ALLEGED PYRAMID SCHEMER TO PAY OVER $1.254 MILLION

The following is an excerpt from the SEC website:

July 15, 2011
The Commission announced that the Honorable John Antoon II, Senior District Judge of the United States District Court for the Middle District of Florida granted the Commission’s Motions to Set Disgorgement and Civil Penalty Amounts as to Defendant Darrel West. The Court ordered West to pay disgorgement of $606,413.31 (representing profits gained as a result of the conduct alleged against him in the Complaint) together with prejudgment interest thereon in the amount of $42,148.81. The Court also ordered West to pay a civil penalty in the amount of $606,413.31 for a total liability of $1,254,975.43. West controlled Defendant Own My Travel, LLC. Previously, the Court entered Judgments of Permanent Injunction against West and Own My Travel. The Judgments, entered by consent, enjoin West and Own My Travel from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Commission voluntarily dismissed with prejudice its previous claims for disgorgement and civil penalties against Own My Travel and disgorgement against Professionally Assisted Marketing, Inc. as both companies are currently defunct.
The Commission filed its complaint on August 14, 2009, against West, Own My Travel and Professionally Assisted Marketing, LLC as a relief defendant. The complaint alleged the defendants misrepresented Own My Travel as a legitimate multi-level marketing company when it was actually a fraudulent pyramid scheme premised on the sale of memberships and thus destined to collapse, leaving investors with substantial losses. The complaint also alleged that West and Own My Travel misled investors about Own My Travel’s business structure and how it generated revenue, the future commissions investors would purportedly receive on a monthly basis, the risks associated with the Own My Travel investment, and West’s failures running a similar predecessor company.”

CFTC CHAIR MAKES REMARKS

The following is an excerpt from the CFTC website:

Remarks Before the Financial Stability Oversight Council
Chairman Gary Gensler
July 18, 2011

Good morning. I thank Secretary Geithner for calling today’s meeting of the Financial Stability Oversight Council (FSOC). I also thank my fellow regulators and FSOC members for their coordination and consultation on the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Lastly, I want to thank the staffs of all the agencies – and particularly the Treasury staff – for their efforts in coordinating amongst eight agencies.

This week is the one-year anniversary of the Dodd-Frank Act. And on this anniversary, it is important to remember why the President and Congress came together to pass this historic law.

The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When large financial firms, such as AIG and Lehman Brothers faltered, we all paid the price.

The Dodd-Frank Act includes critical swaps market reforms to protect the American people. The law brings much-needed transparency to this marketplace and lowers the risk of the swaps market to the overall economy. It lowers the possibility of taxpayers standing behind large financial institutions.

The Dodd-Frank Act also included the establishment of this Council, which is an opportunity for regulators – now and in the future – to ensure that the financial system works better for all Americans.

Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail.

At the CFTC, working with our partners at the SEC, we have been working diligently to write rules to implement swaps provisions in the Dodd-Frank Act that will ensure swaps no longer operate in the shadows and financial institutions pose less risk to taxpayers. We have substantially completed the proposal phase of the rule-writing process and have now turned toward final rules. Tomorrow, we are holding the second public commission meeting to consider approving final rules, and in the coming months, we will continue considering final rules. But until the CFTC completes its rule-writing process and implements and enforces these new rules, the public remains unprotected.

Final Rulemaking on Designating Financial Market Utilities as Systemically Important

I support the final rulemaking on the Authority to Designate Financial Market Utilities as Systemically Important. This is a significant rulemaking that will enable the Financial Stability Oversight Council (FSOC) to identify and designate systemically important financial market utilities, including clearinghouses.

Comprehensive and robust regulatory oversight of clearinghouses, in particular their risk management activities, is essential to our country’s financial stability. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, standardized swaps between financial entities must be brought to clearinghouses.

