  The U.S. Attorney’s Office of the Western District of North Carolina provided valuable assistance in this matter.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants, including more than 2,900 mortgage fraud defendants.

Wednesday, May 20, 2015

Statement at Open Meeting on Investment Company and Investment Adviser Reporting Modernization

Statement at Open Meeting on Investment Company and Investment Adviser Reporting Modernization

Statement at Open Meeting on Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting on Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting: Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Statement at Open Meeting: Modernizing and Enhancing Investment Company and Investment Adviser Reporting

CFTC COMMISSIONER WETJEN'S STATEMENT BEFORE GLOBAL MARKETS ADVISORY COMMITTEE MEETING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Opening Statement by Commissioner Mark Wetjen before the CFTC’s Global Markets Advisory Committee Meeting
May 14, 2015

Thank you everyone for participating today. I would like to welcome Chairman Massad, Commissioner Bowen, and Commissioner Giancarlo, and extend a special warm welcome to our expert panelists.

Our panelists join us from around the globe and include:

David Bailey from the Bank of England;
Fabrizio Planta from the European Securities and Markets Authority;
Shunsuke Shirakawa from Japan’s Financial Services Agency;
Jeffrey Marquardt from the Federal Reserve; and
Sean Campbell from the Federal Reserve.
Also joining us today are staff members from the CFTC:

Bob Wasserman;
Carlene Kim; and
Paul Schlichting.
And I want to extend my welcome to the GMAC members and thank you again for convening today to discuss the topics of central counterparty (CCP) risk management, and the CFTC’s cross-border application of its margin rule for uncleared swaps.

Before I turn to Chairman Massad and the other commissioners, I want to make a couple of brief remarks.

Importance of the Clearing Market Structure

Clearinghouses are at the heart of the new market structure for cleared swaps. As we all know, the G20 recommended that this structure be implemented around the globe, and I strongly supported this effort at the CFTC.

Importantly, in the aftermath of the G20 communique, market regulators around the globe, including the CFTC, have raised significantly the standards that CCPs must meet for authorization to do business. Considerable international coordination of this effort was facilitated through the work of CPMI-IOSCO.

Clearinghouses registered with the CFTC now have enhanced financial-resource and liquidity requirements, as well as other risk management standards, that reflect their heightened role in the marketplace.

I recognize, however, that as clearing volumes increase, we need to be cognizant of, and effectively address, the resulting increased concentration of risk in the cleared space. Many market participants and stakeholders have rather vocally expressed concerns about this.

To maintain consensus behind the cleared market structure, it is important for policy makers to provide a forum to discuss the aforementioned concerns, and review whether further enhancements should be considered. That is why today’s meeting has been convened.

Today’s meeting presents an opportunity to sharpen our thinking about whether and how to further improve the cleared market structure, and how to keep pace with marketplace and technological advancements, especially as they relate to CCPs. In particular, today’s agenda focuses on the framework for conducting CCP stress tests, and the appropriate scaling of CCP capital within a CCP’s default waterfall.

Global coordination on these issues is particularly crucial. That is why I am grateful to have David, Fabrizio, and Shunsuke here today to give us their perspectives. Your contributions to today’s debate, as well as any subsequent policy development in your home countries, are highly relevant, important, and appreciated.

I should also add that, even though there remains some uncertainty about how different jurisdictions will treat one another’s CCPs more generally on a going forward basis, it’s important to pursue an open dialogue like the one today, or the ones we experienced earlier this year at Commissioner Bowen’s Market Risk Advisory Committee meeting and the CFTC staff roundtable.

I see only benefits to having an open dialogue like the one today between regulators and market participants, which will enhance a mutual understanding in the official sector, and lead to better policy outcomes.

Margin for Uncleared Swaps

I also look forward to hearing the views of our panelists and GMAC members regarding the application of the CFTC’s margin rule to cross-border swaps, and swaps between affiliates.

Last fall the commission issued an advanced notice of proposed rulemaking that laid out three different cross-border approaches it could take. The comment file appears to heavily favor an approach that mirrors the one proposed by the prudential regulators, which relies on the availability of substituted compliance but also applies U.S. jurisdiction to more firms and transactions than the CFTC’s cross-border guidance. Today’s discussion will help the commission understand better the relative merits of these approaches and clarify which approach to pursue.

Again, thank you for being here today, and I look forward to our discussion.

Last Updated: May 14, 2015

Tuesday, May 19, 2015

CFTC COMMISSIONER BOWEN'S SPEECH BEFORE 2015 COMPLIANCE CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Commissioner Bowen Speech before the Managed Funds Association, 2015 Compliance Conference
May 5, 2015

Thank you John for the introduction and good morning everyone. It’s a pleasure to be here today at the Managed Funds Association’s 2015 Compliance Conference. I would like to give a few very brief remarks before we move into my fireside chat with Adam Cooper. I have known Adam through our membership on the Northwestern Law School Board, which I chaired several years ago. I look forward to our conversation at the end of my brief remarks this morning. Of course, my remarks today are my own and do not reflect the views of my fellow Commissioners or the CFTC staff.

In my eleven months as a Commissioner, I’ve spoken about a few topics that are at the top of my agenda and which I hope the Commission will address early during my term. One of those is the need for increased regulation of retail foreign exchange transactions, which I believe is necessary to protect the retail investors who trade in that market. Another is the need for full funding of the Commodity Futures Trading Commission (CFTC) so that we will have strong, comprehensive oversight of the swaps and futures markets. Still another is the need to finalize the remaining regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, aka Dodd-Frank.

Finally, I have also spoken about my belief that we need to ensure that our system of regulation, including our universe of self-regulatory organizations, works efficiently and effectively. In fact, I would like to talk to you today about a subject that confirms my belief that we need to finish our Dodd-Frank rules, while enhancing our overall comprehensive regulations. Specifically, I want to talk to you about the topic of governance.

As compliance professionals, I know that you all understand how good governance protocols and rules are at the heart of how any fund or corporation operates. What some of you may not know is that the CFTC was tasked to issue regulations on this subject under Dodd-Frank. Per Section 726 of Dodd-Frank, “In order to mitigate conflicts of interest,” the CFTC was supposed to issues rules within six months of the law’s passage that could potentially “include numerical limits on the control of, or the voting rights with respect to, any derivatives clearing organization that clears swaps, swap execution facility, or board of trade” that is sufficiently involved in the swaps market.1 Additionally, we were mandated to adopt those rules if we determined that “such rules are necessary or appropriate to improve the governance of” a derivatives clearing organization (DCO), a contract market, or certain swap execution facilities (SEFs).2

This rulemaking requirement was one of the first things we acted on. Back in October 2010, almost three months after Dodd-Frank became law, we issued a proposed rule on this subject. It provided guidelines on conflicts of interest over these entities and also crafted a system to improve the governance of DCOs and SEFs.3 Ironically, however, we have not finalized that governance proposal in the intervening five years nor have we issued a new proposal.

