The SEC alleges widespread fraud in microcap companies and has suspended trading in 17 firms. The following is an excerpt from the SEC website:
Washington, D.C., June 7, 2011 — The Securities and Exchange Commission today suspended trading in 17 microcap stocks because of questions about the adequacy and accuracy of publicly available information about the companies, which trade in the over-the-counter (OTC) market.
The trading suspensions spring from a joint effort by SEC regional offices in Los Angeles, Miami, New York, and Philadelphia; its Office of Market Intelligence; and its new Microcap Fraud Working Group, which uses a coordinated, proactive approach to detecting and deterring fraud involving microcap securities. The trading suspensions follow a similar suspension last week against Uniontown Energy Inc. (UTOG), based in Henderson, Nev., and Vancouver, Canada.
“They may be called ‘penny stocks,’ but victims of microcap fraud can suffer devastating losses,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The SEC’s new Microcap Fraud Working Group is targeting the insiders and promoters, as well as the transfer agents, attorneys, auditors, broker-dealers, and other “gatekeepers” who flourish in the shadows of this less-than-transparent market.”
George Canellos, Director of the SEC’s New York Regional Office, added, “The investing public does not have accurate or adequate information about these securities to use in making informed investment decisions. Nonetheless, stock-touting websites, twitter users, and often anonymous individuals posting to Internet message boards have hyped many of these companies, and these promotional campaigns have been followed by spikes in share price and trading volume.”
The 17 companies and their ticker symbols are:
American Pacific Rim Commerce Group (APRM), based in Citra, Fla.
Anywhere MD, Inc. (ANWM), based in Altascadero, Calif.
Calypso Wireless Inc. (CLYW), based in Houston.
Cascadia Investments, Inc. (CDIV), based in Tacoma, Wash.
CytoGenix Inc. (CYGX), based in Houston.
Emerging Healthcare Solutions Inc. (EHSI), based in Houston.
Evolution Solar Corp. (EVSO), based in The Woodlands, Texas.
Global Resource Corp. (GBRC), based in Morrisville, N.C.
Go Solar USA Inc. (GSLO), based in New Orleans.
Kore Nutrition Inc. (KORE), based in Henderson, Nev.
Laidlaw Energy Group Inc. (LLEG), based in New York City.
Mind Technologies Inc. (METK), based in Cardiff, Calif.
Montvale Technologies Inc. (IVVI), based in Montvale, N.J.
MSGI Security Solutions Inc. (MSGI), based in New York City.
Prime Star Group Inc. (PSGI), based in Las Vegas, Nev.
Solar Park Initiatives Inc. (SOPV), based in Ponte Verde Beach, Fla.
United States Oil & Gas Corp. (USOG), based in Austin, Texas.
Some examples of the promotions are as follows:
Calypso Wireless Inc. has not filed periodic reports since February 2008, when it filed a report for the period ending Sept. 30, 2007. Despite that, the company’s share price rose from 4 cents on Sept. 21, 2010 to an intra-day high of 17 cents on Sept. 24, 2010. Over the same period, trading volume jumped to nearly six million shares, up from 376,000 shares. On Sept. 24, 2010, a stock-promoting website encouraged investors to continue buying Calypso Wireless shares (PINK: CLYW, CLYW message board), stating, in part, “Over the week, CLYW stock has been running wild … This CLYW stock rush happened just like that, on no company’s news and on old, well known SEC filings, done for the investment community.”
Shares in Kore Nutrition Inc. began to spike on Aug. 31, 2010, following the release of a company-paid research report setting a target price of $10.50. Moreover, on Sept. 1 and 8, 2010, the company issued press releases announcing new distribution agreements to market its energy drinks. The research report and distribution agreement claims were reiterated on numerous stock-promotion websites, touting Kore Nutrition as a “winner.” Kore Nutrition’s quarterly report for the period ending Sept. 30, 2010, filed with the SEC on Nov. 15, 2010, made no mention of the announced distribution agreements.
Montvale Technologies Inc. announced the dissolution of the company on Feb. 12, 2010, and last filed financial statements with the SEC for the third quarter of 2009. The company’s shares have nonetheless continued to trade, and to be promoted. On Dec. 22, 2010, a website recommended a “closer look” at Montvale Technologies, claiming it “has the potential to do very well in the short term.” That day, the share price rose 75 percent from 12 cents to 20 cents, and trading volume soared 500 percent over the prior day.
The Microcap Fraud Working Group is a joint initiative of the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations. The Working Group is pursuing a strategic approach to combating microcap fraud by focusing on recidivists and insiders, and on the attorneys, auditors, broker-dealers, transfer agents and other gatekeepers that facilitate a large volume of the fraud in this sector. The Working Group is comprised of staff from the SEC’s headquarters in Washington D.C., each of its 11 regional offices, and from the Office of Market Intelligence, Division of Corporation Finance, Division of Risk, Strategy, and Financial Innovation, Office of General Counsel, Division of Trading and Markets, and the Division of Investment Management.”
It is great to see how the SEC is now able to coordinate all its different pieces to go after fraudsters. The microcap world of securities has always been a mystery to me. Perhaps some investors have the knowledge and resources to navigate through the world of microcaps and make a profit. For most of us because microcaps are so had to get real information on, investing in microcap securities often feels like gambling. And, whenever someone offers up an investment to make gigantic returns in a hurry it seems that in every case some sort of fraud is being perpetrated.
