CFTC CHAIRMAN MASSAD'S ADDRESS TO FUTURES INDUSTRY ASSOCIATION BOCA CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Keynote Address of Chairman Timothy G. Massad before the Futures Industry Association Boca Conference
March 11 2015
As Prepared For Delivery

Thank you for inviting me today, and I thank Walt for that kind introduction. It is a pleasure to be here. This is my first time to the International FIA Conference here, an event that I have heard a lot about. And, of course, with the winter we have been having in Washington, being here is a real treat.

Let me begin by acknowledging the work that the Futures Industry Association and its members do. Your commitment to improving the industry, and your participation in the work of the Commission, is very important.

I want to also acknowledge and thank the CFTC staff. What this agency has accomplished, not only since my arrival, but well before that, is a credit to their hard work. We have an incredibly dedicated and talented team. I also thank my fellow commissioners for their efforts, particularly their willingness to work constructively together. We may not always agree, but I believe all of us are working in good faith to carry out the CFTC’s responsibilities.

Everyone here appreciates the importance of the derivatives markets. They enable businesses of all types to manage risk, and in so doing, are engines of economic growth. The success of these markets depends on many factors, and a key one is having a strong and sensible regulatory framework.

We knew that before the global financial crisis, but the crisis certainly drove that lesson home. The absence of regulation allowed the build-up of excessive risk in the over-the-counter swaps market. That risk intensified the crisis and the damage it caused. We must never forget the true costs of the crisis: millions of jobs lost, homes foreclosed and dreams shattered.

As a result of the financial crisis our country took action to address those risks. We are implementing a new regulatory framework for swaps, one that mandates central clearing and brings greater transparency, reporting and oversight. The CFTC’s responsibility today is to regulate the derivatives markets in a manner that not only prevents the build-up of excessive risk, but also creates a foundation on which the derivatives markets can continue to thrive and work for the many businesses that rely on them.

So today I would like first to review briefly some of the things we have done recently, and some of the things we will be doing in the months ahead. And then I want to discuss a key aspect of that new framework, which is the role of clearinghouses. In particular, I want to discuss the issue of clearinghouse resiliency, because this is an issue that has been a priority for us and has received increased public attention lately.

Current Priorities

We have been very busy since two of my fellow commissioners and I took office last summer. Our agenda today reflects several priorities.

First, the agency has largely finished an intensive rule-writing phase to create the new regulatory framework for swaps. We are now focused on implementation of that framework. One of our priorities has therefore been to focus on fine-tuning our rules, in particular to make sure that the commercial businesses, consistent with the Congressional mandate, that depend on these markets to hedge risk can continue to use the markets effectively. We have made a number of changes to address concerns of commercial end-users. This has included amending our rules to enable publicly-owned utilities to continue to be able to hedge their risks effectively in the energy swaps market. We have proposed revisions regarding the posting of residual interest which is related to the posting of collateral with clearing members. We have proposed exemptions for commercial end-users from certain recordkeeping requirements and clarifications to give the market greater certainty with regard to the treatment of contracts with embedded volumetric optionality.

In addition, the Commission staff has taken action to make sure that end-users can use the Congressional exemption regarding clearing and swap trading, including when they enter into swaps through a treasury affiliate. The staff also recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts, recognizing that immediate reporting can sometimes undermine a company’s ability to hedge.

We have also extended relief with respect to the treatment of package trades on swap execution facilities to avoid unnecessary disruptions in the marketplace. There may be additional measures, such as today we are looking at trade option reporting rules and the rules on trading of swaps on swap execution facilities.

Finishing the Dodd Frank Rules. We are also working to finish the few remaining rules mandated by Congress, including our proposed rule on margin for uncleared swaps. This rule plays a key role in the new regulatory framework, because uncleared transactions will always be an important part of the market. Certain products will not be suitable for central clearing because of their lack of sufficient liquidity or other risk characteristics. In these cases, margin will continue to be a significant tool to mitigate the risk of default from those transactions and, therefore, the potential risk to the financial system as a whole.

We are currently working with the bank regulators to finalize these proposed rules. These rules exempt commercial end-users from the margin requirements, consistent with Congressional intent. I am hopeful that we can finalize these rules by the summer.

We are also working on the rules on position limits and capital for swap dealers.

Cross-Border Harmonization. We are also focused on addressing cross border issues related to the new framework. We have had productive discussions with the Europeans to facilitate their recognition of U.S. based clearinghouses, and I would hope that we could reach agreement soon. Another important area for cross-border harmonization is the proposed rule I just mentioned, concerning margin for uncleared swaps. We have been working with our counterparts in Europe and Japan, and I am hopeful that our respective final rules will be substantially similar, even though they are not likely to be identical.

Data. We have also made enhancing our ability to use market data effectively a key priority. We continue to focus on data harmonization, including by helping to lead the international work in this area. We are also looking at clarifications to our own rules to improve data collection and usage. We have a lot of work to do in the area of data generally, but we have come a long way since 2008, when we knew very little about the swaps market. Today, there is real time price and volume information and we have much better insight into participant activity.

New Challenges and Risks. We are also looking at new challenges and risks in our markets. We have been very focused on the increased use of automated trading strategies, for example, and their impact on the derivatives markets. We issued a concept release last year and we received a lot of very useful input. We are also keenly focused on cybersecurity, which is perhaps the single most important new risk to market integrity and financial stability. We have incorporated cyber concerns into our core principles and made it a priority in our examinations. Our challenge is to leverage our limited resources as effectively as possible. Many major financial institutions are spending far more on cybersecurity than our entire budget. We do not have, for example, the resources to do independent testing. So one of the things we are looking at is whether the private companies that run the core infrastructure under our jurisdiction – the major exchanges and clearinghouses for example – are doing adequate testing themselves of their cyber protections. We are holding a public staff roundtable to discuss this issue next week.

Enforcement and Compliance. We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. We have held some of the world’s largest banks accountable for attempting to manipulate key benchmarks. We have brought successful cases against those who would attempt to manipulate our markets through sophisticated spoofing strategies. And we have also stopped crooks trying to defraud seniors through precious metal scams and Ponzi schemes. In all these efforts, our goal is to make sure that the markets we oversee operate with fairness for all participants regardless of their size or sophistication.

Ensuring the Strength and Stability of Clearinghouses in the New Regulatory Framework

Let me turn now to discuss clearinghouses. In just about every speech I have given since taking office, I have talked about our progress in implementing the mandate to clear standardized swaps. In our markets, the percentage of swaps cleared has increased from 15% in December 2007 to about 75% today. At the same time, I have talked about the importance of clearinghouse stability and oversight. As we make clearinghouses even more important in the global financial system, we must pay attention to the risks that they can pose.

Lately, there has been increased discussion of this, with many views put forward in papers and speeches, on issues like clearinghouse resiliency, recovery, and resolution. Questions are being asked in particular about the adequacy of recovery plans, about whether clearinghouses have enough capital or “skin in the game,” and whether the potential liability of clearing members is properly sized or capped. This is a good and healthy debate. Today, I would like to discuss how we at the CFTC think about some of these issues. Let me do so by first talking about the work that has taken place in this area, both by us and internationally, then discuss the need to look at issues in context, and then discuss the work that lies ahead.

First, a great deal of work has already taken place to consider these issues, here and internationally. The CFTC has had a regulatory framework in place to oversee clearinghouses since well before the passage of Dodd-Frank. Dodd-Frank amended the agency’s core principles for clearinghouses, with the goal of reducing risk, increasing transparency, and promoting market integrity within the financial system. In 2011, the agency adopted detailed regulations to implement the revised core principles. These regulations provide a regulatory framework designed to strengthen the risk management practices of DCOs, promote financial integrity for swaps and futures markets, and enhance legal certainty for DCOs, clearing members, and market participants.

In 2013, we also supplemented these regulations by adopting additional requirements for systemically important clearinghouses. Thus, our clearinghouse regulations are now consistent with the Principles for Financial Market Infrastructures, or PFMIs, published in 2012 by CPMI-IOSCO.

The work of CPMI-IOSCO with respect to clearinghouses has been an important international effort, and the CFTC has played an active role. The PFMIs set comprehensive principles and key considerations for the design and operation of financial market infrastructures, including clearinghouses, to enhance their safety and efficiency, to limit systemic risk, and to foster transparency and financial stability. This same group also published a Disclosure Framework and Assessment Methodology and last month published quantitative disclosure standards, to further increase transparency of clearinghouses.

The Basel Committee on Banking Supervision has provided strong incentives for clearinghouses to meet these standards, because bank exposures to such “qualifying CCPs” are subject to capital treatment that is significantly more favorable than that afforded to exposures to clearinghouses that do not meet these standards. CPMI-IOSCO has also undertaken a rigorous process to assess the completeness of the regulatory framework in several jurisdictions. The Financial Stability Board has also contributed through the publication of the Key Attributes of Effective Resolution Regimes, which includes an annex on financial market infrastructures.