So, to some extent, one of the first regulations out of the gate has become one of the last ones to be completed. In fact, the governance rulemaking is one of three major rules we have to complete, along with such well-known regulations as position limits and capital for swap dealers and margin for uncleared swaps. And honestly, I believe that it is as important for us to complete and promulgate a rule on governance, as it is for us to complete those two rules.

The reason I believe completing the rule on governance is critical is two-fold. First, the governance of designated contract markets (DCMs) and SEFs is critical to how the overall markets we regulate function. As a reminder, the governance proposal covered a number of major topics - from compensation policies for public boards of directors4 to an expertise standard for other members of public boards.5 The proposal even required that boards of directors of registered entities engage in an annual performance review.6 Some of those concepts might seem self-evident, but it’s critical that all such entities have such policies in place.

Second, I believe this rule can and should be part of a broader effort to address another key issue at present: improving culture. As I have mentioned previously and as seems self-evident, we have a culture problem in finance at present.7 As a Commissioner at the CFTC, I’ve seen a significant number of settlements and alleged violations of our laws in the last eleven months. Sometimes those violations are from individuals deliberately seeking to defraud investors. Other times, however, the violations come from large organizations that have previously violated the rules. And that is something that should trouble us.

I believe the governance rule is a major tool to deter rule-breaking. Culture comes from the top – when you have a strong, independent, and involved board of directors, it’s more likely that issues will be fixed before they become problems or cause a regulation or law to be broken.

I think completing this governance rule is important because it is a critical step in the process of addressing our mandate. We need to be able to release a strong rule on governance practices for SEFs and DCMs if we’re going to fix the broader culture problem on Wall Street. We all expect that the governance of our DCMs and SEFs will be superior – after all, these markets revolve around trust. If market participants don’t trust that decisions are made fairly on an exchange, they are less likely to trade on that exchange.

It is because of that key fact that I believe there is support for strong governance rules on these entities because they’re the intermediaries between industry players. They’re a big part of the marketplace. And if we want to fix a big problem like culture, this is a good place to start. If we can establish strong, robust governance practices on DCMs and SEFs, that may not be a panacea to our cultural ills, but it could be a small dose of medicine.

To return to the particular rule at hand, the 2010 governance proposal was filled with a number of good, worthy ideas. I want to offer my thoughts on how to enhance this governance rulemaking. My hope is that with these and possibly other enhancements, we can at least be closer to introducing model rules and best practices that serve as a template to improve the culture in the financial industry.

First, we need to have some qualitative standard for board membership. The previous proposal required that 35% of the members of boards of directors of our registrants be public directors and that those boards have a minimum of two public directors.8 I see why that was done that way – specific numerical standards are easy to implement. But I think we can do better. After all, a person being a public director doesn’t immediately make them a good director. We want people who are fully invested in their firms and who will diligently oversee management accountability.

To put a finer point on it, I do think you need a sufficient number of public directors to achieve meaningful independence. We could approach an independence standard through a holistic review of the board’s independence or we may require certifications by the public directors each year to the stockholders that they are truly independent. Alternatively, we could ask that the board certify that it is providing adequate resources to improve culture and the tone at the top or that it craft plans for improving the overall culture of a company. Clearly the standard needs to be more dynamic than just a number. It also has to be one that can clearly be consistently met by a registrant.

Second, I think we should use this rule to ensure that issues of culture will merit the active attention of the board. The previous proposal had provisions that mandated the board of directors to do certain things. For instance, it mandated an annual self-review and required that a registered entity establish procedures to remove a member of the board. I think this rule can be enhanced with a requirement that issues of culture be considered by the board.

There are several ways this could work. As I mentioned in my OpRisk speech, “If there isn’t a dedicated person in the company trying to improve the culture – both through communication and making it clear that the rules need to be constantly followed – the culture won’t broadly improve.”9

Third, we need to try and standardize governance across entities as much as possible. Good governance principles should apply across entities, financial or non-financial, because they provide simple incentives designed to protect the company and its shareholders from issues; inadvertent errors as well as deliberate ones. Entities should strive to ensure that a board is independent and that it is really taking a separate hard-look at the company’s actions, just as entities should strive to prevent conflicts of interest from arising.

Yet, we should not be micro-managing the process. If we’re crafting rules that are too entrenched in the particulars of how a DCM operates, we’re making two mistakes. First, having standards that aren’t largely uniform will lead to additional legal and compliance expenses for those entities. Differing standards could lead to confusion and result in entities making mistakes. Second, we’re missing the chance to actually establish standards that could be a model for others to use, and that would be a clear missed opportunity to improve the culture in finance and increase board independence.

If we can seek standardization and harmonization on the particulars of data standards or determine which country has the jurisdiction over a particular trade, we shouldn’t shy away from the chance to seek standardization on this subject. And I hope and believe that if we can establish strong rules on these entities -- rules that work -- there will be other private sector entities that will voluntarily adopt these rules as well.

I would hope that many entities which are not SEFs or DCMs would view a new governance rule as a model and adopt it voluntarily. But even if they do not, I believe we have the ability to set governance rules on a number of swap dealers and major swap participants, and that we should consider whether it makes sense to apply this rule to those entities.

If you’re going to have an optimally effective organization, you’ve got to have good governance. It’s a condition that is absolutely necessary for success. I believe the time has come for the CFTC to finish this rule, ideally before the end of this calendar year. Thank you and I look forward to my fireside chat with Adam and questions from the audience. Obviously, time is a constraint, so feel free to reach out to me or my staff if you do not have the opportunity to ask a question or raise issues this morning.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(a), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

2 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(b), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

3 Commodity Futures Trading Commission, “Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 17 CFR Parts 1, 37, 38, 39 & 40, October 18, 2010, 75 Fed. Reg. 63732, [hereinafter “Proposed CFTC Governance Rule”], available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

4 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(4), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

5 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(3), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

6 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(5), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

7 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

8 Proposed Governance Rule, 17 C.F.R. Part 40.9(b)(1)(i), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

9 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

Last Updated: May 5, 2015

Monday, May 18, 2015

SEC CHARGES "MAN CAMP" OPERATOR FOR ALLEGEDLY DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Litigation Release No. 23252 / May 6, 2015
Securities and Exchange Commission v. North Dakota Developments, LLC, Robert L. Gavin, and Daniel J. Hogan, et. al., Civil Action No. 4:15-cv-00053-DLH-CSM (D.N.D.)
SEC Halts Bakken Oil and Gas-Related Investment Scheme

The Securities and Exchange Commission today announced charges and an emergency asset freeze against North Dakota Developments, LLC ("NDD") and its two principals for allegedly defrauding investors in a scheme to purportedly build and operate short-term housing facilities or "man camps" for workers in the Bakken oil and gas formation of North Dakota and Montana.