This is a photo of the National Register of Historic Places listing with reference number 7000063
Thursday, June 9, 2011
Wednesday, June 8, 2011
SEC ALLEGES NAME DROPPING FOR PROFIT FRAUD
Using the names of the rich and famous in order to get people to invest in projects or securities is nothing new. Certainly Donald Trump is perhaps the most famous of those dropped names however, others like Ted Turner and Paul Allen would be names to arouse most peoples interest when they are looking at an investment. However,just dropping the names as investors and these celebrities actually being investors is not the same thing in the fraudster world. The SEC has alleged this practice by two individuals. The following excerpt is from the SEC website:
“The Securities and Exchange Commission today charged Ronald Abernathy and Arthur Weiss with orchestrating a $560,000 securities fraud through their company, Sovereign International Group, LLC (“SIG”).
The SEC alleges that Abernathy and Weiss fraudulently obtained investor deposits by telling investors that they would use those funds to trade securities. According to the complaint, they used no investor funds to trade securities. Instead, Abernathy and Weiss misappropriated investor funds for their own personal use. Several investors have demanded that Abernathy and Weiss return their money. With the exception of a limited number of investors who received Ponzi-like payments, Abernathy and Weiss have failed to repay these investors. Instead, they have lulled the investors with various excuses for the delay and by promising repayment in the near future.
According to the SEC’s complaint filed in the Western District of Michigan, Abernathy and Weiss told investors that funds invested by SIG were earning a profit. The SEC further alleges that Abernathy and Weiss did not invest any of those funds and none of the investors earned any actual profits. Additionally, at different times during the scheme, Abernathy and Weiss have told investors that SIG is engaged in the trading of securities, receiving fees in connection with the monetization of multi-million and multi-billion dollar financial instruments, brokering the sale of fine art and, most recently, brokering the sale of and/or refining precious metal ore concentrate. They also falsely told prospective investors that Abernathy was appointed “the director of a highly exclusive group of investors who are purchasing a Major League Baseball Franchise” and that this group of investors includes billionaires Paul Allen (co-founder of Microsoft) and Ted Turner (founder of CNN). Despite their repeated promises of imminent multimillion dollar payouts to SIG from these purported business ventures, SIG, in its entire existence, has not earned any profits, realized any returns or generated any revenue from any business operations. SIG’s only income has consisted of money received from investors.
The SEC’s complaint charges Abernathy, Weiss and SIG with securities fraud in violation 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. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and the imposition of monetary penalties against all defendants.”
“The Securities and Exchange Commission today charged Ronald Abernathy and Arthur Weiss with orchestrating a $560,000 securities fraud through their company, Sovereign International Group, LLC (“SIG”).
The SEC alleges that Abernathy and Weiss fraudulently obtained investor deposits by telling investors that they would use those funds to trade securities. According to the complaint, they used no investor funds to trade securities. Instead, Abernathy and Weiss misappropriated investor funds for their own personal use. Several investors have demanded that Abernathy and Weiss return their money. With the exception of a limited number of investors who received Ponzi-like payments, Abernathy and Weiss have failed to repay these investors. Instead, they have lulled the investors with various excuses for the delay and by promising repayment in the near future.
According to the SEC’s complaint filed in the Western District of Michigan, Abernathy and Weiss told investors that funds invested by SIG were earning a profit. The SEC further alleges that Abernathy and Weiss did not invest any of those funds and none of the investors earned any actual profits. Additionally, at different times during the scheme, Abernathy and Weiss have told investors that SIG is engaged in the trading of securities, receiving fees in connection with the monetization of multi-million and multi-billion dollar financial instruments, brokering the sale of fine art and, most recently, brokering the sale of and/or refining precious metal ore concentrate. They also falsely told prospective investors that Abernathy was appointed “the director of a highly exclusive group of investors who are purchasing a Major League Baseball Franchise” and that this group of investors includes billionaires Paul Allen (co-founder of Microsoft) and Ted Turner (founder of CNN). Despite their repeated promises of imminent multimillion dollar payouts to SIG from these purported business ventures, SIG, in its entire existence, has not earned any profits, realized any returns or generated any revenue from any business operations. SIG’s only income has consisted of money received from investors.
The SEC’s complaint charges Abernathy, Weiss and SIG with securities fraud in violation 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. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and the imposition of monetary penalties against all defendants.”
SEC ALLEGES FOUR FIVE LLC COMMITTED SECURITIES FRAUD
When a company selling investments touts “risk-free” and “triple digit returns” then most likely the investments are not legitimate. Most fraudsters tout that their way of making fantastic returns is unique and unknown to most people and that is why the returns are so compelling for potential investors. Of course it does not make since that only people working at a certain company know of some secret way to trade markets that always leads to a huge rate of return. Common since dictates that most money managers that have been in the business 20 or 30 years have seen every system legitimate and illegitimate for making money. As such, over long periods of time nothing that generates profits escapes their notice. After all, that is what they have been doing for a living over a 20-30 year period. The following excerpt is from the SEC web site and involves a company called Four Five, LLC:
“The United States Securities and Exchange Commission (“Commission”) announced the filing of a civil injunctive action in Atlanta, Georgia on June 2, 2011, alleging that Michael L. Rothenberg (“Rothenberg”) and the company he controlled, Four Five, LLC (“Four Five”) operated a fraudulent “Prime Bank” scheme that violated the antifraud provisions of the federal securities laws.
