BUSINESS AND TWO EXECUTIVES CHARGED BY SEC WITH TAKING INVESTOR FUNDS

July 6, 2011
The followign is an excerpt from the SEC website:

The Securities and Exchange Commission yesterday charged a New York-based brokerage firm and two executives with misappropriating investor funds.
The SEC alleges that Windham Securities, Inc., Windham’s owner and principal Joshua Constantin, and former Windham managing director Brian Solomon fraudulently induced investors to provide more than $1.25 million to Windham for securities investments and fees by making false claims concerning the intended use of investor funds as well as Windham’s investment expertise and historical returns. Instead of purchasing securities for investors as represented, the defendants misappropriated the investors’ funds and then provided false assurances to investors to cover up their fraud.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Windham, Constantin, and Solomon misappropriated investor funds from an investment opportunity they had recommended to investors in Leeward Group, Inc., then a private company they told investors Windham was helping to take public. Constantin and Solomon raised more than $1.1 million for investments in Leeward and collected an additional $135,000 in fees purportedly for access to Windham investment opportunities or other related investment services. Constantin then transferred approximately $668,000 of the funds raised from investors to his personal bank account and to the account of Constantin Resource Group, Inc. (CRG), an entity he owned and controlled. Constantin used these funds to pay his personal and business expenses and to pay Solomon, among other things. Constantin also transferred $450,000 of investor funds to purchase Leeward securities in the name of Domestic Applications Corp. (DAC), an entity he controlled and in which none of the investors held any ownership interest. Constantin and Solomon then attempted to conceal their fraud and falsely reassure investors by fabricating phony promissory notes and Windham account statements that falsely showed that the investors had purchased Leeward securities.
The SEC’s complaint charges Windham, Constantin, and Solomon with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and charges Constantin with liability as a control person for Windham’s Exchange Act violations and as an aider and abettor of Windham’s and Solomon’s Exchange Act violations. In its complaint, the SEC also names CRG and DAC as relief defendants. The SEC’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and penalties against Windham, Constantin, and Solomon, and disgorgement of ill-gotten gains plus prejudgment interest against CRG and DAC as relief defendants.
The SEC’s investigation is continuing.”

Substituting the word "misappropriate" for the word "stealing" seems to diminish an inappropriate action from a crime to a merely overlooked caveat. If one were to hack into a major bank and drain it of money perhaps they just "misappropriated" the funds and hence, should be held to a much lower level of accountability than someone who steals.

SEC COMMISSIONER PAREDES PROPOSES BUSINESS CONDUCT STANDARDS FOR SECURITY-BASED SWAPS

The following is an excerpt from the SEC website:

"Speech by SEC Commissioner:
Statement at Open Meeting to Propose Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants
by
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
Washington, D.C.
June 29, 2011
Thank you, Chairman Schapiro.

The Dodd-Frank Act sets out a new regime to regulate the security-based swap (“SBS”) market. To this end, Section 764 of Dodd-Frank amends the Exchange Act to provide for new rules, to be promulgated by the SEC, that establish business conduct standards for security-based swap dealers and major security-based swap participants (“SBS Entities”). Pursuant to this authority, the Commission is advancing the proposal we are considering this morning.

I support the recommendation before us. But we need to be mindful that, depending on how the new regulatory regime ultimately takes shape, certain parties – most notably, certain special entities – could lose access to the security-based swap market, and those states, municipalities, pension plans, endowments, and other counterparties of SBS Entities that can access the SBS market could find it more costly to transact. If SBS Entities become less willing to transact with certain counterparties because the business conduct standards prove to be too burdensome and unpredictable, those counterparties may lose out on the benefits that SBS transactions afford them, such as more efficient risk management. To this point, it is worth recognizing that the Commission’s proposed business conduct standards go beyond what the agency is mandated by Dodd-Frank to promulgate.