The SEC alleges that NDD and its owners Robert L. Gavin and Daniel J. Hogan have raised over $62 million from hundreds of investors in various states in the U.S. and foreign countries for interests in one of four "man camp" projects. According to the SEC's complaint filed yesterday in U.S. District Court for the District of North Dakota, investors bought "units" in NDD's projects motivated by the Defendants' promises of exceptionally high annual returns, up to 42%, and that NDD would jointly manage all of the units as a fully-developed short-term housing facility with amenities typically found in a hotel. The SEC also alleges that the Defendants offered investors the option of receiving a "guaranteed" annual return of up to 25% of the purchase price of their unit without regard to actual rental income. As further inducement to invest, Defendants also promised investors that the various projects would be operational in a very short time frame, often within months. In reality, the SEC alleges, despite the substantial amount of funds raised by the Defendants since May 2012, at the present time, none of the projects are fully operational and one of the projects offered does not even have governmental approval for construction to begin.

According to the SEC's complaint, Defendants directly or indirectly made material misrepresentations and omissions regarding the use of investor funds, the payment of commissions, and the return on the investment. Among other things, the SEC alleges that NDD's first project was delayed and unprofitable. The SEC alleges that, despite the lack of profits, the Defendants made Ponzi-style payments to certain early investors by paying their "guaranteed" returns using funds provided by later investors. The SEC also alleges that instead of developing the projects as promised, the Defendants have misappropriated over $25 million of investor funds to pay undisclosed commissions to sales agents, make payments to Gavin and Hogan, make investments in unrelated Bakken area projects for Gavin's and Hogan's personal benefit, and to make the Ponzi-like payments.

On May 5, 2015, the Honorable Daniel L. Hovland for the U.S. District Court for the District of North Dakota granted the SEC's request for a temporary restraining order and asset freeze against NDD, Gavin, and Hogan. A court hearing has been scheduled for May 18, 2015, on the SEC's motion for a preliminary injunction.

The Commission's complaint alleges that NDD, Gavin, and Hogan violated 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 seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against each of them.

The SEC's investigation has been conducted by Michael Cates, Anne Romero, and J. Lee Robinson of the Denver Regional Office, with supervision by Ian S. Karpel. The SEC appreciates the assistance of the North Dakota Securities Department.

Sunday, May 17, 2015

CFTC CHARGES NEVADA-BASED COMPANY WITH MAKING ILLEGAL OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
April 27, 2015
CFTC Charges Nevada-Based My Global Leverage, LLC and Toney Blondo Eggleston with Engaging in Illegal, Off-Exchange Precious Metals Transactions with Retail Customers

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil injunctive enforcement action in the U.S. District Court for the District of Nevada against Defendants My Global Leverage, LLC (MGL) and its owner and managing member Toney Blondo Eggleston, who resides in Newport Coast, California. The CFTC Complaint charges the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis. The Complaint further alleges that Eggleston, as controlling person for MGL, is liable for MGL’s violations of the Commodity Exchange Act (CEA).

According to the Complaint, since at least July 16, 2011 and continuing through at least November 2012, MGL, by and through its employees including Eggleston, solicited retail customers by telephone to engage in leveraged, margined, or financed precious metals transactions. During that period, approximately 12 of MGL’s customers paid approximately $786,000 to MGL in connection with precious metals transactions, and MGL received commissions and fees totaling approximately $257,680 in connection with these precious metals transactions, according to the Complaint.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions such as those conducted by MGL, are illegal off-exchange transactions unless they result in actual delivery of metal within 28 days. The Complaint alleges that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of MGL’s customers.

The Complaint further alleges that MGL executed the illegal precious metals transactions through Hunter Wise, LLC (Hunter Wise). The CFTC filed an enforcement action against Hunter Wise, among others, in December 2012, charging the defendants with engaging in illegal, off-exchange precious metals transactions, and charging Hunter Wise with fraud and other violations (see CFTC Press Releases 6447-12 and 6655-13).

On February 19, 2014, the court found that Hunter Wise had no actual metal to deliver to customers and held that Hunter Wise engaged in illegal precious metals transactions and was required to register as a Futures Commission Merchant but did not do so and therefore violated Sections 4(a) and 4d of the CEA (see CFTC v. Hunter Wise Commodities, LLC, et al., 12-81311 (Order on the Parties’ Motions for Summary Judgment)). On April 15, 2014, the U.S. Court of Appeals for the Eleventh Circuit affirmed the court’s issuance of a preliminary injunction and held that the CFTC’s jurisdiction under Section 2(c)(2)(D) of the CEA extends to the precious metals transactions at issue in the case and that no exception to the CFTC’s jurisdiction applied. And, on May 16, 2014, after a bench trial on the remaining claims, including fraud, the District Court entered an Order finding that Hunter Wise fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses (see CFTC Press Release 6935-14).

In its continuing litigation against MGL and Eggleston, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the CEA, as charged.

CFTC Division of Enforcement staff members responsible for this action are Glenn Chernigoff, Michelle Bougas, Alison B. Wilson, and Rick Glaser.

Saturday, May 16, 2015

CFTC CHARGES TELEPHONE SOLICITOR WITH ENGAGING IN ILLEGAL, OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES 
April 21, 2015
CFTC Charges Florida-Based Sentry Asset Group, LLC and its Owner, John Pakel, with Engaging in Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed a civil enforcement action in the U.S. District Court for the Southern District of Florida against Defendants Sentry Asset Group, LLC (SAG) of Boca Raton, Florida, and its owner and manager, John Pakel of Del Ray, Florida. The CFTC Complaint charges the Defendants with engaging in illegal, off-exchange transactions in precious metals with retail customers on a leveraged, margined, or financed basis. The Complaint further alleges that as controlling person for SAG, Pakel is liable for SAG’s violations of the Commodity Exchange Act (CEA).