The Commission’s complaint alleges that between at least February 2010 and March 2010, Rothenberg, through Four Five, used misrepresentations and omissions of material fact to induce investors to participate in a secret and allegedly risk-free trading platform or trading facility. This trading platform or trading facility purportedly involved transactions among international banks that would generate substantial return on a recurring basis. Specifically, Rothenberg represented that the trading platform would produce returns in excess of 300% every fourteen days. Rothenberg and Four Five also represented to investors, both orally and in writing, that the majority of their funds would remain at all times in Rothenberg’s attorney trust account, and that all funds invested, along with the profits, would be returned to the investors at the conclusion of the trades. Rothenberg further represented to the investors that the investment was risk-free because their funds would remain in his attorney trust account. Contrary to Defendants’ representations, a risk-free trading process providing the returns promised by Defendants does not exist. Moreover, contrary to Rothenberg’s representations that investor funds would remain in his attorney trust account, Rothenberg began disbursing investor funds within days of receipt of those funds. Between March 2010 and October 2010, at least $210,000 in investor funds were transferred to a bank account designated for contributions to Rothenberg’s judicial election campaign. Rothenberg used another $190,000 of investor funds for personal expenses. Although Rothenberg ultimately returned approximately $910,000 to investors, Defendants have misappropriated at least $800,000 of investor funds.
In its Complaint, the Commission alleges that Rothenberg and Four Five Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.”
“The United States Securities and Exchange Commission (“Commission”) announced the filing of a civil injunctive action in Atlanta, Georgia on June 2, 2011, alleging that Michael L. Rothenberg (“Rothenberg”) and the company he controlled, Four Five, LLC (“Four Five”) operated a fraudulent “Prime Bank” scheme that violated the antifraud provisions of the federal securities laws.
The Commission’s complaint alleges that between at least February 2010 and March 2010, Rothenberg, through Four Five, used misrepresentations and omissions of material fact to induce investors to participate in a secret and allegedly risk-free trading platform or trading facility. This trading platform or trading facility purportedly involved transactions among international banks that would generate substantial return on a recurring basis. Specifically, Rothenberg represented that the trading platform would produce returns in excess of 300% every fourteen days. Rothenberg and Four Five also represented to investors, both orally and in writing, that the majority of their funds would remain at all times in Rothenberg’s attorney trust account, and that all funds invested, along with the profits, would be returned to the investors at the conclusion of the trades. Rothenberg further represented to the investors that the investment was risk-free because their funds would remain in his attorney trust account. Contrary to Defendants’ representations, a risk-free trading process providing the returns promised by Defendants does not exist. Moreover, contrary to Rothenberg’s representations that investor funds would remain in his attorney trust account, Rothenberg began disbursing investor funds within days of receipt of those funds. Between March 2010 and October 2010, at least $210,000 in investor funds were transferred to a bank account designated for contributions to Rothenberg’s judicial election campaign. Rothenberg used another $190,000 of investor funds for personal expenses. Although Rothenberg ultimately returned approximately $910,000 to investors, Defendants have misappropriated at least $800,000 of investor funds.
In its Complaint, the Commission alleges that Rothenberg and Four Five Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.”
Monday, June 6, 2011
SEC CHARGES ADVISOR WITH FRAUD INVOLVING REAL ESTATE FUNDS
With the extremely low rates that banks pay on CD’s and the government pays on treasuries many investors who saved their money hoping to use their savings to generate income or at least a steady rate of return are often desperate enough to try placing their money into traditionally non-secure investments. In the following case from the SEC web site the SEC alleges that fraud was committed by an investment advisor who allegedly touted a rate of return that was not justified:
“Washington, D.C., May 13, 2011 – The Securities and Exchange Commission today charged a Monticello, N.Y.-based investment adviser with fraudulently offering and selling securities in two upstate New York real estate funds he managed.
The SEC alleges that Lloyd V. Barriger told investors in the Gaffken & Barriger Fund (G&B Fund) that it was a relatively safe and liquid investment that generated a minimum return of 8 percent per year. However, the fund’s actual performance did not justify these performance claims. The SEC further alleges that Barriger defrauded investors in Campus Capital Corp. by raising money from them to prop up the ailing G&B Fund without disclosing that was how their money was actually being used. Barriger also caused Campus to engage in other transactions that personally benefitted him, unbeknownst to Campus investors.
“In the midst of the credit crisis, Barriger chose to lie about the solvency and liquidity of his fund rather than admit the somber truth of a collapsing business,” said George Canellos, Director of the SEC's New York Regional Office. “He continued to solicit new investor funds based on the same misrepresentations up until the day before the fund collapsed.”
According to the SEC’s complaint filed in federal court in Manhattan, the G&B Fund raised approximately $20 million from January 1998 to March 2008, and Campus raised approximately $12 million from October 2001 to July 2008. Barriger froze the G&B Fund in March 2008 and disclosed its true financial condition to investors.