Writing standards that clearinghouses must follow, however, is of course not enough. That is why the CFTC also engages in extensive oversight activities. Our program includes daily risk surveillance, analysis of margin models, stress testing, back testing, and in-depth compliance examinations. We engage in ongoing review of clearinghouse rules and practices, and we review what products should be mandated for clearing. We require a variety of periodic reporting including some on a daily basis as well as event-specific reporting.

In addition to supervision of clearinghouses, we look at risk at the clearing member and large trader levels. We conduct daily stress tests to identify traders who pose risks to clearing members and clearing members who pose risks to clearinghouses. We require clearinghouses to oversee the risk management policies and practices of their members. We require FCMs, whether clearing members or not, to meet risk management and minimum capital standards. And we have a rigorous compliance examination process.

There is also public transparency on these matters. You can go to our website and see each FCM’s net capital requirement and the amounts of adjusted capital and customer segregated assets they hold.

This oversight and reporting framework is intended to enable us to take proactive measures to promote the financial integrity of the clearing process.

So as we engage in this public discussion about clearinghouse risk, we should always remember to look at the full picture – that is, to look at all the regulatory policies, the clearinghouse practices, the oversight, and the sum of activities that contribute to rigorous risk mitigation. We should not focus on one particular issue without considering how it connects to other issues.

An example of the importance of looking at the full picture is when we consider issues pertaining to risk mitigation through the collection of initial margin. Although there are many aspects to consider, there has been some focus on one issue in particular, which is the liquidation period – that is, whether a clearinghouse should assume a 1 day, 2 day, 5 day, or other minimum time horizon for its ability to liquidate a particular product. This is an important issue. Indeed, our regulations require that the time period must be appropriate based on the characteristics of a particular product or portfolio. But the minimum liquidation period is only one of the many issues that affect how much initial margin is posted with the clearinghouse.

The amount of margin a clearinghouse holds will also depend on whether clearing members post margin on a gross or net basis. “Net” means a clearing member can net customers’ positions to the extent they offset one another, which reduces the amount of margin that must be sent to the clearinghouse for the overall portfolio. By contrast, “gross” posting means the clearing member must post for each customer, without any offsets across customers, which means the clearinghouse receives more – in many cases, much more – collateral than under net posting.

A further difference in regulatory regimes is whether the clearing member is even obligated to collect a minimum amount of margin from each customer, sufficient to cover that customer’s position, or whether the clearing member can negotiate different deals with different customers. Our rules, for example, require that the clearinghouse must require each clearing member to collect from each customer, more than 100% of the clearinghouse’s initial margin requirements with respect to each product and swap portfolio.

Another example of the importance of context is with regard to the issue of whether clearinghouses have enough capital or “skin in the game.” There has obviously been a lot of public and regulatory attention in the last few years on how much capital banks should hold. When it comes to clearinghouses, it’s important to remember that there are significant differences between the business models of clearinghouses and banks, and therefore, in the role that capital plays. A banking institution needs capital to offset losses that may arise frequently. Those losses can be as varied as the many lines of businesses in which a bank engages.

By contrast, when people talk about a clearinghouse drawing on its capital, they are usually talking about a very unusual event: there has been a default of a clearing member, and the resources of the defaulter held by the clearinghouse – both initial margin and default fund contribution – are not enough to cover the loss. The clearinghouse has sought to transfer the defaulting member’s positions to one or more other clearing members, and the success of that auction has affected the size of the loss. The clearinghouse is now looking at covering that loss through the waterfall of resources available to it for recovery – that is, the clearinghouse’s capital, the other clearing members’ prefunded contributions to the default fund, and potential assessments on clearing members.

This would be a very serious event. Historically, however, the use of other clearing members’ resources to meet a default is exceedingly rare worldwide. To my knowledge, it has never happened here in the United States.

That does not mean we should not think about it or plan for it. Post financial crisis, we are and should be doing many things to increase the resiliency of our financial system in the event of unusual situations. The issue of capital needs to be considered in the context of a clearinghouse’s overall financial resources. That is, what are the resources to deal with a loss if initial margin is not adequate? Under CFTC requirements, each of our systemically important clearinghouses must maintain sufficient financial resources to meets its financial obligations to its clearing members notwithstanding the default by the two clearing members creating the largest combined loss to the clearinghouse in extreme but plausible market conditions – the standard known as “Cover 2.” These requirements are consistent with the PFMIs.

To meet these requirements, a clearinghouse may use initial margin payments, its own capital dedicated to this purpose, and default fund contributions. The allocation or the balance between these financial resources may vary, such that the more margin paid up front, the less default fund contributions the clearinghouse will collect and vice versa.

I should note that a clearinghouse faces risks outside of a default by a member, and we are looking at those as well. These can include operational or technological issues, such as the cybersecurity concerns I noted earlier. And we separately require clearinghouses to have capital, or other resources acceptable to us, to cover operating costs for one year. This capital is not fungible with the Cover 2 resources.

We are currently considering the issues pertaining to the resources available to deal with a default in the context of reviewing clearinghouse recovery plans. We are trying to make sure that these plans are “viable” – that is, that they are designed to maximize the probability of a successful clearinghouse recovery, while mitigating the risk that recovery actions could result in contagion to other parts of the financial system. And we will be holding a public staff roundtable on these issues next week – unless Washington gets another snowstorm. The agenda will include discussion of what tools a clearinghouse may use in these situations.

Let me suggest a few questions that may be useful to think about in considering clearinghouse capital in this context: first, is capital primarily about alignment of incentives – that is, alignment of incentives between the clearinghouse and its clearing members – rather than the quantitative increase to the waterfall? In an era when the equity of clearinghouses is held by persons other than the clearing members, this may be particularly important. As the CPMI-IOSCO Recovery Report notes, “[e]xposing owners to losses … provides appropriate incentives for them to ensure that the [clearinghouse] is properly risk-managed.”

Second, when we think about capital in the context of recovery plans, should we also think about issues of governance and process? That is, whose interests should be taken into account when a clearinghouse designs its recovery plan and when a clearinghouse faces a default? If the waterfall of resources is not sufficient to cover a default, then how does the clearinghouse decide what happens next, and who should participate in or have input into that decision? How do we ensure there is adequate time for that decision-making process to take place?

In outlining the things the CFTC has done and is doing, as well as the international work that has taken place, let me note a couple of caveats. While I believe the agency has developed very good policies and practices, there is more we should be doing, particularly with respect to the frequency of examinations. Unfortunately, we are limited by our resources. In addition, to state the obvious, no matter how good the regulatory framework, no regulator can ever guarantee that there won’t be problems.

Finally, I want to underscore that this work is ongoing, and there are many aspects of these issues that I have not touched on today given time limitations. We will be continuing to look at the full range of issues pertaining to clearinghouse risk, resiliency, recovery, and resolution. We will also be participating in further international work on these issues. I note that CPMI-IOSCO will be continuing to look at stress testing – are clearinghouse stress testing programs adequate and should we develop standards, for example – and they will also be looking at recovery issues, and we will be helping to lead that process. I also expect the FSB’s Resolution Steering Group to look further at the resolution issues, and we will work with our colleagues on that as well. While no one wants to get to resolution, it is important that we explore how this would be done as well, without a government bailout and without creating contagion. This is very useful, and it reflects the very good international dialogue that has taken place already in this area. In addition, this work can help us balance the multiple regulatory objectives that come into play in considering these issues, so that regulators with different responsibilities do not work at cross purposes.

As we engage in this work, and as the public discussion about clearinghouse resilience continues, I would just encourage all of us to keep in mind the full picture. We should always take a comprehensive approach to these issues, one that is based on a clear understanding of risk, that enhances transparency and market integrity, and that is backed up by rigorous, ongoing oversight. Effective risk mitigation and resiliency require a broad range of policies and procedures.

Central clearing is fundamental to the health and vibrancy of our markets. We must make sure that clearing firms, as well as clearinghouses, can continue to operate successfully. It is only in this way that the businesses which depend on these markets can continue to use them effectively.

Conclusion

That brings me back to where I started, which is the importance of these markets to the many businesses that rely on them, and to our economy generally. All of you who participate in these markets understand that. And that is what guides us at the Commission. I know I speak for all the Commissioners in saying it is a privilege for us to work on these issues of importance to these markets and our economy. I look forward to working with you to make sure these markets continue to thrive in the years ahead.

Thank you for inviting me.