According to the Complaint, since at least March 2012 and continuing through at least July 2013, SAG, by and through its employees including Pakel, solicited retail customers by telephone to engage in leveraged, margined, or financed precious metals transactions. During the period, SAG’s customers paid more than $1.1 million to SAG in connection with precious metal transactions, and SAG received commissions and fees totaling $278,767 in connection with these precious metals transactions. In addition, the Complaint alleges that SAG accepted customer orders and funds and thus acted as a Futures Commission Merchant without registering with the CFTC as such.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, leveraged, margined, or financed transactions such as those conducted by SAG, are illegal off-exchange transactions unless they result in actual delivery of metal within 28 days. The Complaint alleges that metals were never actually delivered in connection with the leveraged, margined, or financed precious metals transactions made on behalf of SAG’s customers.

The Order further finds that SAG and Pakel executed the illegal precious metals transactions through Lloyds Commodities, LLC (Lloyds), Hunter Wise, LLC (Hunter Wise), and AmeriFirst Management LLC (AmeriFirst). The CFTC filed enforcement actions against, among others, Lloyds and Hunter Wise in December 2012 and AmeriFirst in July 2013, charging each with engaging in illegal, off-exchange precious metals transactions, and charging AmeriFirst and Hunter Wise with fraud and other violations (see CFTC Press Releases 6447-12 and 6655-13).

On September 18, 2013, the court entered a consent Order resolving the Commission’s claims against AmeriFirst, finding it liable for illegal off-exchange precious metals transactions and fraud (see CFTC Press Release 6973-14).

On February 5, 2014, in a consent Order resolving the Commission’s claims against Lloyds, the court ordered Lloyds Commodities to pay over $5 million in restitution and penalties (see CFTC Press Release 6850-14).

On February 19, 2014, the court found that Hunter Wise had no actual metal to deliver to customers and held that Hunter Wise engaged in illegal precious metals transactions and was required to register as a Futures Commission Merchant but did not do so and therefore violated Sections 4(a) and 4d of the CEA (see CFTC v. Hunter Wise Commodities, LLC, et al., 12-81311-CIV (Order on the Parties’ Motions for Summary Judgment)). On April 15, 2014, the U.S. Court of Appeals for the Eleventh Circuit affirmed the court’s issuance of a preliminary injunction and held that the Commission’s jurisdiction under Section 2(c)(2)(D) of the CEA extends to the precious metals transactions at issue in the case and that no exception to the Commission’s jurisdiction applied. And, on May 16, 2014, after a bench trial on the remaining claims, including fraud, the court entered an Order finding that Hunter Wise fraudulently misrepresented the nature of precious metals transactions that resulted in millions of dollars in customer losses (see CFTC Press Release 6935-14).

In its continuing litigation against SAG and Pakel, the CFTC seeks disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction from future violations of the CEA, as charged.

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

CFTC Division of Enforcement staff members responsible for this action are Eugenia Vroustouris, Michael Loconte, James H. Holl, III, and Rick Glaser.

Friday, May 15, 2015

CFTC CHARGES MAN, COMPANIES WITH COMMODITY POOL FRAUD,

FROM:  U.S. COMMODITY FUTURES 
April 30, 2015
CFTC Charges North Carolina Resident Barry C. Taylor and His Companies with Commodity Pool Fraud in a Multi-Million Dollar Fraudulent Forex Scheme and with Registration Violations

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

Defendants’ Fraudulent Scheme Allegedly Solicited over $2.4 Million from Approximately 24 Members of the Public

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement Complaint against Barry C. Taylor of Franklin, North Carolina, charging him with operating a multi-million dollar fraudulent scheme through his firms, OTC Investments LLC and Forex Currency Trade Advisors, LLC (collectively, Defendants). On April 22, 2015, Judge Martin Reidinger of the U.S. District Court for the Western District of North Carolina, Asheville Division entered an emergency restraining Order freezing Defendants’ assets and prohibiting the destruction or concealment of their books and records. None of the Defendants has ever been registered with the CFTC, as is required.

The CFTC Complaint, filed under seal on April 21, 2015, alleges that from at least August 1, 2011 through the present, the Defendants engaged in a fraudulent scheme that solicited more than $2.4 million from approximately 24 members of the public in North Carolina and other states within the United States and in Canada to participate in a commodity pool that traded leveraged or margined retail off-exchange foreign currency (forex) contracts.

The Complaint further alleges that Taylor misappropriated pool participant funds for personal and other business uses, and to conceal his fraudulent scheme and misappropriation. Also, as alleged, Taylor issued or caused to be issued false account statements to one or more pool participants to cover up his fraudulent scheme.

Taylor, among other things, allegedly made material misrepresentations and omissions to commodity pool participants that 1) Defendants were engaged in profitable forex trading and 2) failed to disclose that Defendants traded only a portion of pool participant funds and misappropriated the remainder through a combination of personal expenditures and partial distributions of diminishing commodity pool funds to pool participants to lull and deceive them.

The Complaint also charges that the Defendants used pool participant funds to pay purported trading profits and supposedly returned pool participants’ principal in the manner of a Ponzi scheme.

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

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

The CFTC appreciates the assistance of the U.S. Attorney's Office for the Western District of North Carolina and the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this case are JonMarc P. Buffa, Peter M. Haas, Patricia A. Gomersall, Tashieka Taylor, and Paul G. Hayeck.

Thursday, May 14, 2015

SEC.gov | Statement at the Inaugural Meeting of the Market Structure Advisory Committee

SEC.gov | Statement at the Inaugural Meeting of the Market Structure Advisory Committee

TWO CHARGED BY SEC FOR INSIDER TRADING CHINESE INTERNET COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23249 / April 29, 2015
Securities and Exchange Commission v. Xiaoyu Xia and Yanting Hu, Civil Action No. 15-CV-3320
SEC Charges Two with Insider Trading On Chinese Internet Company 58.Com Merger News

The Securities and Exchange Commission today announced insider trading charges and an emergency asset freeze based on trading prior to the announcement of a merger between two Chinese e-commerce companies, 58.com and ganji.com. When the merger was reported on April 14, 2015, the share price of 58.com increased by more than a third, and trading volume increased more than twenty-fold.