The SEC’s complaint alleges that Barriger misused G&B Fund assets by causing the fund to pay cash distributions of “Preferred Returns” to those investors who requested them. Barriger also caused the fund to redeem investors at values reflecting the purported accrued 8 percent per year return when the fund lacked the income to support those allocations and payments.
According to the SEC’s complaint, Barriger caused Campus to inject a total of nearly $2.5 million into the G&B Fund between August 2007 and April 2008 when the G&B Fund was in distress. Barriger did not disclose this information to investors.
The SEC’s complaint alleges that Barriger violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
In its complaint, the SEC seeks a final judgment permanently enjoining Barriger from future violations of the foregoing provisions and ordering him to pay civil penalties and disgorgement of ill-gotten gains with prejudgment interest.
The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.”
Whether or not the SEC allegations are true will be determined. However, this might be more of a case of very poor judgment instead the out and out fraud cases that involve selling completely bogus securities or in targeting people for goal of stealing their hard earned cash.
I personally know what a difficult time it is to get people to make a large investment whether it is in real estate or an IRA. Of course it is always tempting to tweak the truth here and there in order to make the sale. The problem is that once you tweak the truth it is not much of a stretch to telling out and out lies to sell your product. Financial hard times make it easier still to take out some investor cash here and there in order to shore up personal finances. Many think they might pay it back one day but, financial hard times often stretch out long past the hoped for day of financial recovery. In short, it is easier to have some sympathy for those who commit fraud to save their business than for those who set up their business in order to commit fraud.
“Washington, D.C., May 13, 2011 – The Securities and Exchange Commission today charged a Monticello, N.Y.-based investment adviser with fraudulently offering and selling securities in two upstate New York real estate funds he managed.
The SEC alleges that Lloyd V. Barriger told investors in the Gaffken & Barriger Fund (G&B Fund) that it was a relatively safe and liquid investment that generated a minimum return of 8 percent per year. However, the fund’s actual performance did not justify these performance claims. The SEC further alleges that Barriger defrauded investors in Campus Capital Corp. by raising money from them to prop up the ailing G&B Fund without disclosing that was how their money was actually being used. Barriger also caused Campus to engage in other transactions that personally benefitted him, unbeknownst to Campus investors.
“In the midst of the credit crisis, Barriger chose to lie about the solvency and liquidity of his fund rather than admit the somber truth of a collapsing business,” said George Canellos, Director of the SEC's New York Regional Office. “He continued to solicit new investor funds based on the same misrepresentations up until the day before the fund collapsed.”
According to the SEC’s complaint filed in federal court in Manhattan, the G&B Fund raised approximately $20 million from January 1998 to March 2008, and Campus raised approximately $12 million from October 2001 to July 2008. Barriger froze the G&B Fund in March 2008 and disclosed its true financial condition to investors.
The SEC’s complaint alleges that Barriger misused G&B Fund assets by causing the fund to pay cash distributions of “Preferred Returns” to those investors who requested them. Barriger also caused the fund to redeem investors at values reflecting the purported accrued 8 percent per year return when the fund lacked the income to support those allocations and payments.
According to the SEC’s complaint, Barriger caused Campus to inject a total of nearly $2.5 million into the G&B Fund between August 2007 and April 2008 when the G&B Fund was in distress. Barriger did not disclose this information to investors.
The SEC’s complaint alleges that Barriger violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.
In its complaint, the SEC seeks a final judgment permanently enjoining Barriger from future violations of the foregoing provisions and ordering him to pay civil penalties and disgorgement of ill-gotten gains with prejudgment interest.
The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.”
Whether or not the SEC allegations are true will be determined. However, this might be more of a case of very poor judgment instead the out and out fraud cases that involve selling completely bogus securities or in targeting people for goal of stealing their hard earned cash.
I personally know what a difficult time it is to get people to make a large investment whether it is in real estate or an IRA. Of course it is always tempting to tweak the truth here and there in order to make the sale. The problem is that once you tweak the truth it is not much of a stretch to telling out and out lies to sell your product. Financial hard times make it easier still to take out some investor cash here and there in order to shore up personal finances. Many think they might pay it back one day but, financial hard times often stretch out long past the hoped for day of financial recovery. In short, it is easier to have some sympathy for those who commit fraud to save their business than for those who set up their business in order to commit fraud.
Sunday, June 5, 2011
SEC MAKES CHARGES MAM WEALTH MANAGEMENT WITH FRAUD
On the Securities and Exchange Commission web site the SEC announced it has filed investment fraud charges as follows:
“U.S. Securities and Exchange Commission
Litigation Release No. 21921 / April 7, 2011
SECURITIES AND EXCHANGE COMMISSION v. MAM WEALTH MANAGEMENT, LLC, MAMW REAL ESTATE FUND GENERAL PARTNER, LLC, ALEX MARTINEZ, AND RAPHAEL R. SANCHEZ, Civil Action No. CV 11-2934 SJO (JCx) (C.D. Ca.)]
