CFTC CHAIRMAN SUPPORTS EXEMPTIVE ORDER REGARDING DATES OF SOME DODD-FRANK PROVISIONS

FROM:  COMMODITY FUTURES TRADING COMMISSSION
Statement of Support
Chairman Gary Gensler
July 3, 2012
I support the exemptive order regarding the effective dates of certain Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provisions.
Today’s exemptive order makes five changes to the exemptive order issued on December 19, 2011.

First, the proposed exemptive order extends the sunset date from July 16, 2012, to December 31, 2012.

Second, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have now completed the rule further defining the term “swap dealer” and “securities-based swap dealer.” Thus, the exemptive order no longer provides relief as it once did until those terms were further defined.

The Commissions are also mandated by the Dodd-Frank Act to further define the term “swap” and “securities-based swap.” The staffs are making great progress, and I anticipate the Commissions will take up this final definitions rule in the near term. Until that rule is finalized, the exemptive order appropriately provides relief from the effective dates of certain Dodd-Frank provisions.

Third, in advance of the completion of the definitions rule, market participants requested clarity regarding transacting in agricultural swaps. The exemptive order allows agricultural swaps cleared through a derivatives clearing organization or traded on a designated contract market to be transacted and cleared as any other swap. This is consistent with the agricultural swaps rule the Commission already finalized, which allows farmers, ranchers, packers, processors and other end-users to manage their risk.

Fourth, unregistered trading facilities that offer swaps for trading were required under Dodd-Frank to register as swap execution facilities (SEFs) or designated contract markets (DCM) by July of this year. These facilities include exempt boards of trade, exempt commercial markets and markets excluded from regulation under section 2(d)(2). Given the Commission has yet to finalize rules on SEFs, this order gives these platforms additional time for such a transition.

Fifth, the Commission is providing guidance regarding enforcement of rules that require that certain off-exchange swap transactions only be entered into by eligible contract participants (ECPs). The guidance provides that if a person takes reasonable steps to verify that its counterparty is an ECP, but the counterparty turns out not to be an ECP based on subsequent Commission guidance, absent other material factors, the CFTC will not bring an enforcement action against the person.

SEC SUES FOR FEES CHARGED IN BREACH OF DUTY

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Sues Fund Adviser for Fees Charged in Breach of Duty Under the Investment Company Act
Washington, D.C., June 26, 2012 — The Securities and Exchange Commission today sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, alleging that for more than a decade, AMC charged a U.S. registered fund for advisory services that AMC did not provide. The SEC alleges that by doing so, AMC breached its fiduciary duty with respect to compensation under the Investment Company Act of 1940.

Kuala Lumpur-based AMC served as a sub-adviser to the Malaysia Fund, Inc., a closed-end fund that invests in Malaysian companies, whose principal investment adviser is Morgan Stanley Investment Management, Inc. (MSIM). The SEC alleges that AMC misrepresented its services during the fund’s annual advisory agreement review process for each year for more than 10 years, and AMC collected fees for advisory services that it did not provide.

AMC, a unit of AMMB Holdings Berhad, one of Malaysia’s largest banking groups, agreed to pay $1.6 million to settle the SEC’s charges, without admitting or denying the allegations. The case follows the SEC’s recent related action against the Malaysia Fund’s primary adviser, MSIM, and is part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division’s Asset Management Unit.
“We are committed to ensuring that advisers to registered funds adhere to their fiduciary duty with respect to the receipt of compensation. Here, AMC breached that duty by charging fees for services that were not rendered,” said Bruce Karpati, Chief of the Asset Management Unit in the SEC’s Division of Enforcement.

AMC’s advisory fees were approved each year from 1996 to 2007 as part of the “15(c) process,” a reference to Section 15(c) of the Investment Company Act of 1940, which requires a registered fund’s board to annually evaluate the fund’s advisory agreements, and advisers to provide the board with information reasonably necessary to make that evaluation.

According to the SEC, AMC submitted a report to the Malaysia Fund’s board of directors each year that falsely claimed that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund. In reality, the SEC’s complaint said AMC’s services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use. Moreover, the SEC alleged that AMC failed to adopt and implement adequate policies, procedures, and controls over its advisory business, contrary to certifications provided to the fund’s directors in 2006 and 2007. AMC’s advisory agreement with the fund was terminated in early 2008 after the SEC’s examination staff inquired about the services AMC was purportedly providing to the fund.

