MAN SENTENCED IN SOUTH FLORIDA $135 MILLION INVESTOR FRAUD CASE

FROM:  SEC
Royal West Properties, Inc. Founding Principal Sentenced In $135 Million Investor Fraud
On April 4, 2012, U.S. District Judge Kathleen Williams of the Southern District of Florida sentenced Gaston E. Cantens to five years’ imprisonment followed by three years of supervised release for conspiring to commit mail and wire fraud in violation of 18 U.S.C. §371 involving a $135 million securities offering fraud and Ponzi scheme targeting Cuban-American investors primarily from South Florida. Cantens, who is now 73, served as president of Royal West Properties, Inc. (Royal West), a Miami-based real estate developer that purchased and resold thousands of parcels of real estate on the west coast of Florida. Cantens funded Royal West by offering investors no-risk promissory notes that promised investors annual returns of 9% to 16% purportedly backed by recorded mortgage assignments. On January 25, 2012, Cantens pled guilty to a criminal Information filed by the United States Attorney for the Southern District of Florida. According to the Information, beginning in 2008, Cantens made numerous material misrepresentations to investors about the financial health of Royal West when Cantens knew that Royal West, among other things, paid existing investors with new investors’ funds, assigned the same collateral to multiple investors, assigned investors to non-performing or non-existing mortgages, and failed properly to record mortgages and other interests in the public records, causing investors to have unsecured legal interests in the mortgages and parcels.

On March 3, 2010 the SEC filed an injunctive action that named Cantens and his wife, Teresita Cantens, as defendants.  The SEC’s complaint alleged that Cantens and his wife 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. On March 24, 2011, both Cantens and Teresita Cantens each consented to entry of a Final Judgment of Permanent Injunction and Other Relief in the SEC action. In addition to being enjoined from further violations of the federal securities laws, Cantens and his wife were ordered to pay full injunctive relief and disgorgement of $5,276,750, along with prejudgment interest of $88,297.62. The Order forgoes seeking payment of civil penalties under Section 20(d) of the Securities Act and Section 21(d) of the Exchange Act based on the Cantens’s asserted inability to pay as evidenced by their sworn financial statements and supporting documents submitted to the Commission staff.

SEC ALLEGES FLORIDA MAN MADE FALSE CLAIMS ON QUARTERLY REPORTS

FROM: SEC
Commission Charges South Florida Man in Investment Fraud Scheme
The Commission today charged that a South Florida investment manager defrauded investors by making false claims about his investment track record and providing bogus account statements that reflected fictitious profits.

In the complaint filed in the U.S. District Court for the Southern District of Florida, the SEC alleges that since 2005, George Elia and International Consultants & Investment Group Ltd. Corp., pulled in at least $11 million from investors by falsely claiming annual returns as high as 26%, and that Elia transferred more than $2.5 million of investor funds to two entities he controlled, Elia Realty, Inc., and 212 Entertainment Club, Inc.

Elia, age 67, and until recently a resident of Oakland Park, Florida, told investors that he had extensive experience in day trading stocks and exchange-traded funds, but his trading resulted in losses or only marginal gains, and the quarterly account statements he sent to clients overstated their returns, the SEC alleged.

According to the SEC’s complaint, Elia typically met and pitched prospective investors over meals at expensive restaurants in and around Fort Lauderdale. The SEC said his clients typically came to him through word-of-mouth referrals among friends and relatives.  A significant number of the victims of his scheme were members of the gay community in Wilton Manors, Florida.

"Elia's blatant fraud and cruel deceptions have wrecked the lives of investors and their families," said Eric I. Bustillo, Regional Director of the SEC's Miami Regional Office. "This is a sad lesson that investors must always be skeptical of claims of high and steady investment returns, even when the manager is recommended by trusted friends or members of one’s own community."

In a parallel criminal case, the U.S. Attorney for the Southern District of Florida announced that Elia was indicted on April 5 on one count of wire fraud.

The SEC alleges that Elia and ICIG operated through an informal “Investor Funding Club” and through funds including Vision Equities Fund II, LLC and Vision Equities Fund IV, LLC. It alleges that Elia sent one investor a statement for the first three quarters of 2009, showing returns of 3.48%, 3.48%, and 3.52% respectively.  The SEC alleges the statement was false and misleading because the returns exceeded Elia’s trading gains for the period.  In at least one instance, the SEC alleges Elia reassured an investor by showing him falsified statements that grossly overstated account balances.