SEC CHARGES INVESTMENT ADVISER, FUND MANAGER AND TWO INDIVIDUALS WITH SECURITIES FRAUD INVOLVING CLIENT FUNDS
The Securities and Exchange Commission announced the filing of a civil injunctive action in U.S. District Court in Los Angeles, California against MAM Wealth Management, LLC (MAM), MAMW Real Estate General Partner, LLC (MAMW), Alex Martinez and Ralph Sanchez, alleging fraud in connection with client investments in a $10.3 million risky real estate venture. According to the Commission's complaint, from July 2007 through March 2009, Martinez, a MAM and MAMW principal, and Ralph Sanchez, a MAM registered representative and MAMW principal, had 50 of their advisory clients invest in MAM Wealth Management Real Estate Fund, LLC (Fund). The complaint alleges that Martinez and Sanchez misrepresented to some clients that the Fund was a safe, relatively liquid investment, was earning 9% per year, and would show profits in three years. The complaint alleges that they used their discretionary authority over other clients’ funds to invest them in the Fund, even though it was unsuitable for their conservative investment goals. The complaint alleges that many accounts were retirement accounts and that the Fund was an unsuitable investment for clients who did not have the ability and willingness to accept the risks of losing their entire investment. The complaint further alleges that the defendants caused the Fund to use client funds to make risky mortgage loans.
The complaint alleges that the defendants have violated the antifraud provisions of the federal securities laws, including 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 by MAM, MAMW, Martinez and Sanchez and Sections 206(1) and 206(2) of the Investment Advisers Act by MAM and Martinez and aiding and abetting violations of Sections 206(1) and 206(2) of the Investment Advisers Act by Sanchez. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.”
“U.S. Securities and Exchange Commission
Litigation Release No. 21921 / April 7, 2011
SECURITIES AND EXCHANGE COMMISSION v. MAM WEALTH MANAGEMENT, LLC, MAMW REAL ESTATE FUND GENERAL PARTNER, LLC, ALEX MARTINEZ, AND RAPHAEL R. SANCHEZ, Civil Action No. CV 11-2934 SJO (JCx) (C.D. Ca.)]
SEC CHARGES INVESTMENT ADVISER, FUND MANAGER AND TWO INDIVIDUALS WITH SECURITIES FRAUD INVOLVING CLIENT FUNDS
The Securities and Exchange Commission announced the filing of a civil injunctive action in U.S. District Court in Los Angeles, California against MAM Wealth Management, LLC (MAM), MAMW Real Estate General Partner, LLC (MAMW), Alex Martinez and Ralph Sanchez, alleging fraud in connection with client investments in a $10.3 million risky real estate venture. According to the Commission's complaint, from July 2007 through March 2009, Martinez, a MAM and MAMW principal, and Ralph Sanchez, a MAM registered representative and MAMW principal, had 50 of their advisory clients invest in MAM Wealth Management Real Estate Fund, LLC (Fund). The complaint alleges that Martinez and Sanchez misrepresented to some clients that the Fund was a safe, relatively liquid investment, was earning 9% per year, and would show profits in three years. The complaint alleges that they used their discretionary authority over other clients’ funds to invest them in the Fund, even though it was unsuitable for their conservative investment goals. The complaint alleges that many accounts were retirement accounts and that the Fund was an unsuitable investment for clients who did not have the ability and willingness to accept the risks of losing their entire investment. The complaint further alleges that the defendants caused the Fund to use client funds to make risky mortgage loans.
The complaint alleges that the defendants have violated the antifraud provisions of the federal securities laws, including 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 by MAM, MAMW, Martinez and Sanchez and Sections 206(1) and 206(2) of the Investment Advisers Act by MAM and Martinez and aiding and abetting violations of Sections 206(1) and 206(2) of the Investment Advisers Act by Sanchez. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.”
Friday, June 3, 2011
CFTC CHAIRMAN MAKES REMARKS ON TRANSPARENCY AND THE SWAPS MARKETS
The following remarks were made by Chairman Gary Gensler of the Commodity Futures Trading commission. These remarks are from the CFTC web site:
" Remarks, Bringing Transparency to the Swaps Markets, National Association of Corporate Treasurers Conference
Chairman Gary Gensler
June 2, 2011
Good afternoon. I thank the National Association of Corporate Treasurers and Tom Deas for inviting me to speak today. Both the Commodity Futures Trading Commission (CFTC) and I have benefited from your thoughtful input and constant attention to important issues with regard to the swaps marketplace during the legislative process and the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act brings essential reform to the swaps markets that will benefit the American public and each of you in your roles as corporate treasurers.
Though I am speaking to you in my formal capacity as Chairman of a market regulatory agency, I also was once co-head of finance at a major firm. Like many of you, I helped oversee how a corporation funded itself, managed its risk and met its budget.
As the CFTC has been working to implement the Dodd-Frank Act, I also have had the opportunity to meet with numerous corporate end-users to discuss their perspectives on the derivatives marketplace.
A lot has changed in the 13 years since I last had a role similar to yours – and most of you are treasurers for non-financial organizations – but I think we share a view that the financial system needs to work for both corporate America and the economy as a whole. I think we also can agree that, in 2008, the financial system did not work for corporate America or the economy as a whole.
Derivatives in the 2008 Financial Crisis
The financial crisis was very real. I am sure that most of your organizations did not make budget in 2009 – or at least not your original budget. Many of you probably had trouble making budgets in 2010.