The SEC’s complaint, filed in the U.S. District Court for the District of Columbia, alleges that AMC breached its fiduciary duty with respect to the receipt of compensation within the meaning of Section 36(b) of the Investment Company Act of 1940. The SEC also alleges that AMC violated Sections 206(2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-7 thereunder, and Section 15(c) of the Investment Company Act of 1940. AMC consented to a judgment that bars it from violating these provisions in the future. AMC has also agreed to disgorge $1.3 million of its advisory fees paid by the fund and pay a $250,000 penalty.

Chad Alan Earnst, Christine Lynch, and Jessica Weiner, of the Enforcement Division’s Asset Management Unit staff, conducted the investigation along with Tonya Tullis and Edward D. McCutcheon. Karen Stevenson, Susan Schneider, and Dennis Delaney conducted the related examinations.

The SEC acknowledges the assistance of the Securities Commission of Malaysia and the Monetary Authority of Singapore.

INVESTMENT ADVISER SUSPECTED OF FRAUD DISAPPEARS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., July 2, 2012 – The Securities and Exchange Commission today obtained a court order to freeze the assets of a Georgia-based investment adviser who has apparently gone into hiding after orchestrating a $40 million investment fraud.

The SEC alleges that Aubrey Lee Price raised money from more than 100 investors living primarily in Georgia and Florida by selling shares in an unregistered investment fund (PFG) that he managed. Price purported to invest fund assets in traditional marketable securities, but he also made illiquid investments in South America real estate and a troubled South Georgia bank. In order to conceal mounting losses of investor funds, Price created bogus account statements with false account balances and returns that were provided to investors and bank regulators.

“Price raised nearly $40 million from investors and made woeful financial transactions that he hid from them,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office. “Now both the money and Price are missing.”

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Georgia, Price is believed to be a resident of Lowndes County in Georgia after moving from Manatee County, Fla.

The SEC alleges that Price began his scheme in 2008. According to PFG’s private placement memorandum, the investment objective was to achieve “positive total returns with low volatility” by investing in a variety of opportunities, including equity securities traded on the U.S. markets. A significant portion of PFG investor funds – approximately $36.9 million – was placed in a securities trading account at a broker-dealer. The trading account suffered massive trading losses and money was frequently wire-transferred to PFG’s operating bank account. Throughout the time during which PFG suffered trading losses, client account statements prepared by Price were made available to investors indicating fictitious amounts of assets and investment returns.

According to the SEC’s complaint, Price has sent a letter to some individuals dated June 2012 and titled “Confidential Confession For Regulators – PFG, LLC and PFGBI, LLC Summary.” In the 22-page letter, Price admits that he “falsified statements with false returns” in order to conceal between $20 million and $23 million in investor losses.
The Honorable Timothy C. Batten, Sr. granted the SEC’s request for a temporary restraining order and entered an asset freeze for the benefit of investors against Price, PFG, and his affiliated entities.

Anyone with information about Price’s whereabouts should contact the Atlanta office of the Federal Bureau of Investigation at 404-679-9000 or the Lowndes County, Georgia Sheriff’s Office at 229-671-2985.

The SEC’s investigation, which is continuing, was conducted in the Atlanta Regional Office by Senior Trial Counsels David Baddley, Kristin Wilhelm and W. Shawn Murnahan, and Assistant Regional Director Aaron W. Lipson. Mr. Murnahan is leading the SEC’s ongoing litigation. The Commission thanks the Federal Bureau of Investigation for the significant assistance provided in this matter.

LONG ISLAND SOFTWARE COMPANY CHARGED WITH BRIBERY BY SEC

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Charges Long Island Software Company in Connection with Bribery Scheme
On June 27, 2012, the Securities and Exchange Commission (“Commission”) charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co. FalconStor has agreed to pay a $2.9 million civil penalty to settle the Commission’s case.

The Commission’s complaint, filed in federal district court in the Eastern District of New York, alleges that from October 2007 through July 2010, the Company’s co-founder and then-chief executive officer, president and chairman, who is now deceased (the “CEO’), ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives. The bribes given and offered, which totaled approximately $430,000, included grants of FalconStor options and restricted stock, direct cash payments, gift cards, payment of golf club fees, and lavish entertainment, including gambling in Macau and Las Vegas casinos. The CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer.

