INVESTMENT MANAGER AND OTHERS CHARGED BY SEC WITH SECURITIES LAW VIOLATIONS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., July 30, 2012 – The Securities and Exchange Commission charged New York-based investment manager Peter Siris and two of his firms with a host of securities law violations mostly related to his activities with a Chinese reverse merger company, China Yingxia International Inc.

The SEC alleges that Siris, an active investor in Chinese companies and former newspaper money columnist, misled investors in his two hedge funds through which he invested $1.5 million in China Yingxia. Siris understated his involvement with the company particularly after it went out of business, and used his insider status to make illegal trades based on nonpublic information as he received it. In an attempt to circumvent the registration provisions of the securities laws, Siris also received shares from the China Yingxia CEO’s father and improperly sold them without any registration statement in effect. Siris further engaged in insider trading ahead of 10 confidentially solicited offerings for other Chinese issuers.

Siris and his firms agreed to pay more than $1.1 million to settle the SEC’s charges. The SEC also separately charged five individuals and one firm for securities law violations related to China Yingxia.

“Siris operated by his own set of rules in his dealings with China Yingxia and other Chinese issuers,” said Andrew M. Calamari, Acting Director of the SEC’s New York Regional Office. “He was the go-to person when Chinese reverse merger companies wanted to raise capital or needed advice about operations, but he used his prominence and reputation in this area to illegally game the system to his advantage.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Siris and his firms Guerrilla Capital Management LLC and Hua Mei 21st Century LLC became involved with China Yingxia in 2007 and their misconduct continued until 2010. Along with being one of three “consultants” that improperly raised money for China Yingxia, Siris and Hua Mei acted as advisers to the purported nutritional foods company.

Insider Trading and Illegal Short Selling

The SEC alleges that in February and March 2009, Siris sold China Yingxia stock while in possession of material, nonpublic information about problems at China Yingxia that he learned directly from the CEO. This confidential information included that she had engaged in illegal fundraising activities in China and that a company factory had shut down. Siris immediately began selling hundreds of thousands of shares of China Yingxia stock prior to any public disclosure by China Yingxia about these issues. Siris learned additional material, nonpublic information during the late afternoon of March 3, 2009, when he received a draft press release and notice that China Yingxia planned to publicly disclose the problems. Siris increased his orders to sell over the next couple of days before China Yingxia issued its press release publicly on March 6. Siris, through his funds, sold 1,143,660 China Yingxia shares in a matter of weeks for ill-gotten gains of approximately $172,000.

According to the SEC’s complaint, Siris and Guerrilla Capital Management also engaged in illegal insider trading ahead of 10 offering announcements for other Chinese issuers and made approximately $162,000 in ill-gotten gains. After expressly agreeing to go “over-the-wall,” which included a prohibition on trading, Siris traded ahead of the offering announcements in breach of his duty not to trade on such information.

The SEC further alleges that Siris sold short the securities of two Chinese companies prior to participating in firm-commitment offerings.

Fraudulent Representations in a Securities Purchase Agreement

The SEC alleges that in order to induce at least one issuer to sell securities to his funds, Siris falsely represented in a securities purchase agreement that his funds had not engaged in any trading after being contacted in confidence about a particular deal, when in fact his funds had effected sales in that issuer’s securities. Siris directed short sales of a Chinese issuer on Dec. 9, 2009, despite going “over-the-wall” in original solicitation discussions, and nevertheless Siris signed a securities purchase agreement later that afternoon that misrepresented he had not traded in those securities. The following morning, Siris directed additional sales of the company’s shares before the public announcement of the offering. Siris realized illegal insider trading gains.

Materially Misleading Disclosures to Fund Investors

The SEC alleges that Siris generally disclosed that he and his consulting firm Hua Mei, may provide services to Chinese issuers, but he did not disclose the depth of his involvement in China Yingxia. Investors were not informed that Siris and his firm provided drafting assistance for press releases and SEC filings, translation services, management preparation in advance of conference calls, and officer recommendations. By omitting key facts and making misrepresentations about his role with the company, Siris deprived his investors of material information that could have impacted their continued investment decisions with his funds. Furthermore, when China Yingxia later collapsed, Siris wrote to his investors and placed blame on others he claimed were responsible for the SEC filings and key hiring decisions while omitting his significant role in these very same tasks.