The SEC alleges that Dr. Xiaoyu Xia and Ms. Yanting Hu, residents of Beijing, China, each purchased out-of-the-money call options in 58.com in the time period between when 58.com, ganji.com, and 58.com's largest shareholder, Tencent Holdings, agreed to the merger and when the merger was first reported on April 14, 2015. The defendants each traded through U.S. brokerage accounts and their purchase of speculative, out-of-the-money call options in 58.com resulted in combined realized and unrealized profits totaling over $2 million. Defendants are both connected to the financial industry in China.

The United States District Court for the Southern District of New York granted the SEC's request for an asset freeze against monies held in Xia and Hu's United States brokerage accounts, and issued an order to show cause why an injunction and other miscellaneous relief should not issue. A hearing has been scheduled for May 6, 2015.

The SEC's complaint charges the defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks permanent injunctions, disgorgement, civil money penalties, and other relief.

The SEC's investigation, which is continuing, has been conducted by L. James Lyman and Jeffrey D. Felder of the Denver Regional Office, with supervision by Ian S. Karpel. The SEC's litigation is led by Dugan Bliss with supervision by Gregory Kasper.

Wednesday, May 13, 2015

Optimizing Our Equity Market StructureOpening Remarks at the Inaugural Meeting of the Equity Market Structure Advisory Committee

Optimizing Our Equity Market StructureOpening Remarks at the Inaugural Meeting of the Equity Market Structure Advisory Committee

Remarks at the Inaugural SEC Equity Market Structure Advisory Committee Meeting

Remarks at the Inaugural SEC Equity Market Structure Advisory Committee Meeting

SEC CHARGES FORMER BANK HOLDING COMPANY OFFICERS WITH DISCLOSURE FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23254 / May 7, 2015
Securities and Exchange Commission v. David R. Gibson, et al., Civil Action No. 15-cv-00363 (D. Del., May 6, 2015)
SEC Charges Four Former Officers of Delaware Bank Holding Company with Disclosure Fraud

On May 6, 2015, the Securities and Exchange Commission filed fraud charges against four former officers of Wilmington Trust for intentionally understating past due bank loans during the financial crisis.  The former Delaware-based bank holding company was acquired by M&T Bank in May 2011 and paid $18.5 million in September 2014 to settle related SEC charges of improper accounting and disclosure fraud.

The SEC’s complaint, filed in federal district court in Wilmington, Delaware, alleges the four took part in a scheme to mask the impact of real estate market declines on the bank’s portfolio of commercial real estate loans.  According to the SEC’s complaint, the former officials improperly excluded hundreds of millions of dollars of past due real estate loans from financial reports filed by Wilmington Trust in 2009 and 2010, violating a requirement to fully disclose the amount of loans 90 or more days past due.

The complaint names the bank’s former Chief Financial Officer David R. Gibson, former Chief Operating Officer and President Robert V.A. Harra, former Controller Kevyn N. Rakowski, and former Chief Credit Officer William B. North.  The complaint alleges that Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from Wilmington Trust’s disclosures in the third quarter of 2009, so that the bank disclosed only $38.7 million of such loans.  The four former officials allegedly omitted approximately $330.2 million of these loans in the fourth quarter of 2009, so that the bank’s annual report disclosed just $30.6 million in matured loans 90 days or more past due.

In addition, the complaint alleges that Gibson, Rakowski and North schemed to materially misreport this category of past due loans in the first half of 2010.  Gibson also is alleged to have materially understated the amount of non-accruing loans in Wilmington Trust’s portfolio in the third quarter of 2009 and the bank’s loan loss provision and allowance for loan losses in the fourth quarter of 2009.  Gibson, Harra, Rakowski and North are each charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws.  Each also is charged with aiding and abetting violations of the reporting, recordkeeping, and internal controls provision of the federal securities laws.  The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors.

In a related action, the U.S. Attorney’s Office for the District of Delaware today announced criminal charges against Rakowski and North.

The SEC’s investigation has been conducted by Margaret Spillane, James Addison, and Thomas P. Smith, Jr. of the New York Regional Office.  Jack Kaufman and Ms. Spillane will lead the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

Monday, May 11, 2015

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SEC CHARGES HEDGE FUND ADVISORY FIRM, EXECUTIVES WITH IMPROPER ALLOCATION OF ASSETS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
04/29/2015 12:30 PM EDT

The Securities and Exchange Commission announced charges against a Santa Barbara, Calif.-based hedge fund advisory firm and two executives involved in improper allocations of fund assets to pay undisclosed operating expenses.  The SEC also charged an accountant who conducted the outside audit of misleading financial statements that the firm sent to investors.

An SEC investigation found that Alpha Titans LLC, its principal Timothy P. McCormack, and general counsel Kelly D. Kaeser used assets of two affiliated private funds to pay more than $450,000 in office rent, employee salaries and benefits, and similar expenses without clear authorization from fund clients and without accurate and complete disclosures that fund assets were being used for these purposes.  The firm’s outside auditor Simon Lesser was aware of how Alpha Titans used fund assets but still gave his final approval of audit reports containing unqualified opinions that the funds’ financial statements were presented fairly.

The firm, both executives, and the auditor agreed to settle the SEC’s charges.

“Alpha Titans did not make the proper disclosures for clients to decipher that the funds were footing the bill for many of the firm’s operational expenses,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Private fund managers must be fully transparent about the type and magnitude of expenses they allocate to the funds.”

According to the SEC’s orders instituting settled administrative proceedings, Alpha Titans, McCormack, and Kaeser sent investors audited financial statements that failed to disclose almost $3 million in expenses tied to transactions involving other entities controlled by McCormack.  Lesser engaged in improper professional conduct while auditing the funds’ financial statements by not considering the adequacy of the related party disclosures in the funds’ financial statements.  Alpha Titans violated the custody rule by distributing financial statements that were not GAAP compliant.

To settle the SEC’s charges, Alpha Titans and McCormack agreed to pay disgorgement of $469,522, prejudgment interest of $28,928, and a penalty of $200,000.  McCormack and Kaeser each agreed to be barred from the securities industry for one year, and Kaeser agreed to a one-year suspension from practicing as an attorney on behalf of any entity regulated by the SEC.  Lesser agreed to pay a penalty of $75,000 and consented to an order suspending him from practicing as an accountant on behalf of any entity regulated by the SEC for at least three years.  The firm and the three individuals settled the charges without admitting or denying the SEC’s findings.