The complaint further alleges that shortly after the bribes began, FalconStor secured a direct, multi-million dollar, contract with JPMC, which then became one of FalconStor’s largest customers and a major source of FalconStor’s revenue during the relevant period. Thereafter, on several quarterly earnings calls and in two earnings releases filed with the Commission on Forms 8-K in April 2008 and February 2009, the CEO touted FalconStor’s large, direct contract with JPMC as a vindication of the quality and desirability of FalconStor’s products and proof of its strides in moving to direct sales rather than relying on third-party distributors. FalconStor never disclosed that JPMC’s business resulted, in whole or in part, from the inducements that it was lavishing on JPMC’s employees.

The complaint also alleges that the Company also granted restricted stock and options to relatives of two of the executives even though the recipients provided no bona fide services to the Company and the grants were thus not covered by the Company’s registered Incentive Stock Plan. In addition, the Company failed to accurately record the expenses associated with the bribes on its books and records, and failed to devise or implement a system of effective internal accounting controls to detect or prevent the bribes, which violated state law and were inconsistent with the Company’s policies.

The complaint charges FalconStor with violating the books-and-records and internal controls provisions of the Securities Exchange Act of 1934, Sections 13(b)(2)(A) and 13(b)(2)(B), and the offering registration provisions and certain antifraud provisions of the Securities Act of 1933, Sections 5(a), 5(c), and 17(a)(2) and (3).

FalconStor has agreed to settle this matter by consenting to a court order permanently enjoining it from violating Sections 5(a), 5(c), and 17(a)(2) and (3) of the Securities Act and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; ordering it to pay a civil monetary penalty of $2.9 million; and ordering it to comply with certain undertakings. The proposed settlement is subject to court approval.

FalconStor is a Delaware corporation headquartered in Melville, New York. The Company also maintains offices in California, and throughout Europe, Asia and Australia. FalconStor’s common stock trades on NASDAQ under the symbol FALC.

The Commission thanks the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation, and acknowledges to cooperation of the New York County District Attorney’s Office in this investigation.

CFTC COMMISSIONER BART CHILTON'S STATEMENT ON CROSS BORDER RULES AND REGULATIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
“Not the Boss”
Statement of Commissioner Bart Chilton on Cross Border
June 29, 2012
I support the proposed cross interpretive guidance and policy statement and exemptive order. These are global interconnected markets and we need to work with our colleagues around the planet to ensure that we have, to the greatest extent practical, harmonized rules, regulations, surveillance and enforcement. The recent Barclays matter, the JPMorgan loss and many other illustrations make the case for this far better than anything else. As they say in the detective programs: These are real cases with real victims.
I’ve often heard teenagers protest, “You're not the boss of me." Well, we in the U.S. aren’t seeking to be the boss of anyone. Nation’s around the world have their own laws, rules and regulations and they have individual sovereign and idiosyncratic issues that not only should be considered, but are at the very fundamental core of nations’ rights to incorporate into whatever they do. No argument on that. At the same time, we all need to accept that these global financial markets operate all the time and cross borders as a matter of course. Risk is very portable; it can be shifted around like a shell game. Trading for a firm headquartered in one nation can take place in another. Like nations’ sovereignty is a fact, so is it a fact that these markets cross borders and are interconnected. These are facts—evident truths.

So, while we do not seek to be the boss of anyone, we do seek to ensure that our consumers, taxpayers, markets and our economy are protected. I assume other nations not only have this parochial interest as well, but that they will ensure analogous laws that address the matter. If nations do this, as a matter of self-interest and global interest, there should not be any bossing around of anyone—easy peasy.

If for some reason, there are not comparable laws of self-interest in nations, and there is the possibility that the lack thereof would be a potential matter of concern to the U.S., our law requires that we address it in an appropriate fashion, and we will do so.
Here are the key points on what the proposal and exemptive order suggest, and I look forward to comments upon both of these important matters. The proposed interpretive guidance and policy statement proposes to (1) define U.S. persons, (2) provide that foreign SDs and MSPs (swaps dealers and major swaps participants, respectively) and foreign affiliates of U.S. SDs and MSPs may be exempted from entity-level requirements under Dodd-Frank if they are subject to comparable and comprehensive foreign regulations, (3) provide that foreign SDs and MSPs and foreign affiliates of U.S. SDs and MSPs are not exempt generally from transaction-level requirements for swaps facing U.S. persons and foreign persons guaranteed by a U.S. person, and (4) provide that foreign SDs and MSPs and foreign affiliates of U.S. SDs and MSPs are generally exempt from transaction-level requirements for swaps facing non-U.S. persons.

