SHOULD FIRMS BE BANNED FROM DESIGNING A TRANSACTION TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”. This speech is an excerpt from the SEC website: September 19, 2011 Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure. In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2 The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts. In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”

SEC ALLEGES PAYDAY LOAN OWNER USED INVESTOR MONEY FOR CARS, GAMBLING AND HOME IMPROVEMENTS

The following excerpt is from the SEC website: September 22, 2011 “The Securities and Exchange Commission today charged the owner of a Spokane-Wash.-based payday loan business with conducting a massive Ponzi scheme and stealing investor money to fund her home improvement projects, gambling jaunts to Las Vegas, and purchases of a Corvette and a Mercedes. The SEC alleges that Doris E. Nelson of Colbert, Wash., defrauded investors in her company - the Little Loan Shoppe - by misrepresenting the profitability and safety of their investments and giving them the false impression that their money was being used to grow her business. In truth, Nelson used the vast majority of new investor money to repay principal and purported returns to earlier investors. She misappropriated millions of dollars in investor funds for her personal use. According to the SEC's complaint filed in federal district court in Spokane, Nelson raised approximately $135 million between 1999 and 2008 from at least 650 investors in the United States, Canada, and Mexico. Nelson falsely told investors that Little Loan Shoppe was financially sound. In written promissory notes, Nelson promised investors annual returns of 40 to 60 percent that she claimed would be paid through Little Loan Shoppe's profits. She also told investors that their money was safe because she had insurance or a separate account to pay investors back. However, Little Loan Shoppe was not profitable, investor money was not safe, and Nelson misappropriated the money to run her Ponzi scheme. The SEC further alleges that in mid-2008 as the scheme was nearing collapse, Nelson made a last-ditch effort to attract more investment money by announcing a "window to invest" and falsely telling investors that Little Loan Shoppe had "defied financial gravity" in the declining economy. Investors responded by investing millions of dollars in 2008 before the scheme finally collapsed in 2009. Payments to investors ceased and Little Loan Shoppe was forced into bankruptcy. In its federal court action, the SEC alleges Nelson violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and monetary penalties.”

KARA N. BROCKMEYER NAMED CHIEFOF FCPA UNIT FORCUSED ON ANTI-BRIBERY PARTS OF FEDERAL SECURITIES LAWS

The following is an excerpt from the SEC website: "Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission’s Division of Enforcement announced today that Kara Novaco Brockmeyer has been named Chief of its national specialized Foreign Corrupt Practices Act Unit that focuses on violations of the anti-bribery provisions of the federal securities laws. Ms. Brockmeyer has been serving as an Assistant Director in the Enforcement Division and supervising a number of complex investigations involving violations of the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. companies from bribing foreign officials to obtain government contracts and other business. Ms. Brockmeyer spearheaded the SEC’s investigation of Halliburton Co., KBR Inc., Technip S.A., and ENI S.p.A. for FCPA violations resulting from a decades-long bribery scheme in Nigeria. The SEC’s actions in this matter together with the Department of Justice resulted in the recovery of $1.2 billion of ill-gotten gains and criminal penalties. In addition to her significant FCPA experience, Ms. Brockmeyer has served as the co-head of the Division’s Cross Border Working Group, a proactive risk-based initiative focusing on U.S. companies with substantial foreign operations. Ms. Brockmeyer’s efforts on the Cross Border Working Group have resulted in several recent significant enforcement actions, including the Commission’s first stop orders for post-effective registration statements due to the resignation of the companies’ independent auditor. “Kara’s creativity and perseverance is reflected in her outstanding efforts and results over the years in fulfilling the Commission’s mission of investor protection,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Enforcement of the FCPA remains a high priority for the Division, and adding Kara’s talent to the exceptional ability and dedication of the members of the Foreign Corrupt Practices Act Unit will further enhance our anti-corruption program.” Ms. Brockmeyer said, “I am looking forward to the privilege of leading the Foreign Corrupt Practices Act Unit and its dedicated and talented staff.” Ms. Brockmeyer is filling the position previously held by Cheryl Scarboro, who left the agency in June after serving as the first chief of the unit. Ms. Brockmeyer joined the SEC in 2000 following several years in private practice. She started supervising investigations in 2002 and was promoted to Assistant Director in 2005. In addition to FCPA investigations, Ms. Brockmeyer has substantial experience supervising matters involving financial fraud, insider trading, market manipulation, and violations by regulated entities. Ms. Brockmeyer received her law degree magna cum laude from the University of Michigan Law School and her undergraduate degree cum laude from Williams College."