Last Updated: March 11, 2015

PARTICIPANTS IN ALLEGED PONZI SCHEME CONSENT TO FINAL JUDGEMENT

FROM: U.S. SECURITIES AND EXCHANGE COMISSION

SEC Announces Settlements with Cache Decker and David Decker in SEC V. Zufelt

The United States Securities and Exchange Commission (Commission) announced that on March 6, 2013, Judge Dee Benson entered final judgments against Cache D. Decker and David M. Decker, Jr. The Commission's complaint alleges that Cache and David Decker participated in and aided and abetted Ponzi schemes operated by Anthony C. Zufelt ("Zufelt").

Without admitting or denying the allegations of the complaint, the Deckers each consented to the entry of a final judgment permanently enjoining them from directly or indirectly violating Sections 5, 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Section 15(a) of the Securities Exchange Act of 1934. Â The final judgment against David Decker orders him to pay disgorgement of $141,000 and prejudgment interest of $39,582. The final judgment also orders David Decker to pay a civil penalty of $25,000. The final judgment against Cache Decker orders him to pay disgorgement of $43,000 and prejudgment interest of $9,395 over three years. The Court did not order Cache Decker to pay a civil penalty based on his sworn statement of financial condition.

The Commission filed a complaint on June 23, 2010, alleging that from approximately June 2005 through June 2006, Zufelt operated a Ponzi scheme through his company Zufelt, Inc. (ZI), and that between July 2006 and December 2006 he ran a second fraudulent scheme through Silver Leaf Investments, Inc. ("SLI"). The Complaint alleges that, in connection with these schemes, the Deckers each made materially false and misleading statements to investors about, among other things, the profitability of ZI and SLI, the ability of ZI and SLI to repay investors, the use of investor funds, and the security of the investments. The Order finds that the Deckers acted as unregistered broker-dealers and sold unregistered ZI and SLI securities.

THE PROTECTION OF INVESTORS FROM FRAUDSTERS

FROM:  U.S. DEPARTMENT OF JUSTICE
Protecting Investors from Fraud
The following post appears courtesy of Barbara L. McQuade, the U.S. Attorney for the Eastern District of Michigan
Investor fraud schemes are among the most pervasive types of cases handled by the White Collar Crime Unit of the U.S. Attorney’s Office for the Eastern District of Michigan.
In the past year, our prosecutors have charged a number of investment advisors and stock brokers with defrauding their investors. In one case, a defendant encouraged elderly investors to liquidate legitimate investments to invest with him. In fact, he kept their funds for his own use, depleting many of the victims of their life savings, totaling $4 million. In another case, a defendant offered investments over the Internet, promising high returns and taking in $72 million in investor dollars. Instead, the investments either generated losses or were never made at all.

Victims of fraud include individual investors with modest portfolios as well as institutional investors with large investments, such as pension funds.

President Obama’s Financial Fraud Enforcement Task Force was designed to attack fraud, waste and abuse by increasing coordination among agencies and fully leveraging the government’s law enforcement and regulatory system. As part of that effort, the U.S. Attorney’s Office for the Eastern District of Michigan is aggressively prosecuting financial fraud cases. In the largest investment scheme in the history of the district, a defendant was recently convicted of defrauding more than 1,200 individuals by convincing them to invest more than $350 million in fictitious limited liability corporations. He was sentenced to 16 years in prison.

In addition to prosecuting perpetrators, we are also combating fraud by raising public awareness to help investors protect themselves. Knowledge of common fraud schemes can help prevent individuals from becoming victims of these crimes.

One of the most common investor fraud schemes is the classic “Ponzi” scheme, named for Charles Ponzi, who devised the concept in the 1920s. In a Ponzi scheme, the investment promoter promises investors a high rate of return for their investment and then uses the funds of new investors to pay the promised return to the earlier investors. These early investors then unwittingly help advance the scheme by bragging about the high rate of return on their investment. Eventually, of course, the scheme collapses when the swindler needs to pay out more than he can take in. A recent example of this type of fraud was the massive scheme Bernard Madoff operated that cost investors billions of dollars.

Another common scheme is known as affinity fraud. In these schemes, perpetrators prey on members of an identifiable group, such as a church community, a school parent-teacher organization, a country club or a professional group. The investment advisor will join the group, or pretend to be part of it. As a result, he enjoys an inflated credibility that encourages members of the group to trust him and be less cautious than they might otherwise be when making an investment.

Another frequently used tactic used by perpetrators of investment fraud is to ingratiate themselves with their victims. In one recent case, a defendant regularly visited his clients at home, shared details of his personal life with them, attended family functions, such as birthday parties and weddings, provided gifts to family members, made donations to the clients’ preferred charities, and assisted clients in life decisions. After obtaining their trust, he took their money for his own use.

THE WASHINTON PONZI FAMILY

The following excerpt is from the SEC website: “On November 18, 2011, the Securities and Exchange Commission charged a Bethesda, Md. man and several family members and friends with conducting a multi-million dollar Ponzi scheme targeting investors in the Washington D.C. metropolitan area. The SEC alleges that Garfield M. Taylor lured primarily middle-class residents in his community with little to no investing experience to invest in promissory notes issued by his two companies that engaged in purportedly low-risk options trading. Taylor urged investors to refinance their homes and use any available means to invest, including their personal savings and retirement funds. The SEC alleges that he promised returns as high as 20 percent per year and falsely assured investors that their investments would be protected by a “reserve account” or that he would employ a “covered call” trading strategy that would not touch the principal amount of their investment. According to the SEC’s complaint filed in federal court in Washington D.C., Taylor and his companies instead engaged in very high-risk, speculative options trading and suffered massive losses. Taylor relied upon money from new investors to pay returns to earlier investors in typical Ponzi scheme fashion. The SEC’s complaint also alleges that he siphoned off $5 million in investor funds to pay family and friends and for other personal uses, including $73,000 to the private school his children attended. The SEC alleges that the Ponzi scheme defrauded more than $27 million from approximately 130 investors from 2005 to 2010. The scheme ultimately collapsed in the fall of 2010 when the companies’ accounts were depleted by the trading losses and interest payments to investors. The SEC’s complaint charged Taylor’s companies Garfield Taylor Inc. and Gibraltar Asset Management Group LLC – which were not registered with the SEC – as well as five collaborators in Taylor’s scheme: Maurice G. Taylor of Bowie, Md., who is the brother of Garfield Taylor. He is the Chief Investment Officer at Gibraltar and worked as a trader for Garfield Taylor Inc. Randolph M. Taylor of Washington D.C., who is the nephew of Garfield Taylor. He was formerly the Vice President for Organizational Development at Gibraltar. Benjamin C. Dalley of Washington D.C., who is the childhood friend and business partner of Randolph Taylor. He was formerly Vice President of Operations at Gibraltar. Jeffrey A. King of Upper Marlboro, Md., whose sister is married to Maurice Taylor. He was a former independent contractor for Garfield Taylor Inc. and former President and Chief Operating Officer of Gibraltar. William B. Mitchell of Middle River, Md., who was formerly Vice President for Finance at Garfield Taylor Inc. and former Executive Vice President of Strategic Planning at Gibraltar. According to the SEC’s complaint, Garfield Taylor and the others jointly prepared and finalized a Gibraltar PowerPoint presentation for prospective investors that was riddled with false and misleading statements. They misrepresented the nature of the company’s options trading strategy, the anticipated rate of return, the protections offered by its outside accountant, and the overall level of risk involved in an investment with Gibraltar. They pitched the PowerPoint presentation to potential institutional investors and charitable organizations, including a Washington D.C.-based children’s charity and a Baptist church in Maryland. Garfield Taylor went so far as to provide the Baptist church with a fake “letter of recommendation” from Charles Schwab as he pitched the investment opportunity. The SEC alleges that in order to maintain a steady flow of new investor money, Garfield Taylor induced current investors and others including King and Mitchell to solicit and refer new investors to him in exchange for commission payments based on the amounts invested. Garfield Taylor, who was not a licensed securities broker, persuaded several individuals to give him online access to their personal brokerage accounts so he could place trades and share in any profits generated. The SEC’s complaint charges Garfield Taylor, Inc., Gibraltar Asset Management Group LLC, Garfield Taylor, Dalley, King, and Randolph Taylor with violations of Sections 17(a) of the Securities Act of 1933 (“Securities Act”). The SEC’s complaint also charges those defendants and Maurice Taylor with violating or aiding and abetting violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. It also alleges that Garfield Taylor violated Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The SEC’s complaint also charges Garfield Taylor, Inc., Gibraltar Asset Management Group, LLC, and Garfield Taylor with violations of Sections 5(a) and 5(c) of the Securities Act. The SEC’s complaint also alleges that Garfield Taylor, King, and Mitchell violated Section 15(a) of the Exchange Act. The SEC seeks a judgment permanently enjoining the defendants from future violations of the relevant provisions of the federal securities laws and ordering them to pay penalties and disgorgement with prejudgment interest. The SEC also named three companies belonging to Randolph Taylor, Dalley, King, and Mitchell as relief defendants for the purposes of seeking disgorgement with prejudgment interest of investor funds.”