Entity-level requirements include: capital; chief compliance officer; risk management; swap data recordkeeping and reporting; and large trader reporting. Transaction-level requirements include: clearing and swap processing; margin and segregation for uncleared swap transactions; mandatory trade execution requirement; swap trading relationship documentation; portfolio reconciliation and compression; real-time public reporting; trade confirmation; and daily trading records.

The proposed exemptive order regarding compliance with certain swap regulations exempts foreign persons (foreign affiliates of U.S. SDs and MSPs and foreign SDs and MSPs) and foreign branches of U.S. SDs and MSPs from transaction-level requirements for swaps with foreign counterparties for 12 months. Swaps with U.S. persons will still be subject to Dodd-Frank transaction-level requirements also for 12 months. External business conduct standards, however, only apply when both counterparties are U.S. persons. The proposed order also exempts U.S. SDs and MSPs from entity-level requirements, except for swap data reporting, recordkeeping, and large trader reporting requirements until January 1, 2013.

In particular, I am interested in receiving comments about how to prevent gaming through the use of conduits or other globe-trotting structures and under what circumstances foreign entities should be seen as being subject to “comparable and comprehensive” regulations. On the latter point, I think we should take an approach that encourages our sister regulators abroad to make the strong reforms necessary to ensure fair and safe global markets.

What we are proposing allows for nations to undertake their own protections that can fit into the overall global regulation, supervision and enforcement of markets. This is not about anyone trying to boss anyone around. This is about a balanced and thoughtful approach—a planetary patchwork of harmonized financial and markets rules of the road. That said, I look forward to comments to ensure that we get this correct.

AN OUTLINE OF AN ALLEGED PONZI-LIKE INVESTMENT FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 28, 2012 — The Securities and Exchange Commission today announced that it has obtained an emergency court order to halt an alleged Ponzi-like scheme operated by Small Business Capital Corp. and its principal Mark Feathers, who raised $42 million by selling securities issued by Investors Prime Fund LLC and SBC Portfolio Fund LLC - two mortgage investment funds they controlled.

The SEC alleges that more than 400 investors were attracted to the funds by promises that profits from mortgage investments would yield annual returns of 7.5 percent or more. In reality, Feathers operated a Ponzi-like scheme by paying returns to investors that came partly from fund profits and partly from other investors.

“Feathers raised millions from investors by promising high returns,” said John McCoy, Associate Regional Director of the SEC’s Los Angeles Office. “The returns turned out to be too good to be true and were funded in part with new investors’ money.”

The SEC alleges that from 2009 to early 2012, Feathers improperly transferred more than $6 million from the funds to Small Business Capital to pay its expenses, including substantial payments to Feathers. According to the SEC, the defendants had the funds account for the transfers in a way that disguised the depletion of fund assets, and did not tell investors that Small Business Capital’s ability to repay was uncertain and that it was only able to make the interest payments owed to the funds by borrowing more from them.
In addition, the SEC alleges that investors were not told that in February and March 2012, the defendants caused one fund to sell mortgages to the other fund at an inflated price, thus generating a “profit” for the selling fund so it could pay Small Business Capital management fees of more than $575,000. The SEC also charged Feathers and Small Business Capital for Small Business Capital’s effecting transactions in the funds’ securities without being registered as a broker-dealer with the SEC.

The Honorable Edward J. Davila for the U.S. District Court for the Northern District of California granted the SEC’s request for a temporary restraining order and asset freeze against Feathers, Small Business Capital, and the funds, and appointed Thomas A. Seaman as a temporary receiver over Small Business Capital and the funds. Judge Davila has scheduled a court hearing for July 10, 2012, on the SEC's motion for a preliminary injunction.

Susan Hannan and Roger Boudreau conducted the investigation and John Bulgozdy will lead the litigation. They work in the SEC's Los Angeles Regional Office.