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

Tuesday, June 30, 2015


06/30/2015 12:15 PM EDT

The Securities and Exchange Commission today charged Goldman, Sachs & Co. with violating the market access rule in connection with a trading incident that resulted in erroneous executions of options contracts.

Goldman Sachs agreed to pay a $7 million penalty to settle the charges.

An SEC investigation found that Goldman Sachs did not have adequate safeguards to prevent the firm from erroneously sending approximately 16,000 mispriced options orders to various options exchanges in less than an hour on Aug. 20, 2013, after the firm implemented new electronic trading functionality designed to match internal options orders with client orders.  A software configuration error inadvertently converted the firm’s “contingent orders” for various options series into live orders and assigned them all a price of $1.  These orders were then sent to the options exchanges during pre-market trading, and approximately 1.5 million options contracts were executed within minutes after the opening of regular market trading.  Many of the executed trades were later canceled or received price adjustments pursuant to the options exchanges’ rules on clearly erroneous trades.

According to the SEC’s order instituting a settled administrative proceeding, Goldman Sachs further violated Securities Exchange Act Rule 15c3-5 by having deficient controls for preventing orders that would cause the firm to exceed its pre-set capital threshold.

“Firms that have market access need to have proper controls in place to prevent technological errors from impacting trading,” said Andrew Ceresney, Director of the SEC Enforcement Division.  “Goldman’s control environment was deficient in several ways, significantly disrupted the markets, and failed to meet the standard required of broker-dealers under the market access rule.”

Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, “It is crucial for broker-dealers with market access to understand and control  the interaction of multiple electronic trading systems, not only to comply with Rule 15c3-5 but also to ensure the orderly operation of the markets as a whole.”

The SEC’s order made the following findings:

Goldman employed unreasonably wide price checks for its options orders during pre-market hours.  Had appropriate price bands been in place similar to those Goldman used during regular trading hours, thousands of the erroneous orders all priced at $1 would have been intercepted and not sent to exchanges.

On Aug. 20, 2013, a Goldman employee lifted several electronic circuit breaker blocks that automatically shut off outgoing options order messages once the rate of messages exceeded a certain level.

Goldman’s policies regarding these circuit breakers were not properly disseminated or fully understood by employees with responsibilities relating to the circuit breakers.

Goldman’s written policies relating to the implementation of software changes did not require several precautionary steps that, if taken, would likely have prevented the erroneous options incident.

In a separate failure that did not relate to the trading incident, Goldman did not maintain adequate controls designed to prevent the entry of orders that exceed the firm’s capital threshold.  The firm only computed its capital usage level every 30 minutes, did not have an automated mechanism to shut off orders in the event that the firm exceeded its capital threshold, and failed for several months to include a number of business units in the firm’s capital utilization calculation, thereby underestimating the firm’s trading risk.

Goldman consented to the SEC’s order without admitting or denying the findings.  In addition to paying the $7 million penalty, Goldman agreed to cease and desist from further violations of Section 15(c)(3) of the Exchange Act and Exchange Rule 15c3-5.

The SEC’s investigation was conducted by Market Abuse Unit staff Daniel Marcus, Charles Riely, and Matthew Koop and supervised by Mr. Hawke and the unit’s co-deputy chiefs Robert Cohen and Joseph Sansone.  Substantial assistance was provided by Rosanne Smith, Stephanie Morena, and Jennifer Conwell of the SEC’s National Exam Program and David Shillman, John Roeser, Richard Vorosmarti, and Carl Emigholz of the agency’s Division of Trading and Markets.

Monday, June 29, 2015


06/15/2015 02:20 PM EDT

The Securities and Exchange Commission announced fraud charges against a Washington D.C.-based investment advisory firm’s former president accused of stealing client funds.  The firm and its chief compliance officer separately agreed to settle charges that they were responsible for compliance failures and other violations.

SFX Financial Advisory Management Enterprises is wholly-owned by Live Nation Entertainment and specializes in providing advisory and financial management services to current and former professional athletes.  The SEC Enforcement Division alleges that SFX’s former president Brian J. Ourand misused his discretionary authority and control over the accounts of several clients to steal approximately $670,000 over a five-year period by writing checks to himself and initiating wires from client accounts for his own benefit.

The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC separately charged SFX and its CCO Eugene S. Mason, finding that the firm failed to supervise Ourand, violated the custody rule, and made a false statement in a Form ADV filing.  The SEC finds that Mason caused some of SFX’s compliance failures by negligently failing to conduct reviews of cash flows in client accounts, which was required by the firm’s compliance policies, and not performing an annual compliance review.  Mason also was responsible for a misstatement in SFX’s Form ADV that client accounts were reviewed several times each week.  SFX and Mason agreed to pay penalties of $150,000 and $25,000 respectively.

“Investment advisers have a fiduciary obligation to safeguard client assets,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “SFX failed to detect an alleged misappropriation for years because it had insufficient internal controls to limit Ourand’s ability to withdraw client funds for personal use.”

The SEC’s continuing investigation is being conducted by Payam Danialypour and C. Dabney O’Riordan, members of the Asset Management Unit in the Los Angeles Regional Office. The Enforcement Division’s litigation against Ourand will be conducted by Mr. Danialypour, Donald Searles, and Lynn Dean.

Sunday, June 28, 2015


June 24, 2015
CFTC Charges Illinois Resident Nick A. Wurl and His Company Ludiera Capital LLC with Fraud and Misappropriation in $9 Million Scheme

Defendants allegedly defrauded at least 46 participants in an investment pool
Wurl was charged with wire fraud in a related criminal action

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a federal enforcement action in the U.S. District Court for the Northern District of Illinois against Defendants Nick A. Wurl and his company Ludiera Capital LLC, both of Chicago, Illinois, charging them with fraud, misappropriation, and the issuance of false statements in connection with an investment pool they operated that traded commodity futures contracts and options on futures contracts. According to the CFTC Complaint, “In reality, the pool was little more than a shell company used to defraud pool participants and enrich Defendants at their expense.”

On May 27, 2015, the U.S. Department of Justice (DOJ), in a related criminal complaint filed in the U.S. District Court for the Northern District of Illinois, charged Wurl with wire fraud. In conjunction with that action, DOJ obtained writs of garnishment against known accounts in the names of Wurl and Ludiera.

The CFTC’s Complaint alleges that Defendants fraudulently solicited over $9 million from at least 46 investors for the represented purpose of trading physical commodities, such as soybeans and other agricultural commodities, as well as energy products. In their solicitations, Defendants fraudulently represented that (1) Defendants would only invest participants’ funds in the buying and selling of physical commodities; (2) Defendants’ physical commodity trading was generating profits for participants; (3) Defendants were not engaged in the trading of futures or options; (4) participants’ funds would be maintained in segregated accounts; and (5) the worst potential outcome for investors was 0 percent return on investment.

According to the Complaint, and contrary to the represented investment strategy, Defendants never engaged in physical commodity trading. Rather, the bulk of participants’ funds — over $6.8 million — was pooled and used by Defendants to trade futures and options. Defendants never disclosed to participants the risk of trading futures and options and never disclosed that a significant portion of participants’ funds would be used for trading futures and options. Further, Defendants never disclosed that Defendants were sustaining significant trading losses. Rather, Defendants operated to conceal their commingling and misappropriation of customer funds and trading losses by providing pool participants with false reports and account statements showing fictitious profits.

The CFTC Complaint also alleges that Defendants misappropriated at least $600,000 of participants’ funds to pay down personal credit card debt and purchase vehicles, among other things. Akin to a Ponzi scheme, and in order to further disguise their trading losses and misappropriation, the Defendants also distributed approximately $1.8 million to pool participants in redemptions, utilizing other pool participants’ principal to fund these payments.

In its continued litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and preliminary and permanent injunctions from further violations of the federal commodities laws, as charged.

The CFTC thanks and acknowledges the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation.

CFTC Division of Enforcement staff members responsible for this action are Rachel Hayes, Rebecca Jelinek, Stephen Turley, Lauren Fulks, Diane Romaniuk, Peter Riggs, and Charles Marvine.

Friday, June 26, 2015


06/23/2015 04:55 PM EDT

The Securities and Exchange Commission charged a microcap promoter with illegally selling more than 83 million penny stock shares that he secretly obtained through at least 10 different offshore front companies.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Gregg R. Mulholland surreptitiously accumulated at least 84 percent of the issued and outstanding shares of Vision Plasma Systems Inc.  Once he effectively controlled the company through this majority ownership, Mulholland liquidated his shares for proceeds of at least $21 million.  No registration statement was filed or in effect covering Mulholland’s sales, and no exemption from registration was available.

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

“Mulholland’s intricate web of offshore entities failed to hide his alleged illicit sales,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement.  “We are committed to holding accountable those who abuse the microcap markets, regardless of the elaborate steps they take to conceal their misconduct.”

According to the SEC’s complaint, Mulholland lives in Canada and was previously charged by the SEC in 2011 for the fraudulent pump-and-dump manipulation of a sports drink company founded by Daniel “Rudy” Ruettiger, known for having inspired the motion picture “Rudy.”  In 2013, the SEC obtained a monetary judgment against Mulholland for more than $5.3 million in disgorgement, prejudgment interest, and penalties that remains unpaid.