The SEC’s investigation was conducted by Ronnie B. Lasky, C. Dabney O’Riordan, and Dan Pines of the Asset Management Unit along with Carol Shau and Megan T. Monroe.  The SEC examination that led to the investigation was conducted by Charles Liao, John K. Kreimeyer, Nicholas Mead, and Andy Ganguly of the SEC’s Los Angeles office.

Sunday, May 10, 2015

SEC FILES FRAUD CHARGES AGAINST FORMER OFFICRS OF WILMINGTON TRUST

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23254 / May 7, 2015
Securities and Exchange Commission v. David R. Gibson, et al., Civil Action No. 15-cv-00363 (D. Del., May 6, 2015)
SEC Charges Four Former Officers of Delaware Bank Holding Company with Disclosure Fraud

On May 6, 2015, the Securities and Exchange Commission filed fraud charges against four former officers of Wilmington Trust for intentionally understating past due bank loans during the financial crisis.  The former Delaware-based bank holding company was acquired by M&T Bank in May 2011 and paid $18.5 million in September 2014 to settle related SEC charges of improper accounting and disclosure fraud.

The SEC’s complaint, filed in federal district court in Wilmington, Delaware, alleges the four took part in a scheme to mask the impact of real estate market declines on the bank’s portfolio of commercial real estate loans.  According to the SEC’s complaint, the former officials improperly excluded hundreds of millions of dollars of past due real estate loans from financial reports filed by Wilmington Trust in 2009 and 2010, violating a requirement to fully disclose the amount of loans 90 or more days past due.

The complaint names the bank’s former Chief Financial Officer David R. Gibson, former Chief Operating Officer and President Robert V.A. Harra, former Controller Kevyn N. Rakowski, and former Chief Credit Officer William B. North.  The complaint alleges that Gibson, Rakowski, and North omitted approximately $351 million of matured loans 90 days or more past due from Wilmington Trust’s disclosures in the third quarter of 2009, so that the bank disclosed only $38.7 million of such loans.  The four former officials allegedly omitted approximately $330.2 million of these loans in the fourth quarter of 2009, so that the bank’s annual report disclosed just $30.6 million in matured loans 90 days or more past due.

In addition, the complaint alleges that Gibson, Rakowski and North schemed to materially misreport this category of past due loans in the first half of 2010.  Gibson also is alleged to have materially understated the amount of non-accruing loans in Wilmington Trust’s portfolio in the third quarter of 2009 and the bank’s loan loss provision and allowance for loan losses in the fourth quarter of 2009.  Gibson, Harra, Rakowski and North are each charged with violating or aiding and abetting violations of the antifraud provisions of the federal securities laws.  Each also is charged with aiding and abetting violations of the reporting, recordkeeping, and internal controls provision of the federal securities laws.  The SEC is seeking to have all four return allegedly ill-gotten gains with interest and pay civil monetary penalties, and to have Gibson and Harra barred from serving as corporate officers or directors.

In a related action, the U.S. Attorney’s Office for the District of Delaware today announced criminal charges against Rakowski and North.

The SEC’s investigation has been conducted by Margaret Spillane, James Addison, and Thomas P. Smith, Jr. of the New York Regional Office.  Jack Kaufman and Ms. Spillane will lead the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

Thursday, May 7, 2015

MICHIGAN RESIDENT RECEIVES PRISON SENTENCE FOR DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23250 / April 30, 2015
Securities and Exchange Commission v. Joel I. Wilson et al., Civil Action No. 12-cv-15062 (E.D. Mich.)
Michigan Businessman Sentenced to Up to 20 Years for Defrauding Investors

The Securities and Exchange Commission announced that on April 24, 2015, the Honorable Joseph K. Sheeran of the Bay County Circuit Court in Bay City, Michigan sentenced Joel Wilson to concurrent prison terms of 105 months to 20 years and 80 months to 10 years on six criminal counts. The Court ordered that he pay $6.5 million in restitution, plus $11,000 to the Michigan Attorney General's Office for the costs of extraditing him from Germany. Wilson, 32, of Saginaw, Michigan, had been previously found guilty by a jury in March 2015 of fraudulent sale of securities, sale of unregistered securities, and continuing a criminal enterprise or racketeering and larceny.

The criminal charges arose out of the same facts that were the subject of a civil enforcement action that the Commission filed against Wilson on November 15, 2012. According to the Commission's complaint, Wilson defrauded investors who bought unregistered securities offered by his company, Diversified Group Partnership Management, LLC, and sold through his brokerage firm, W R Rice Financial Services, Inc. Wilson raised approximately $6.7 million from approximately 120 investors who bought Diversified Group's securities from September 2009 through October 2012, and used the funds to finance his business of buying, renovating, and selling houses in and around Bay City, the Commission alleged.

Although Wilson promised investors that he would invest their money in real estate that would yield returns of 9.9% per year, he used most of it to make unsecured loans to his real estate business, which did not generate enough income to repay the investors. Wilson also diverted $582,000 of investor money to pay personal expenses, including $75,000 he used to buy W R Rice Financial, $46,780 he spent on travel, and $35,000 for his wife's business. In addition, Wilson used investors' money to pay for a sponsorship and tickets to the Saginaw Sting football team and to buy thousands of dollars worth of tickets to the Detroit Red Wings.

The Commission also alleged that Wilson raised additional funds for his real estate business through stock sales for another of his companies, American Realty Funds Corporation, which traded on the OTC Bulletin Board under the symbol ANFDE at the time and is now no longer listed. The complaint alleged that there were misrepresentations and omissions in some of the reports the company filed with the Commission, which Wilson signed, including that American Realty had failed to make loan payments and that its purportedly independent directors have undisclosed personal and business relationships with Wilson.

The Commission's complaint, filed in the U.S. District Court for the Eastern District of Michigan, charged Wilson and Diversified Group with violations of the registration and antifraud provisions of the federal securities laws and American Realty with violations of the antifraud and reporting provisions of the federal securities laws. When Wilson failed to answer the Commission's complaint, the Court granted the Commission's motion for entry of a default judgment against him. On July 26, 2013, the Court entered a Second Amended Final Judgment against Wilson, which permanently enjoined Wilson from future violations of the federal securities laws and ordered him to pay disgorgement of $6,403,580, prejudgment interest of $290,319, and a civil penalty of $7,500 for a total of $6,701,399. The Commission also entered a final administrative order on October 17, 2014, barring Wilson from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in an offering of penny stock.

