The following is from the SEC website:
Former Executive of Illinois Refuse Container Repair Company Sentenced to Serve 16 Months in Prison for Conspiring to Defraud the City of Chicago
WASHINGTON — A former vice president of an Illinois refuse disposal container repair company was sentenced today to serve 16 months in prison and to pay a $40,000 criminal fine for his role in a conspiracy to commit mail and wire fraud in connection with bids on a contract with the city of Chicago, the Department of Justice announced.
Steven Fenzl, a California resident, was also sentenced by U.S. District Court Judge Ruben Castillo to pay $35,302 in restitution for his participation in a conspiracy to defraud the city of Chicago on a contract for the repair of refuse carts from as early as November 2004 to as late as September 2008. Fenzl, along with his business partner Douglas E. Ritter, was charged in an indictment filed on April 21, 2009, in U.S. District Court in Chicago. Fenzl was found guilty by a jury on Sept. 28, 2010, of one count of conspiracy to commit mail and wire fraud, two counts of mail fraud and one count of wire fraud. Ritter, an Illinois resident, pleaded guilty to the conspiracy on June 3, 2010, and was sentenced on May 10, 2011, to serve 16 months in prison and to pay $35,303 in restitution.
According to the indictment, Fenzl, Ritter and their co-conspirator conspired to deceive city of Chicago officials about the number of legitimate, competitive bids submitted for the contract. Specifically, Fenzl and his co-conspirators fraudulently induced other companies to submit bids for the contract at prices determined by Fenzl and his co-conspirators and greater than the price for which Fenzl’s company had submitted a bid. The department said that included in these bids were fraudulent documents indicating that, if awarded the contract, the bidder would enter into subcontracts to purchase goods or services for a specified percentage of the contract from a minority-owned business and a women-owned business, as required by the city of Chicago. According to the indictment, Fenzl and his co-conspirators also fraudulently certified to the city on Fenzl’s company’s bid that it had not entered an agreement with any other bidder relating to the price named in any other bid submitted to the city for the contract.
Today’s sentencing resulted from an investigation of the refuse cart repair industry being conducted by the Antitrust Division’s Chicago Field Office and the city of Chicago’s Office of Inspector General.”
This is a photo of the National Register of Historic Places listing with reference number 7000063
Saturday, June 25, 2011
Friday, June 24, 2011
CFTC ON EXEMPTIVE RELIEF
The following is from the CFTC website:
Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011
Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011
Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011
Oral Statement on Proposed Order for Exemptive Relief
General Counsel Dan Berkovitz
June 14, 2011
Good morning Mr. Chairman and Commissioners.
First, I would like to thank the members of the OGC team that have worked very hard on this order: Harold Hardman, Terry Arbit, Carlene Kim, Neal Kumar, Sue McDonough, and Mark Higgins. I also would like to thank the Divisions for their helpful comments and support on this project.
The proposed order before you today clarifies how the Commodity Exchange Act will apply to swaps as of July 16, 2011, the general effective date of the Title VII of the Dodd-Frank Act.
Section 754 of Dodd-Frank provides that, unless otherwise provided, provisions of the Act that require a rulemaking are effective no sooner than the earlier of 60 days after the rulemaking is completed, or 360 days after enactment, which is July 16, 2011. Many provisions fall into this category. Examples of such provisions include the registration of swap dealers and major swap participants, margin and capital requirements, and external business conduct standards for swap dealers and MSPs. Although the Commission has issued proposed rules to implement these provisions, these rulemakings will not be completed by July 16. Because these provisions will not become effective until after the rulemakings have been completed and implementing dates established, the proposed Order does not include relief from these provisions as of July 16.
We have provided the Commission with a list of the provisions that require a rulemaking.
Provisions that do not require a rulemaking are effective on the general effective date. Thus, certain provisions of the Dodd-Frank Act will become effective immediately on July 16, while others will be phased-in over a period of time. The proposed Order before the Commission would provide clarity to market participants and the public regarding which provisions of the CEA as amended by the Dodd-Frank Act will apply during this transition, and those which will not.
The draft proposed Order proposed to grant exemptive relief in two parts.