The Commodity Futures Trading Commission (CFTC) has overseen clearinghouses for decades. The Dodd-Frank Act provides for enhanced oversight of these clearinghouses. In close consultation with our fellow domestic and international regulators, including the Federal Reserve Board and the Securities and Exchange Commission, the CFTC proposed rulemakings on risk management for clearinghouses. These rulemakings take into account relevant international standards, particularly those developed by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (CPSS-IOSCO).

The Dodd-Frank Act gives both the Council and the Federal Reserve Board important roles in clearinghouse oversight by authorizing the Council to designate certain clearinghouses as systemically important and by permitting the Federal Reserve Board to recommend heightened prudential standards in certain circumstances.

The Council’s final rulemaking complements the CFTC’s rulemaking efforts and enhances the regulation of systemically important financial market utilities, which will mitigate systemic risk and promote financial stability.

Report to Congress on Secured Creditor Haircuts

I will vote to approve the Report to Congress on Secured Creditor Haircuts. The report appropriately addresses the arguments in favor of and against legislation to mandate secured creditor haircuts, and also provides a helpful analysis of the academic literature on this subject.

The report also covers the issues Congress specified, including a comparison of the relevant aspects of resolution under the Bankruptcy Code, Federal Deposit Insurance Act, and Dodd-Frank Title II Orderly Liquidation Authority. And it discusses other means to promote market discipline."

SEC ISSUES BULLETIN ON FOREIGN CURRENCY EXCHANGE TRANSACTIONS

The following bulletin is an excerpt from the SEC website: “Washington, D.C., July 20, 2011 — The Securities and Exchange Commission today issued an investor bulletin highlighting some of the most significant risks that foreign currency exchange (forex) transactions may pose for individual investors. The forex market is a large and generally liquid financial market. Banks, insurance companies, and other financial institutions as well as large corporations use the forex markets to manage the risks associated with fluctuations in currency rates. However, the risk of loss for individual investors who trade forex contracts can be substantial. “Forex trading can be very risky and is not appropriate for all investors,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “Individual investors considering forex trading need to fully understand the unique characteristics of this market and consult their financial adviser before making any investment decisions.” Last week, the Commission issued an interim final temporary rule to permit registered broker-dealers to continue to engage in retail forex transactions for up to one year under the existing regulatory framework that applies to them when effecting such transactions. Under Section 742(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, retail forex transactions would have been prohibited as of July 16, 2011, in the absence of Commission action. The interim rule provides the Commission with time to collect additional information regarding the retail forex activities of broker-dealers and take such regulatory action as may be appropriate to reduce forex risk for investors purchasing or selling foreign securities.”

TWO FORMER PRUDENTIAL REPRESENTATIVES ORDERED T PAY BACK OVER $1.1 MILLION

Martin J. Druffner Ordered to Pay $1,131,157 in Ill-Gotten Gains and Prejudgment Interest; Skifter Ajro Ordered to Pay $124,427

The following is an excerpt from the SEC website:

The Commission today announced that, on July 13, 2011, a Massachusetts federal court entered an order against Martin J. Druffner of Hopkinton, Massachusetts, and Skifter Ajro of Milford, Massachusetts, two defendants in a civil injunctive action filed by the Commission on November 4, 2003, requiring them to pay $1,131,157 and $124,427, respectively, in disgorgement and prejudgment interest. The court had previously entered judgments against Druffner and Ajro on October 10, 2006 enjoining them from future violations of the federal securities laws. The Commission alleged in its complaint that Druffner and Ajro, former registered representatives of broker-dealer Prudential Securities, Inc., committed fraud in connection with their deceptive market timing trades in dozens of mutual funds.
The Commission filed its complaint against Druffner and Ajro, three other former Prudential Securities registered representatives, and their former branch manager, on November 4, 2003, and amended its complaint on July 14, 2004. The amended complaint alleged that Druffner and Ajro were part of a group of registered representatives that defrauded mutual fund companies and the funds' shareholders by placing thousands of market timing trades worth more than $1 billion for five hedge fund customers from at least January 2001 through September 2003. According to the amended complaint, Druffner and Ajro knew that the mutual fund companies monitored and attempted to restrict excessive trading in their mutual funds. The amended complaint alleged that, to evade those restrictions when placing market timing trades, members of the group disguised their own identities by establishing multiple broker identification numbers and disguised their customers' identities by opening numerous customer accounts for what were, in reality, only a handful of customers.
The order was entered by the Honorable Nathaniel M. Gorton of the United States District Court for the District of Massachusetts.
In addition to the Commission's civil injunctive action, Druffner pled guilty to four counts of securities fraud and four counts of wire fraud on September 15, 2006. He was sentenced to 6 months of home confinement, three years of probation, and a $4,000 fine. He was also barred from associating with any broker, dealer, or investment adviser on March 17, 2006. Similarly, Ajro pled guilty to four counts of securities fraud and four counts of wire fraud on August 9, 2006. He was sentenced to two years of probation and a $2,000 fine. He was also barred from associating with any broker, dealer, or investment adviser on February 2, 2006.”