The SEC’s complaint charges that Elia and ICIG violated antifraud provisions of U.S. securities laws and that Elia aided and abetted violations by the firms.  The SEC is seeking permanent injunctions against Elia and ICIG, disgorgement of ill-gotten gains plus pre-judgment interest, and civil penalties.  The complaint also named Elia Realty, Inc. and 212 Club Entertainment, Inc. as relief defendants.
The Commission thanks the U.S. Attorney’s Office for the Southern District of Florida and the Federal Bureau of Investigation for their assistance in this matter. (Press Rel. 2012-56; LR-22319)

CFTC ORDERS JPMORGAN CHASE TO PAY $20 MILLION TO SETTLE ILLEGAL HANDLING OF CUSTOMER FUNDS

FROM CFTC
April 4, 2012
CFTC Orders JPMorgan Chase Bank, N.A. to Pay a $20 Million Civil Monetary Penalty to Settle CFTC Charges of Unlawfully Handling Customer Segregated Funds
CFTC charges relate to JPMorgan’s handling of Lehman Brothers, Inc.’s customer segregated funds.

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed and simultaneously settled charges against JPMorgan Chase Bank, N.A. (JPMorgan) for its unlawful handling of Lehman Brothers, Inc.’s (LBI) customer segregated funds. The CFTC order imposes a $20 million civil monetary penalty against JPMorgan. The order also requires JPMorgan to implement undertakings to ensure the proper handling of customer segregated funds in the future and to release customer funds upon notice and instruction from the CFTC.

The CFTC order finds that from at least November 2006 to September 2008, JPMorgan was a depository institution serving LBI, a futures commission merchant (FCM) registered with the CFTC. During this time, LBI deposited its customers’ segregated funds with JPMorgan in large amounts that varied in size, but almost always more than $250 million at any one time. According to the order, during the same time period, JPMorgan extended intra-day credit to LBI on a daily basis to facilitate LBI’s proprietary transactions, including repurchase agreements, or “repos.” JPMorgan would extend intra-day credit to LBI to the extent that LBI’s “net free equity” at JPMorgan was positive. As of November 17, 2006, JPMorgan included LBI’s customer segregated funds in its calculation of LBI’s net free equity, even though these funds belonged to LBI’s customers, not to LBI, the order also finds.

The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like JPMorgan, from using or holding segregated funds that belong to an FCM’s customer as though they belong to anyone other than that customer, and also prohibit the extension of credit based on such funds to anyone other than that customer.

According to the order, JPMorgan violated these prohibitions in two ways. First, as stated in the order, JPMorgan extended intra-day credit to LBI for approximately 22 months based in part on LBI customers’ segregated funds because those funds were included in JPMorgan’s determination of LBI’s net free equity. Second, on September 15, 2008, Lehman Brothers Holding, Inc. filed for bankruptcy. Two days later, LBI requested that JPMorgan release LBI’s customers’ segregated funds. JPMorgan improperly declined the request based on JPMorgan’s determination that LBI no longer had positive net free equity held at JPMorgan. JPMorgan continued to refuse to release these funds for approximately two weeks thereafter, only to release the funds after being instructed by CFTC officials. The CFTC order does not find that there were any customer losses.

“The laws applying to customer segregated accounts impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal,” said David Meister, the Director of the CFTC’s Division of Enforcement. “As should be crystal clear, these laws must be strictly observed at all times, whether the markets are calm or in crisis."

CFTC Division of Enforcement staff members responsible for this matter are Joan M. Manley, A. Daniel Ullman II, and Alison B. Wilson. Ananda K. Radhakrishnan and Robert B. Wasserman, of the CFTC’s Division of Clearing and Risk, also contributed to this matter.

CFTC CHARGES ROYAL BANK OF CANADA WITH WASH SALE SCHEMING

FROM CFTC
CFTC Charges Royal Bank of Canada with Multi-Hundred Million Dollar Wash Sale Scheme
CFTC also charges that bank concealed material information from, and made material false statements to, a futures exchangeWashington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a complaint in federal district court in New York charging theRoyal Bank of Canada (RBC), a Canadian bank and financial services firm doing business in New York, with conducting a multi-hundred million dollar wash sale scheme in connection with exchange-traded stock futures contracts. The CFTC’s complaint also alleges that RBC willfully concealed, and made false statements concerning, material aspects of its wash sale scheme from OneChicago, LLC (OneChicago), an electronic futures exchange, and CME Group, Inc. (CME Group), the entity that exercised the regulatory compliance function for OneChicago.

From at least June 2007 to May 2010, RBC allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index futures (NBI) and single stock futures (SSF) contracts with two of its subsidiaries that RBC reported as “block” trades on OneChicago.  The CFTC’s complaint alleges that RBC’s NBI and SSF trading activity, which accounted for the majority of OneChicago’s volume during the relevant period, constituted unlawful non-competitive trades, wash sales and fictitious sales.

Specifically, according to the CFTC’s complaint, RBC’s NBI and SSF trades were not negotiated at arm’s length between the counterparties to the trades, as required by law, but were instead designed and controlled by a small group of senior RBC personnel acting on RBC’s behalf.  The trading scheme was allegedly designed as part of RBC’s strategy to realize lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts.