KNOWN PURCHASERS WHO MADE CERTAIN TRADES HAVE HAD THEIR ASSETS FROZEN

UThe following excerpt is from the SEC website: “On September 16, 2011, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Global Industries, Ltd. (the “Unknown Purchasers”). The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the September 12, 2011 public announcement that Technip SA (“Technip”), a French company, and Global Industries, Ltd. (“Global”) had entered into an agreement pursuant to which Technip would offer to acquire all of the outstanding common stock of Global for $8.00 per share, a 55% premium over the closing price of Global common stock on the trading day preceding the public announcement. The Commission’s complaint alleges that the Unknown Purchasers engaged in insider trading, thereby violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil money penalties. The Commission’s complaint alleges that on September 8 and 9, 2011, the Unknown Purchasers bought a total of 685,840 shares of Global common stock through an omnibus account in the name of Raiffeisen Bank International AG Vienna, Austria, at Brown Brothers Harriman & Co., at share prices ranging from $5.14 to $5.39. These purchases accounted for 8.6% and 11.9%, respectively, of the total volume of Global trading on each of those days. The closing price for Global common stock on September 9 was $5.15 per share. On the next trading day, September 12, before the U.S. markets opened, the public announcement of the Global buy-out was made. Following the public announcement, Global shares opened at $7.77. The Unknown Purchasers sold all 685,840 shares of Global on September 12 at prices ranging from $7.77 to $7.80 per share, realizing a profit of approximately $1,726,809. The U.S. District Court for the Southern District of New York issued a Temporary Restraining Order freezing the assets relating to the trading; requiring the Unknown Purchasers to identify themselves, imposing an expedited discovery schedule, and prohibiting the defendants from destroying documents. The Commission acknowledges the Office of Fraud Detection and Market Intelligence of the Financial Industry Regulatory Authority (“FINRA”) for its assistance in this investigation.”

SEC ALLEGES A QUANTITATIVE FUND MANAGER CONCEALED A COMPUTER ERROR THAT COST INVESTORS $217 MILLION

The following excerpt is from the SEC website: Washington, D.C., Sept. 22, 2011 — The Securities and Exchange Commission today charged the co-founder of institutional money manager AXA Rosenberg with securities fraud for concealing a significant error in the computer code of the quantitative investment model that he developed and provided to the firm's entities for use in managing client assets. According to the SEC's order instituting administrative proceedings against Barr M. Rosenberg, he learned of the error in June 2009 but directed others to keep quiet about it and not fix it immediately. Rosenberg denied the existence of any significant errors in the model during an October 2009 board meeting discussion about its performance. AXA Rosenberg disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination. The error was not disclosed to clients until April 2010, causing them $217 million in losses. Rosenberg has agreed to settle the SEC's charges by paying a $2.5 million penalty and consenting to a lifetime securities industry bar. The SEC previously charged AXA Rosenberg and its affiliated investment advisers, and they agreed to pay $217 million to harmed clients plus a $25 million penalty. "Rosenberg chose concealment over candor, and in doing so selfishly served his interests over those of his clients," said Robert Khuzami, Director of the SEC's Division of Enforcement. Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement, added, "Investors in quant funds trust their advisers to develop, maintain and operate the quant models that drive a fund's performance. Rosenberg betrayed investors when he failed to disclose the material coding error." According to the SEC's order, Rosenberg created the model, oversaw research projects to improve and enhance it, and exercised significant authority throughout the AXA Rosenberg organization. The material error in the model's computer code disabled one of its key components for managing risk and affected the model's ability to perform as expected. Clients raised concerns about this underperformance, and Rosenberg knew about and discussed these concerns with others at AXA Rosenberg. But instead of disclosing and correcting the error immediately, Rosenberg directed others to conceal the error and declined to fix the error. The SEC's order found that due to Rosenberg's misconduct, AXA Rosenberg and its affiliated investment advisers misrepresented to clients that the model's underperformance was attributable to factors other than the error, and inaccurately stated that the model was controlling risk correctly. Rosenberg's instructions to delay fixing the error caused additional client losses. In its order, the SEC found that Rosenberg willfully violated anti-fraud provisions of the Investment Advisers Act of 1940, Sections 206(1) and 206(2). Without admitting or denying the SEC's findings, Rosenberg consented to the entry of an SEC order that requires him to cease and desist from committing or causing any violations and any future violations of these provisions; orders him to pay the $2.5 million penalty; and bars him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from serving as an officer, director or employee of a mutual fund.”