CFTC COMMISSIONER MICHAEL DUNN'S SPEECH ON DODD-FRANK

The following is an excerpt from the CFTC website:

Opening Statement, Public Meeting on Dodd-Frank Act
Commissioner Michael V. Dunn
July 19, 2011

Thank you all for joining us today for our second meeting to consider final rules promulgated pursuant to the Dodd-Frank Act. Today we consider three final rules:

Part 40, Provisions Common to Registered Entities;
The Process for Review of Swaps for Mandatory Clearing;
Removing any Reference to or Reliance on Credit Ratings in Commission Regulations; Proposing Alternatives to the Use of Credit Ratings
Before even considering any final rule, I ask each rule writing team to answer a set of questions. First and foremost among these questions is whether or not the proposed final rule adheres to the agency’s principle-based regulatory approach, an approach that has served the futures industry well both before and after the financial crisis. I am concerned that the final rule regarding Part 40 is too prescriptive and does not adhere to our principle-based approach. Despite staff’s efforts to soften this rule in response to comments on our original proposal, I still believe that the requirements in the final rule regarding documentation are prescriptive in nature. Additional requirements for the self-certification of products may unnecessarily delay exchange innovation for little to no benefit to the CFTC.

Part 40 also includes rules pertaining to rule certifications for systemically important designated clearing organizations. Like both the CME and OCC, I believe that a SIDCO attempting to implement a risk reducing rule change should not have to wait up to 60 days to change their rules. While I understand that the CFTC must consult with the Federal Reserve regarding certain matters relating to SIDCOs, such consultation should not jeopardize the public interest. This portion of Part 40 seems to not only slow down a SIDCO seeking to reduce systemic risk, but it may slow down our ability to approve such a change as well.

From early in the proposed rule phase of Dodd-Frank implementation, I have stated my concern that budget constraints and the efforts of those who would delay, weaken, or eliminate Dodd-Frank would force us to be more prescriptive than we would otherwise be in promulgating our final rules. I fear that my concerns have come to fruition in this rule. If not for our budget constraints, I would vote against this rule. As it stands, I must weigh my disdain for prescriptive, perhaps restrictive, rules against the competing interest of having a rule that we can implement and enforce with an undersized and overworked staff.

I also expressed concerns and questions to the Chairman’s office and the rule team regarding the final rule on the process for review of swaps for mandatory clearing. As has been the case throughout this process, the Chairman’s office and the rule team were accommodating in answering my questions, making necessary changes, and working collaboratively with my office. I continue to give the Chairman high marks for conducting an open and transparent rulemaking process.

In addition to the final rules considered today, we are also considering a proposed rule on Customer Clearing Documentation, Timing of Acceptance for Clearing and Clearing Member Risk Management. While I again have concerns that this proposed rule is too prescriptive, I will look to the public comments to guide my ultimate decision on whether or not to vote for this rule.