The effects of the crisis remain. We still have high unemployment, millions of homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the economy.
One reason we had the 2008 financial crisis was because we did not have the right financial regulations in place. The financial system and the financial regulatory system failed. They failed the American public and they failed American businesses. When AIG and Lehman Brothers failed, you paid the price. As Americans are still struggling, still out of work and still very careful with their spending, your businesses are directly affected.
Though there were many causes to the crisis, it is clear that swaps played a central role. They added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market. They contributed to a financial system where institutions were thought to be not only too big to fail, but too interconnected to fail. U.S. taxpayers bailed out AIG with $180 billion when that company’s ineffectively regulated $2 trillion swaps portfolio, which was cancerously interconnected to other financial institutions, nearly brought down the financial system.
These events demonstrate how swaps – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.
Lowering Risk
A key piece of the derivatives reforms of the Dodd-Frank Act is to lower the risks to the overall economy that are posed by the swaps marketplace. As we were so surely reminded in 2008, your health – the health of corporate America – as well as the economic health of the country, is put at risk when the financial system falters. Therefore, though much of the Dodd-Frank Act was directed to the financial sector, its reforms are critical to the health of the overall economy and the health of your own prospects.
One of the challenges that the Dodd-Frank Act addresses is that, like so many other industries, the financial industry has gotten very concentrated around a small number of very large firms.
Adding to the challenge is the perverse outcome of the financial crisis, which may be that many people in the markets have come to believe that this handful of large financial firms will – if in trouble – have the backing of the taxpayers. As it is unlikely that we could ever ensure that no financial institution will fail – because surely, some will in the future – we must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail.
The Dodd-Frank Act addresses this in many ways beyond derivatives, but the derivatives piece is a critical component. The derivatives reforms lower risk throughout the economy by heightening market transparency and directly regulating dealers for their swaps activity.
In addition, it directly lowers interconnectedness in the swaps markets by requiring those standardized swaps that are entered into and amongst financial institutions to be brought to central clearing. Each of these reforms is critical to lowering the risk that the financial system and, in particular, the failure of a large financial institution, poses to all of your corporations and the economy as a whole.
Promoting Transparent, Open and Competitive Markets
A further benefit that reform will bring to the economy and you in your roles as corporate treasurers is making the swaps marketplace more transparent, open and competitive. This reform will bring real, tangible benefits to the corporations that you represent.
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives markets are used to hedge risk and discover prices. They initially emerged around the time of the Civil War as tools to allow producers and merchants to be certain of the prices of commodities that they planned to use or sell in the future.
Not many of you are active in the agriculture derivatives markets, but that is where the markets first emerged. Initially, there were derivatives on agricultural commodities, such as wheat, corn and cotton. These early derivatives, called futures, are currently regulated by the CFTC. After much debate, futures markets first came under regulation in the 1920s and 1930s and have been comprehensively regulated since.
The derivatives markets have grown from those agricultural futures through the 20th and 21st centuries to include swaps. I am sure that most of you in this room have used swaps to hedge risks in your business. Maybe you have hedged an interest rate risk or a currency risk. A commodity price risk or credit risk. The swaps markets provide corporations with a means of locking in rates or prices in one part of their business so that they can focus on what they are best at – whether it be producing goods or providing services.
Such price certainty allows companies to better make essential business decisions and investments. Thus, it is critical that market participants have confidence in the integrity of these price discovery markets.
While the derivatives market has changed significantly since swaps were first transacted in the 1980s, the constant is that the financial community maintains information advantages over their nonfinancial counterparties. When a Wall Street bank enters into a bilateral derivative transaction with one of the corporations represented in this room, for example, the bank knows how much its last customer paid for similar transactions. That information, however, is not generally made available to other customers or the public. The bank benefits from internalizing this information.
The Dodd-Frank Act includes essential reforms to bring sunshine to the opaque swaps markets. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is for standardized instruments, the more competitive it is and the lower the costs for hedgers, borrowers and, ultimately, their customers. This transparency would benefit the companies that comprise your investment portfolios.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings transparency to the time immediately before the transaction is completed, which is called pre-trade transparency. This is done by requiring standardized swaps – those that are cleared, made available for trading and not blocks – between or amongst financial entities to be traded on exchanges or swap execution facilities (SEFs), which are a new type of swaps trading platform created by the Dodd-Frank Act.
Exchanges and SEFs will allow investors, hedgers and speculators to meet in a transparent, open and competitive central market. Even if you, as corporate treasurers of nonfinancial entities, decide not to use exchanges or SEFs for your swaps transactions – because the Dodd-Frank Act says that you are not required to do so – you still will benefit from the transparent pricing and liquidity that such trading venues provide.
The Dodd-Frank Act mandates that all market participants have the ability to utilize SEFs and derivatives exchanges if they choose to do so. The statute requires these trading facilities “to provide market participants with impartial access to the market.” The CFTC’s proposed rules require SEFs to allow market participants to leave executable bids or offers that can be seen by the entire marketplace. That means that any market participant – a bank or a nonbank – a corporation or a financial institution – can choose if they want to hedge a risk and enter into a swap. This brings competition to the marketplace that improves pricing and lowers risk.