Acting as an Unregistered Securities Broker

The SEC alleges that Siris, who was not registered as a broker or dealer nor associated with a registered broker-dealer, acted as an unregistered broker during China Yingxia’s second securities offering, as he raised more than $2 million worth of investments. In a backdated consulting agreement, Siris through Hua Mei in fact received transaction-based fees for leading fundraising efforts for China Yingxia and not for providing consulting services. No disclosures were made to potential or actual investors concerning payments to three so-called consultants including Siris, who sold China Yingxia securities.

Improper Unregistered Sale of Securities

The SEC alleges that Siris and Hua Mei improperly sold securities that Hua Mei received from China Yingxia in a sham agreement intended to hide the fact that they were shares from a person controlled by the company. China Yingxia agreed to pay Siris for due diligence he conducted in connection with his lead investment in the company’s July 2007 PIPE offering. The company transferred shares to Siris with the appearance that they came from a shareholder to reimburse him for services performed for that shareholder. In fact, the sham agreement was simply a means for China Yingxia to provide Hua Mei with shares believed to be immediately eligible for sale, because had the company issued the shares directly to Hua Mei, they would have been restricted stock subject to holding period and other requirements for resale. The shareholder and source of the shares was later revealed to be the father of China Yingxia’s CEO – someone who was in fact a person directly or indirectly controlled by the issuer.

The SEC’s complaint against Siris and his entities alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, Rule 105 of Regulation M, and Section 206(4) of the Investment Advisers Act of 1940, and Rule 206(4)-8 thereunder. Without admitting or denying the allegations, Siris and his firms agreed to pay $592,942.39 in disgorgement and $70,488.83 prejudgment interest. Siris agreed to pay a penalty of $464,011.93. They also consented to the entry of a judgment enjoining them from violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. The settlement is subject to court approval.

Also charged for securities law violations related to China Yingxia:

• Ren Hu – the former CFO of China Yingxia made fraudulent representations in Sarbanes-Oxley (SOX) certifications, lied to auditors, failed to implement internal accounting controls, and aided and abetted China Yingxia’s failure to implement internal controls.
• Peter Dong Zhou – engaged in insider trading and unregistered sales of securities and aided and abetted unregistered broker-dealer activity while assisting China Yingxia with its reverse merger and virtually all of its public company tasks. Without admitting or denying the charges, Zhou agreed to pay $20,900 in disgorgement, $2,463.39 in prejudgment interest, and a penalty $50,000. He agreed to a three-year collateral bar, penny stock bar, and investment company bar.
• Alan Sheinwald and his investor relations firm Alliance Advisors LLC – were retained as “consultants” to China Yingxia and acted as unregistered securities brokers while raising money for China Yingxia and at least one other issuer.
• Steve Mazur – acted as an unregistered securities broker while selling away from his firm the securities of China Yingxia and one other issuer. Without admitting or denying the charges, Mazur agreed to pay $126,800 in disgorgement, $25,550.01 in prejudgment interest, and a penalty of $25,000. He agreed to a two-year collateral bar, penny stock bar, and investment company bar.
• James Fuld, Jr. – involved in the unregistered sales of securities. Without admitting or denying the charges, he agreed to pay $178,594.85 in disgorgement and $38,096.70 in prejudgment interest.

Mr. Calamari said, “With these charges, the SEC continues to make good on its commitment to hold accountable those who enable some Chinese reverse merger firms to take unfair advantage of investors in the U.S. capital markets.”

The SEC’s investigation, which is continuing, was conducted in the New York Regional Office by Celeste Chase, Eduardo A. Santiago-Acevedo, and Osman Nawaz, with assistance from Frank Milewski. Paul Gizzi and Osman Nawaz will lead the SEC’s litigation team. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.

SEC CHAIRMAN SPEAKS ON KNIGHT CAPITAL GROUP AND THE FLASH CRASH

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Aug. 3, 2012 — Securities and Exchange Commission Chairman Mary Schapiro today made the following statement:

The apparent trading error by Knight Capital Group on Wednesday reflects the type of event that can raise concerns for investors about our nation’s equity markets — markets that I believe are the most resilient, efficient, and robust in the world.

Reliance on computers is a fact of life not only in markets everywhere, but in virtually every facet of business. That doesn’t mean we should not endeavor to reduce the likelihood of technology errors and limit their impact when they occur.

While Wednesday’s event was unacceptable, I would note that several of the measures we instituted following the Flash Crash helped to limit its impact. Recently-adopted circuit breakers halted trading on individual stocks that experienced significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken giving the marketplace certainty.
In addition, existing rules make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly. And, naturally, we will consider whether such compliance measures were followed in this case.