THREE TAKEN TO COURT OVER ALLEGEDLY SELLING FAKE SECURITIES AND RUNNING FAKE TRADING PROGRAMS

The following is an excerpt from the SEC website: “On September 19, 2011, the Securities and Exchange Commission filed an enforcement action in federal court in Massachusetts against Diane Glatfelter of Billerica, Massachusetts, Robert Rice of Tallahassee, Florida, and Robert Anderson of Madison, Indiana, charging each of them with participating in fraudulent schemes involving the promotion and sale of fictitious financial instruments and trading programs. The Commission also charged two entities controlled by Glatfelter and Rice, K2 Unlimited, Inc. and 211 Ventures, LLC, in connection with the scheme. The Commission's Complaint alleges that beginning in 2007, Glatfelter and Rice, through K2 Unlimited and 211 Ventures, offered fraudulent venture capital financing, which was purportedly to be raised through the use of "bank guarantees." According to the Commission's Complaint, Glatfelter, Rice and 211 Ventures also offered direct investments involving fictitious securities and trading programs, promising sky-high returns with guarantees against loss. In fact, the Commission alleges that the bank guarantees were non-existent fictional instruments and that the defendants defrauded investors of at least $1.8 million. The Commission's Complaint also alleges that in early 2009, Glatfelter became associated with Anderson and the two began to offer fraudulent investments to investors, also based in part on the use of various fictitious financial instruments. The Commission's Complaint alleges that Glatfelter and Anderson offered these fraudulent investments through an entity called E-Trust Clearing House, KB. The Commission alleges that Glatfelter and Anderson caused at least $425,000 in investor losses through the E-Trust scheme. The Commission's Complaint alleges that Glatfelter, Rice, Anderson, K2 Unlimited and 211 Ventures violated various anti-fraud, broker-dealer and securities registration provisions of the federal securities laws. Specifically, the complaint alleges that Glatfelter, Rice, Anderson and 211 Ventures violated Sections 5(a) and 5(c) of the Securities Act of 1933; that all defendants violated Section 17(a) of the Securities Act; that all defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; that Glatfelter and Rice aided and abetted K2 Unlimited and 211 Ventures' violations of Section 10(b) and Rule 10b-5 thereunder; and that Glatfelter, Rice and K2 Unlimited violated Section 15(a) of the Exchange Act. The Commission seeks permanent injunctions, disgorgement and prejudgment interest, and civil penalties against each defendant, and a bar prohibiting Glatfelter from serving as an officer or director of a public company. The Commission's Complaint alleges that the defendants in this matter purported to offer investment using the so-called "bank guarantees," stand-by letters of credit, or mid-term notes, among others. The Complaint alleges these instruments are fictitious and are not legitimate investments.”