Part one of the draft order proposes to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant” that the Dodd-Frank Act requires the Commission and the Securities and Exchange Commission to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the draft order proposes to temporarily exempt persons or entities from complying with these provisions until the earlier of the effective date of the definitional rulemaking for such terms or December 31, 2011. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.
Part two of the draft order proposes to address provisions of the Commodity Exchange Act that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011, specifically Commodity Exchange Act sections 2(d), 2(e), 2(g), 2(h) and 5d as well. The Commission is proposing to temporarily exempt such transactions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.
The proposed exemptive order would be issued under section 712(f) of the Dodd-Frank Act, which specifically authorizes the Commission to issue exemptive orders in preparation for the effective date of the Dodd-Frank Act, and section 4(c) of the CEA, which provides the Commission with exemptive authority for many provisions of the CEA. As required by section 4(c), if approved by the Commission, the proposed Order would be subject to a period of notice and comment. In light of the impending July 16 effective date, the proposed Order would provide for a 14-day public comment period. This would provide the Commission and staff sufficient time to analyze the public comments and issue a final Order, as appropriate, prior to the July 16 effective date.
The proposed Order does not provide relief from all of the provisions of the CEA that will become effective on July 16. The staff has also provided a list of those provisions for which relief is not being provided. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.
There are a few provisions in the CEA that will apply as of the effective date and for which the Commission does not have authority to issue exemptive relief under section 4(c). The staff is considering whether to issue no action relief from these provisions.
Before concluding, I would like to also highlight several limitations on the scope of the proposed temporary relief in both parts.
First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.
I am happy to take any questions you might have.
Last Updated: June 15, 2011
SOME STANFORD GROUP COMPANY MAY GET SIPA PROTECTION
The following is from the Sec Website:
If you invest in securities many times you are covered by SIPA which insures that if you invest your money with a crooked broker then you will be held harmless should that broker default on it's accounts. In the following case the SEC believes that some defrauded investors in the Stanford Group Company might be able to receive some recovery.
"Washington, D.C., June 15, 2011 – The Securities and Exchange Commission today concluded that certain individuals who invested money through the Stanford Group Company – a U.S. broker-dealer owned and used by Allen Stanford to perpetrate a massive Ponzi scheme – are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA).
In exercising its discretionary authority under SIPA and based on the totality of the facts and circumstances of the case, the Commission asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer.
According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit (CDs) issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC). SGC is a SIPC Member.
In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.
In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.
Among other things, the receiver also noted that “[c]orporate separateness was not respected within the Stanford empire. ... Money was transferred from entity to entity as needed, irrespective of legitimate business need. Ultimately, all of the fund transfers supported the Ponzi scheme in one way or another, or benefitted Allen Stanford personally.”
The Commission further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.
A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review.
The Commission has authorized its staff to file an action in federal district court under SIPA to compel SIPC to initiate a liquidation proceeding in the event SIPC does not do so.”
If you invest in securities many times you are covered by SIPA which insures that if you invest your money with a crooked broker then you will be held harmless should that broker default on it's accounts. In the following case the SEC believes that some defrauded investors in the Stanford Group Company might be able to receive some recovery.
"Washington, D.C., June 15, 2011 – The Securities and Exchange Commission today concluded that certain individuals who invested money through the Stanford Group Company – a U.S. broker-dealer owned and used by Allen Stanford to perpetrate a massive Ponzi scheme – are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA).
In exercising its discretionary authority under SIPA and based on the totality of the facts and circumstances of the case, the Commission asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer.
According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit (CDs) issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC). SGC is a SIPC Member.
In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.
In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.
Among other things, the receiver also noted that “[c]orporate separateness was not respected within the Stanford empire. ... Money was transferred from entity to entity as needed, irrespective of legitimate business need. Ultimately, all of the fund transfers supported the Ponzi scheme in one way or another, or benefitted Allen Stanford personally.”
The Commission further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.
A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review.
The Commission has authorized its staff to file an action in federal district court under SIPA to compel SIPC to initiate a liquidation proceeding in the event SIPC does not do so.”