The SEC’s complaint charges Mulholland with violating Sections 5(a) and 5(c) of the Securities Act of 1933.  

The SEC’s continuing investigation is being conducted in coordination with the Microcap Fraud Task Force by John P. Lucas and Andrew R. McFall.  The case is being supervised by J. Lee Buck II, and will be litigated by Derek Bentsen and Michael J. Roessner.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York, Federal Bureau of Investigation, Internal Revenue Service, Department of Homeland Security, and Financial Industry Regulatory Authority.

Sunday, June 21, 2015


Litigation Release No. 23286 / June 15, 2015
Securities and Exchange Commission v. Capital Financial Partners, LLC et al., Civil Action No. 15-cv-11447-IT (D. Mass.)
United States of America v. Will D. Allen and Susan C. Daub, Case No. 15-mj-7095-JCB (D. Mass.)
Defendants in SEC Case Involving Loans to Professional Athletes Are Criminally Charged

The Securities and Exchange Commission announced that, on June 12, 2015, the U.S. Attorney's Office in Massachusetts filed a criminal complaint against William D. Allen and Susan C. Daub charging them with securities fraud. The criminal charges are in connection with the same conduct on which the SEC filed a civil fraud case on April 1, 2015 alleging that Allen and Daub, through various corporate entities, operated a Ponzi scheme that raised more than $31 million from investors who were promised profits from loans to professional athletes. In the civil fraud case, the federal court in the District of Massachusetts granted the SEC's request for emergency relief against Allen, Daub, and various corporate entities registered to them, and issued an order freezing their assets and affording other injunctive relief.

The criminal complaint alleges that Allen and Daub solicited and collected money from investors for loans to athletes that were never issued on multiple occasions. On one occasion, according to the criminal complaint, one investor received forged loan documents from Daub in connection with a purported loan to an athlete that was never made. The criminal complaint also alleges that Allen and Daub collected money for oversubscribed loans. As one example, according to the criminal complaint, Daub collected approximately $2.5 million from several investors to fund a $500,000 loan to an athlete in March 2013. The criminal complaint alleges that investor funds collected on both occasions were used to make payments to other investors, to make payments to an entity registered to Allen, and to make transfers directly to Allen.

In the SEC's earlier, related enforcement action, the SEC named Allen, Daub, Florida-based Capital Financial Partners Enterprises LLC, and Boston-based Capital Financial Partners LLC and Capital Financial Holdings LLC, alleging that they violated federal anti-fraud laws and related SEC anti-fraud rules. Four other entities owned or controlled by Allen, Daub, or both were named in the complaint as relief defendants based on their receipt of investor funds - WJBA Investments LLC, Insurance Depot of America LLC, Simplified Health Solutions LLC, and Simplified Health Solutions 2 LLC. On April 28, 2015, the defendants assented to a preliminary injunction restraining them from violating Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. The preliminary injunction also froze the assets of all defendants and relief defendants, restrained the defendants from accepting additional investor funds in furtherance of the alleged fraud, and restrained the defendants from destroying or concealing documents related to the alleged fraud.

Allen and Daub are scheduled to appear in federal court for a hearing in the criminal case on July 7, 2015.

Saturday, June 20, 2015


06/17/2015 12:55 PM EDT

The Securities and Exchange Commission charged a mutual fund adviser, its principal, and three mutual fund board members with failing to satisfy their statutory obligations in connection with the evaluation and approval of mutual fund advisory contracts.

Richmond, Va.-based advisory firm Commonwealth Capital Management was charged with violating Section 15(c) of the Investment Company Act of 1940 for providing incomplete or inaccurate information to two mutual fund boards, and the firm’s majority owner John Pasco III was charged with causing the violations.  They and former trustees J. Gordon McKinley III, Robert R. Burke, and Franklin A. Trice III have agreed to settle the SEC’s charges.

Commonwealth Capital Management acted as the investment adviser to various mutual funds within World Funds Trust (WFT) and World Funds Inc. (WFI).  Commonwealth Capital Management was part of a turnkey mutual fund platform that provided various services to small to mid-size mutual funds.  An SEC investigation found that as part of what’s known as the 15(c) process, the WFT board of trustees requested that Commonwealth Capital Management and Pasco provide certain information regarding advisory fees paid by comparable funds as well as the nature and quality of the firm’s services.  There was no documentary evidence that Commonwealth Capital Management provided or that the trustees evaluated fees paid by comparable funds.  Commonwealth Capital Management also provided incomplete responses about the nature and quality of services provided by Commonwealth Capital Management versus services provided by the funds’ sub-adviser and administrator, and the trustees did not request or receive additional materials.  Nevertheless, the trustees approved the advisory contracts without having all of the information they requested as reasonably necessary to evaluate the contracts.

“As the first line of defense in protecting mutual fund shareholders, board members must be vigilant,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “These trustees failed to fully discharge their fund governance responsibilities on behalf of fund shareholders.”

Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “The advisory fee typically is the largest expense reducing investor returns.  The WFT trustees fell short as the shareholders’ watchdog by essentially rubber-stamping the adviser’s contract and related fee.”

According to the SEC’s order instituting a settled administrative proceeding, Commonwealth Capital Management also omitted or provided inaccurate information requested by independent directors in the WFI series of mutual funds in connection with board meetings to approve the firm’s advisory contract.  Commonwealth Capital Management supplied a fee chart containing inapt comparisons and erroneous information while omitting other details.  The firm additionally failed to provide certain information about profitability and an expense limitation agreement that had been in place to limit the relevant fund’s expenses.  Commonwealth Capital Management also informed the WFI independent directors that the fund had appropriate breakpoints when, in fact, breakpoints were omitted from the advisory contract.

The SEC’s order finds that Commonwealth Capital Management, McKinley, Burke, and Trice violated Section 15(c) of the Investment Company Act, and Pasco caused the firm’s violations.  The order finds that Commonwealth Capital Management’s affiliated administrator Commonwealth Shareholder Services was contractually responsible for preparing the shareholder reports on behalf of the WFI funds, and failed to include required information concerning the 15(c) process in one fund’s 2010 shareholder report in violation of Section 30(e) of the Investment Company Act and Rule 30e-1.  Without admitting or denying the findings, they each consented to the order and agreed to cease and desist from committing or causing any such violations.  Pasco and the firms agreed to jointly and severally pay a $50,000 penalty, and the trustees each agreed to pay $3,250 penalties.

The SEC’s investigation was conducted by Jacob Krawitz, Brian Privor, and John Farinacci, and the case was supervised by Anthony Kelly of the Asset Management Unit.  Christian Schultz assisted with the investigation.  The SEC examination that led to the investigation was conducted by Miguel A. Torres, Andrew B. Green, Cormac J. Logue, and Tamara D. Young, and managed by Margaret Jackson.

Friday, June 19, 2015


06/18/2015 03:00 PM EDT

The Securities and Exchange Commission today charged a Texas-based oil company and its CEO with defrauding investors about reserve estimates and drilling plans, and charged the author of a stock-picking newsletter for his role in a fraudulent promotional campaign encouraging readers to buy the oil company’s penny stock shares.

The SEC alleges that shortly after becoming Norstra Energy’s CEO in March 2013, Glen Landry began making false and misleading claims about business prospects on Norstra’s website as well as in press releases and SEC filings.  Landry and Norstra Energy misled investors about the location of the company’s property in order to make the wells appear more promising and twice disclosed an inaccurate date to begin drilling operations to make the potential for oil riches appear imminent.

The SEC’s complaint filed in federal court in Manhattan alleges that promotional materials issued by Eric Dany falsely proclaimed that “Norstra Energy could be sitting on top of as much as 8.5 billion barrels of oil!” and said the planned wells had a 99 percent chance of profitability.  After the exaggerated statements about its property and prospects caused Norstra Energy’s stock price to increase nearly 600 percent in a three-month period, the SEC suspended trading in June 2013.

“When microcap companies appear to be misleading the investing public, the SEC investigates those promoting the stock as well as the culpability of company officers,” said Michael Paley, Co-Chair of the SEC Enforcement Division’s Microcap Fraud Task Force.  “We allege that as a longtime geologist, Landry was well aware that Norstra Energy did not have the oil reserves or drilling plans being touted to investors.  And as a self-proclaimed expert in oil-and-gas stocks, Dany knew that claims made about the company were false but touted the stock anyway in a spam e-mail campaign and a hard-copy mailer he was paid to endorse.”

The SEC’s complaint charges Norstra Energy, Landry, and Dany with fraud and seeks final judgments ordering permanent injunctions, return of allegedly ill-gotten gains with interest, and financial penalties.  The SEC also seeks to bar Landry from serving as an officer or director of a public company or participating in a penny stock offering.

The SEC’s investigation has been conducted by Yitzchok Klug and Michael Paley of the Microcap Fraud Task Force along with Christopher Castano and Nancy Brown in the New York Regional Office.  The SEC’s litigation will be led by Ms. Brown, and the case is being supervised by Sanjay Wadhwa.

Thursday, June 18, 2015


06/16/2015 12:55 PM EDT

The Securities and Exchange Commission announced charges against an Ohio-based self-directed IRA provider accused of ignoring red flags for accounts with investments that turned out to be fraudulent.