Corporate treasurers will benefit from markets that have competition. When you use the swaps markets, you are paying for a service to reduce your risk. You want a lot of people competing for that business. You want them to compete in a transparent marketplace where you will benefit from better pricing.
Second, the Dodd-Frank Act brings real-time transparency to the pricing immediately after a swaps transaction takes place. This post-trade transparency provides all end-users and market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
The CFTC’s proposed real-time reporting rules include provisions to protect the confidentiality of market participants. The rules also provide for a time delay for large swap transactions – or block trades.
Third, the Dodd-Frank Act brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. Thus, you as corporate treasurers and the broader public will benefit from knowing the valuations of outstanding swaps on a daily basis.
Additionally, the Dodd-Frank Act brings transparency of the swaps markets to regulators through swap data repositories. The Act includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
Commercial End-User Exceptions
So far I have discussed what the Dodd-Frank Act will do to benefit corporate treasurers and the economy as a whole. Before I close, I will take a moment to address what the Act does not require.
First, the Act does not require non-financial end-users that are using swaps to hedge or mitigate commercial risk to bring their swaps into central clearing. The Act leaves that decision up to the individual end-users.
Second, there was a related question about whether corporate end-users would be required to post margin for their uncleared swaps. The CFTC has published proposed rules that do not require such margin.
Third, the Dodd-Frank Act maintains your ability to enter into bilateral swap contracts with swap dealers. You will still be able to hedge your company’s particularized risk, whatever it may be, through customized transactions.
Conclusion
In conclusion, the Dodd-Frank Act reforms are important to the economy and to each of the corporations you represent. Only with these reforms can we hope to lower the risk that taxpayers and your corporations would bear the costs if a large financial institution failed in the future.
Only with reform can the public get the benefit of transparent, open and competitive markets. That transparency, openness and competitiveness will directly benefit your corporations because they will lower your costs over time. These reforms will reduce risk in the swaps market similar to that which contributed to AIG’s failure and the 2008 financial crisis.
Thank you."
" Remarks, Bringing Transparency to the Swaps Markets, National Association of Corporate Treasurers Conference
Chairman Gary Gensler
June 2, 2011
Good afternoon. I thank the National Association of Corporate Treasurers and Tom Deas for inviting me to speak today. Both the Commodity Futures Trading Commission (CFTC) and I have benefited from your thoughtful input and constant attention to important issues with regard to the swaps marketplace during the legislative process and the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act brings essential reform to the swaps markets that will benefit the American public and each of you in your roles as corporate treasurers.
Though I am speaking to you in my formal capacity as Chairman of a market regulatory agency, I also was once co-head of finance at a major firm. Like many of you, I helped oversee how a corporation funded itself, managed its risk and met its budget.
As the CFTC has been working to implement the Dodd-Frank Act, I also have had the opportunity to meet with numerous corporate end-users to discuss their perspectives on the derivatives marketplace.
A lot has changed in the 13 years since I last had a role similar to yours – and most of you are treasurers for non-financial organizations – but I think we share a view that the financial system needs to work for both corporate America and the economy as a whole. I think we also can agree that, in 2008, the financial system did not work for corporate America or the economy as a whole.
Derivatives in the 2008 Financial Crisis
The financial crisis was very real. I am sure that most of your organizations did not make budget in 2009 – or at least not your original budget. Many of you probably had trouble making budgets in 2010.
The effects of the crisis remain. We still have high unemployment, millions of homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the economy.
One reason we had the 2008 financial crisis was because we did not have the right financial regulations in place. The financial system and the financial regulatory system failed. They failed the American public and they failed American businesses. When AIG and Lehman Brothers failed, you paid the price. As Americans are still struggling, still out of work and still very careful with their spending, your businesses are directly affected.
Though there were many causes to the crisis, it is clear that swaps played a central role. They added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market. They contributed to a financial system where institutions were thought to be not only too big to fail, but too interconnected to fail. U.S. taxpayers bailed out AIG with $180 billion when that company’s ineffectively regulated $2 trillion swaps portfolio, which was cancerously interconnected to other financial institutions, nearly brought down the financial system.
These events demonstrate how swaps – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.
Lowering Risk
A key piece of the derivatives reforms of the Dodd-Frank Act is to lower the risks to the overall economy that are posed by the swaps marketplace. As we were so surely reminded in 2008, your health – the health of corporate America – as well as the economic health of the country, is put at risk when the financial system falters. Therefore, though much of the Dodd-Frank Act was directed to the financial sector, its reforms are critical to the health of the overall economy and the health of your own prospects.
One of the challenges that the Dodd-Frank Act addresses is that, like so many other industries, the financial industry has gotten very concentrated around a small number of very large firms.
Adding to the challenge is the perverse outcome of the financial crisis, which may be that many people in the markets have come to believe that this handful of large financial firms will – if in trouble – have the backing of the taxpayers. As it is unlikely that we could ever ensure that no financial institution will fail – because surely, some will in the future – we must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail.
The Dodd-Frank Act addresses this in many ways beyond derivatives, but the derivatives piece is a critical component. The derivatives reforms lower risk throughout the economy by heightening market transparency and directly regulating dealers for their swaps activity.