SEC ACCUSES TWO FLORIDA MEN OF OPERATING A PONZI SCHEME

There have been so many Ponzi schemes uncovered lately by the SEC and others it just seems very difficult to imagine that investors ae still not investigating potential investments that are purport to be able to generate huge profits. The case below alleges yet another Ponzi scheme. The following excerpt is from the Sec Website: "Washington, D.C., Aug. 29, 2011 – The Securities and Exchange Commission today charged two Florida men with operating a Ponzi scheme disguised as a purported private equity fund that fraudulently raised approximately $22 million from more than 100 investors, many of whom were Florida teachers or retirees. According to the SEC’s complaint filed in U.S. District Court for the Middle District of Florida, James Davis Risher of Sanibel was responsible for handling the fund’s trading operations, and Daniel Joseph Sebastian of Lakeland distributed offering materials and solicited investors for the fund. Risher boasted to investors that he had substantial experience in trading equities and providing wealth and asset management services. In reality, Risher had no such experience but rather a lengthy criminal history, spending 11 of the last 21 years in jail instead of growing a thriving retail brokerage business as he claimed. The SEC alleges that Risher and Sebastian falsely told investors that the fund earned annual returns ranging from 14 percent to 124 percent by investing in public equity securities through a broker-dealer. They sent investors fabricated account statements indicating such high returns to support their false claims. Only a fraction of the money raised was actually invested, and Risher instead misspent investor funds on such personal purchases as jewelry, gifts, and property in North Carolina and Florida. Risher and Sebastian also paid themselves millions of dollars in phony management and performance fees. “Risher, who masqueraded as a highly successful equity trader, teamed up with Sebastian to tout sophisticated trading strategies they claimed would generate substantial profits for investors. Instead, Risher and Sebastian used investors’ life savings and retirement nest eggs to line their own pockets,” said Eric Bustillo, Director of the SEC’s Miami Regional Office. According to the SEC’s complaint, Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in fund offering documents as “two unique individuals” who used their expertise to “create an investment vehicle that would allow investors to capitalize from both bull and bear markets.” The SEC alleges that Sebastian often solicited his former customers at his prior job as an insurance broker. He primarily pitched the investment opportunity to educators, retirees, and members of several churches in Florida, but also solicited investors in California, other states, and Canada. Sebastian persuaded former customers to roll over money in their insurance and annuity products into the fund. He told them the fund would provide a higher rate of return than they could receive from the products he had previously sold them. At least one investor liquidated an annuity she had purchased from Sebastian and invested the proceeds in the fund. The SEC alleges that Risher and Sebastian made a number of material false statements and omissions to investors about Risher’s criminal history, the fund’s investment strategy, the fund’s investment returns, the safety of investors’ principal, and the existence of audited financial statements. Risher misrepresented that the fund was registered in Bermuda, and he and Sebastian falsely claimed that the fund was audited annually by a Bermudan auditor. Sebastian verbally told investors during telephone calls and meetings that they would never lose their principal investments in the fund. He even provided some investors with written guarantees from a company he owned that would reimburse any loss. In reality, Sebastian knew that the company had no assets to reimburse investors for losses, making his guarantee meaningless. The SEC charged Risher and Sebastian with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC further charged Risher with violating Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and Sebastian with aiding and abetting Risher’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC seeks permanent injunctions, disgorgement, and financial penalties against Risher and Sebastian. The U.S. Attorney’s Office for the Middle District of Florida, which conducted a parallel investigation of this matter, has filed criminal charges against Risher. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Middle District of Florida, Federal Bureau of Investigation, Internal Revenue Service, U.S. Postal Inspector Service, Florida Department of Law Enforcement, and Florida Office of Financial Regulation.”

SEC CHARGES CPA AND HIS CONSULTING FIRM WITH PARTICIPATING IN A PONZI SCHEME

The designation CPA (Certified Public Accountant) was once a venerated designation that meant that the bookwork handled by such a designate was accurate and that such work was according to established accounting standards. In the following case the SEC alleges that a CPA and his consulting firm helped to steer clients into a Ponzi scheme and mismanaged statements that kept the scheme ongoing. The case is an excerpt from the SEC website:

"SEC Charges John N. Irwin and Jacklin Associates, Inc. with Participating in Ponzi Scheme Orchestrated by Joseph S. Forte and Joseph S. Forte, LP
The Securities and Exchange Commission announced today that on July 11, 2011, it filed a settled civil action in the United States District Court in Philadelphia against John N. Irwin (“Irwin”), a certified public accountant, and his consulting firm, Jacklin Associates, Inc. (“Jacklin”). The Commission alleges that, from at least February 1995 through December 2008, Irwin and Jacklin participated in a multi-million dollar Ponzi scheme orchestrated and run by Joseph S. Forte (“Forte”) through his limited partnership Joseph S. Forte, LP (“Forte LP”). In December 2008, Forte confessed to federal authorities that, for over a decade, he had been operating a Ponzi scheme in which he fraudulently obtained approximately $50 million from roughly 80 investors through the sale of securities in the form of limited partnership interests in Forte LP. Subsequent investigation of Forte’s confession has revealed over 100 investors who collectively invested over $75 million. Forte and Forte LP solicited investors by making misrepresentations regarding, among other things, use of invested funds, investment returns, and investor account balances. On January 7, 2009, the Commission and the United States Commodities Futures Trading Commission filed civil actions against Forte and Forte LP and successfully sought emergency relief that, among other things, froze their assets and enjoined further illegal conduct. SEC v. Forte, et al., 09-CV-0063 (E.D. Pa.); CFTC v. Forte, 09-CV-0064 (E.D. Pa.). In parallel criminal proceedings, Forte pled guilty to charges of wire fraud, mail fraud, bank fraud and money laundering and was sentenced to 15 years in prison. U.S. v. Forte, 09-CR-304 (E.D. Pa.).

The Commission’s complaint against Irwin and Jacklin alleges that they participated in Forte’s scheme by soliciting investors for Forte LP. In doing so, Irwin relied exclusively on Forte’s misrepresentations about Forte LP’s stellar performance and, without performing any due diligence, passed along to investors through Jacklin materially false and misleading information about, among other things, Forte LP’s current value and growth, historical performance, rapid-trading strategy, and retention of an accountant. Irwin, through Jacklin, also performed back office and bookkeeping functions for Forte LP, including creating and issuing to investors false quarterly statements and tax documents prepared based on the false information provided by Forte. In communicating the fraudulent information to investors, Irwin disregarded red flags that should have alerted him that the information that he was passing on was false. Over the course of the fraud, Irwin, through Jacklin, received ill-gotten gains exceeding $5 million in purported fees and trading profits.

Irwin and Jacklin agreed to settle the Commission’s charges, without admitting or denying the allegations in the Commission’s complaint. Under the settlement, which is subject to the court’s approval, Irwin and Jacklin consented to a judgment permanently enjoining them from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The judgment also orders the defendants to pay disgorgement plus prejudgment interest, and permits the Commission to ask the court to impose civil penalties, the amounts of which will be determined at a later date. As part of the settlement, Irwin agreed to the entry of an order suspending him from appearing or practicing before the Commission as an accountant. "

FORMER BOARD CHAIRMAN OF FIRST CASH FINANCIAL SERVICES CHARGED WITH INSIDER TRADING

Filed June 10, 2011

Securities insider trading is possibly the most heinous crime someone can commit against honest investors. Many would argue that Ponzi schemes are worse for the market. However, Ponzi crimes are often perpetrated upon people who do not have the technical skills to examine an investment using both mathematics along with the prerequisite skill do be able to look at a situation and realize something must be wrong in order to generate large rates of returns. Insider trading offers no clues at all to even the most astute investor before money is committed and lost since only the insider has the necessary information to make the right call and when that insider makes that right call then all the most technically oriented and sophisticated investors may well pay the price and then declare openly that “the U.S. securities market is rigged”. Thus, not only are the trading markets seen as being compromised and fixed but, the entire capitalist system is then seen as corrupt and without any redemptive remedies.