Prior to each trade, RBC allegedly identified stocks in U.S. and Canadian companies that RBC believed would generate a tax benefit.  RBC and a subsidiary allegedly bought and sold these stocks, and also bought and sold NBI or SSF futures contracts written on the stocks opposite each other.  According to the complaint, RBC’s futures trading was conducted in a riskless manner that ensured that the positions, profits and losses of each RBC counterparty washed to zero, in disregard of the price discovery principles of the futures markets, which resulted in a financial and position nullity for RBC while allowing it to reap the tax benefits.

In addition, the CFTC’s complaint alleges that, from at least January 2005 to April 2010, RBC unlawfully concealed material information from, and made false statements to, CME Group concerning RBC’s SSF trading activity.  Specifically, the complaint alleges that when RBC purported to describe the trades to CME Group, RBC falsely stated that its SSF trading was conducted at arm’s length between the counterparties to the trades, and concealed the fact that the trading strategy was created and managed by a group of senior RBC personnel acting on RBC’s behalf.  In addition, the complaint alleges that RBC concealed from CME Group the fact that it had intentionally designed its stock futures trading strategy to exclude non RBC-affiliated parties from RBC’s futures trades.

“A fundamental purpose of the futures markets is to provide an arm’s-length mechanism for market participants to discover prices and shift risks associated with products traded in those markets,” said David Meister, the Director of the CFTC’s Division of Enforcement.  “As we allege, RBC not only designed and executed a wash sale scheme that undermined that purpose, it went a step further and misled the exchange into believing that its conduct was lawful.  Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain.”

In its continuing litigation, the CFTC seeks civil monetary penalties and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC’s Regulations, as charged.

The following CFTC Division of Enforcement staff members are responsible for this case: Susan Gradman, David Slovick, Lindsey Evans, Joseph Rosenberg, Joseph Patrick, Scott Williamson, Rosemary Hollinger and Richard Wagner.

BANK HOLDING COMPANY CEO AND CFO CHARGED BY SEC WITH MISLEADING INVESTORS

FROM:  SEC
Commission Charges Texas Bank Holding Company’s CEO and CFO with Misleading Investors about Loan Quality and Financial Health during the Financial Crisis
The Commission announced that it charged Franklin Bank Corp.’s former chief executives for their involvement in a fraudulent scheme designed to conceal the deterioration of the bank’s loan portfolio and inflate its reported earnings during the financial crisis.

The SEC alleges that former Franklin CEO Anthony J. Nocella and CFO J. Russell McCann used aggressive loan modification programs during the third and fourth quarters of 2007 to hide the true amount of Franklin’s non-performing loans and artificially boost its net income and earnings.  The Houston-based bank holding company declared bankruptcy in 2008.

“Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “Franklin’s analysts and investors monitored the quality of the bank’s loan portfolio as a key indicator of its financial health.  But Nocella and McCann intentionally concealed the fact that the quality of the bank’s loan portfolio was rapidly deteriorating.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Texas late Thursday, as Franklin’s holdings of delinquent and non-performing loans rose significantly in the summer of 2007, Nocella and McCann instituted three loan modification schemes that caused Franklin to classify such loans as performing.  By the end of September 2007, Nocella and McCann had used the loan modification programs to conceal more than $11 million in non-performing single family residential loans and $13.5 million in non-performing residential construction loans.

As a result of the loan modifications, Franklin overstated its third-quarter 2007 net income and earnings by 317% and 77% respectively, and reported that it earned $0.30 per share, of which $0.23 per share was directly attributable to the loan modifications.  On May 2, 2008, in a Form 8-K report filed with the SEC, Franklin acknowledged that the accounting for the loan modifications should be revised and that investors should no longer rely upon Franklin’s Form 10-Q for the quarter ended September 30, 2007.
The SEC’s complaint seeks financial penalties, officer-and-director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws.  The complaint also seeks repayment of bonuses received by Nocella and McCann under Section 304 of the Sarbanes Oxley Act of 2002, which allows for “clawbacks” of bonuses received by executives if the company later must restate its earnings.

CFTC WILL PROHIBIT BETTING ON FEDERAL ELECTIONS WITH DERIVATIVE CONTRACTS

FROM CFTC
CFTC Issues Order Prohibiting North American Derivatives Exchange’s Political Event Derivatives Contracts
Washington, DC – The Commodity Futures Trading Commission (CFTC) today issued an order pursuant to Section 5c(c)(5)(C)(ii) of the Commodity Exchange Act and CFTC Regulation 40.11(a)(1), prohibiting the North American Derivatives Exchange (Nadex) from listing or making available for clearing or trading a set of self-certified political event derivatives contracts. The contracts are binary option contracts that pay out based upon the results of various U.S federal elections to be held in 2012.

Nadex self-certified the contracts on December 19, 2011, and on January 3, 2012, the CFTC initiated a 90-day review period of the contracts pursuant to CFTC Regulation 40.11(c). As a result of reviewing the complete record, the CFTC determined that the contracts involve gaming and are contrary to the public interest, and cannot be listed or made available for clearing or trading. By a separate letter, the CFTC also requested that Nadex withdraw its self-certification of related rule amendments that were submitted by Nadex to enable trading of the contracts.