OPENING STATEMENT BY MARY SCHAPIRO AT SEC OPEN MEETING
The following is from the SEC website:
Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Proposals to Amend Rule 17a-5
by
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
June 15, 2011
Good morning. This is an open meeting of the United States Securities and Exchange Commission on June 15, 2011.
Today, we will consider a proposal that is designed to strengthen the audits that broker-dealers must undergo, and enhance the ability of regulators to oversee the ways in which broker-dealers maintain custody of their customers’ assets.
This proposal builds upon the rules we adopted two years ago that strengthened the protections provided to investors who turn their assets over to investment advisers.
As with the investment adviser rules, the proposal under consideration today grew out of the Madoff Ponzi scheme and other frauds in which investor assets were misappropriated.
The fact is that when investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed. But when a broker-dealer violates that trust and misuses the assets, that broker not only harms the investor but also erodes confidence broadly in the financial system. This in turn undermines the ability of legitimate businesses to raise capital.
To protect investors and help maintain confidence in the market, I believe we must take strong steps to help safeguard the assets held by broker-dealers.
Strengthening Broker-Dealer Audits
The proposals under consideration would strengthen the annual audits of broker-dealers by requiring those audits to have increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, today’s proposal would mandate an audit of the controls that the broker-dealer has put in place to ensure compliance with those rules.
While not directly mandated by the Dodd-Frank Act, today’s proposals would facilitate the PCAOB’s new responsibility established by that Act to oversee the registered public accounting firms that audit broker-dealers.
Strengthening Oversight of Broker-Dealer Custody
Additionally, the proposals would strengthen oversight of broker-dealer custody practices. First, the proposals would require broker-dealers that maintain custody of customer assets – or that self-clear transactions – to allow staff of the Commission and the relevant designated examining authority (DEA) to review work papers of the public accounting firm that audits the broker-dealer and to discuss any findings with the accounting firm. The goal would be to enhance the Commission’s or DEA’s examination of the broker-dealer by building on the work performed by the accounting firm, particularly in the area of verifying the custody of customer assets.
Second, the proposed amendments would require all broker-dealers to file, on a quarterly basis, a proposed new form that would elicit information about the custody practices of the broker-dealer. This would create a profile of the broker-dealer’s custody practices to be used as a starting point for examinations by regulators.
I strongly encourage public comment on the proposals to assist the Commission in formulating sound rules and regulations. I look forward to reviewing the public comment.
Before I turn to Robert Cook and John Ramsay, I would like to thank them and other Commission staff including Mike Macchiaroli, Tom McGowan, Nathaniel Stankard, Randall Roy, Rose Wells, and Mark Attar from the Division of Trading and Markets for the long hours and hard work they have devoted to preparing the recommendations before us.
Additionally, I would like to thank Brian Croteau, Jeffrey Minton, and John Offenbacher from the Office of the Chief Accountant and Norm Champ, Julius Leiman-Carbia, and Robert Sollazo from the Office of Compliance Inspections and Examinations for their valuable assistance in developing these proposals.
I also appreciate the contributions from Meredith Mitchell, David Blass, Paula Jenson, Cynthia Ginsberg, Janice Mitnick, and Lynn Taylor from the Office of the General Counsel; Jennifer Marietta-Westberg, Tiago Requeijo, and Chuck Dale from the Division of Risk, Strategy, and Financial Innovation; and Dan Kahl, Jaime Eichen, and Brian Johnson from the Division of Investment Management.
I’d also like to thank my fellow Commissioners and their staff for their work on this proposal.
Now I will ask Robert and John to provide us with additional details about the Division’s recommendations.”
Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Proposals to Amend Rule 17a-5
by
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
June 15, 2011
Good morning. This is an open meeting of the United States Securities and Exchange Commission on June 15, 2011.
Today, we will consider a proposal that is designed to strengthen the audits that broker-dealers must undergo, and enhance the ability of regulators to oversee the ways in which broker-dealers maintain custody of their customers’ assets.
This proposal builds upon the rules we adopted two years ago that strengthened the protections provided to investors who turn their assets over to investment advisers.
As with the investment adviser rules, the proposal under consideration today grew out of the Madoff Ponzi scheme and other frauds in which investor assets were misappropriated.