The SEC Enforcement Division alleges that Equity Trust Company took an active role in marketing investments offered by Ephren Taylor, who targeted churchgoers while running a Ponzi scheme, and Randy Poulson, who has been indicted in federal district court for an alleged offering fraud targeting investors in New Jersey.  The Enforcement Division alleges that Taylor and Poulson defrauded more than 100 investors out of $5 million invested through accounts at Equity Trust, and that Equity Trust was a cause of violations of Section 17(a) of the Securities Act of 1933 by Taylor and Poulson.  

“We allege that Equity Trust failed to protect the interests of its customers when it acted as more than a passive custodian,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “When custodians like Equity Trust are aware of red flags suggesting an ongoing fraud, they must take action to try to prevent it.”

In its order instituting proceedings, the Enforcement Division alleges among other things:

Equity Trust representatives participated at events hosted by Taylor and Poulson, and they encouraged attendees to transfer their retirement savings from traditional IRAs to self-directed IRAs at Equity Trust so they could invest in the Taylor or Poulson offerings.  Equity Trust also sponsored Poulson dinner events with prospective investors.

Equity Trust processed investments in notes offered by Taylor and Poulson in spite of serious red flags.  These included knowing that Taylor and Poulson had not provided them with documentation of the investments’ collateral as it required as custodian of the self-directed IRAs, and that Taylor made false statements to thousands of people at a church near Atlanta.

Equity Trust continued to charge fees to customers invested in Taylor’s notes as recently as this year despite the fraud charges announced against him in 2012.
The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted by Andrew Dean and Lara Shalov Mehraban in the New York Regional Office and Luke Fitzgerald in the Asset Management Unit.  The case was supervised by Julie M. Riewe and Amelia A. Cottrell, and the SEC’s litigation will be led by Mr. Dean, Mr. Fitzgerald, and David Stoelting.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the U.S. Attorney’s Office for the Northern District of Georgia, the Federal Bureau of Investigation, and the U.S. Secret Service.

Wednesday, June 17, 2015


06/15/2015 12:50 PM EDT

The Securities and Exchange Commission announced that a Swiss trader has agreed to pay more than $2.8 million to settle charges that he traded on nonpublic information ahead of a Florida-based biometrics company’s acquisition by Apple Inc.

A SEC investigation found that Helmut Anscheringer purchased stock and call options in AuthenTec Inc. upon learning from a longtime friend related to an AuthenTec executive that Apple proposed to buy the company, which provided fingerprint sensors and software for use in electronic devices.  The call options accounted for nearly all of the series volume on the days he purchased them.  Just days later, AuthenTec publicly announced that it had agreed to become a wholly-owned subsidiary of Apple for $355 million in cash.  The positive news led to the stock price closing approximately 60 percent higher than the previous day.  Through his unlawful trading, Anscheringer garnered more than $1.8 million in illicit profits.

“Anscheringer attempted to profit by freely trading on inside information,” said Glenn Gordon, Associate Director of the SEC’s Miami Regional Office.  “Foreign traders in U.S. stocks are not exempt from SEC scrutiny as we traced the misconduct back to Anscheringer when investigating these significant purchases in a trading account belonging to an entity in the British Virgin Islands for which he was listed as the beneficiary.”

The SEC’s order instituting a settled administrative proceeding finds that Anscheringer, who lives in Basel, Switzerland, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Without admitting or denying the findings, Anscheringer agreed to pay disgorgement of $1,820,024, prejudgment interest of $121,732, and a penalty of $910,012 for a total of $2,851,768.  He must cease and desist from committing or causing any violations and any future violations of the antifraud provisions of the federal securities laws.

The SEC’s continuing investigation is being conducted by Sunny H. Kim and Kathleen E. Strandell in the Miami Regional Office with assistance from Mathew Wong of the Market Abuse Unit in the New York Regional Office.  The case is being supervised by Jason R. Berkowitz and the litigation is being led by Robert K. Levenson.  The SEC appreciates the assistance of the Swiss Financial Market Supervisory Authority, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.

Monday, June 15, 2015


06/09/2015 03:00 PM EDT

The Securities and Exchange Commission charged three men living in California with insider trading in the stock and options of a biotechnology company where one of them worked.

The SEC alleges that Michael J. Fefferman learned material nonpublic information as senior director of information technology at Ardea Biosciences Inc.  He tipped his brother-in-law Chad E. Wiegand in advance of major public announcements related to two pharmaceutical trials, a licensing agreement for a cancer drug, and eventually the acquisition of the company by AstraZeneca PLC.  Wiegand, a stockbroker, purchased Ardea stock in various customer accounts based on the confidential information he received from Fefferman, and he tipped his friend and fellow stockbroker Akis C. Eracleous so he could similarly buy stock on behalf of his customers.  The alleged insider trading resulted in illegal profits of approximately $530,000.

One of Eracleous’s customers, his cousin, has been named as a relief defendant in the SEC’s complaint for the purpose of recovering insider trading profits in his brokerage account.  The cousin agreed to pay back the entire amount of illicit profits in his account totaling $219,175 in disgorgement and interest.

Fefferman, Wiegand, and Eracleous have agreed to settlements that are subject to court approval.  Disgorgement, prejudgment interest, and penalties will be determined at a later date.  Wiegand and Eracleous have agreed to be barred from the securities industry.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today announced criminal charges against Wiegand and Eracleous.

“As a corporate insider, Fefferman breached his duty to Ardea’s shareholders by tipping confidential information about significant corporate events before they were announced,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office.  “Wiegand and Eracleous took unfair advantage of the investing public by trading on confidential company knowledge unknown to others.”

According to the SEC’s complaint filed in federal court in San Diego, the insider trading occurred from April 2009 to April 2012.  The complaint charges Fefferman, Wiegand, and Eracleous with violating the antifraud provisions of the federal securities laws.

The SEC’s continuing investigation is being conducted by Patricia A. Paw, John S. Rymas, and Daniel Koster in the Philadelphia office.  The case is being supervised by Brendan P. McGlynn, and the litigation will be led by David L. Axelrod and Michael J. Rinaldi.  The SEC appreciates the assistance of the U. S. Attorney’s Office for the Southern District of California, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

Sunday, June 14, 2015


Litigation Release No. 23283 / June 11, 2015
Securities and Exchange Commission v. Joshua A. Yudell and OCFB LLC, et al., Civil Action No. 1:15-cv-4548 (S.D.N.Y. June 11, 2015)
SEC Charges Individual with Operating an Unregistered Brokerage Business

The Securities and Exchange Commission charged a New York-based individual, operating through numerous doing-business-as entities, with effecting transactions in securities while neither he nor any of the entities he controlled were registered with the Commission as a broker or dealer.

The SEC alleges that, beginning at least as early as April 2010, Joshua A. Yudell, operating through OCFB LLC; Oxford Advisors, Inc.; Oxford Capital Advisors, LLC; Oxford Capital Alternative Investments, Inc.; Oxford Capital Fund, LP; and Oxford Capital Fund, LLP; entered into numerous agreements with securities owners pursuant to which he would obtain custody and control over their securities, attempt to sell the securities into the market, and then provide the net proceeds, minus Yudell's fees, to the securities owners. Yudell agreed to pay a total of $4,420,568.87 to settle the SEC's charges.

Without admitting or denying the allegations in the SEC's complaint, Yudell consented to the entry of a final judgment that, among other things, orders him to pay disgorgement, prejudgment interest, and financial penalties, and permanently enjoins him from violating Section 15(a)(1) of the Securities Exchange Act of 1934.

The proposed settlement is subject to court approval.

Saturday, June 13, 2015


Assistant Attorney General Caldwell Remarks at the ACAMS Anti-Money Laundering & Financial Crime Conference
Hollywood, FL United States ~ Monday, March 16, 2015
Thank you for the kind introduction. 

I am honored to open this important event, which commemorates the 20th year of ACAMS’s anti-money laundering conference, and serves as an opportunity for all of us – financial institution representatives, regulators, and law enforcement personnel – to reflect on the relationship between anti-money laundering efforts and the integrity of the worldwide financial system.

The health of the global economy depends on both creating access for a wide range of participants and preventing abuse and corruption.  To accomplish these goals, banks and other financial institutions must maintain robust, effective anti-money laundering and other compliance programs that account for international business realities.

And the increasingly global nature of business means that corporate entities, including banks and other financial institutions, must be attuned to complying with the laws of all the countries in which they operate.

As cross-border crime continues to proliferate, prosecutors and other law enforcement must be prepared to find evidence and witnesses all over the world, and to work in coordination with our law enforcement partners abroad.  The international law enforcement and regulatory communities must continue to work together to prevent, identify, punish and deter financial crime.

Today, I will speak about what we expect of businesses operating internationally, and how we are investigating and prosecuting crimes involving international conduct, particularly within and among financial institutions.

Since last May, I have had the tremendous pleasure of leading the Criminal Division of the Department of Justice.  The Criminal Division includes approximately 600 attorneys who investigate and prosecute federal crimes, help develop criminal law and formulate law enforcement policy.

While the 93 U.S. Attorneys around the country focus on investigating and prosecuting crime in their respective districts, the Criminal Division tends to focus on issues that affect the nation as a whole and on investigations that are international in scope.

As a result, the Criminal Division currently has people stationed in more than 45 countries.  Among other work, those folks facilitate collaboration and cooperation with our law enforcement partners in those locations.