In the following case, the SEC has alleged that the former chairman of the board of First Cash Financial Services, Inc. engaged in insider trading. Below is an excerpt from the SEC website:


The Securities and Exchange Commission today charged Phillip E. (Rick) Powell, former chairman of the board of First Cash Financial Services, Inc. (“First Cash”), with illegal insider trading. The SEC’s Complaint, filed in United States District Court for the Western District of Texas (Waco Division), alleges that in early March 2008 Powell, while he was serving as the chairman of the board of First Cash, learned material, non-public information about the commencement of a company share buyback.
According to the Complaint, on November 6, 2007, the company had announced that it had authorized a buyback of up to 1 million First Cash shares. That announcement did not disclose when the authority would be exercised or even whether management would actually exercise the authority. The SEC alleges that Powell, through his position as chairman of First Cash’s board of directors, later learned, among other things, that First Cash had decided to actually exercise its repurchase authority and was set to begin the repurchase.
According to the Complaint, Powell, armed with this material, non-public information, called his broker on March 11, the same day that First Cash entered into an agreement with JP Morgan Securities to facilitate the repurchase and the day before First Cash began repurchasing its shares. He instructed the broker to buy 100,000 First Cash shares. According to the SEC’s Complaint, Powell insisted that the purchase needed to be made that day.
As alleged in the Complaint, Powell’s pre-buyback purchases caused First Cash to overpay $36,000 for its own securities between March 12 and March 14, 2008. In addition, the SEC alleges that, as a result of the share price increase following disclosure that the buyback had commenced, Powell profited in the amount of $124,000 from his illegal purchase.
Powell is alleged to have repeatedly tried to hide his trading from First Cash and its shareholders. For example, the Complaint alleges that he misled another board member when he was warned against purchasing in advance of the buyback, and later he misled First Cash’s chief executive officer when he asked about the trade. In addition, after his broker warned him that Commission rules required him to file a Form 4 disclosing his trade, he refused to do so and delayed filing his Form 4 until April 30, 2009, over thirteen months after it was required by Commission rules and only after he knew the Commission was investigating his trades.
The SEC’s complaint alleges that, as a result of his conduct, Powell violated Sections 10(b) and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 16a-3 thereunder. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, a monetary penalty, and an order barring Powell from serving as an officer or director of a public company.
The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Northern District of Texas and the Federal Bureau of Investigation.”

SEC GETS SUMMARY JUDGEMENT AGAINST COMPANY FOR FRAUD

There are so many ponzi scheme cases brought by the SEC that perhaps Ponzi should be made into a criminal business game to compete against the popular legitimate Monopoly Game. The following is an excerpt from the SEC website:

"The Securities and Exchange Commission announced today that on June 6, 2011, the Honorable Dale A. Kimball of the United States District Court for the District of Utah granted the SEC’s motion for summary judgment and entered final judgment against defendants Brian J. Smart of Lehi, Utah, and his company Smart Assets, LLC. The Court found that Smart and his company violated the antifraud provisions of the federal securities laws, and ordered defendants to pay $4.7 million in disgorgement and civil penalties.

The SEC filed this action against the defendants on March 11, 2009, alleging that Smart and his company had engaged in a Ponzi-like scheme in the offer and sale of promissory notes and other securities. The complaint alleged that Smart falsely represented to investors, including senior citizens, that he was providing a conservative, liquid investment opportunity. Instead, according to the complaint, Smart was misappropriating investor funds for his own personal use, investing in illiquid and ill-fated real estate ventures, and using proceeds from new investors to make payments to earlier investors.

On the day this action was filed, the Court granted the SEC’s motion for a temporary restraining order, asset freeze, and other preliminary relief. Subsequently, on August 21, 2009, the Court granted the SEC’s motion for a preliminary injunction against the defendants.

After completion of discovery in this case, the parties moved for summary judgment. In granting the SEC’s motion for summary judgment and entering final judgment, the Court found that Smart and his company misappropriated over $2.05 million from investors through a “systematic program of deception and fraud.” The Court found that Smart targeted elderly investors and that he falsely represented that he would place investor funds in safe, principal guaranteed investments. Instead, the Court found, Smart used investor money to pay personal expenses, to invest in risky real estate ventures and hard money loans, and to pay purported “dividends” to other investors.

The Court’s final judgment against Smart and Smart Assets permanently enjoins the defendants from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5, and orders defendants to pay $2,059,077 in disgorgement, $597,426 in prejudgment interest, and a $2,059,077 civil penalty."

SEC CHARGES AIC INC OF PONZI SCHEME INVOLVING THE ELDERLY

Anyone with elderly parents has to worry that they might become a victim of a financial fraudster. This is especially so because the elderly who have any savings at all, often receive unsolicited phone calls, e-mails and, land mail from people purporting to be from their bank, stock broker, insurance company etc. The following case is an excerpt from the sec web site. In it the SEC is alleging that a financial services company and others had set up a Ponzi scheme with many of the victims being the elderly:

April 18, 2011
“The Securities and Exchange Commission announced today that it filed a civil action in the United States District Court for the Eastern District of Tennessee against AIC, Inc., a financial services holding company for three broker-dealers and an investment adviser based in Richmond, Virginia, and its President and CEO, Nicholas D. Skaltsounis. The Complaint alleges that Skaltsounis devised and orchestrated an offering fraud and Ponzi scheme by offering and selling more than $7.7 million in AIC promissory notes and stock. Also named in the Complaint are AIC’s subsidiary, Community Bankers Securities, LLC (“CB Securities”), a broker-dealer, along with associated stockbrokers John B. Guyette, of Greeley, Colorado, and John R. Graves, of Pensacola, Florida, who was also an investment adviser.

The Complaint alleges that, from at least January 2006 through November 2009, Skaltsounis, directly and through registered representatives associated with CB Securities, including Guyette and Graves, fraudulently offered and sold AIC promissory notes and stock to at least 74 investors in at least 14 states, many of whom were elderly, unsophisticated brokerage customers of CB Securities. Skaltsounis, Guyette, and Graves misrepresented and omitted material information to investors relating to, among other things, the safety and risk associated with the investments, the rates of return on the investments, and how AIC would use the proceeds of the investments.

The Complaint also alleges that AIC promised to pay interest and dividends ranging from 9 to 12.5 percent on the promissory notes and stock knowing that it did not have the ability to pay those returns. AIC and its subsidiaries were never profitable. AIC earned de minimis revenue and its subsidiaries did not earn sufficient revenue to meet its expenses. Skaltsounis used the money raised from new investors to pay back principal and returns to existing investors in the nature of a Ponzi scheme. By early December 2009, Skaltsounis’ scheme collapsed when he could no longer solicit investments and recruit new investors to pay back existing investors.

The Commission seeks permanent injunctions and civil penalties against Skaltsounis, AIC, CB Securities, Guyette, and Graves for violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission also charged Graves with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Commission also seeks disgorgement plus prejudgment interest against Skaltsounis, AIC, CB Securities, and Guyette. In addition, the Commission has charged AIC subsidiaries, Allied Beacon Partners, Inc. (f/k/a Waterford Investor Services, Inc.), Advent Securities, Inc., and CBS Advisors, LLC, as relief defendants seeking disgorgement of funds received from the fraudulent scheme.”

PONZI SCHEMER GOES TO PRISON

The following case an excerpt from the SEC web site:

“May 12 , 2011
COURT ENTERS JUDGMENT OF PERMANENT INJUNCTION AGAINST LUIS FELIPE PEREZ AND THE COMMISSION DISMISSES ITS MONEY CLAIMS AGAINST PEREZ IN LIGHT OF HIS 10-YEAR PRISON SENTENCE AND $14 MILLION RESTITUTION ORDERS IN PARALLEL CRIMINAL ACTION
SEC v. Luis Felipe Perez, Case No. 1:10-CV-21804-Martinez/McAliley (S.D. Fla.)
The Commission announced that on May 9, 2011, the Honorable Jose E. Martinez, United States District Court Judge for the Southern District of Florida, entered judgment of permanent injunction against Luis Felipe Perez. Perez consented to the entry of an injunction against future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the Commission dismissed its claims for disgorgement, prejudgment interest, and a civil penalty against Perez based on his criminal sentences and restitution orders in Case Nos. 10-20584-CR and 10-20411-CR before the Southern District of Florida.
On June 2, 2010, the Commission filed its complaint against Perez alleging that he orchestrated a $40 million Ponzi scheme with funds primarily raised from investors in the Miami Hispanic community to purportedly support jewelry businesses and pawn shops.”

ONLINE PAYDAY LENDER PONZI SCHEME ALLEGED IN UTAH

The following is a case brought by the SEC which alleges fraud by a Utah pay day firm. The commingled funds of investors and the company seemed to have been used to set up a Ponzi scheme. The following is an excerpt from the SEC web site:

“Washington, D.C., March 28, 2011 – The Securities and Exchange Commission today announced that it has obtained a court order freezing the assets of two online payday loan companies and their owner charged with perpetrating a $47 million offering fraud and Ponzi scheme.
The SEC alleges that John Scott Clark of Hyde Park, Utah, promised investors astronomical annual returns of 80 percent on their investments in his companies – Impact Cash LLC and Impact Payment Systems LLC. Investors were told their money would be kept in separate bank accounts and used to fund payday loans and other aspects of the companies’ operations. However, Clark instead commingled investor funds into a single pool and used them to make unauthorized investments, pay fictitious profits to earlier investors, and finance his own lavish lifestyle.