I would like to acknowledge that this week will mark the first anniversary of the Dodd-Frank Act. Over the past year, the Chairman and his staff have done a tremendous job moving forward on implementation of Dodd-Frank despite limited resources. As we move forward in the coming months on the bulk of the new regulations required by Dodd-Frank, I urge the Chairman to place special emphasis on rules pertaining to the regulation of swaps transactions, which were, in my opinion, largely responsible for the financial meltdown. With all of the Commission’s new responsibilities under Dodd-Frank, this is not the time for us to make significant changes to regulations pertaining to the futures industry which functioned properly during the financial crisis. We need to focus our limited resources on regulations that will provide real safeguards to our financial service industry.

I would like to thank the staff at the CFTC for all their hard work on these very important rules. The rule writing teams have put in incredibly long hours answering difficult and time consuming questions from the Commissioners’ offices. I appreciate their effort and look forward to their presentations."

CFTC COMMISSIONER O'MALIA SPEAKS ON ACCOUNTABILITY

The statement below by Commissioner Scott O’Malia and is excerpted from the CFTC website:

“The Importance of Being Accountable”
Opening Statement by Commissioner Scott D. O’Malia
July 19, 2011
Public Hearing:
Consideration of Proposed Rules: Customer Clearing Documentation, Timing of Acceptance for Clearing and Clearing Member Risk Management
Consideration of Final Rules: Process for Review of Swaps for Mandatory Clearing; Part 40, Provisions Common to Registered Entities; and Removing Any Referance to or Reliance on Credit Ratings in Commission Regulations, Proposing Alternatives to the Use of Credit Ratings
Today, the Commission will consider three final rules and two proposed rules. I support the final rules as they are noncontroversial process rules. However, I have serious concerns with both proposed rules as they rely on weak statutory authority, poorly articulate a necessity for either rule and are neither justified nor required under the Dodd-Frank Act. Today’s draft rules regarding client documentation and clearing member risk standards were never mentioned previously during these months of intense rulemaking and seem to be fabricated from whole cloth. This is unacceptable.
I have grown increasingly frustrated with the rulemaking process because there appears to be no specific plan or strategy for implementing these rules, nor do we appear to be following President Obama’s direction to ensure that the federal rulemaking process be done in the most transparent, responsible and accountable fashion.
I have requested specific reforms to improve the rulemaking process, but each request has been met with silence. I fear that we are running astray of the President’s executive orders by eschewing transparency and accountability in favor of opacity and expediency. As we push forward, we are running out of time to make a correction. To be clear, the failure to produce a final rule schedule and implementation plan the next time the Commission meets on August 4th will render public input irrelevant as the Commission barrels through with final rules this fall.
Creating a More Open Government
In his inaugural address, President Obama gave us the directive; he told us to enter a new era of responsibility. To those of us who manage the public’s dollars, President Obama warned that we will be held accountable. Through spending wisely, reforming bad habits, and doing our business in the light of day, the President said that we can restore the trust between the American people and their government. Two days later, the President issued a memorandum to the heads of the Executive Departments and Agencies titled “Transparency in Open Government” in which he further laid out his implementation plan for an administration committed to creating an unprecedented level of openness in government.1 This plan offers the public increased opportunities to participate in policymaking and to provide the benefits of their expertise. It is about utilizing technology to communicate, collaborate, and improve opportunities to make the entire process more efficient and effective.
Executive Order #13,563 – Improving Regulation and Regulatory Review
This past January, President Obama grabbed our attention with a Wall Street Journal opinion piece2 to accompany his signing of Executive Order 13,563 “Improving Regulation and Regulatory Review.”3 He put the administration on this mission: “[T]o root out regulations that conflict, that are not worth the cost, or that are just plain dumb.” Yes, he did say that.
Executive Order #13,579 – Application to Independent Agencies
Six months later, the President signed another Executive Order (Executive Order 13,579) titled “Regulation and Independent Regulatory Agencies.”4 If the January directive wasn’t clear, this new order should eliminate any doubt that Independent Agencies like the CFTC must go out of their way to ensure responsible rulemaking by, among other things, undertaking a thorough cost benefit analysis, both qualitatively and quantitatively, to ensure that new rules do not impose unreasonable costs. We also must make our process more accountable through increased transparency and openness, which our current process lacks.