In addition, the Criminal Division’s Office of International Affairs obtains foreign evidence needed in U.S. investigations, seeks extradition of people wanted for federal and state prosecution in the United States and responds to extradition and mutual legal assistance requests from foreign governments.

Among the sections and offices that make up the Criminal Division is the Asset Forfeiture and Money Laundering Section, known as AFMLS.  AFMLS attorneys pursue criminal prosecutions and forfeiture actions against financial institutions and corporate officers engaged in money laundering, Bank Secrecy Act violations, and sanctions violations.

They also prosecute facilitators or third-party money launderers who move money for transnational criminal organizations.

In addition, AFMLS forfeits the proceeds of high-level foreign corruption through the Kleptocracy Asset Recovery Initiative, which seeks to recover ill-gotten gains from corrupt foreign officials.  Once secured, the forfeited assets are used, whenever possible, for the benefit of the citizens of the victim country.

The increasingly global scope of the Criminal Division’s work – in particular the international nature of the investigations and prosecutions handled by AFMLS and our Fraud Section – is a direct product of the increasingly global nature of both U.S.-based and foreign-based entities, including financial institutions.

When U.S.-based corporate entities, including financial institutions, conduct business beyond our borders and, conversely, when foreign-based entities operate in the U.S., law enforcement must adapt.

The international nature of our work also is driven by the global reach of the Internet.  Increasingly, we seek data such as email from companies’ operations all over the world and often have to navigate a thicket of data privacy rules that may vary greatly from country to country.

I am not here to discuss cyber threats, but I would be remiss if I did not note that the internet also has allowed foreign criminals to carry out crimes in the U.S., sometimes on a massive scale, without ever having to set foot in our country.  And the victims of those crimes have included many financial institutions.

This is not just a U.S. problem, but a global one.  And we are working closely with our foreign counterparts to try to thwart cyberattacks before they happen, as well as to catch and bring to justice cybercriminals.

Identifying and prosecuting overseas cybercriminals, however, is not easy, and companies must protect themselves.

If your companies have not already done so, you need to make state of the art cybersecurity a top priority, and compliance with cybersecurity policy, a major priority.   Cybersecurity compliance is critical, because even a single human error, such as one person opening the wrong email and thereby allowing access to a company’s computer systems, can have devastating consequences.

Likewise, companies must protect themselves against violations of the law.  Your institutions’ compliance teams are the first line of defense against money laundering and other financial crime.  The importance of your work cannot be overstated.

Robust compliance programs are essential to preventing fraud and corruption.  But they also are an important factor for prosecutors in determining whether to bring charges against a business entity that has engaged in some form of criminal misconduct.

Prosecutors look at “the existence and effectiveness of the corporation’s pre-existing compliance program”.  We also look at what remedial measures were taken by the company once it became aware of the misconduct.

As all of you know, there is no “one size fits all” compliance program.  Rather, effective anti-money laundering and other compliance programs are those that are tailored to the unique needs, risks and structure of each institution.  But, in general, here are some hallmarks of effective compliance programs in our view:

•  An institution must ensure that its directors and senior managers provide strong, explicit and visible support for its corporate compliance policies.

•  The people who are responsible for compliance should have stature within the company.  Compliance teams need adequate funding and access to necessary resources.

•  An institution’s compliance policies should be clear and in writing.  They should be easily understood by employees.  That means that the policies must be translated into languages spoken in the countries in which the companies operate.  That sounds simple, but it is important and sometimes is not done.

•  An institution should ensure that its compliance policies are effectively communicated to all employees.  The written policies should be easy for employees to find.  And employees should have repeated training, which should include direction regarding what to do or with whom to consult when issues arise.

•  An institution periodically should review its policies and practices to keep them up to date with evolving risks and circumstances.  Especially if a U.S.-based entity acquires or merges with a foreign entity, all compliance policies should be reviewed and revised.

•  There must be mechanisms to enforce compliance policies.  Those include incentivizing compliance and disciplining violations.  And any discipline must be even handed.  The department does not look favorably on situations in which low-level employees who may have engaged in misconduct are terminated, but the more senior people who either directed or deliberately turned a blind eye to the conduct suffer no consequences.  Such action sends the wrong message –to other employees, to the market and to the government – about the institution’s commitment to compliance.

•  An institution should sensitize third parties like vendors, agents or consultants to the company’s expectation that its partners are also serious about compliance.  This means more than including boilerplate language in a contract.  It means taking action – including termination of a business relationship – if a partner demonstrates a lack of respect for laws and policies.   And that attitude toward partner compliance must exist regardless of geographic location.

These are just some of the elements of a strong compliance program.  When the Criminal Division evaluates a company’s compliance policy during an investigation, we look not only at how the policy reads “on paper,” but also on the messages conveyed to employees, including through in-person meetings, emails, telephone calls and compensation.

We look at whether, as a whole, a company meaningfully stressed compliance or, when faced with a conflict between compliance and profits, the company chose profits.

In the anti-money laundering and sanctions contexts, in particular, effective compliance requires more.  I’d like to highlight a few points.

First, of course, is “know your customer.”  An institution must ensure that its anti-money laundering, sanctions and other compliance policies and practices are tailored to identify and mitigate the risks posed by its portfolio of customers, and that those customers are providing complete and accurate information.

Second, if a financial institution operates in the U.S. – whether it is a U.S.-based bank or a U.S. branch or component of a foreign bank – it must comply with U.S. laws.  This may sound straightforward in principle, but we have seen that it is all too often not implemented in practice.

Part of that compliance is sharing information about potentially suspicious activity with other branches or offices.  For example, if a foreign branch of a U.S. bank identifies suspicious activity related to an account held by a customer that also maintains an account with the bank in the U.S., compliance personnel in the U.S. should be alerted to the suspicious activity.

In our view, to effectuate these practices, financial institutions with a U.S. presence should give U.S. senior management a material role in implementing and maintaining a bank’s overall compliance framework.

Third, all regulated companies and, in particular, financial institutions, must be candid with regulators.  When we investigate companies, we look closely at the information the companies provided to regulators about the violation.  We look at whether the companies were forthcoming, or not.

The vast majority of financial institutions file Suspicious Activity Reports when they suspect that an account is connected to nefarious activity.  But, in appropriate cases, we encourage those institutions to consider whether to take more action: specifically, to alert law enforcement authorities about the problem, who may be able to seize the funds, initiate an investigation, or take other proactive steps.

Some banks take more action by closing the suspicious account, but sometimes that may just prompt the criminals to move the illicit funds elsewhere.  So, we encourage you to speak with regulators and law enforcement about particularly suspicious activity.

The department appreciates that the global economy, and the international nature of the banking and financial services industries, present a compliance challenge, and often institutions must bridge a cultural, as well as a geographic, divide.  But such challenges do not justify non-compliance.

Overall, we expect financial institutions to take compliance risk as seriously as they take other business-related risks.  Although compliance may not be a profit center, investment in compliance will pay off – and it’s the right thing to do.

The importance of global financial institutions having effective compliance programs – particularly policies that facilitate or mandate information sharing between foreign and domestic branches or components --  is evidenced by the global resolution reached just last week with Commerzbank AG, a global financial institution based on Frankfurt, Germany, and its New York branch Commerz New York.

The bank agreed to forfeit $563 million, pay a $79 million fine and enter into a Deferred Prosecution Agreement with the Department of Justice for violating the International Emergency Economic Powers Act and the Bank Secrecy Act.  The bank also entered into settlement agreements with the Treasury Department’s Office of Foreign Assets Control and the Board of Governors of the Federal Reserve System.

According to the resolution documents, from 2002 to 2008, Commerzbank knowingly and willfully moved approximately $263 million through the U.S. financial system on behalf of sanctioned entities in Iran and Sudan.  To do so, Commerzbank used “cover payments,” which concealed the involvement of the sanctioned entities in transactions processed through Commerz New York and other financial institutions in the U.S.  Internal bank emails show that Commerzbank knew that its practices violated U.S. law.  Commerzbank’s senior management was warned about the violative payments and internal auditors “raised concerns,” but those concerns were not shared with their U.S. counterparts.  Instead, Commerzbank intentionally hid from its New York branch that it was processing payments on behalf of Iranian clients.  So the bank ignored warnings from the internal managers charged with ensuring compliance, then concealed the transactions from its own branch office.

In addition, according to court documents, from 2008 until 2013, Commerz New York violated the Bank Secrecy Act by failing to maintain adequate compliance policies and procedures both to detect and report suspicious activity.  Specifically, Olympus, the Japanese camera maker, used Commerzbank and Commerz New York to conceal hundreds of millions of dollars in losses from auditors and investors.  To perpetuate the fraud, Commerzbank, through its branch and affiliates in Singapore, loaned money to off-balance-sheet entities created by or for Olympus.

Although numerous bank executives and compliance officers expressed suspicion about the nature and structure of the Olympus transactions, Commerz New York failed to file Suspicious Activity Reports as required or to conduct adequate “know your customer” due diligence.

The potential consequences of having weak, or unenforced, compliance programs also are illustrated by the department’s recent, landmark criminal resolution with BNP Paribas (BNPP) – the fourth largest bank in the world.