The proposing release solicits comment on a range of topics and asks a number of thoughtful questions. As always, I look forward to considering the comments we will receive. I am particularly interested in comments that address the following:

The release acknowledges that the Commission is proposing more business conduct obligations than Dodd-Frank requires. “Know your counterparty” requirements and “suitability” standards are just two features of the proposal that would add to what Dodd-Frank mandates. What are the potential consequences of these additional obligations when layered on top of what Dodd-Frank requires? To what extent, and in what ways, might these additional regulatory demands impact a market participant’s access to SBS transactions?

If adopted, how will the proposal likely impact the ability of special entities to transact in security-based swaps? What consequences will special entities face if they find it more difficult to access the SBS market?

Just as one recognizes the benefits of the new regulatory regime, one also should consider that certain costs of the proposal might ultimately be borne by special entities and other counterparties of SBS Entities. Accordingly, to what extent should an intended beneficiary of the regime be afforded more choice to decide for itself the degree of protection it wants from regulation? In other words, under what circumstances, if any, should the counterparty of an SBS Entity be allowed to opt out of some or all of the new regulation?

The proposing release explains, “[A]bsent special circumstances, it would be appropriate for SBS Entities to rely on counterparty representations in connection with certain specific requirements under the proposed rules.” The release offers two alternatives for when it might not be appropriate for an SBS Entity to rely on a counterparty’s representations. Under one alternative, an SBS Entity could rely on a counterparty’s representation “unless [the SBS Entity] knows that the representation is not accurate.” Under the second alternative, an SBS Entity could rely on a counterparty’s representation “unless the SBS Entity has information that would cause a reasonable person to question the accuracy of the representation.”

I am keenly interested in commenters’ views on the pros and cons of these two alternatives. For example, under which alternative would an SBS Entity have greater legal certainty concerning its business conduct obligations? If an SBS dealer is not confident that it can rely on a special entity’s representations in establishing that the dealer is not advising the special entity, will the SBS dealer be less willing to transact with the special entity?

The proposal states that an SBS dealer “acts as an advisor to a special entity,” thus triggering a duty to act in the “best interests of the special entity,” when the SBS dealer makes a recommendation, unless certain conditions are met. Should a dealer have to do more than make a recommendation to be found to be acting as an advisor? How, if at all, should the “best interests” standard be defined to address the tension that may arise if an SBS dealer finds itself acting as both a counterparty and an advisor to a special entity?

I am interested in hearing from commenters on how, if at all, the Commission’s rulemaking should account for any concerns that are presented when the SEC’s business conduct regime and the Department of Labor’s ERISA fiduciary regime interact.

I join my colleagues in thanking the staff – particularly those from the Division of Trading and Markets – for your hard work on this rulemaking."

DISSENT AT THE CFTC

THE FOLLOWING EXCERPT IS FROM THE CFTC WEBSITE:

"Dissent of Commissioner Scott D. O’Malia to the Fiscal Year 2011 Commission Spending Plan
Commissioner O’Malia
June 15, 2011
I respectfully dissent from signing the fiscal year 2011 Commission Spending Plan allocating funding per the direction provided in Public Law 112-10, The Department of Defense and Full-Year Continuing Appropriations Act, 2011. The Commission's spending plan continues to concentrate resources on an ever-expanding staff hiring plan that is both fiscally unsustainable and detrimental to the Commission's already ailing technology programs. This spending plan proposes to hire 50 additional federal employees—12 of which will implement internal reorganization in support of new Dodd-Frank authorities—and an undisclosed number of contractors.1· Instead of complying with the explicit Congressional directive establishing a $37.2 million floor for technology spending, the proposal caps spending at this minimum level while completely ignoring clear statutory direction to prioritize such funding for higher priority information technology activities. I am mindful of the challenge of adjusting the budget priorities within the resources provided. However, in the face of the broad new statutory authority to oversee and monitor both the futures and derivatives markets, the Commission cannot afford delays in the development and deployment of automated surveillance tools, or in real-time trade monitoring, integration of trade data provided from the swap data repositories and the development of new risk analytics.
Statutory Direction Ignored and Investments Delayed
Not only has the Commission provided the minimum level of funding for technology, but it has failed to delineate "highest priority information technology" from basic operational responsibilities such as telephones, blackberry devices, laptops and printer toner, which are included in the overall technology account. The Commission's own fiscal year 2011 request provided for $53 million in technology funding, of which $18 million was set aside for Dodd-Frank Act implementation with the remaining $35 million budgeted for ongoing pre-Dodd-Frank Act mission critical functions. Rather than seizing the opportunity and support provided by Congress to invest in technology reserved for Dodd-Frank reforms, the Commission spending plan now proposes to invest just $5.4 million of the $18 million requested for Dodd-Frank.
Technology 2.0: The Budget that Should Have Been
Congress couldn't have been more clear about the direction the Commission should take in developing a technology-focused spending plan. Congress included statutory direction to provide a minimum level of funding and to be expended on the "highest priority information technology activities of the Commission.”2 Instead, the Commission failed on two counts to follow statutory direction regarding technology. First, the Commission ignored Congressional intent by capping its investment in technology at $37.2 million, which Congress clearly provided as a floor. Second, the Commission's spending plan doesn't distinguish between "highest priorities" and other investments, as directed in the statute. By failing to distinguish between priorities, it appears that the Commission has no priorities, which is abundantly clear in this spending plan.
For the past several years, the Commission has spent roughly $18 million annually to provide basic telecommunication, computing, and mobile connectivity to Commission staff in its technology account. Considering the challenges before the Commission, I certainly do not believe such funding constitutes “the highest priority information technology.” Instead, it should be added to $37 million provided in this plan for an overall technology spending level of $55 million. The Commission’s own FY’11 request totaled $53 million including critical investments in additional hardware, software, expanded analytical capabilities.
There are numerous and relevant technology needs the Commission could begin to address if it would allocate $55 million in technology funding. For example, the Commission must address upgrading its capabilities to establish a more sophisticated approach to overseeing swaps, options and futures markets, including electronically-filed forms that automatically populate our surveillance programs. In addition, the Commission must be prepared to integrate transaction data from swap data repositories, an essential element of monitoring for systemic risk and improving market transparency. As of yet, there is no technology strategy to serve this essential function. The Commission staff has also expressed a strong desire to expand oversight capabilities and is working to develop multiple automated surveillance and analytical tools, as well as the development of real-time market monitoring capabilities. Finally, there are critical investments in hardware and software, totaling $6 million that were requested as part of the FY’11 request, but are not funded in this spending plan and should be restored. This investment would represent a down payment on the investments that must be made if the Commission is going to perform any critical analysis of order book data, rather than transaction level data".

CFTC COMMISISONER COMPLAINS ABOUT SLOW GOVERNMENTAL REFORM

The following is an excerpt from the CFTC website:

"The Waiting"
Statement by Commissioner Bart Chilton Regarding Anti-Fraud and Anti-Manipulation Final Rules, Washington, DC
July 7, 2011
It has been almost a year since the Dodd-Frank Act became law. If we were in school, we couldn't receive a grade. We'd get an incomplete since we still have so much work.
Folks have been waiting on issues like position limits, yet we haven't acted. We have said we won't get things done on time, and for many final rules that makes sense. For me, delaying on limits does not make sense. However, that's a matter for another time.
There is an old Tom Petty song, "The Waiting" in which he sings, "The waiting is the hardest part," and later "Don't let it get to you." Well, I'm trying not to let it get to me and very pleased that today we are moving forward and we may not have to wait any longer.
Before the Commission today are several final rules, including new anti-fraud and anti-manipulation authorities, which will be critical ammo in the Commission’s enforcement arsenal.
I particularly thank Senator Maria Cantwell for her leadership on the anti-fraud and anti-manipulation provisions. Without Senator Cantwell these provisions wouldn’t exist.
Currently, we have a nearly impossible manipulation standard, winning only one case in 35 years. We have had to prove intent, artificial price, market control and that the manipulators actually caused the artificial price. A very tall order. With the adoption of this new rule, the Commission will be able to prosecute a broader array of commodity law violations. Here are a few of them:
First, it will give us the ability to go after fraudulent practices that manipulate prices—like disseminating misinformation about the global availability of crude oil to manipulate the market.
Pocketing profits from the misuse of privileged information will now be prosecuted. We’ll be able to get at, for example, bad actors akin to insider traders.
Also, this new regulation moves us toward a reckless standard similar to that under securities laws as defined by the courts, and the law specifically gives us a reckless standard for false reporting.
The ability to effectively prosecute this type of unscrupulous activity is critically important. We now will be able to swiftly and aggressively “get at” these types of fraudulent market practices, which can contribute to uneconomic or false prices in commodities markets.
The waiting has been a hard part of this process. Hopefully, we will conclude some very important work today.
For the other regulations that we have not yet been able to complete, I'll take heed of Tom Petty’s advice and, "Don't let it kill ya’ baby, don't let it get to you."
Thanks.”

SEC CHAIRMAN SCHAPIRO SPEAKS AT SEC OPEN MEETING

The following is from the SEC website:

"Speech by SEC Chairman:
Opening Statement at SEC Open Meeting
by
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.
June 29, 2011
Good morning. This is an Open Meeting of the United States Securities and Exchange Commission on June 29, 2011.

Today, we will consider proposing new rules that would establish business conduct standards for security-based swaps dealers and major security-based swap participants.

As with our prior proposals regarding security-based swaps, today’s proposal stems from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That Act authorizes the Commission to implement a comprehensive framework for regulating the over-the-counter swaps markets.

In laying the groundwork for this new regulatory regime, Congress recognized the importance of having a regulatory framework that adequately protects investors. The rules we are proposing today would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly.

Among other things, the proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and to disclose conflicts of interest and material incentives to potential counterparties. Additional requirements would be imposed for dealings with special entities, which include municipalities, pension plans, endowments and similar entities.

In particular, when acting as a counterparty to a special entity, a security-based swap dealer or major security-based swap participant would need to have a reasonable basis to believe that the special entity has a qualified independent representative that can help it assess the transaction. In addition, a security-based swap dealer that is acting as an advisor to a special entity would need to act in the best interests of the special entity.

The standards we propose today are intended to establish a framework that protects investors and also promotes efficiency, competition, and capital formation. They are also intended to take into account the nature of the security-based swap market and existing business conduct requirements applicable for broker-dealers and other market participants. In this regard, the Commission staff has worked closely with CFTC staff in consulting with the public and other regulators including the Department of Labor. Indeed, we have had dozens of meetings with a broad range of interested parties including regulated entities, consumer and investor advocates, institutional investors, financial institutions, endowments, SROs, state and local governments, and end-users.

We look forward to public comment on today’s proposed rules. We welcome and need the input of commenters, and we hope they will provide analysis, data, and other information to help the Commission further evaluate the proposal and make any appropriate changes.

Before I ask Robert Cook, Director of the Division of Trading and Markets, and Lourdes Gonzalez, Co-Acting Chief Counsel of the Division of Trading and Markets, to discuss the proposed rules, I would like to express my thanks to the CFTC for their effort in crafting these proposed rules along with our team at the SEC.

I would also like to thank Robert, as well as James Brigagliano, Lourdes Gonzalez, Joanne Rutkowski, Cindy Oh, Leila Bham, Jack Habert, Peter Curley, Tom Eady, Gregg Berman, Catherine McGuire, and David Sanchez from the Division of Trading and Markets for their tremendous work on this rulemaking.

Thanks as well to David Blass, Bob Bagnall and Jeff Berger from the Office of the General Counsel; Scott Bauguess, Burt Porter and Adam Glass from the Division of Risk, Strategy, and Financial Innovation; Amy Starr and Tamara Brightwell from the Division of Corporation Finance; and Douglas Scheidt from the Division of Investment Management.