Reforms to Our Rulemaking Process
In an effort to respond to the concerns of the many citizens who have walked through my door and submitted comment after comment in the more than fifty rulemakings to date, I have put forward two proposals to squarely address the need for greater openness, transparency and accountability.
First, I have called for a detailed plan that reveals the order, timing, and substance of the Commission’s rules implementing and effectuating the Dodd-Frank Act. This proposal should have the benefit of public comment as well.
Second, I have requested that all proposed and final rules that the Commission will be voting on be published for seven-days prior to each public meeting. Today, the public must wait days, if not weeks for the Federal Register to publish proposed and final rules that the Commission has already voted on. My proposal will give the public a clear picture of the end result of the rulemaking process prior to our final vote.
The Commission has responded with silence, cementing in my mind that the current process is inadequate.
The Commission is tentatively scheduled to next meet on August 4th. I ask again that we make the final rule proposals publicly available seven days prior to that meeting. At that meeting, I propose that we first and foremost vote to put forward a clear rulemaking order and implementation schedule for public comment. This will allow the public to comment on the draft schedule during August before too many more final rules are passed this fall. If we continue to delay development of an implementation schedule and continue to adopt rules without the benefit of meaningful final comment, then we are being downright insubordinate. To ignore our President not once, but twice, and to respond to Congressional recommendations such as the letter we received Thursday, July 14th from Chairman Lucas and Subcommittee Chairman Conaway, which again implored us to adhere to what amounts to notions of honest dealing and fair play and to not make speed more important than substance, is arrogant and shameful. We can do better, and we should.
The Rules Before Us
The Removal of References to Credit Rating Agencies
I’d like to recognize Ward Griffin and his team for their work on the final rule before us regarding the removal of references to credit rating agencies from the Commission’s regulations.
Part 40 Rule Certification
I commend Bella Rosenberg, and her team for their work on this rule that provides an improved process for the evaluation of designated contract markets (DCMs), swap execution facilities (SEFs) and swap data repositories (SDRs) against the core principles outlined in the Commodity Exchange Act (CEA). The team has given thoughtful consideration to comments from both the public and from my office, and I believe their willingness to hear concerns and seek practical solutions that work has resulted in a final rule that is an improvement from the rule proposal.
Part 39 Process for Review of Swaps for Mandatory Clearing
I also commend Eileen Donovan and her team on their work to establish a new process for reviewing swaps for mandatory clearing. I support the final regulation today, because the regulation sets forth a reasonable process for a clearing organization: (1) to request, if necessary, that the Commission determine whether the clearing organization is eligible to clear swaps; and (2) to submit a swap to the Commission for review.
In addition, the regulation sets forth a reasonable process for a swap counterparty to request that the Commission stay a clearing requirement pending review. However, it is not enough for the Commission to simply establish a process for clearing organizations and swap counterparties to request or contest clearing determinations. In their comments to the Commission, market participants, as well as international regulators, have requested more transparency and clarity on substance. For example, they have requested greater certainty on the criteria that the Commission will use to determine whether mandatory clearing is appropriate for a swap.
I recognize that such specificity will not be provided in this rule. Instead, I have drafted a letter that I will be sending to clearing organizations and market participants seeking their input on further defining the various thresholds and standards that the Commission should consider in determining whether a swap should be subject to mandatory clearing. (See Attachment). I hope to receive comments during the 60 days prior to the effective date of this rule, and I hope that such comments will inform staff discussions going forward. Given our emphasis on clearing to manage systemic risk, to move forward on mandatory clearing without written guidance is irresponsible. It is also arguably an abrogation of our responsibilities under Section 2(h)(3)(D) of the CEA, as amended by the Dodd-Frank Act.5 I also hope that such comments will inform a roundtable discussion, as well as written guidance, on these important questions.