Between 2004 and 2012, BNPP knowingly violated the IEEPA and the Trading with the Enemy Act by moving more than $8.8 billion through the U.S. financial system on behalf of Sudanese, Iranian, and Cuban entities subject to U.S. economic sanctions.  The majority of the transactions facilitated by BNPP were on behalf of entities in Sudan, which is subject to a U.S. embargo due to the Sudanese government’s role in facilitating terrorism and committing human rights abuses.

BNPP’s criminal conduct took place despite repeated warnings expressed by the bank’s own compliance officers and its outside counsel.  In response to the concerns identified by compliance personnel, high-ranking BNPP officials explained that the questioned transactions had the “full support” of BNPP management in Paris.  In short, VBPP expressly elected to favor profits over compliance.

Ultimately, BNPP pleaded guilty to conspiracy to violate IEEPA and TWEA, and agreed to pay record-setting financial penalties of over $8.9 billion.  And the company admitted its misconduct – including its disregard of compliance advice – in a detailed statement of facts that was made public.

Those are just two examples of recent cases we have handled involving financial institutions and their international businesses.  The Criminal Division has recently resolved financial fraud and sanctions violations investigations with several other major financial institutions, including Standard Chartered, HSBC, UBS, RBS and Barclays, just to name a few.  In those cases, we have often entered into deferred prosecution agreements or non-prosecution agreements – known as DPAs and NPAs – with the banks.

DPAs and NPAs are useful enforcement tools in criminal cases.  Through those agreements, we can often accomplish as much as, and sometimes even more than, we could from a criminal conviction.  We can require improved compliance programs, remedial steps or the imposition of a monitor.  We can require that the banks cooperate with our ongoing investigations, particularly in our investigations of individuals.  We can require that such compliance programs and cooperation be implemented worldwide, rather than just in the United States.  We can require periodic reporting to a court that oversees the agreement for its term.  These agreements can enable banks to get back on the right track, under the watchful eye of the Criminal Division and sometimes a court.

And these agreements have teeth – not just because they are overseen by the Department of Justice and sometimes a court, but because of the potential penalties triggered by a breach.

Let me be clear: in the Criminal Division, we will hold banks and other entities that enter into DPAs and NPAs to the obligations imposed on them by those agreements.  And where banks fail to live up to their commitments, we will hold them accountable.

Just like an individual on probation faces a range of potential consequences for a violation, so too does a bank that is subject to a DPA or NPA.

Under DPAs and NPAs, we have a range of tools at our disposal.  We can extend the term of the agreement and the term of any monitor, while we investigate allegations of a breach, including allegations of new criminal conduct.  Where a breach has occurred, we can impose an additional monetary penalty, or additional compliance or remedial measures.  Most significantly, we can pursue charges based on the conduct covered by the agreement itself – the very conduct that the bank had tried to resolve through the DPA or NPA.

Make no mistake: the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.

DPAs and NPAs are powerful tools.  They can’t be ignored once they’re signed, and they can’t be followed partially but not completely.  We will take action to ensure that banks are held accountable for DPA or NPA violations.  And where a bank that violates a DPA or NPA is a repeat offender with a history of misconduct, or where a violating bank fails to cooperate with an investigation or drags its feet, that bank will face criminal consequences for its breach of the agreement.

Many of the cases we have handled with financial institutions involve coordination with regulators and other law enforcement around the world.  To successfully investigate and prosecute cases involving global entities, including financial institutions, we work closely with our foreign law enforcement counterparts and foreign regulators.  Cooperation and coordination with foreign authorities strengthens our collective ability to bring transnational criminals to justice – whether they are multi-national corporations, corporate executives, corrupt political officials, drug or human traffickers, terrorists or hackers behind computer screens.

In May 2013, the department announced charges against Liberty Reserve, a digital currency system that was incorporated in Costa Rica and created for the express purpose of assisting cybercriminals and others in anonymously laundering illicit proceeds through the U.S. and global financial systems.

At the time, Liberty Reserve had more than one million users worldwide who conducted transactions involving more than six billion in funds, which encompassed suspected proceeds of credit card fraud, identity theft, investment fraud, computer hacking, child pornography, narcotics trafficking and other crimes.

But, due to the coordinated efforts of law enforcement authorities in the U.S., Costa Rica, the Netherlands, Spain, Sweden and Switzerland, justice prevailed.  Liberty Reserve permanently is out of business, and the government also charged seven individuals connected to Liberty Reserve, including its founder Arthur Budovsky, information technology manager Maxim Chukharev and chief technology officer Mark Marmilev.

To date, four defendants have pleaded guilty.  In December 2014 and January 2015, Marmilev and Chukarev were sentenced to serve five years in prison and three years, respectively.  Budovsky was extradited from Spain to the United States and will stand trial in November.

Our kleptocracy cases are other examples of our cooperation with international authorities to remediate fraud, abuse and corruption.  Through the department’s Kleptocracy Asset Recovery Initiative, we work with law enforcement agencies to forfeit the proceeds of foreign official corruption and to use those recovered assets to benefit the people harmed by the acts of corruption and abuse of office.

One of our kleptocracy cases involves Chun Doo-Hwan, the former president of South Korea, who was convicted in 1997 of receiving more than $200 million in bribes from South Korean businesses and other companies.  President Chun and his relatives laundered some of the corruption proceeds through a web of nominees and shell companies in the U.S.  In coordination with South Korean law enforcement authorities, since 2013, the department has assisted in the recovery of over $27.5 million in corruption proceeds from Chun’s associates.  Earlier this month, the department secured the forfeiture of another $1.2 million in assets in the U.S. traceable to corruption proceeds accumulated by Chun.

Also in connection with the Kleptocracy Asset Recovery Initiative, in October 2014, the department settled a civil forfeiture action against assets in the U.S. of the Second Vice President of the Republic of Equatorial Guinea Teodoro Obiang Mangue.  Obiang looted his own government and solicited and received bribes and kickbacks from businesses to support a lavish lifestyle while his fellow citizens lived in extreme poverty.  In all, Obiang amassed more than $300 million in assets through corruption and money laundering.  Among the assets he purchased with corruption proceeds were a $30 million mansion in Malibu, California; a Ferrari and various items of Michael Jackson memorabilia.  Under the terms of the settlement, Obiang was required to disgorge over $30 million, $10 million of which was to be forfeited, and another $20 million to be used to benefit the people of Equatorial Guinea through a charity.

There have been suggestions – perhaps by some in this room today – that the Department of Justice, in collaboration both with U.S. regulators and foreign law enforcement authorities, are unreasonably targeting financial institutions for investigation and prosecution.  That is not the case.

Simply put, banks and other financial institutions continue to come up on our radar screens because they, and the individuals through which they act, continue to violate the law, maintain ineffective compliance programs or simply turn a blind eye to criminal conduct to preserve profit.  If the government learns of such action (or inaction), it is our obligation to investigate and follow the evidence wherever it may lead.  And we will prosecute banks and other financial institutions for willful failures to maintain effective anti-money laundering programs and for other financial crimes.

I strongly encourage the representatives of banks and other financial institutions participating in this conference to take the opportunity – both during the next few days and once you return to your respective offices – to reflect on whether your institutions have effective anti-money laundering programs and other compliance policies and practices to prevent or mitigate financial crime.  The integrity and viability of the global financial system require that you do.

Thank you.  

Friday, June 12, 2015


Litigation Release No. 23278 / June 8, 2015
Securities and Exchange Commission v. Anthony Andrade, et al., Civil Action No. 15-cv-231 (District of Rhode Island, Complaint filed June 8, 2015)
SEC Charges Director of Rhode Island Bank and Three Others with Insider Trading

The Securities and Exchange Commission today charged Anthony Andrade, a former member of the board of directors of Bancorp Rhode Island, Inc., formerly a publicly-traded bank headquartered in Rhode Island, with tipping inside information about the bank's potential acquisition to three friends and close business associates. The SEC alleges that those individuals then traded on this information and collectively profited by over $80,000 from their insider trading. Two of the traders have agreed to settle the SEC's charges.

According to the SEC's complaint, filed in federal court in Providence, Rhode Island, Bancorp Rhode Island and Massachusetts-based Brookline Bancorp, Inc., publicly announced on April 20, 2011, that Brookline Bancorp would acquire Bancorp Rhode Island. According to the complaint, this acquisition announcement was preceded by weeks of confidential negotiations soliciting the sale of Bancorp Rhode Island, which were led by Bancorp Rhode Island's management and its board of directors, including Andrade.

According to the SEC's complaint, Andrade, of Rehoboth, Massachusetts, illegally tipped inside information about the Bancorp Rhode Island's potential acquisition to his friends and business associates: Robert Kielbasa of Portsmouth, Rhode Island, Fred Goldwyn of Wilmington, Delaware, and Kenneth Rampino of Seekonk, Massachusetts. The complaint alleges that each of the three traded on the inside information Andrade supplied to them, and profited when Bancorp Rhode Island's stock price significantly increased after the April 20, 2011, acquisition announcement. On the day of the acquisition announcement, Bancorp Rhode Island's stock closed at $44 per share, an increase of $13.29 per share, or forty three percent, from the prior day's closing price.

The complaint charges that Andrade, Kielbasa, Goldwyn, and Rampino violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and seeks to have them be enjoined, disgorge their allegedly ill-gotten gains with interest, and pay civil penalties of up to three times their gains. The complaint further seeks to bar Andrade from serving as an officer or director of a public company.