As with every significant incident of volatility that occurs in our markets, we will continue to review what happened and determine if any, additional measures are needed. That process has already begun.

In particular, I have asked the staff to accelerate ongoing efforts to propose a rule to require exchanges and other market centers to have specific programs in place to ensure the capacity and integrity of their systems. And I have directed the staff to convene a roundtable in the coming weeks to discuss further steps that can be taken to address these critical issues.

CFTC ANNOUNCES EMERGENCY ASSET FREEZE AGAINST COMMODITY TRADING ADVISOR

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Charges California Resident Victor Yu and His Company, VFRS, LLC, with Multi-Million Dollar Forex Fraud and Failure to Register as a Commodity Trading Advisor

Federal court issues order freezing defendants’ assets and protecting books and records

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that on July 27, 2012, The Honorable Yvonne Gonzalez Rogers of the U.S. District Court for the Northern District of California entered an emergency order freezing the assets of defendants Victor Yu (Yu) of San Jose, Calif., and his company, VFRS, LLC (VFRS), based in Alameda, Calif. The court’s order also prohibits the destruction or alteration of books and records, and grants the CFTC immediate access to such documents. The judge set a hearing on the CFTC’s motion for a preliminary injunction for August 10, 2012.

The order arises out of a civil enforcement action filed by the CFTC on July 26, 2012, charging defendants Yu and VFRS with defrauding at least 100 clients in connection with off-exchange foreign currency (forex) trading. The CFTC’s complaint also charges Yu with failure to register with the CFTC as a commodity trading advisor (CTA).

According to the CFTC complaint, since at least August 2009 to the present the defendants’ clients invested more than $5 million in forex trading accounts and lost more than $2 million, while defendants received fees of more than $270,000 from their clients.

The defendants allegedly fraudulently solicited clients to open forex accounts that allowed the defendants to place trades in their accounts using trading software that Yu claimed to have developed. Further, defendants misrepresented to clients that the trading software made forex trading "extremely safe," prevented clients from ever reaching certain loss thresholds, and guaranteed that clients will not have a losing trade, according to the complaint. In addition, defendants allegedly misrepresented to some prospective customers that their trading software had shown positive returns on every trade it had ever made and has successfully predicted activity in the currency markets back to the 1920s.

To solicit new clients, Yu and VFRS, by and through Yu, held face-to-face meetings with prospective clients in various clients’ homes, obtaining leads primarily through word-of-mouth, according to the complaint. Yu allegedly promised existing clients a referral fee or a percentage of any profits earned in the new clients’ forex accounts. When opening accounts, clients signed agreements promising to pay the defendants a service fee of 30 percent of their net profits, and the defendants provided log-in and password information so that clients could "hook up" to the defendants’ trading software. The complaint alleges that by this conduct, Yu acted as a CTA and was required to register with the CFTC.

In its continuing litigation, the CFTC seeks civil monetary penalties, restitution, trading and registration bans, and preliminary and permanent injunctions against further violations of the federal commodities laws, as charged.

Putnam Investment Management, LLC

Putnam Investment Management, LLC

IDAHO ENTREPRENEUR ORDED TO PAY $11.8 MILLION FOR OPERATING COMMODITY TRADING PONZI SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Idaho Orders Michael Justin Hoopes to Pay over $11.8 Million for Operating a Ponzi Scheme

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court order requiring defendant Michael Justin Hoopes of Rexburg, Idaho, to pay more than $10.4 million in restitution and a civil monetary penalty of over $1.4 million for operating a Ponzi scheme that defrauded Idaho residents and others. The order also imposes permanent trading and registration bans against Hoopes and permanently prohibits him from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

The consent order of permanent injunction, entered on July 26, 2012, by Judge Edward J. Lodge of the U.S. District Court for the District of Idaho, stems from a CFTC complaint filed on October 25, 2011, that charged Hoopes with solicitation fraud and misappropriation in connection with a commodity futures scheme (see CFTC Press Release 6128-11, October 26, 2011).

The order finds that from at least September 2007 to October 25, 2011, Hoopes fraudulently solicited and accepted $2,068,103 from 10 individuals, mostly Idaho residents, to trade stock index commodity futures in a commodity pool that he owned and operated called Aspen Trading, LLC. The order also finds that Hoopes solicited and accepted an additional $9.68 million from other mostly Idaho residents during the same period for various other investments, all of which was extensively commingled with Hoopes’ personal funds and funds accepted for futures trading in Aspen Trading. Hoopes misappropriated at least $151,694 of the commingled funds for his personal expenses, including car, credit card, and mortgage payments, according to the order.