Another concern that I have with this rule is that it overreaches in interpreting Section 723(a)(3) of the Dodd-Frank Act, and in Regulation 39.5(c)(3)(iii). Basically, the final regulation leaves open the possibility that the Commission could impose capital and margin requirements directly on end-users exempt from the clearing requirement. This interpretation contradicts the letter from Senator Christopher Dodd and Senator Blanche Lincoln, which states, among other things, that “Congress clearly stated in this bill that the margin and capital requirements are not to be imposed on end users.” Further, the final regulation permits the Commission to impose capital and margin requirements on bank swap dealers and bank major swap participants. Understandably, the Office of the Comptroller of the Currency, our fellow regulator, disagrees.
Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management
I oppose the two proposed rulemakings on (i) Client Clearing Documentation and Timing of Acceptance for Clearing and (ii) Clearing Member Risk Management. Both proposals fail to conform to the type of responsible rulemaking that I have tried to persuade the Commission to endorse. The two proposed rules before us today put the cart ahead of the horse. Neither rule is mandated under Dodd-Frank, nor are they well grounded in statutory authority. Further it is unclear as to what resources the Commission will utilize to administer these two new optional rules.
Without statutory direction and given the massive number of rules already under consideration, I imagined the Commission would have developed a justification for the policy recommendations before us today. Unfortunately, neither the Commission nor the staff held a single hearing to understand whether or not we have a serious problem, or we are drafting rules in search of a problem.
Setting aside the flawed process in the development of these rules, this first proposal regarding client clearing documentation may be attempting to solve a problem that no longer exists. The proposal alleges that a voluntary annex to a voluntary model agreement from two industry associations6 may restrict open access to clearing and harm competitive trading. I understand that more than 60 market participants, on both the buy- and sell-sides, discussed the voluntary model agreement over a period of several months. The final agreement reflected an accommodation – even if imperfect – of their respective interests.7
I am very supportive of maximizing the effectiveness of clearing. I do not want any artificial barriers to clearing, such as needless credit or position sub-limits. Based on the practices in the futures market, I am also quite certain that technology is available to ensure timely acceptance of trades. However, as the second part of this rulemaking (i.e., the Timing of Acceptance for Clearing) makes evident, the industry must still resolve a number of operational issues. Therefore, there may be a role for certain types of documentation. Ideally, the buy-side, sell-side, and clearing organizations will continue their dialogue on such documentation. Before substituting Commission judgment for private consensus, I hope the Commission will host a public roundtable and a Commission meeting to see if the restrictions and anticompetitive effects alleged in this rulemaking exist, and, if so, how to resolve these issues to everyone’s satisfaction.
The second proposal regarding clearing member risk management fails to justify its costs in light of its benefits. First, as I mentioned previously, the proposal is neither mandated by the Dodd-Frank Act nor any provision in the CEA. Second, the proposal would require the Commission to ascertain whether clearing members are following certain risk management procedures. However, under another rulemaking, the Commission assigns the same responsibility to clearing organizations.8 Given our resource constraints, the Commission should focus on supervising clearing organizations – the main bulwarks against systemic risk. The Commission should ensure that clearing organizations are fulfilling their self-regulatory responsibilities, and adequately evaluating the risk management of its members. The Commission should not divert its resources to directly auditing clearing members, the failure of any one of which may be non-systemic.
Frankly, I would rather see the Commission dedicate resources towards developing real-time trade surveillance capabilities, rather than developing a redundant oversight function that will require additional resources we don’t possess. As our President has advised, we will be held accountable.
Mr. Chairman, I greatly appreciate the hard work of the staff and I sincerely hope you will provide an answer as to whether or not the Commission will publish a rule making schedule and an implementation timetable that includes dates to give the market and its participants an unambiguous strategy for implementing the Dodd-Frank rules. I also hope you will commit to publishing our draft rules when you publish the notice regarding all commission meetings.”