The fact is that when investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed. But when a broker-dealer violates that trust and misuses the assets, that broker not only harms the investor but also erodes confidence broadly in the financial system. This in turn undermines the ability of legitimate businesses to raise capital.
To protect investors and help maintain confidence in the market, I believe we must take strong steps to help safeguard the assets held by broker-dealers.
Strengthening Broker-Dealer Audits
The proposals under consideration would strengthen the annual audits of broker-dealers by requiring those audits to have increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, today’s proposal would mandate an audit of the controls that the broker-dealer has put in place to ensure compliance with those rules.
While not directly mandated by the Dodd-Frank Act, today’s proposals would facilitate the PCAOB’s new responsibility established by that Act to oversee the registered public accounting firms that audit broker-dealers.
Strengthening Oversight of Broker-Dealer Custody
Additionally, the proposals would strengthen oversight of broker-dealer custody practices. First, the proposals would require broker-dealers that maintain custody of customer assets – or that self-clear transactions – to allow staff of the Commission and the relevant designated examining authority (DEA) to review work papers of the public accounting firm that audits the broker-dealer and to discuss any findings with the accounting firm. The goal would be to enhance the Commission’s or DEA’s examination of the broker-dealer by building on the work performed by the accounting firm, particularly in the area of verifying the custody of customer assets.
Second, the proposed amendments would require all broker-dealers to file, on a quarterly basis, a proposed new form that would elicit information about the custody practices of the broker-dealer. This would create a profile of the broker-dealer’s custody practices to be used as a starting point for examinations by regulators.
I strongly encourage public comment on the proposals to assist the Commission in formulating sound rules and regulations. I look forward to reviewing the public comment.
Before I turn to Robert Cook and John Ramsay, I would like to thank them and other Commission staff including Mike Macchiaroli, Tom McGowan, Nathaniel Stankard, Randall Roy, Rose Wells, and Mark Attar from the Division of Trading and Markets for the long hours and hard work they have devoted to preparing the recommendations before us.
Additionally, I would like to thank Brian Croteau, Jeffrey Minton, and John Offenbacher from the Office of the Chief Accountant and Norm Champ, Julius Leiman-Carbia, and Robert Sollazo from the Office of Compliance Inspections and Examinations for their valuable assistance in developing these proposals.
I also appreciate the contributions from Meredith Mitchell, David Blass, Paula Jenson, Cynthia Ginsberg, Janice Mitnick, and Lynn Taylor from the Office of the General Counsel; Jennifer Marietta-Westberg, Tiago Requeijo, and Chuck Dale from the Division of Risk, Strategy, and Financial Innovation; and Dan Kahl, Jaime Eichen, and Brian Johnson from the Division of Investment Management.
I’d also like to thank my fellow Commissioners and their staff for their work on this proposal.
Now I will ask Robert and John to provide us with additional details about the Division’s recommendations.”
MORGAN KEEGAN TO PAY $200 MILLION TO SETTLE FRAUD CHARGES
The “false valuation of sub-prime mortgage backed securities” is now playing out with civil and sometimes criminal charges being settled. In the case against Morgan Keegan the SEC alleged that certain persons at the firm manipulated the valuation of sub-prime mortgages. The following excerpt is from the SEC website:
“Washington, D.C., June 22, 2011 – The Securities and Exchange Commission, state regulators, and the Financial Industry Regulatory Authority (FINRA) announced today that Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. Two Morgan Keegan employees also agreed to pay penalties for their alleged misconduct, including one who is now barred from the securities industry.
The Memphis-based firms, former portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller were accused in an administrative proceeding last year of causing the false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset Management from January 2007 to July 2007. The SEC’s order issued today in settling the charges also finds that Morgan Keegan failed to employ reasonable pricing procedures and consequently did not calculate accurate “net asset values” for the funds. Morgan Keegan nevertheless published the inaccurate daily NAVs and sold shares to investors based on the inflated prices.
The SEC brought its enforcement action in coordination with FINRA and a task force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina.
“The falsification of fund values misrepresented critical information exactly when investors needed it most – when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Such misconduct does grievous harm to investors.”