“Investors were promised extraordinary returns while Clark was actually diverting their money to make such extraordinary personal purchases as a fully restored classic 1963 Corvette Stingray,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “Clark recruited new investors through referrals from earlier investors who thought the Ponzi payments they received were actual returns on their investments and sought to share the lucrative opportunity with family and business associates.”
The SEC alleges that in addition to buying multiple expensive cars and snowmobiles, Clark stole investor funds to purchase a home theater, bronze statues and other art for himself.
According to the SEC’s complaint filed in U.S. District Court for the District of Utah, Clark lured at least 120 investors into his scheme. Besides word-of-mouth referrals from earlier investors, Clark also recruited investors by attending trade shows in various states, attending payday loan conferences, and paying salespeople to locate potential investors to meet with Clark. Clark paid one salesperson between more than a half-million dollars over a multi-year period to locate potential investors and attend payday loan conferences and trade shows.
The SEC alleges that from at least March 2006 to September 2010, Clark and the Impact companies raised funds from investors for the stated purposes of funding payday loans, purchasing lists of leads for payday loan customers, and paying Impact’s operating expenses. Impact did not distribute a private placement memorandum or any other document disclosing the nature of the investment or the risks involved to investors. The SEC’s complaint charges Impact and Clark with fraudulently selling unregistered securities.
According to the SEC’s complaint, Clark routinely altered investor account statements provided to him by Impact’s accounting department to create artificially high annual rates of return. The altered account statements with purported profits were then sent to investors. Account statements to customers showed annualized returns varying from 30 percent to more than 200 percent.
In addition to the asset freeze approved late Friday, the court has appointed a receiver to preserve and marshal assets for the benefit of investors. The SEC’s complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and financial penalties from Impact and Clark.”

When people are living well beyond their means that usually means one of two things: either they are borrowing their way into bankruptcy or they are stealing the money in some way.

THE PONZI REAL ESTATE FUND

Enron was never a rouge company that cheated their employees, investors and clients out of their money. Stealing money from employees, investors and clients is the way with many businesses today. For the most part government does nothing to improve this situation. The SEC is one of the few institutions that are currently investigating some of the fraudsters in America but, they have no power to prosecute the fraudsters and recommend anything except civil penalties. The power of the SEC is limited to fines and disgorgements. Even those committing Ponzi schemes, which are one of the most blatant forms of fraud, are often placed under no personal jeopardy of losing their freedom even if they admit to the crime.

Ponzi schemes are perpetrated in their most basic form by paying previous investors money using funds provided by new investors. As long as there is more money coming in from new investors than going out to old investors the Ponzi scheme can continue. The following is just another tale of a Ponzi scheme that was discovered. The next several paragraphs are taken from the SEC website:


“Washington, D.C., Sept. 21, 2010 — The Securities and Exchange Commission today charged a Minneapolis-based attorney and two San Francisco-area promoters with defrauding investors in a real estate lending fund by concealing the financial collapse of the fund's sole business partner.
The SEC alleges that Todd A. Ducksonn attorney who resides in Prior Lake, Minn., and Michael W. Bozora and Timothy R. Redpath, who reside in Marin County, Calif., raised more than $21 million from investors in the Capital Solutions Monthly Income Fund after the fund's sole business partner defaulted on its obligations to the fund. The SEC alleges that after this May 2008 default, the fund - whose sole business was to make real estate loans to a single borrower - had no meaningful income and was using new investor funds to pay existing investors.

"The fund's real estate lending strategy failed due to the collapse of the fund's sole borrower. Instead of disclosing this fact, Bozora, Redpath, and Duckson falsely claimed that the fund was positioned to profit from the U.S. real estate downturn," said Robert J. Burson, Senior Associate Regional Director of the SEC's Chicago Regional Office. "Investors were entitled to know true facts rather than the misleading positive spin that Bozora, Redpath, and Duckson provided."

The SEC alleges that after the default, Duckson, Bozora, and Redpath told investors that the fund was poised to take advantage of attractive lending opportunities provided by the collapse in the U.S. credit and real estate markets, when in fact the fund' s business strategy had failed.

According to the SEC's complaint filed in federal court in Minneapolis, Bozora and Redpath launched the fund in 2004 and, through August 2009, raised approximately $74 million from approximately 450 investors from across the U.S. After the May 2008 default by the fund's sole borrower, the fund foreclosed on the borrower's real estate projects. The SEC alleges that in late 2008, Bozora and Redpath asked Duckson, who was acting as the fund's outside counsel, to take over managing the fund. The SEC alleges that Duckson then began managing the fund while Bozora and Redpath continued to raise money from new investors. The SEC alleges that Bozora, Redpath, and Duckson failed to disclose the default and foreclosure to investors for several months.

The SEC alleges that Bozora, Redpath, and Duckson eventually made some disclosure of the default and foreclosure, but they minimized the impact of these events and continued to misleadingly promote the fund's ability to make new loans. In fact, the fund's ability to make new loans was limited. After the default and foreclosure, the fund was required to use most of its assets to maintain its existing real estate portfolio acquired through the foreclosure and to pay existing investors.

The SEC's complaint also charges True North Finance Corporation, a Minneapolis real estate lending company that merged with the fund in 2009, and True North's Chief Financial Officer Owen Mark Williams with accounting fraud. The SEC alleges that in 2008 and 2009, Williams caused True North to overstate its revenues by as much as 99 percent. The SEC alleges that True North improperly recognized revenue on interest from borrowers who were not paying True North and were in poor financial condition. The SEC further alleges that True North's recognition of revenue was contrary to its own revenue recognition policy, which stated that it would not recognize revenue where payment of interest was 90 days past due.

The SEC is seeking permanent injunctions, disgorgement, prejudgment interest and civil penalties against all of the defendants, and officer-director bars against Bozora, Redpath, Duckson, and Williams."

Perhaps these fraudsters might be bared from doing bad things in the future but, the future is a mysterious place. Today my own country is replete with criminals that make very large incomes based on bribery and fraudulant operations like Ponzi schemes.

ACCOUNTANTS CREATE A PONZI SCHEME: MORE BUSINESS AS USUSAL

Thanks to our complex tax and legal system, accounting is one of those few remaining fields in America in which there are still good paying jobs. To become an accountant it takes years of study at an accredited college plus years of on the job training not to mention the tests that must be passed to become a certified public accountant or CPA.

In the following release of information by the SEC two accountants developed a scheme to sell fake securities in a gas pipeline to the public. These investment securities paid a 10% rate of return which of course is generally not available during a recession. On the other hand, many pipelines do pay a dividend in excess of 5% to holders of securities in what are known as Master Limited Partnerships or MLP’s. I currently own a few shares in an MLP that pays about 6.5 %. An MLP is different than a regular company in that the MLP is set up to return much of the revenue to investors rather than to keep most of the revenue for retained earnings for future expansion and sales promotions. There are also differences in how taxes are paid on an MLP for which you must consult an accountant to learn such details.

In the following case the accountants allegedly used a gas pipeline that had not been used for years as the basis of setting up a Ponzi scheme to pay old investors a large dividend based upon selling more securities to new suckers (investors). Please read the following excerpt from the SEC online site if you wish to know the details of this scheme:

“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged two certified public accountants with fraud and is seeking an emergency court order to freeze their assets after they sold phony securities to investors and then stole the money for personal use.
The SEC alleges that Laurence M. Brown and Ronald Mangini, who reside in Westchester County, N.Y., took the name of an inoperative company owned by a client of their accounting firm and sold investors fake promissory notes and common stock in what they purported to be a profitable company operating a gas pipeline in Tennessee. They falsely touted themselves as senior officers of the company, which they proclaimed to have a captive market in its area and a stable minimum rate of production with quality gas that could be sold well above market prices. What Brown and Mangini concealed from investors was that the pipeline had been inoperative for more than a decade. Behind the scenes, Brown and Mangini were instead operating a Ponzi scheme and diverting investor funds into their personal bank accounts and those of family members.

"Brown and Mangini not only deceived investors into making investments in a pipeline that was not producing any gas at all, but they stole the identity of a company owned by a client in order to do it," said George Canellos, Director of the SEC's New York Regional Office. "Brown and Mangini also victimized and betrayed the trust of other accounting clients who invested in their scheme."