Goldwyn and Kielbasa agreed to settle the SEC's charges, without admitting or denying the allegations, by consenting to the entry of judgments permanently enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The judgments also order:

Kielbasa to disgorge $39,645 in trading profits plus prejudgment interest of $5,335 and a civil penalty of $39,645, for a total of $84,625.

Goldwyn to disgorge $23,565 in trading profits plus prejudgment interest of $3,171 and a civil penalty of $23,565, for a total of $50,301.
The SEC's investigation was conducted by William Donahue and Paul Block of its Boston Regional Office. Litigation of this matter will be led by Richard Harper and Kathleen Shields, also of the SEC's Boston Regional Office.

Thursday, June 11, 2015

Quality Data and the Power of Prevention: Remarks at Meet the Market, North America

Quality Data and the Power of Prevention: Remarks at Meet the Market, North America



The Securities and Exchange Commission staff  made available additional analysis related to its proposed rules for pay ratio disclosure.  The analysis by the Division of Economic and Risk Analysis (DERA) considers the potential effects of excluding different percentages of employees from the pay ratio calculation.

The analysis is posted on the SEC’s website as part of the comment file for rules proposed by the Commission in September 2013 that would require the disclosure of the median of the annual total compensation of all employees of the issuer; the annual total compensation of the chief executive officer of the issuer; and the ratio of the median of the annual total compensation of all employees of the issuer to the annual total compensation of the chief executive officer of the issuer.  

The staff believes that the analysis will be informative for evaluating the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees, such as employees in foreign countries, part-time, seasonal, or temporary employees as suggested by commenters.  The staff is making the analysis available for public comment.  This analysis may supplement other information considered in connection with the rules.

Comments may be submitted to the comment file (File No. S7‑07‑13) for the proposed rules and should be received by July 6.

Additional studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking.  A notification of the inclusion in the comment file of any such materials will be made available on the SEC’s website.

Wednesday, June 10, 2015


06/05/2015 09:40 AM EDT

The Securities and Exchange Commission charged Computer Sciences Corporation and former executives with manipulating financial results and concealing significant problems about the company’s largest and most high-profile contract.  The SEC additionally charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to increase reported profits.

CSC agreed to pay a $190 million penalty to settle the charges, and five of the eight charged executives agreed to settlements.  Former CEO Michael Laphen agreed to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty.  Former CFO Michael Mancuso agreed to return $369,100 in compensation and pay a $175,000 penalty.

The SEC filed complaints in federal court in Manhattan against former CSC finance executives Robert Sutcliffe, Edward Parker, and Chris Edwards, who are contesting the charges against them.  Sutcliffe was CSC’s finance director for its multi-billion dollar contract with the United Kingdom’s National Health Service (NHS).

The SEC alleges that CSC’s accounting and disclosure fraud began after the company learned it would lose money on the NHS contract because it was unable to meet certain deadlines.  To avoid the large hit to its earnings that CSC was required to record, Sutcliffe allegedly added items to CSC’s accounting models that artificially increased its profits but had no basis in reality.  CSC, with Laphen’s approval, then continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract.  In reality, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work.  By basing its models on the flailing proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011.

The SEC’s investigation found that Laphen and Mancuso repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they made public statements about the NHS contract that misled investors about CSC’s performance.  Mancuso also concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate.  Mancuso merely told investors that CSC was hitting its targets “the old fashioned hard way.”

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract.  The significant sanctions in this case against the company, CEO, and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished.”

Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement, added, “The wide-ranging misconduct in this case spanned several countries and occurred over multiple years, reflecting significant management lapses and internal controls failures.  We expect this settlement and the recommendations of an independent ethics and compliance consultant will help prevent future misconduct.”

In addition to the accounting and disclosure violations involving the NHS contract, the SEC’s investigation found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions.

The SEC alleges that Parker, who served as controller in Australia, along with regional CFO Wayne Banks overstated the company’s earnings by using “cookie jar” reserves and failing to record expenses as required.  They overstated CSC’s operating results by more than 5 percent in the first quarter of fiscal year 2009 and allowed the company to meet analysts’ earnings targets during that period.  Banks agreed to settle the charges and pay disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years.  The SEC’s case continues against Parker.

In CSC’s Nordic region, the SEC alleges a variety of accounting manipulations to fraudulently inflate operating results as finance executives there struggled to achieve budgets set by CSC management in the U.S.  Among the misconduct was improperly accounting for client disputes, overstating assets, and capitalizing expenses.  For example, Edwards, who was a finance manager, allegedly recorded and maintained large amounts of “prepaid assets” that CSC was required to actually record as expenses.  This tactic guaranteed these expenses would not reduce CSC’s earnings.  CSC’s finance director of the Nordic region Paul Wakefield also engaged in the accounting fraud, which overstated CSC’s consolidated pre-tax income in Denmark as much as 7 percent.  CSC’s finance manager Claus Zilmer was involved in violations of the financial reporting and books and records provisions of the securities laws.  Wakefield and Zilmer agreed to settle the charges, with Wakefield agreeing to accept an officer-and-director bar of at least three years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least three years.  The SEC’s case continues against Edwards.

CSC and the five settling executives neither admit nor deny the findings in the SEC’s order instituting a settled administrative proceeding against them.  CSC must retain an independent consultant to review the company’s ethics and compliance programs.  The SEC particularly acknowledges the cooperation of Wakefield in its investigation, which was conducted by Shelby Hunt, David Miller, Ian Rupell, Robert Peak, and Joseph Zambuto Jr.  The SEC appreciates the assistance of the United Kingdom’s Financial Conduct Authority.

Tuesday, June 9, 2015

Dissenting Statement on the Final Interagency Policy Statement:Failing to Advance Diversity and Inclusion

Dissenting Statement on the Final Interagency Policy Statement:Failing to Advance Diversity and Inclusion


06/09/2015 01:35 PM EDT

The Securities and Exchange Commission today announced that a trader residing in Canada has agreed to pay more than $1 million to settle charges that he shorted U.S. stocks in companies planning follow-on offerings and then illegally bought shares in the follow-on offerings to lock in significant profits with little to no market risk.

An SEC investigation found that Andrew L. Evans through his firm Maritime Asset Management violated an anti-manipulation provision of the federal securities laws known as Rule 105 on nearly a dozen occasions.  Rule 105 prohibits short selling an equity security during a restricted period (generally five business days before a public offering) and then purchasing that same security through the offering.  By purchasing lower-priced shares in the follow-on offerings that he could use to cover his short sales, Evans reaped $582,175 in illegal profits.

“Evans repeatedly gamed the system by short selling shares that he knew he could later obtain at a lower price,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Rule 105 was specifically designed to prevent unfair and manipulative trading that erodes pricing integrity and the ability of issuers to effectively raise capital.”

According to the SEC’s complaint filed in U.S. District Court in San Francisco, Evans’s short selling violations occurred from December 2010 to May 2012.  The settlement, which is subject to court approval, requires Evans to pay disgorgement of $582,175, prejudgment interest of $63,424, and a penalty of $364,389 for a total of $1,009,988.  Without admitting or denying the allegations, Evans agreed to be permanently enjoined from violating Rule 105 in the future.

The SEC’s investigation was conducted by Robert J.  Durham and

Monday, June 8, 2015


6/03/2015 11:50 AM EDT

The Securities and Exchange Commission warned investors to thoroughly check the claimed credentials of people soliciting their investments to ensure they are not falsifying, exaggerating, or hiding facts about their backgrounds.  The agency has brought several recent enforcement cases along these lines, including two actions announced today.

An investor alert issued by the SEC’s Office of Investor Education and Advocacy cautions, “Do not trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a ‘buzz of success.’”  The alert notes that investors sometimes unintentionally contribute to a fraudster’s false reputation of success and accomplishment by merely repeating to others the misrepresentations being made to them.  Investors can conduct background checks of financial professionals to ensure they are properly licensed or registered with the SEC, Financial Industry Regulatory Authority, or a state regulatory authority by visiting the “Ask and Check” section of the SEC’s website.

The SEC Enforcement Division today announced two separate fraud cases against investment advisers who made false claims about their experience and industry accolades in an effort to gain the trust and confidence of investors.

“Advisers looking to raise funds cannot lie about their backgrounds to lull investors into a false sense of security about their purported expertise or the profitability of a potential investment,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Each adviser in these cases used false claims about his background to create trustworthiness and lend credibility to their offering schemes.”

An SEC investigation found that Michael G. Thomas of Oil City, Pa., touted that he was named a “Top 25 Rising Business Star” by Fortune Magazine as he solicited investors through blast e-mails and the Internet for a private fund named Michael G. Investments LLC.  No such distinction actually exists at Fortune Magazine, and Thomas also greatly exaggerated his own past investment performance, misrepresented that certain industry professionals would co-manage and advise the fund, and inflated the fund’s projected performance.  To settle the SEC’s charges, Thomas agreed to pay a $25,000 penalty and consented to an order requiring him not to participate in the issuance, offer, or sale of certain securities for five years.  He also is barred from associating with any broker, dealer, or investment adviser for at least five years.