William Hicks, Associate Director for the SEC’s Atlanta Regional Office, added, “This enforcement action makes clear that the SEC will deal firmly with those who abuse their responsibility to assign accurate values to securities or other assets held by funds.”
The SEC’s order finds that Kelsoe instructed Morgan Keegan’s fund accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities. The price adjustments ignored lower values for those same securities provided by outside broker-dealers as part of the pricing process, and often lacked a reasonable basis. In some instances, when price information was received that was substantially lower than current portfolio values, fund accounting personnel acted at the direction of Kelsoe and lowered values of bonds over a period of days in a series of pre-planned reductions to values at or closer to the price confirmations. As a result, during the interim days, the Morgan Keegan did not price those bonds at their current fair value.
The SEC’s order further finds that Kelsoe screened and influenced the price confirmations obtained from at least one broker-dealer. Among other things, the broker-dealer was induced to provide interim price confirmations that were lower than the values at which the funds were valuing certain bonds, but higher than the initial confirmations that the broker-dealer had intended to provide. The interim price confirmations enabled the funds to avoid marking down the value of securities to reflect current fair value. In some instances, Kelsoe induced the broker-dealer to withhold price confirmations, where those price confirmations would have been significantly lower than the funds’ current valuations of the relevant bonds.
According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.
Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.
The SEC’s case originated from an SEC examination by Barbara Martin, Glen Richards and Christopher Ray. The matter was investigated by Stephen Donahue, Jack Westrick, and Edward Saunders. The case was litigated by Graham Loomis, Robert Gordon, John O'Halloran, Shawn Murnahan, Jerome Dewitt, Deborah Moore, and Eunita Holton with the assistance of valuation specialist Rick Mayfield. The case was brought under the supervision of Atlanta Regional Director Rhea Dignam and Associate Regional Director William Hicks.”
Morgan Keegan was a big player in the sub-prime mortgage industry and the people involved in the investigation and litigation of the case are certainly deserving of congratulations from their fellow Americans. Fraud seems to many people to be a harmless crime but, just look at the destruction the mortgage fraud debacle has done to this country.
“Washington, D.C., June 22, 2011 – The Securities and Exchange Commission, state regulators, and the Financial Industry Regulatory Authority (FINRA) announced today that Morgan Keegan & Company and Morgan Asset Management have agreed to pay $200 million to settle fraud charges related to subprime mortgage-backed securities. Two Morgan Keegan employees also agreed to pay penalties for their alleged misconduct, including one who is now barred from the securities industry.
The Memphis-based firms, former portfolio manager James C. Kelsoe Jr., and comptroller Joseph Thompson Weller were accused in an administrative proceeding last year of causing the false valuation of subprime mortgage-backed securities in five funds managed by Morgan Asset Management from January 2007 to July 2007. The SEC’s order issued today in settling the charges also finds that Morgan Keegan failed to employ reasonable pricing procedures and consequently did not calculate accurate “net asset values” for the funds. Morgan Keegan nevertheless published the inaccurate daily NAVs and sold shares to investors based on the inflated prices.
The SEC brought its enforcement action in coordination with FINRA and a task force of state regulators from Alabama, Kentucky, Mississippi, Tennessee and South Carolina.
“The falsification of fund values misrepresented critical information exactly when investors needed it most – when the subprime mortgage meltdown was impacting the funds,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Such misconduct does grievous harm to investors.”
William Hicks, Associate Director for the SEC’s Atlanta Regional Office, added, “This enforcement action makes clear that the SEC will deal firmly with those who abuse their responsibility to assign accurate values to securities or other assets held by funds.”
The SEC’s order finds that Kelsoe instructed Morgan Keegan’s fund accounting department to make arbitrary “price adjustments” to the fair values of certain portfolio securities. The price adjustments ignored lower values for those same securities provided by outside broker-dealers as part of the pricing process, and often lacked a reasonable basis. In some instances, when price information was received that was substantially lower than current portfolio values, fund accounting personnel acted at the direction of Kelsoe and lowered values of bonds over a period of days in a series of pre-planned reductions to values at or closer to the price confirmations. As a result, during the interim days, the Morgan Keegan did not price those bonds at their current fair value.