In addition, it directly lowers interconnectedness in the swaps markets by requiring those standardized swaps that are entered into and amongst financial institutions to be brought to central clearing. Each of these reforms is critical to lowering the risk that the financial system and, in particular, the failure of a large financial institution, poses to all of your corporations and the economy as a whole.
Promoting Transparent, Open and Competitive Markets
A further benefit that reform will bring to the economy and you in your roles as corporate treasurers is making the swaps marketplace more transparent, open and competitive. This reform will bring real, tangible benefits to the corporations that you represent.
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives markets are used to hedge risk and discover prices. They initially emerged around the time of the Civil War as tools to allow producers and merchants to be certain of the prices of commodities that they planned to use or sell in the future.
Not many of you are active in the agriculture derivatives markets, but that is where the markets first emerged. Initially, there were derivatives on agricultural commodities, such as wheat, corn and cotton. These early derivatives, called futures, are currently regulated by the CFTC. After much debate, futures markets first came under regulation in the 1920s and 1930s and have been comprehensively regulated since.
The derivatives markets have grown from those agricultural futures through the 20th and 21st centuries to include swaps. I am sure that most of you in this room have used swaps to hedge risks in your business. Maybe you have hedged an interest rate risk or a currency risk. A commodity price risk or credit risk. The swaps markets provide corporations with a means of locking in rates or prices in one part of their business so that they can focus on what they are best at – whether it be producing goods or providing services.
Such price certainty allows companies to better make essential business decisions and investments. Thus, it is critical that market participants have confidence in the integrity of these price discovery markets.
While the derivatives market has changed significantly since swaps were first transacted in the 1980s, the constant is that the financial community maintains information advantages over their nonfinancial counterparties. When a Wall Street bank enters into a bilateral derivative transaction with one of the corporations represented in this room, for example, the bank knows how much its last customer paid for similar transactions. That information, however, is not generally made available to other customers or the public. The bank benefits from internalizing this information.
The Dodd-Frank Act includes essential reforms to bring sunshine to the opaque swaps markets. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is for standardized instruments, the more competitive it is and the lower the costs for hedgers, borrowers and, ultimately, their customers. This transparency would benefit the companies that comprise your investment portfolios.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings transparency to the time immediately before the transaction is completed, which is called pre-trade transparency. This is done by requiring standardized swaps – those that are cleared, made available for trading and not blocks – between or amongst financial entities to be traded on exchanges or swap execution facilities (SEFs), which are a new type of swaps trading platform created by the Dodd-Frank Act.
Exchanges and SEFs will allow investors, hedgers and speculators to meet in a transparent, open and competitive central market. Even if you, as corporate treasurers of nonfinancial entities, decide not to use exchanges or SEFs for your swaps transactions – because the Dodd-Frank Act says that you are not required to do so – you still will benefit from the transparent pricing and liquidity that such trading venues provide.
The Dodd-Frank Act mandates that all market participants have the ability to utilize SEFs and derivatives exchanges if they choose to do so. The statute requires these trading facilities “to provide market participants with impartial access to the market.” The CFTC’s proposed rules require SEFs to allow market participants to leave executable bids or offers that can be seen by the entire marketplace. That means that any market participant – a bank or a nonbank – a corporation or a financial institution – can choose if they want to hedge a risk and enter into a swap. This brings competition to the marketplace that improves pricing and lowers risk.
Corporate treasurers will benefit from markets that have competition. When you use the swaps markets, you are paying for a service to reduce your risk. You want a lot of people competing for that business. You want them to compete in a transparent marketplace where you will benefit from better pricing.
Second, the Dodd-Frank Act brings real-time transparency to the pricing immediately after a swaps transaction takes place. This post-trade transparency provides all end-users and market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
The CFTC’s proposed real-time reporting rules include provisions to protect the confidentiality of market participants. The rules also provide for a time delay for large swap transactions – or block trades.
Third, the Dodd-Frank Act brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. Thus, you as corporate treasurers and the broader public will benefit from knowing the valuations of outstanding swaps on a daily basis.
Additionally, the Dodd-Frank Act brings transparency of the swaps markets to regulators through swap data repositories. The Act includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
Commercial End-User Exceptions
So far I have discussed what the Dodd-Frank Act will do to benefit corporate treasurers and the economy as a whole. Before I close, I will take a moment to address what the Act does not require.
First, the Act does not require non-financial end-users that are using swaps to hedge or mitigate commercial risk to bring their swaps into central clearing. The Act leaves that decision up to the individual end-users.
Second, there was a related question about whether corporate end-users would be required to post margin for their uncleared swaps. The CFTC has published proposed rules that do not require such margin.
Third, the Dodd-Frank Act maintains your ability to enter into bilateral swap contracts with swap dealers. You will still be able to hedge your company’s particularized risk, whatever it may be, through customized transactions.
Conclusion
In conclusion, the Dodd-Frank Act reforms are important to the economy and to each of the corporations you represent. Only with these reforms can we hope to lower the risk that taxpayers and your corporations would bear the costs if a large financial institution failed in the future.
Only with reform can the public get the benefit of transparent, open and competitive markets. That transparency, openness and competitiveness will directly benefit your corporations because they will lower your costs over time. These reforms will reduce risk in the swaps market similar to that which contributed to AIG’s failure and the 2008 financial crisis.
Thank you."
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