A separate SEC investigation found that Todd M. Schoenberger of Lewes, Del., misrepresented that he had a college degree from the University of Maryland and touted his appearances on cable news programs while soliciting investors to purchase promissory notes issued by his unregistered investment advisory firm LandColt Capital LP.  Schoenberger falsely told prospective investors that LandColt would repay the notes through fees earned from managing a private fund.  Schoenberger never actually launched the fund, never had the commitments of capital to the fund that he claimed, and never paid investors the returns he promised.  To settle the SEC’s charges, Schoenberger agreed to pay $65,000 in disgorgement of ill-gotten gains plus interest.  He consented to an order barring him from associating with any broker, dealer, or investment adviser and from serving as an officer or director of a public company.

The SEC’s investigation of Thomas was conducted by Mark D. Salzberg and Corey A. Schuster of the Asset Management Unit, and the case was supervised by Panayiota K. Bougiamas and Jeffrey B. Finnell.  The SEC’s investigation of Schoenberger was conducted by John G. Westrick of the Asset Management Unit and supervised by Stephen E. Donahue.  The investor alert was prepared by M. Owen Donley III and Holly Pal in the Office of Investor Education and Advocacy.

Sunday, June 7, 2015


06/03/2015 10:45 AM EDT

The Securities and Exchange Commission announced insider trading charges against four individuals stealing confidential information from investment banks and their public company clients in order to trade in advance of secondary stock offerings.  The scheme allegedly involved at least 15 stocks and generated more than $4.4 million in illegal trading profits.

The SEC alleges that a former day trader living in California, Steven Fishoff, schemed with two friends and his brother-in-law to pose as legitimate portfolio managers and induce investment bankers to bring them “over the wall” and share confidential information about an upcoming secondary offering.  After promising they wouldn’t disclose the nonpublic information to others or trade an issuer’s stock before an offering was announced, they violated the agreements and tipped each other about the upcoming offerings expected to inherently depress the price of the issuer’s stock.  The tippees then shorted the stock before an offering was publicly announced and assured themselves profits on the short sales after the stock price dropped.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, they eventually expanded the scope of their scheme from short selling to buying stock in advance of a positive corporate news announcement based on confidential information obtained about secret negotiations between two large pharmaceutical companies.

Charged along with Fishoff in the SEC’s complaint is his brother-in-law Steven Costantin of New Jersey, his friend and California neighbor Ronald Chernin, and his friend Paul Petrello, also a former day trader who resides in Florida.  In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Fishoff, Petrello, Chernin, and Costantin.

“We allege an insider trading scheme based on a short-selling business model designed to systematically profit on confidential information obtained under false pretenses,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “But the defendants’ short selling proved to be short-sighted as they overlooked the fact that their trading patterns would be detected and they would be caught by law enforcement.”

The SEC’s complaint charges Fishoff, Petrello, Chernin, and Costantin as well as seven entities they collectively controlled with illegal insider trading in violation of the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.  The complaint also charges Fishoff, Petrello, Chernin, Costantin, and three associated entities with violations of Rule 105 of Regulation M of the Exchange Act in connection with certain short sales made in advance of public securities offerings in which they purchased shares.

The SEC’s investigation is continuing and being conducted by Dominick Barbieri, David Austin, Matthew Lambert, Stephen Johnson and George Stepaniuk.  The litigation will be led by Todd Brody, Dominick Barbieri, and David Austin.  The case is being supervised by Mr. Wadhwa.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, and Options Regulatory Services Authority.

Saturday, June 6, 2015


Remarks of Chairman Timothy Massad before the Global Exchange and Brokerage Conference (New York)
June 3, 2015
As Prepared For Delivery

Thank you for inviting me today, and I thank Rich for that kind introduction. It’s a pleasure to be here.

Next month, we will observe the fifth anniversary of the passage of the Dodd-Frank Act. As you know, this law made dramatic changes to our regulatory system in response to the worst financial crisis since the Great Depression. In particular, it aimed to bring transparency and oversight to the over-the-counter swaps market, and gave the CFTC primary responsibility to accomplish that task.

The timing of this speech is significant to me in another way, as it was exactly one year ago today that I was confirmed by the Senate as chairman of the CFTC. So in light of those two anniversaries, it seems like a good time to take stock. Where are we in implementing these reforms? Is the new regulatory framework achieving the goals envisioned in Dodd-Frank? And what have we done over the last year in particular to advance those objectives? What are our priorities going forward?

All of you appreciate the important role that the derivatives markets play in our economy. In 2008, however, we saw how the build-up of excessive risk in the over-the-counter swaps market made a very bad crisis even worse. There were many causes of the crisis, but particularly because of that excessive swap risk, our government was required to commit $182 billion just to prevent the collapse of a single company – AIG – because its failure at that time, in those circumstances, could have caused our economy to fall into another Great Depression. Our country lost eight million jobs as a result of the crisis. I spent five years at Treasury helping our nation recover from that crisis – including getting all that money back from AIG. I also had a long career working as a corporate lawyer, which included helping to draft the original ISDA master agreements and advising businesses on all sorts of transactions, including derivatives. So I appreciate both the need for reform and the importance of implementing these reforms in a way that ensures that these markets can continue to thrive and contribute to our economy.

The Dodd-Frank Act enacted the four basic reforms agreed to by the leaders of the G-20 nations to bring transparency and oversight to this market: central clearing of standardized swaps, oversight of the largest market participants, regular reporting, and transparent trading on regulated platforms.

Today that framework is largely in place. The vast majority of transactions are centrally cleared. Trading on regulated platforms is a reality. Transaction data is being reported and publicly available. And we have developed a program for the oversight of major market participants.

There is more work to do in all these areas, as I will discuss in a moment. But as I see it, there are a lot of parallels between where we are today with swaps market reform and what happened with securities market reform in the 1930s and 40s. Coming out of the Great Depression, we created a framework for securities regulation and trading which proved tremendously successful. Many of its mandates were revolutionary at the time and therefore quite controversial. When the Securities Exchange Act was passed and required periodic reporting by public companies, the President of the New York Stock Exchange said it was “a menace to national recovery.” History has proved otherwise. Today, the concept of periodic reporting by public companies is about as controversial as seat belts. Indeed, the basic framework created in the 1930s of disclosure, transparency, periodic reporting and trading on regulated exchanges has been the foundation for the growth of our securities markets.

I believe the swaps market reforms we have put in place are similar. I believe the basic framework is one that will benefit our markets and the economy as a whole for decades to come. Is that framework perfect? No. Is there more to do? Yes. So let’s look at where we are.

Congress required that the rules be written within a year of passage of Dodd-Frank, and the agency worked incredibly hard to meet that goal. Now we are in a phase of making necessary minor adjustments to the rules, which is to be expected with any change as significant as this. And so a priority of mine over the last year has been to do just that: to look at how well the new rules are working and to make adjustments where necessary.

So let me give you a quick big picture view of where we are on each of the four key reforms of the OTC swaps market, as well as what I see as the next steps in each of those areas, and then discuss in more detail a couple of key priorities for the months ahead.


First is the goal of requiring central clearing of transactions. This is a critical means to monitor and mitigate risk. Here we have accomplished a great deal. Our rules require clearing through central counterparties for most interest rate and credit default swaps, and the percentage of transactions that are centrally cleared in the swaps markets we oversee has gone from about 15 percent in December 2007 to about 75 percent today. That’s a dramatic change.

Importantly, our rules do not impose this requirement on commercial end-users. Nor do we impose the trading mandate on commercial end-users. And an important priority for me over the last year has been to make sure this new framework as a whole does not impose unintended burdens on commercial end-users. They were not the cause of the crisis or the focus of the reforms. And we want to make sure that they can still use these markets to hedge commercial risk effectively.

What are the next steps when it comes to clearing? First, we must recognize that for all its merits, central clearing does not eliminate risk, and therefore we must make sure clearinghouses are strong and resilient. The CFTC has already done a lot of work in this area. Over the last few years, we overhauled our supervisory framework and we increased our oversight. But there is more to do, and there will be significant efforts taking place, including through international organizations.

We will be looking at stress testing of clearinghouses, and whether there should be international standards for stress testing that give us some basis to compare the resiliency of different clearinghouses. And while we hope never to have to use these tools, we will be looking further at recovery and resolution planning.

You may also know that we are engaged in discussions with Europe on cross-border recognition of clearinghouses. While this issue is taking longer to resolve than I expected, I believe we have narrowed the issues and are making good progress. For those interested, I recently gave a speech to a committee of the European Parliament that describes the issues we are discussing in more detail. I believe my counterpart in these discussions, Lord Jonathan Hill of the European Commission, wants to resolve this soon, as I do, and we are working in good faith toward that end. I also believe we can resolve this without disruptions to the market, and I am pleased that the EC has again postponed capital charges toward that end.

Oversight of Swap Dealers

Let me turn to the second reform area, general oversight of major market players. We have made great progress here as well, as we have in place a regulatory framework for supervision of swap dealers. They are now required to observe strong risk management practices, and they will be subject to regular examinations to assess risk and compliance with rules designed to mitigate excessive risk.

Next steps in this area include looking at the swap dealer de minimis threshold. Under the swap dealer rules adopted in 2012, the threshold for determining who is a swap dealer will decline from $8 billion to $3 billion in December of 2017 unless the Commission takes action. I believe it is vital that our actions be data-driven, and so we have started work on a comprehensive report to analyze this issue. We will make a preliminary version available for public comment, and seek comment not only on the methodology and data, but also on the policy questions as to what the threshold should be, and why. I want us to complete this process well in advance of the December 2017 date so that the Commission has some data, analysis, and public input with which to decide what to do.