The SEC’s order further finds that Kelsoe screened and influenced the price confirmations obtained from at least one broker-dealer. Among other things, the broker-dealer was induced to provide interim price confirmations that were lower than the values at which the funds were valuing certain bonds, but higher than the initial confirmations that the broker-dealer had intended to provide. The interim price confirmations enabled the funds to avoid marking down the value of securities to reflect current fair value. In some instances, Kelsoe induced the broker-dealer to withhold price confirmations, where those price confirmations would have been significantly lower than the funds’ current valuations of the relevant bonds.
According to the SEC’s order, through his actions Kelsoe fraudulently prevented a reduction in the NAVs of the funds that should otherwise have occurred as a result of the deterioration in the subprime securities market in 2007. His misconduct occurred in the context of a nearly complete failure by Morgan Keegan to employ the fair valuation policies and procedures adopted by the funds’ boards of directors to fair value the funds’ portfolio securities.
Under the settlement, Morgan Keegan is required to pay $25 million in disgorgement and interest and a $75 million penalty to the SEC to be placed into a Fair Fund for the benefit of investors harmed by the violations. Morgan Keegan will pay $100 million into a state fund that also will be distributed to investors. The firms are additionally required to abstain from involvement in valuing fair valued securities on behalf of investment companies for three years. Kelsoe agreed to pay $500,000 in penalties and be barred from the securities industry by the SEC, and Weller agreed to pay a penalty of $50,000.
The SEC’s case originated from an SEC examination by Barbara Martin, Glen Richards and Christopher Ray. The matter was investigated by Stephen Donahue, Jack Westrick, and Edward Saunders. The case was litigated by Graham Loomis, Robert Gordon, John O'Halloran, Shawn Murnahan, Jerome Dewitt, Deborah Moore, and Eunita Holton with the assistance of valuation specialist Rick Mayfield. The case was brought under the supervision of Atlanta Regional Director Rhea Dignam and Associate Regional Director William Hicks.”
Morgan Keegan was a big player in the sub-prime mortgage industry and the people involved in the investigation and litigation of the case are certainly deserving of congratulations from their fellow Americans. Fraud seems to many people to be a harmless crime but, just look at the destruction the mortgage fraud debacle has done to this country.
Thursday, June 23, 2011
SEC CHARGES FORMER COLONIAL BANK EXECUTIVES WITH FRAUD IN TARP SCHEME
The following is an excerpt from the SEC web site:
On June 16, 2010 the Securities and Exchange Commission (SEC) charged Lee B. Farkas, the former chairman and majority owner of Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository mortgage lender, with orchestrating a large-scale securities fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).
On February 24, 2011, the SEC charged Desiree E. Brown, TBW’s former treasurer, with aiding and abetting Farkas’ securities fraud and TARP related schemes.
On March 2, 2011, the SEC charged Catherine L. Kissick, a former vice president at Colonial Bank and the head of its mortgage warehouse lending division (MWLD) with being an active participant in Farkas’ securities fraud scheme.
On March 16, 2011, the SEC charged Teresa A. Kelly, a former operations supervisor at Colonial Bank’s MWLD with being an active participant in Farkas and Kissick’s securities fraud scheme.
In the comprehensive scheme, the SEC alleged that Farkas, Kissick, Brown and Kelly (collectively, Defendants) conspired together to sell more than $1.5 billion worth of fabricated or impaired mortgage loans and securities from TBW to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas and Brown were also responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — The Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.
According to the SEC's complaints, each filed in U.S. District Court for the Eastern District of Virginia, Defendants executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Florida — filed for bankruptcy. TBW was the largest customer of Colonial Bank's MWLD. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.
According to the SEC's complaints, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured Kissick and Kelly to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.
The SEC alleges that in order to conceal this initial fraudulent conduct, Defendants jointly devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Defendants also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Defendants' misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.
The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas and Brown caused BancGroup to misstate publicly that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Farkas also issued a press release on behalf of TBW announcing that TBW had secured the necessary financing for BancGroup. Contrary to his representations to BancGroup and to the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.
The SEC's complaint against Farkas charges him with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Farkas. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company. On November 5, 2010, at the request of Farkas, the court stayed the SEC’s action against him pending resolution of the criminal case filed against him in the same district by the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Virginia.