According to the SEC's complaint, filed in federal court in Manhattan, Brown and Mangini began selling common stock and promissory notes of a company called Infinity Reserves-Tennessee Inc. as early as April 2008. They peddled the phony securities to clients of their accounting practice and other investors. Without authorization from the client who solely owned Infinity Reserves, Brown and Mangini used the company name to sell the stock and notes. Brown and Mangini falsely represented themselves as senior officers of Infinity Reserves with authority to sell the securities, calling themselves "president" and "secretary-treasurer" respectively. The phony notes promised investors a 10 percent annual return that would be paid semiannually on the principal amount of the investment.

According to the SEC's complaint, Infinity Reserves owns one principal asset — a gas gathering and trunk pipeline system located in Tennessee that it has not operated for more than a decade. The offering document that Brown and Mangini provided investors falsely portrays the investment as interests in an active system with an interconnect into the Duke Energy main east-west trunk line. The offering document falsely explained supposed merits of the investment and made various untrue statements while assuring investors that Infinity Reserves enjoyed a captive market in its area, a stable minimum rate of production, and quality gas that could be sold at a 20 percent premium over market prices. The offering document did not tell investors that the pipeline had been inoperative for years and thus in reality had no market for its gas and no minimum rate of production.

The SEC alleges that Brown and Mangini illegally obtained more than $2.1 million from investors. In classic Ponzi scheme fashion, they returned approximately $136,000 to certain investors in the form of interest payments. At least $1.6 million of investor funds were transferred to personal bank accounts controlled by Brown, Mangini, or family members including Mangini's wife and Browns's wife and daughter. The family members are named as relief defendants in the SEC's complaint for the purposes of recovering investor funds in their possession.

The SEC's complaint charges Brown and Mangini with violations of the anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. In addition to the emergency relief, the SEC's complaint seeks permanent injunctions, disgorgement of the defendants' and relief defendants' ill-gotten gains plus prejudgment interest, and financial penalties from the defendants.

In addition to the SEC's charges, the U.S. Attorney's Office for the Southern District of New York today brought criminal charges against Laurence Brown concerning the same illegal activities alleged in the SEC's complaint.

Brown is a repeat securities law offender. In 1994, the SEC charged Brown with, among other things, violations of the antifraud provisions of the federal securities laws in connection with another offering fraud. Brown was enjoined from future violations of those provisions and barred from associating with any broker, dealer, government securities broker or dealer, investment company, investment adviser, or municipal securities dealer.”

I give two thumbs up to the SEC and to the U.S. Attorney’s office for the Southern District of New York. The SEC can only recover stolen money and implement fines but, there are others in government who can make stealing peoples life savings a real crime. But, of course there are many politicians who would disagree with what they call “making a business practice a crime” or “criminalizing business”.

GETTING SEMINAR PONZIED BY FAKE ESTATE PLANNERS

Below is an excerpt from the SEC web site which outlines an alleged Ponzi Scheme committed by some very smooth operators. This story has the real smell of a con complete wining and dining potential victims and with lying about investments and even about having an MBA. Please read the following excerpt regarding the Estate Planning Seminar Con:

"SEC Halts Ponzi Scheme Preying on Retirees Attending Estate Planning Seminars
FOR IMMEDIATE RELEASE
2010-37
Washington, D.C., March 10, 2010 — The Securities and Exchange Commission has obtained an emergency court order to shut down a Ponzi scheme targeting retirees in California and Illinois by inviting them to estate planning seminars and later coaxing them to buy promissory notes for purported Turkish investments.

The SEC alleges that USA Retirement Management Services (USARMS) and managing partners Francois E. Durmaz and Robert C. Pribilski mass-mailed promotional materials to prospective investors and invited them to estate planning seminars held at country clubs and banquet halls. They gained retirees' confidence in follow-up meetings and portrayed themselves as educated and experienced in foreign investments specifically tailored to the needs of seniors. Durmaz and Pribilski then pitched what they represented as safe, guaranteed investments in "Turkish Eurobonds" through the purchase of USARMS promissory notes that would earn annual returns between 8 and 11 percent.

The SEC alleges that USARMS raised at least $20 million from more than 120 investors, but did not actually invest the money in Turkish Eurobonds as promised. Instead, returns were paid to earlier investors with funds received from new investors in Ponzi-like fashion. Durmaz and Pribilski further misused investor funds to finance their other businesses and purchase such things as luxury automobiles, homes, vacations, and web-based pornography. They also wired investor money into bank accounts belonging to individuals living in Turkey who are named as relief defendants in the SEC's case.

"Durmaz and Pribilski used estate planning seminars as a means to elicit investor trust and lure retirees into investing in a classic Ponzi scheme," said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office.

USARMS and its securities are not registered with the SEC. USARMS is incorporated in Illinois and has offices in Los Angeles; Irvine, Calif.; and Oakbrook Terrace, Ill. Durmaz resides in Los Angeles and Streamwood, Ill., and Pribilski resides in Lisle, Ill. Neither of them is registered with the SEC in any capacity nor do they hold any securities licenses.

According to the SEC's complaint, filed on March 9 in U.S. District Court for the Central District of California, Durmaz and other USARMS employees provided seminar attendees a general presentation on estate planning and later sent them a letter inviting them to their offices for a personal consultation "to explain the amazing steps you must take when you set up a Living Trust or Will."

The SEC alleges that once seminar attendees went to their estate planning appointments, Durmaz examined their personal financial information and told prospective investors that they had issued hundreds of millions of dollars in USARMS promissory notes. In addition, Durmaz falsely claimed that he held a Masters of Business Administration (MBA) and was a Certified Senior Advisor (CSA). Thus, prospective investors were led to believe that Durmaz was educated and experienced in investments specifically tailored to the needs of seniors and retirees."

The above allegations of the SEC demonstrates again how widespread fraud exists all over the investment community. Ponzi schemes have been around for generations but, crooks seem to love to use them over and over again.

EXECUTIVES CHARGED WITH ENRICHING CEO WITH PERKS

The following excerpt of information was gathered from the SEC webpage. It shows how easily executives can drain a company of money leaving shareholders, employees and creditors to suffer great losses. Please read the following excerpt:
2010-39
Washington, D.C., March 15, 2010 — The Securities and Exchange Commission today charged three former senior executives and a former director of an Omaha-based database compilation company for their roles in a scheme in which the CEO funneled illegal compensation to himself in the form of perks worth millions of dollars.

The SEC alleges that Vinod Gupta, the former CEO and Chairman of infoUSA Inc. and infoGROUP Inc. (Info), fraudulently used corporate funds to pay almost $9.5 million in personal expenses to support his lavish lifestyle. He additionally caused the company to enter into $9.3 million of undisclosed business transactions between Info and other companies in which he had a personal stake.

The SEC also charged the former chairman of Info's audit committee, Vasant H. Raval, and two of the company's former chief financial officers, Rajnish K. Das and Stormy L. Dean, for enabling Gupta to carry out the scheme.
Gupta stole millions of dollars from Info shareholders by treating the company like it was his personal ATM," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Other corporate officers also abused their positions of trust by looking the other way instead of standing up for investors and bringing the scheme to a halt."

Donald M. Hoerl, Director of the SEC's Denver Regional Office, added, "Officers and directors must ensure that shareholders receive accurate and complete disclosure of all compensation paid to executives. Raval, as chairman of the audit committee, neglected these duties and allowed the money to flow to Gupta unbeknownst to investors."

The SEC's complaints, filed in federal district court in Nebraska, allege that from 2003 to 2007, Gupta improperly used corporate funds for more than $3 million worth of personal jet travel for himself, family, and friends to such destinations as South Africa, Italy, and Cancun. He also used investor money to pay $2.8 million in expenses related to his yacht; $1.3 million in personal credit card expenses; and other costs associated with 28 club memberships, 20 automobiles, homes around the country, and three personal life insurance policies. The SEC also alleges that Gupta failed to inform Info's other board members of the material fact that he had purchased shares of an Info acquisition target for his own ill-gotten financial benefit.

The SEC alleges that Raval failed to respond appropriately to various red flags concerning Gupta's expenses and Info's related party transactions with Gupta's other entities. Two Info internal auditors raised concerns to Raval that Gupta was submitting requests for reimbursement of personal expenses, yet Raval failed to take meaningful action to further investigate the matter and he omitted critical facts in a report to the board concerning Gupta's expenses.

The SEC further alleges that Das and Dean allowed Gupta to support his lavish lifestyle by rubber-stamping hundreds of his expense reimbursement requests. Das and Dean approved Gupta's expense reimbursement requests despite the fact that the requests lacked sufficient explanation of business purpose and supporting documentation, even in the face of concerns raised by several Info employees. Das and Dean also signed management representation letters to Info's outside auditor falsely representing that all related party transactions with Gupta's entities had been properly recorded and disclosed in Info's financial statements.