Another priority for us over the next few months in the area of general oversight is to finalize our proposal on margin requirements for uncleared swaps. This is one of the most important Dodd-Frank requirements that remains to be finalized, and one of the most important overall. There will always be a large part of the swaps market that is not and should not be centrally cleared, and therefore margin is key to minimizing the risk to our system that can come from uncleared bilateral trades. The proposal applies to swap dealers, in their transactions with one another and their transactions with financial institutions that exceed certain thresholds. As with the clearing and trading mandates, commercial firms are exempted.

We are working closely with the bank regulators on this rule. They have the responsibility to issue rules that apply to swap dealers that are banking entities under their respective jurisdictions, and our rule will apply to other swap dealers. It is vitally important that these rules be as consistent as possible, and we are making good progress in this regard. We are also working to have our U.S. rules be similar to rules being considered by Europe and Japan. I expect that they will be consistent on many major issues.


With regard to reporting, the public and regulators are benefiting from a new level of market transparency – transparency that did not exist before. All swap transactions, whether cleared or uncleared, must be reported to registered swap data repositories (SDRs), a new type of entity responsible for collecting and maintaining this information. You can now go to public websites and see the price and volume for individual swap transactions. And the CFTC publishes the Weekly Swaps Report that gives the public a snapshot of the swaps market. This means more efficient price discovery for all market participants. Equally important, this reporting enables regulatory authorities to engage in meaningful oversight, and when necessary, enforcement actions.

While we have much better data today than in 2008, we have a lot more work to do to get to where we want to be. One step is revising our rules to bring further clarity to reporting obligations. Later this summer I expect that we will propose some initial changes to the swap reporting rules for cleared swaps designed to clarify reporting obligations and, at the same time, improve the quality and usability of the data in the SDRs. And we are looking at other possible changes as well to improve the data reporting process and usefulness of the information.

This is also an international effort. There are around two dozen data repositories globally. And there are participants around the world who must report. We and the European Central Bank currently co-chair a global task force that is seeking to standardize data standards internationally. While much of this work is highly technical, it is vitally important to international cooperation and transparency.

We will also make sure participants are taking their obligations seriously to provide us good data in the first place. We have taken, and will continue to take, enforcement action against those who do not.

Transparent Trading

Let me turn to the last reform area, which is trading. Today, trading swaps on regulated platforms is a reality. We have nearly two dozen SEFs registered. Each registered exchange is required to operate in accordance with certain statutory core principles. These core principles provide a framework that includes obligations to establish and enforce rules, as well as policies and procedures that enable transparent and efficient trading. SEFs must make trading information publicly available, put into place system safeguards, and maintain financial, operational, and managerial resources necessary to discharge their responsibilities.

So we are making progress, but here too, there is more work to do. We have been looking at ways to improve the framework, focusing on some operational issues where we believe adjustments can improve trading. We have taken action in a number of areas, including steps to make it easier to execute package trades and correct error trades, and steps to simplify trade confirmations and reporting obligations. We are looking at additional issues pertaining to SEF trading as well. For example, we are planning to hold a public roundtable later this year on the made-available-for-trade determination process, where many industry participants have suggested that the agency play a greater role in determining which products should be mandated for trading and when.

We have also been working to harmonize our trading rules with the rules of other jurisdictions where possible. CFTC staff worked with Australian swap platforms to clarify how they can permit U.S. participation under our trading rules. One platform, Yieldbroker, confirmed that it intends to apply for relief and achieve compliance by this fall. This is an important step and we are open to working with other jurisdictions and platforms.

Responding to Changes in the Market

I began by saying that the approaching five year anniversary of Dodd-Frank was a good time to take stock of what has been accomplished in terms of implementing the reforms required by the law. Equally important to consider is: How have the markets changed over the last five years? How does that impact what we are doing? After all, there is always the danger that as regulators, we focus on fighting the last war.

It is beyond the scope of my speech today to discuss all the significant changes to markets over the last few years, or how regulatory actions may be affecting market dynamics and costs. These are important, complex subjects, but they are well beyond the time I have today to explore. Today, however, I’d like to take a few minutes more to just note one major way in which our markets are changing, and how that is affecting our work.

That change has to do with the increased use of electronic and automated trading. Some speak of “high frequency trading” or HFT, a classification that is hard to define precisely. I will focus on automated or algorithmic trading. Over the last decade, automated trading has increased from about 25 percent to well over 50 percent of trading in U.S. financial markets. Looking specifically at the futures markets, almost all trading is electronic in some form, and automated trading accounts for more than 70 percent of trading over the last few years.

I commend to you a recent paper by our Chief Economist office which gives some interesting data on our markets. This looked at over 1.5 billion transactions across over 800 products on CME over a two year period. It found that the percentage of automated trading in financial futures – such as those based on interest rates, currencies or equity indices – was 60 to 80 percent. But even among many physical commodities, there was a high degree of automated trading, such as 40 to 50 percent for many energy and metals products. The paper also provides a lot of rich detail on what types of trades are more likely to be automated.

The increase in electronic, and particularly automated, trading has changed what we do, and how we do it. Let me say at the outset that the increased use of electronic trading has brought many benefits, such as more efficient execution and lower spreads. But it also raises issues. These are somewhat different in the futures markets than in the cash equity markets where they have received the most attention, in part because typically in the futures market, trading of a given product occurs on only one exchange. Nevertheless, the increased use of automated, algorithmic trading poses challenges for how we execute our responsibilities, and it raises important policy questions. For example, it creates profound changes in how we conduct surveillance. The days when market surveillance could be conducted by observing traders in floor pits are long gone. Today, successful market surveillance activities require us to have the ability to continually receive, load, and analyze large volumes of data. We already receive a complete transactions tape, but effective surveillance requires looking at the much larger sets of message data—the bids, offers, cancelations which far outnumber consummated transactions.

And consider that we oversee the markets in a wide range of financial futures products based on interest rates, currencies and equities, as well as over 40 physical commodity categories, each of which has very different characteristics.

Surveillance today requires a massive information technology investment and sophisticated analytical tools that we must develop for these unique environments. And we must have experienced personnel who understand the markets we oversee, who can discern anomalies and patterns and who have the experience, judgment, and skills to know when to investigate further.

The increased use of high speed and electronic trading has impacted our enforcement activity as well. We have recently brought several spoofing cases, where market participants used complex algorithmic strategies to generate and then cancel massive numbers of bids or offers without the intention of actually consummating those transactions in order to affect price. Some have asked, does that mean I cannot cancel a trade without fear of enforcement coming after me? Hardly. Intent is a key element that we must prove. There is a difference between changing your mind in response to changed market conditions and canceling an order you previously entered, and entering an order that you know, at the time, you have no intention of consummating.

The Commission is also looking at automated trading and specifically the use of algorithmic trading strategies from a policy perspective. We have adopted rules requiring certain registrants to automatically screen orders for compliance with risk limits if they are automatically executed. The Commission has also adopted rules to ensure that trading programs, such as algorithms, are regularly tested. In addition, the Commission issued a Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. We received substantial public comment, and we are currently considering what further actions may be appropriate.

Although we have not made any decisions yet, let me note a few areas we are thinking about. Traditionally, our regulatory framework has required registration by intermediaries handling customer orders and customer funds. In addition, proprietary traders who were physically present on the floor of the exchange and active in the pits had to register as floor traders. Today, the pits are gone, and physical presence on the floor of an exchange is no longer a relevant concept. We are considering whether the successors to those floor traders – proprietary traders with direct electronic access to a trading venue – should be subject to a registration requirement if they engage in algorithmic trading.

We are considering the adequacy of risk controls, and in particular pre-trade controls, with respect to algorithmic trading. The exchanges, and many participants themselves, have put controls in place. The question is whether our rule framework should set some general principles to require measures such as message and execution throttles, kill switches, and controls designed to prevent erroneous orders. We also may consider standards on the development and monitoring of algorithmic trading systems.

We are also considering who should have the responsibility to implement controls. This may include persons using algorithmic trading strategies as well as the exchanges. But what about the role of clearing members who do not see the orders of customers using direct electronic access? Today, our rules require exchanges that permit direct electronic access to have systems to facilitate the clearing member’s management of the financial risk of their direct access customers. Should there be a similar requirement for the exchanges to facilitate the management by clearing members of risks related to those customers’ use of algorithmic trading?

We are looking self-trading – that is, when orders from distinct trading desks or algos from the same firm transact – and its potential implications and effects on the markets. In addition, we are looking at the adequacy of disclosure by exchanges of market maker and incentive programs.


I said at the outset that where we are today in the implementation of reforms of the swaps market has many parallels to the reforms of the securities market after the Great Depression. The framework created then – including public disclosure and regular reporting, and trading on regulated platforms – was controversial at the time. But it has proven to not only be effective, it has provided a vital foundation on which our securities markets grew to become the most dynamic in the world. I believe we can achieve the same result with the derivatives market. We must always be attentive to how the market is changing, and adapt core principles to those changes. I look forward to working with you to achieve that goal.

Last Updated: June 3, 2015