The SEC’s complaint against Kissick charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Kissick also consented to an order barring her from acting as an officer or director of any public company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act. Kissick also consented to an order prohibiting her from serving in a senior management or control position at any mortgage-related company or other financial institution or from holding any position involving financial reporting or disclosure at a public company. The proposed preliminary settlement, under which the SEC’s requests for financial penalties against Kissick would remain pending, is subject to court approval.
The SEC's complaint against Brown charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Rule 13b2-1 of the Exchange Act and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The proposed preliminary settlement, under which the SEC's requests for financial penalties against Brown would remain pending, is subject to court approval.
The SEC’s complaint against Kelly charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The preliminary settlement, under which the SEC's requests for financial penalties against Brown remain pending, was entered by the court on May 4, 2011.
The SEC's investigation is ongoing. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Housing Finance Agency's Office of the Inspector General, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development.”
On June 16, 2010 the Securities and Exchange Commission (SEC) charged Lee B. Farkas, the former chairman and majority owner of Taylor, Bean and Whitaker Mortgage Corp. (TBW), which was once the nation's largest non-depository mortgage lender, with orchestrating a large-scale securities fraud scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).
On February 24, 2011, the SEC charged Desiree E. Brown, TBW’s former treasurer, with aiding and abetting Farkas’ securities fraud and TARP related schemes.
On March 2, 2011, the SEC charged Catherine L. Kissick, a former vice president at Colonial Bank and the head of its mortgage warehouse lending division (MWLD) with being an active participant in Farkas’ securities fraud scheme.
On March 16, 2011, the SEC charged Teresa A. Kelly, a former operations supervisor at Colonial Bank’s MWLD with being an active participant in Farkas and Kissick’s securities fraud scheme.
In the comprehensive scheme, the SEC alleged that Farkas, Kissick, Brown and Kelly (collectively, Defendants) conspired together to sell more than $1.5 billion worth of fabricated or impaired mortgage loans and securities from TBW to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas and Brown were also responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — The Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.
According to the SEC's complaints, each filed in U.S. District Court for the Eastern District of Virginia, Defendants executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Florida — filed for bankruptcy. TBW was the largest customer of Colonial Bank's MWLD. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.
According to the SEC's complaints, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured Kissick and Kelly to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.
The SEC alleges that in order to conceal this initial fraudulent conduct, Defendants jointly devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Defendants also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Defendants' misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.
The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas and Brown caused BancGroup to misstate publicly that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Farkas also issued a press release on behalf of TBW announcing that TBW had secured the necessary financing for BancGroup. Contrary to his representations to BancGroup and to the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.
The SEC's complaint against Farkas charges him with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties against Farkas. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company. On November 5, 2010, at the request of Farkas, the court stayed the SEC’s action against him pending resolution of the criminal case filed against him in the same district by the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of Virginia.
The SEC’s complaint against Kissick charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Kissick also consented to an order barring her from acting as an officer or director of any public company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act. Kissick also consented to an order prohibiting her from serving in a senior management or control position at any mortgage-related company or other financial institution or from holding any position involving financial reporting or disclosure at a public company. The proposed preliminary settlement, under which the SEC’s requests for financial penalties against Kissick would remain pending, is subject to court approval.
The SEC's complaint against Brown charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Rule 13b2-1 of the Exchange Act and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The proposed preliminary settlement, under which the SEC's requests for financial penalties against Brown would remain pending, is subject to court approval.
The SEC’s complaint against Kelly charges her with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC's allegations, Brown consented to the entry of a judgment permanently enjoining her from violation of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The preliminary settlement, under which the SEC's requests for financial penalties against Brown remain pending, was entered by the court on May 4, 2011.
The SEC's investigation is ongoing. The SEC acknowledges the assistance of the Fraud Section of the U.S. Department of Justice's Criminal Division, the Federal Bureau of Investigation, the Office of the Special Inspector General for the TARP, the Federal Housing Finance Agency's Office of the Inspector General, the Federal Deposit Insurance Corporation's Office of the Inspector General, and the Office of the Inspector General for the U.S. Department of Housing and Urban Development.”
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