Between October 2006 and May 31, 2011, Hoopes suffered net losses of over 90 percent of the $2,280,550 he traded in futures, according to the order. To conceal his losses, Hoopes paid pool participants $594,339 in purported profits in the manner of a Ponzi scheme and issued false account statements to at least one pool participant showing that the Aspen Trading account was earning monthly profits as high as 83.52 percent, with only one losing month, according to the order. In reality, however, Hoopes never opened a trading account in Aspen Trading’s name but simply altered his personal trading account statements to make it appear as though the Aspen Trading account was earning large profits from futures trading, the order finds.

The CFTC appreciates the assistance of the United States Attorney’s Office for the District of Idaho.

SEC REPORT ON DISCLOSURE IN THE $3.7 MILLION MUNICIPAL SECURITIES MARKET

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., July 31, 2012
— The Securities and Exchange Commission today issued a comprehensive report with recommendations to help improve the structure of the $3.7 trillion municipal securities market and enhance the disclosures provided to investors

　

The report is the culmination of an extensive review of the municipal securities market that was initiated by SEC Chairman Mary L. Schapiro in mid-2010 and led by SEC Commissioner Elisse B. Walter. The recommendations address concerns raised by market participants and others in public field hearings and meetings with Commissioner Walter and SEC staff as well as the public comment process during the agency’s review of the municipal securities market.

"The municipal securities market is the bedrock for funding of local government projects throughout our country. It is essential that the market work well and that investors have confidence in it," said Chairman Schapiro. "While we have put in place measures to help investors make more knowledgeable decisions about municipal securities, we could do more for investors with statutory authority to improve disclosure and muni market practices."

Commissioner Walter said, "On behalf of my colleagues and the professional and dedicated staff at the SEC, I am pleased that the report brings into clear focus the current state of the municipal securities market and recommends potential action to address issues raised by investors, issuers, and other market participants. I look forward to moving forward with the efforts articulated in our report to further strengthen and enhance this vital market."

State and local governments issue municipal securities to finance a wide variety of projects that are critical to building and maintaining the nation’s infrastructure.

At the start of 2012, there were more than one million different municipal bonds outstanding totaling $3.7 trillion, with 75 percent held by individual "retail" investors.

Despite its size and importance, the municipal securities market has not been subject to the same level of regulation as other sectors of the U.S. capital markets due to broad exemptions under federal securities laws for municipal securities.

Without a statutory regime for municipal securities regulation, the SEC’s investor protection efforts in the municipal securities market have been limited. The SEC’s report discusses potential legislative changes that could help improve disclosures to investors. For instance, the report recommends that Congress consider authorizing the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements.

Other potential legislative changes recommended in the report to help improve disclosures and practices in the municipal securities market include:
Eliminating the availability of Securities Act and Exchange Act exemptions for conduit borrowers who are not municipal entities.
Authorizing the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities, and to recognize a designated private-sector body as the standard setter for generally accepted for federal securities law purposes.
Providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers that satisfy certain conditions.
Permitting the Internal Revenue Service to share information with the SEC that it obtains from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
Providing a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders.
In addition to potential legislation, the SEC’s report identifies potential rulemaking by the Commission or the Municipal Securities Rulemaking Board and enhancement of best practices by the municipal securities industry.

The SEC’s report discusses several disclosure issues including the timing and content of financial information, disclosures relating to pension and other post-employment benefit plans, derivatives use by issuers and obligated persons, and conflicts of interest including pay-to-play practices. The report also reviews the current structure of the municipal securities market and discusses potential initiatives to improve pre-trade and post-trade price transparency and support existing dealer pricing obligations.

The report was prepared after substantial input from investors, investor advocates, market professionals, and representatives of municipal issuers – including those who participated in the SEC’s field hearings in San Francisco, Washington D.C., and Birmingham, Ala.

The SEC already has taken steps to improve municipal securities disclosure within its limited regulatory authority. In May 2010, the Commission adopted amendments to Exchange Act Rule 15c2-12 that were aimed at improving the quality and timeliness of municipal securities disclosure. The changes were intended to help provide investors with enhanced information by further regulating those who underwrite or sell municipal securities. The measures strengthened existing requirements for the scope of securities covered, the nature of the events that issuers must disclose, and the time period in which disclosure must be made.