Wednesday, May 6, 2015

COMPANY SANCTIONED BY CFTC FOR FAILURE TO ADEQUATELY SUPERVISE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
May 1, 2015
CFTC Sanctions FCStone, LLC for Supervision Violations
Firm Ordered to Pay $140,000 Civil Penalty

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) entered an Order filing and simultaneously settling charges against FCStone, LLC, a CFTC-registered Futures Commission Merchant (FCM) headquartered in New York, New York, for failing to provide and maintain an adequate program of supervision and for failing to diligently supervise its employees on one occasion in violation of CFTC Regulation 166.3.

The CFTC Order requires FCStone to pay a $140,000 civil monetary penalty and to cease and desist from violating CFTC Regulation 166.3, as charged.

Specifically, the Order finds that, from at least 2008 until May 2013, FCStone did not have adequate policies or procedures governing the transfer of positions between customers’ accounts, and no set written policy governing a request by a customer to transfer positions between accounts. Instead, FCStone had an unwritten policy such that its employees understood that they were to seek guidance if a transfer was requested between two accounts that were not under common control. That unwritten policy, however, did not provide specific guidance regarding the impact of beneficial ownership on account transfers, according to the Order. In particular, an FCM, like FCStone, may transfer positions among customers’ commodity accounts held at the firm 1) so long as the transfer merely constitutes a change from one account to another account, and 2) the underlying beneficial ownership in the two accounts remains the same, according to the Order.

The Order also finds that on one occasion FCStone’s employees transferred positions between two accounts that did not have the same underlying beneficial ownership. Specifically, they transferred approximately $20 million in gold and silver positions from an individual’s personal account to a corporate account in which the individual was a 98.95 percent owner. They made the transfer believing that, because the individual and corporate accounts had the same large trader number and the individual controlled both accounts, the positions could be transferred between the two accounts. In actuality, however, the tax identification numbers for the two accounts were different, and the accounts did not have the same underlying beneficial ownership because there were two fractional minority owners of the corporate account.

The Order further finds that FCStone cooperated fully with the CFTC’s investigation into this matter and that FCStone, on its own, revised its written procedures concerning the transfer of positions accordingly.

CFTC Division of Enforcement staff members responsible for this matter are James Deacon and Rick Glaser.

Tuesday, May 5, 2015

SEC COMMISSIONER KARA STEIN'S DISSENTING STATEMENT REGARDING DEUTSCHE BANK'S WAIVER FROM INELIGIBLE ISSUER STATUS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
PUBLIC STATEMENT

Dissenting Statement in the Matter of Deutsche Bank AG, Regarding WKSI

Commissioner Kara M. Stein
May 4, 2015

I respectfully dissent from the Commission’s Order (“Order”), approved on May 1, 2015, by a majority of the Commission.[1] The Order grants Deutsche Bank AG a waiver from ineligible issuer status triggered by a criminal conviction of its subsidiary, DB Group Services (UK) Ltd. (collectively with Deutsche Bank AG, “Deutsche Bank”), for manipulating the London Interbank Offered Rate (“LIBOR”), a global financial benchmark.[2] This waiver will allow Deutsche Bank to maintain its well-known seasoned issuer (“WKSI”) status, which would have been automatically revoked as a result of its criminal misconduct absent a Commission waiver.

Created by the Commission as part of the Securities Offering Reforms of 2005, WKSI status is available “for the most widely followed issuers representing the most significant amount of capital raised and traded in the United States.”[3] This status confers on the largest companies certain advantages over smaller companies. WKSIs are granted nearly instant access to investors through the capital markets. WKSIs enjoy greater flexibility in their public communications and a streamlined registration process with less oversight than smaller businesses. For example, unlike smaller businesses, the WKSI issuer does not have to wait for the Division of Corporation Finance to review and declare a registration statement effective prior to selling financial products to investors.[4] WKSI companies also enjoy a number of other privileges related to the payment of fees.

With these WKSI advantages comes a modicum of responsibility. WKSIs must meet the very low hurdle of not being ineligible. This means that, among other things, they have not been convicted of certain felonies or misdemeanors within the past three years.[5] In granting this waiver, the Commission continues to erode even this lowest of hurdles for large companies, while small and mid-sized businesses appear to face different treatment.[6]

Deutsche Bank’s illegal conduct involved nearly a decade of lying, cheating, and stealing. This criminal conduct was pervasive and widespread, involving dozens of employees from Deutsche Bank offices including New York, Frankfurt, Tokyo, and London. Deutsche Bank’s traders engaged in a brazen scheme to defraud Deutsche Bank’s counterparties and the worldwide financial marketplace by secretly manipulating LIBOR.[7] The conduct is appalling. It was a complete criminal fraud upon the worldwide marketplace.

Prior Commissions sensibly did not grant WKSI waivers for criminal misconduct. At least, that was the practice until September 19, 2013, when Commission staff granted a waiver to a large institution that pleaded guilty to criminal fraud.[8] This Commission granted another waiver on April 25, 2014, to another large institution that had also been criminally convicted of manipulating LIBOR.[9] A majority of this Commission, with this current action, continues the trend by granting its third waiver for criminal conduct at a large institution in a little less than two years. It is safe to assume that these waiver requests will continue to roll in, as issuers are now emboldened by an unofficial Commission policy to overlook widespread and serious criminal conduct — and ensure that the largest companies retain their array of advantages in our capital markets.

It is unclear to me how this waiver can be granted, for reasons substantially similar to those I outlined in my dissent regarding another institution involved in LIBOR manipulation.[10] Among other factors, the egregious criminal nature of the conduct and the duration of the manipulation (almost a decade) weigh heavily in my mind when considering this waiver. Additionally, Deutsche Bank is a recidivist, and its past conduct undermines its current promise of future good conduct. Since 2004, Deutsche Bank has, among other violations, a criminal admission of wrongdoing connected to promoting tax shelters,[11] a settlement involving misleading investors about auction rate securities,[12] and a violation against its investment bank for improperly asserting influence over research analysts.[13] Deutsche Bank requested and was previously granted a WKSI waiver in 2007 and 2009.

This criminal scheme involving LIBOR manipulation was designed to inflate profits, and it was effective. It created the impression that Deutsche Bank was more creditworthy and profitable than it actually was. Accordingly, the conduct affected its financial results and disclosures. Because LIBOR plays such an important role in the worldwide economy, manipulation of it goes to the heart of many aspects of Deutsche Bank’s disclosures. Interest rates represented to clients and the public also were clearly false. Based on this conduct, I do not find any basis to support the assertion that Deutsche Bank’s culture of compliance is dependable, or that its future disclosures will be accurate and reliable.