Finally, I would like to thank the Commissioners and all of our counsels for their work and comments on the proposed rules.

Now I'll turn the meeting over to Robert Cook to hear more about the Division's recommendations."

JPMORGAN CHASE AGREES TO PAY $228 MILLION FOR ANTICOMPETITIVE CONDUCT

Market manipulation is not a victimless crime. Many of the painful choices federal, state and, local governments have to make now are a direct result of large Wall Street companies manipulating markets. It would be the right thing to do if each company that is guilty of such crimes was to apologize to the people of America and the world for ever entertaining such criminal actions. Instead, only by threat of prosecution do large institutions admit to crimes and agree to pay some fine or other penalty. Meanwhile, societies crumble. The following excerpt is from the Department of Justice website from July 7, 2011:

“WASHINGTON — JPMorgan Chase & Co. has entered into an agreement with the Department of Justice to resolve the company’s role in anticompetitive activity in the municipal bond investments market and has agreed to pay a total of $228 million in restitution, penalties and disgorgement to federal and state agencies, the Department of Justice announced today.
As part of its agreement with the department, JPMorgan admits, acknowledges and accepts responsibility for illegal, anticompetitive conduct by its former employees. According to the non-prosecution agreement, from 2001 through 2006, certain former JPMorgan employees at its municipal derivatives desk, entered into unlawful agreements to manipulate the bidding process and rig bids on municipal investment and related contracts. These contracts were used to invest the proceeds of, or manage the risks associated with, bond issuances by municipalities and other public entities.

“By entering into illegal agreements to rig bids on certain investment contracts, JPMorgan and its former executives deprived municipalities of the competitive process to which they were entitled,” said Assistant Attorney General Christine Varney in charge of the Department of Justice’s Antitrust Division. “Today’s agreements ensure that JPMorgan will pay restitution to the municipalities harmed by its anticompetitive conduct, disgorge its profits from the illegal activity and pay penalties for the criminal conduct. We are committed to rooting out anticompetitive activity in the financial markets and our investigation into the municipal bond derivatives industry, which has led to criminal charges against 18 former executives, remains active and ongoing.”

Under the terms of the agreement, JPMorgan agrees to pay restitution to victims of the anticompetitive conduct and to cooperate fully with the Justice Department’s Antitrust Division in its ongoing investigation into anticompetitive conduct in the municipal bond derivatives industry. To date, the ongoing investigation has resulted in criminal charges against 18 former executives of various financial services companies and one corporation. One of these charged executives, James Hertz, is a former JPMorgan employee. Nine of the 18 executives charged have pleaded guilty, including Hertz.

The Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Fed) and 25 state attorneys general also entered into agreements with JPMorgan requiring the payment of penalties, disgorgement of profits from the illegal conduct and payment of restitution to the victims harmed by the manipulation and bid rigging by JPMorgan employees, as well as other remedial measures.

As a result of JPMorgan’s admission of conduct; its cooperation with the Department of Justice and other enforcement and regulatory agencies; its monetary and non-monetary commitments to the SEC, IRS, OCC, Fed and state attorneys general; and its remedial efforts to address the anticompetitive conduct, the department agreed not to prosecute JPMorgan for the manipulation and bid rigging of municipal investment and related contracts, provided that JPMorgan satisfies its ongoing obligations under the agreement.

In May 2011, UBS AG agreed to pay a total of $160 million in restitution, penalties and disgorgement to federal and state agencies for its participation in anticompetitive conduct in the municipal bond derivatives market.

The department’s ongoing investigation into the municipal bonds industry is being conducted by the Antitrust Division, the FBI and the IRS-Criminal Investigation. The department is coordinating its investigation with the SEC, the OCC and the Federal Reserve Bank of New York. The department thanks the SEC, IRS, OCC, Fed and state attorneys general for their cooperation and assistance in this matter."