Gupta, Raval, and Info agreed to settle the SEC's charges without admitting or denying the allegations against them.

Gupta agreed to pay disgorgement of $4,045,000, prejudgment interest of $1,145,400, and a penalty of $2,240,700. He consented to an order barring him from serving as an officer or director of a public company, and placing restrictions on the voting of his Info common stock. Gupta consented to a final judgment enjoining him from violations of Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 and from aiding and abetting Info's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1, 13a-13, and 12b-20.

Raval agreed to pay a $50,000 penalty and consented to an order barring him from serving as an officer or director of a public company for five years. He also consented to a final judgment enjoining him from violations of Exchange Act Sections 10(b) and 14(a) and Rules 10b-5, 14a-3, and 14a-9, and from aiding and abetting Info's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20 and 13a-1.

Info consented to the issuance of an Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order without admitting or denying any of the findings in the SEC's order. The Order orders Info to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 14a-3, and 14a-9.

The SEC's case against Das and Dean is ongoing. They are charged with violating Exchange Act Sections 10(b), 13(b)(5), and 14(a), and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9, and for aiding and abetting Info's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Rules 12b-20 and 13a-1. Additionally, Das is charged with violating Exchange Act Rule 13a-13. The Commission's complaint seeks permanent injunctions, financial penalties, prejudgment interest, and an officer and director bar against both defendants.

http://www.sec.gov/news/press/2010/2010-39.htm

SEC GETS TOUGH ON WALL STREET FRAUDSTERS

Following is the speech by the new Securities and Exchange Commission Chairman, Mary Schapiro. She wants to get tough on Wall Street. She will have a lot law makers who are in the pocket of Wall Street who, will fight her at every turn. An edited copy of her speech is included in this blog because unlike most Washington speeches, her speech is not too boring and is full of needed information. Because this is a speech to SEC employees, part of this speech was removed to better highlight the changes she wants to make to at least get some justice (revenge) for Americans who are being so devastated by trillionaires on Wall Street and their government stooges. This speech was lifted from the SEC web site where the speech can be read in its entirety:

Speech by SEC Chairman:
Address to Practising Law Institute's "SEC Speaks in 2009" Program
by
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
February 6, 2009

I have been back at the Commission for less than two weeks, after a nearly 15-year hiatus. I am extremely proud to return to the agency that I know is so important to investors and our economy.

We must take our cues from the current environment. Trillions of dollars of wealth have been lost. Our economy is in recession. And investor confidence has been badly shaken. Middle-class families who were relying on that nest egg to send a son or daughter to college or for a secure retirement now don't know where to turn.

It is precisely during times like these that we need the SEC as the "investor's advocate." An SEC with the staff, the will, and the resources necessary to move with great urgency to:bring transparency and accountability to all corners of the marketplace,vigorously prosecute those who have broken the law and cheated investors, andmodernize our country's regulatory system to match the realities of today's global, interdependent markets.

As the current market crisis has unfolded, the SEC, along with the entire regulatory structure, has been put under a microscope. This crisis has exposed weaknesses and gaps in the regulatory system and areas where the SEC particularly must re-commit its resources and talents in order to restore investor confidence. We must help to restore that lost confidence — that is our challenge.

Success in this endeavor demands that we as an organization engage in serious self-evaluation. That means taking an honest look at everything we are doing and how we do it. I know there is so much being done right, but there is also much that can be done better. I learned long ago that one of the SEC's greatest strengths has been its ability to adapt to change, while never forgetting that it is the American people we are here to serve.

The challenges we face are historic. But they're not insurmountable. It will take determination, hard work, toughness, and above all, an unrelenting will to stand up for investors.

But make no mistake. Regulation is a two-way street. The "regulated" need not wait for a regulator's reforms, though they will come. At a time when investors are appalled at the ways of Wall Street, it is there that change must begin. A strong and reinvigorated SEC will be on the beat like never before to catch wrongdoers. But there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place. The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world.

There is much we can do to accelerate that process, including giving shareholders a greater say on who serves on corporate boards, and how company executives are paid.

There is much to be accomplished, but this morning I'm here to describe how we will approach the challenges we face, and the actions we've already taken.

At my confirmation hearing, I emphasized the need for the SEC to move with the sense of urgency that investors demand — to be willing and able to move quickly, precisely, and decisively to take actions that will restore investor trust and confidence in our financial markets.

Investors are looking to the SEC to protect them. To do that well, we have to act swiftly to respond to market events, and that means we must be willing to change the way we do business.

Those who break the law and take advantage of investors need to know that they will face an unrelenting law enforcement agency in the SEC — an agency that will pursue them until the full force of the law is the sure, certain, and sole reward for their wrongdoing. No one should be heard credibly to question whether enforcement is a priority at the SEC. It is, and always will remain, a foundation of our mission.

As the first SEC Chairman, Joseph Kennedy, told the nation 75 years ago in explaining the agency's role, "The Commission will make war without quarter on any who sell securities by fraud or misrepresentation."

As a first, but significant, step in empowering our Enforcement staff, I am this week taking action to end the Commission's two-year "penalty pilot" experiment, which had required the Enforcement staff to obtain a special set of approvals from the Commission in cases involving civil monetary penalties for public companies as punishment for securities fraud.

In speaking to our Enforcement staff, I've been told that these special procedures have introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed.

At a time when the SEC needs to be deterring corporate wrongdoing, the "penalty pilot" sends the wrong message. The action I am taking to end the penalty pilot is designed to expedite the Commission's enforcement efforts to ensure that justice is swiftly served to those public companies who commit serious acts of securities fraud.

Another immediate change I am putting in place to bolster the SEC's enforcement program is to provide for more rapid approval of formal orders of investigation — the permission slips given out by the Commission that allow SEC staff to use the power of subpoenas to compel witness testimony and the production of documents. When I was a Commissioner, formal orders were routinely reviewed and approved within a couple of days by written approval of the Commission or by "duty officer" — a single Commissioner acting promptly and on behalf of the entire Commission.

Today, however, many formal orders of investigation are made subject to full review at a meeting of all five Commissioners, necessitating that they be placed on the calendar sometimes weeks in advance. In investigations that require use of subpoena power, time is always of the essence, and every additional day of delay can be costly. To ensure that subpoena power is available to SEC staff when needed, I've given direction for the agency to return to the prior policy of timely approval of formal orders by seriatim approval or where appropriate, by a single Commissioner acting as duty officer.

In addition to these immediate actions, I have also spent much of my first week and a half on the job in meetings with my fellow Commissioners and the agency's senior staff to discuss other ways in which we can reinvigorate the SEC's enforcement program, including improving the handling of tips and whistleblower complaints and focusing on areas where investors are most at risk. And I anticipate that we'll be making further improvements in the coming weeks and months to ensure swift and vigorous enforcement.

In deciding upon regulatory priorities, it is vital that the SEC re-engage with the people we serve: investors. The investor community — from the largest pension fund to the family who has saved in their 401(k) or 529 plan — needs to feel that they have someone on their side — that they can go to the SEC to seek redress, or to have their opinions heard.

To that end, we will form an Investor Advisory Committee to ensure that the Commission hears first hand about the issues most concerning to investors.

The crisis facing our capital markets will require aggressive and timely action to restore investor trust and confidence. To this end, allow me to highlight a few of the initiatives that I hope to pursue as priorities:

Improving the quality of credit ratings by addressing the inherent conflicts of interest credit rating agencies face as a result of their compensation models and limiting the impact of credit ratings on capital requirements of regulated financial institutions.

Reducing systemic risk to investors and markets by promoting — and regulating appropriately — centralized clearinghouses for credit default swaps.

Strengthening risk-based oversight of broker-dealers and investment advisers.

Improving the quality of audits for nonpublic broker-dealers and promoting the safe and sound custody of customer assets by any broker-dealer or investment adviser.

Seventy-five years after the SEC was founded, the Commission finds itself in a situation where, once again, it must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.

The American people want and expect us to update the regulatory system that has failed them — and to prevent the kinds of abuses that have contributed to the economic crisis we now face.

Even as we pursue these regulatory priorities, the SEC will also be working closely with Congress to ensure that legislative restructuring of our financial regulatory system will preserve and strengthen our commitment to transparency, accountability, disclosure, and most of all, investor protection.

I am under no illusion that this will be an easy job. There is a lot of work to be done — quickly and diligently — in the months ahead. I look forward to this challenge, to helping the millions of investors who rely on strong markets and a strong economy, and to working with the professionals at the SEC.

The above speech sounds like we will have a great improvment in the confidnece the American people feel for their government.




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