Finally, Deutsche Bank has not shown good cause for receiving a waiver from automatic disqualification, in this, its third WKSI waiver request in eight years. I am unable to conclude that Deutsche Bank’s culture of compliance and the reliability and accuracy of its future disclosures establishes good cause for a waiver. As the U.S. Commodity Futures Trading Commission’s (“CFTC”) Director of Enforcement noted: “Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive.”[14]

For all of these reasons, I cannot support the Commission’s latest waiver.

In addition, the Commission adopted rules disqualifying felons and other “Bad Actors” from Rule 506[15] offerings on July 10, 2013.[16] Based on the criminal conduct in this case, I expected to receive a request from Deutsche Bank AG for a waiver from the automatic disqualification contained in Rule 506.[17] After all, the final CFTC order was “based on a violation of any law that prohibits fraudulent, manipulative, or deceptive conduct.”[18] It should therefore trigger an automatic disqualification absent a waiver.

However, based on a loophole contained in Rule 506(d)(2)(iii), the CFTC has intervened and prevented the bad actor disqualification question from even coming before the Securities and Exchange Commission. The CFTC saw fit to opine on the SEC’s Rule 506 jurisprudence about whether Deutsche Bank AG should receive a waiver from automatic disqualification under SEC rules. It is unclear to me what, if any, analysis went into this decision and what prompted the CFTC to insert language into its final order stating that a bad actor disqualification “should not arise as a consequence of this Order.”[19] The implications of the CFTC’s actions here — and in other actions[20] — are deeply troubling. The Commission should closely review this provision and how it is being used.


[1] In the Matter of Deutsche Bank AG, Order under Rule 405 of the Securities Act of 1933, Granting a Waiver from Being an Ineligible Issuer, available at http://www.sec.gov/rules/other/2015/33-9764.pdf.

[2] For more information on the statements of facts, plea agreement, and deferred prosecution agreement related to the LIBOR manipulation, see “Deutsche Bank's London Subsidiary Agrees to Plead Guilty in Connection with Long-Running Manipulation of LIBOR,” available at http://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation.

[3] See Division of Corporation Finance’s Revised Statement on Well-Known Seasoned Issuer Waivers (Apr. 24, 2014), available at http://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp-031214.htm.

[4] Id.

[5] See Rule 405 of the Securities Act of 1933 (the “Securities Act”) (17 C.F.R. 230.405).

[6] A review of WKSI waivers granted since August 2013, reveals a total of 12 such waivers granted, 100% of which went to large financial institutions. See Division of Corporation Finance, available at http://www.sec.gov/divisions/corpfin/cf-noaction.shtml#405. This is precisely the concern I expressed a year ago in a dissenting statement from another waiver. See Dissenting Statement In the Matter of Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granter a Waiver from Being an Ineligible Issuer (Apr. 28, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541670244 (“I fear that the Commission’s action to waive our own automatic disqualification provisions arising from RBS’s criminal misconduct may have enshrined a new policy—that some firms are just too big to bar.”).

[7] See Deutsche Bank Services (UK) Ltd. Statement of Facts, available at http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/23/dbgs_statement_of_facts.pdf. Numerous Deutsche Bank derivatives traders communicated their desire to manipulate LIBOR to Deutsche Bank pool and money market derivatives traders, causing the pool and money market derivatives traders to submit false and misleading LIBOR contributions. These derivatives traders would then enter into derivatives transactions tied to LIBOR with unsuspecting counterparties who were unaware of Deutsche Bank’s criminal manipulation of LIBOR going on behind the scenes. These counterparties included universities, charitable organizations, and other financial institutions.

[8] See Letter from the Division of Corporation Finance to Mr. Steven Slutzky (Sep. 19, 2013) available at http://www.sec.gov/divisions/corpfin/cf-noaction/2013/ubs-ag-091913-405.pdf regarding “UBS-AG — Waiver Request of Ineligible Issuer Status under Rule 405 of the Securities Act.”

[9] See Order Under Rule 405 of the Securities Act of 1933, Granting a Waiver From Being an Ineligible Issuer, In the Matter of Royal Bank of Scotland Group, plc, Rel. No. 33-9578, (Apr. 25, 2014) available at http://www.sec.gov/rules/other/2014/33-9578.pdf.

[10]See Dissenting Statement In the Matter of Royal Bank of Scotland Group, plc, Regarding Order Under Rule 405 of the Securities Act of 1933, Granter a Waiver from Being an Ineligible Issuer (Apr. 28, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541670244.

[11] See “Deutsche Bank to Pay More Than $550 Million to Resolve Federal Tax Shelter Fraud Investigation,” available at http://www.justice.gov/sites/default/files/tax/legacy/2011/01/03/deutschebankpr.pdf.

[12] See “SEC Finalizes ARS Settlements With Bank of America, RBC and Deutsche Bank, Providing Over $6 Billion in Liquidity to Investors,” available at https://www.sec.gov/litigation/litreleases/2009/lr21066.htm.

[13] See “SEC Sues Deutsche Bank Securities Inc. for Research Analyst Conflicts of Interest and Failure to Timely Produce All E-Mail,” available at https://www.sec.gov/litigation/litreleases/lr18854.htm.

[14] U.S. Commodity Futures Trading Commission, Press Release “Deutsche Bank to Pay $800 Million Penalty to Settle CFTC Charges of Manipulation, Attempted Manipulation, and False Reporting of LIBOR and Euribor,” (Apr. 23, 2015), available at http://www.cftc.gov/PressRoom/PressReleases/pr7159-15.

[15] Rule 506 of Regulation D is considered a safe harbor for the private offering exemption of Section 4(a)(2) of the Securities Act. (17 C.F.R. 230.506).

[16] Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) required the Commission to adopt rules that disqualify certain securities offerings from reliance on Rule 506 of Regulation D. See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-9414 (July 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9414.pdf.

[17] See Rule 506(d)(1)(iii) of the Securities Act of 1933. (17 C.F.R. 230.506(d)(1)(iii)).

[18] See id.

[19] In the Matter of Deutsche Bank AG, CFTC Docket No. 15-20, at 44 (Apr. 23, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfdeutscheorder042315.pdf.

[20] See, e.g., In the Matter of JPMorgan Chase Bank, NA, CFTC Docket No. 14-01, at 18 (Oct. 13, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfjpmorganorder101613.pdf; CFTC v. Royal Bank of Canada, 13 Civ 2497, at 14 (Dec. 18, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfrbcorder121814.pdf.
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