This is a photo of the National Register of Historic Places listing with reference number 7000063
Monday, March 4, 2013
SEC CHARGES FALCON RIDGE DEVELOPMENT, INC. AND ITS PRESIDENT AND CEO FOR MARKET MANIPULATION SCHEME
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced that today it charged Falcon Ridge Development, Inc. ("Falcon Ridge") and its President and CEO, Fred M. Montano, of Albuquerque, New Mexico, with engaging in a fraudulent scheme to manipulate the market for Falcon Ridge’s common stock. Falcon Ridge is a New Mexico real estate company, headquartered in Albuquerque. The United States Attorney for the Eastern District of Pennsylvania separately announced criminal charges involving the same conduct.
The Commission’s action, filed in federal district court in Philadelphia, alleges that, from at least August through November 2008, Montano, who claimed to control Falcon Ridge’s common stock, arranged with an individual (the "Cooperator") he believed had connections to corrupt registered representatives to generate purchases of the company’s stock in exchange for cash kickbacks. In reality, the Cooperator was, at all times, secretly cooperating with the FBI. The Commission alleges that, in furtherance of the scheme, Montano paid $1,000 to orchestrate the purchase of 625,000 shares of Falcon Ridge common stock by the Cooperator, in part, through a matched trade designed by Montano to ensure that he received proceeds from the purchases. In addition, Montano shared nonpublic news releases and a confidential shareholder list with the Cooperator, and coordinated the release of news with the illegal purchases in the stock.
The complaint further alleges that Montano engaged in several telephone conversations with the Cooperator in which Montano described his intent and confirmed his involvement in the manipulation. Through these activities, Montano created artificial trading activity, injected artificial information into the marketplace, and created a false impression of supply and demand for Falcon Ridge’s stock.
The complaint alleges violations of Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against Falcon Ridge and Montano. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains, together with prejudgment interest, and civil penalties against both defendants, and penny stock and officer and director bars against Montano.
The Securities and Exchange Commission announced that today it charged Falcon Ridge Development, Inc. ("Falcon Ridge") and its President and CEO, Fred M. Montano, of Albuquerque, New Mexico, with engaging in a fraudulent scheme to manipulate the market for Falcon Ridge’s common stock. Falcon Ridge is a New Mexico real estate company, headquartered in Albuquerque. The United States Attorney for the Eastern District of Pennsylvania separately announced criminal charges involving the same conduct.
The Commission’s action, filed in federal district court in Philadelphia, alleges that, from at least August through November 2008, Montano, who claimed to control Falcon Ridge’s common stock, arranged with an individual (the "Cooperator") he believed had connections to corrupt registered representatives to generate purchases of the company’s stock in exchange for cash kickbacks. In reality, the Cooperator was, at all times, secretly cooperating with the FBI. The Commission alleges that, in furtherance of the scheme, Montano paid $1,000 to orchestrate the purchase of 625,000 shares of Falcon Ridge common stock by the Cooperator, in part, through a matched trade designed by Montano to ensure that he received proceeds from the purchases. In addition, Montano shared nonpublic news releases and a confidential shareholder list with the Cooperator, and coordinated the release of news with the illegal purchases in the stock.
The complaint further alleges that Montano engaged in several telephone conversations with the Cooperator in which Montano described his intent and confirmed his involvement in the manipulation. Through these activities, Montano created artificial trading activity, injected artificial information into the marketplace, and created a false impression of supply and demand for Falcon Ridge’s stock.
The complaint alleges violations of Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against Falcon Ridge and Montano. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains, together with prejudgment interest, and civil penalties against both defendants, and penny stock and officer and director bars against Montano.
Sunday, March 3, 2013
SEC SETTLES PENNY STOCK MANIPULATION CHARGES WITH DEFENDANT
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Defendant Adam S. Rosengard Settles SEC Charges in Penny Stock Manipulation Case
The Securities and Exchange Commission announced today that Chief Judge Gregory M. Sleet of the United States District Court for the District of Delaware entered a final judgment against Defendant Adam S. Rosengard on February 25, 2013 in SEC v. Dynkowski, et al., Civil Action No. 1:09-361, a stock manipulation case the SEC filed on May 20, 2009. The SEC’s complaint alleges that Defendant Pawel P. Dynkowski and others engaged in market manipulation schemes involving at least four separate stocks. The complaint alleges that Rosengard violated Section 5 of the Securities Act of 1933 by acting as a nominee account holder in one of the schemes.
As alleged in the complaint, the schemes generally followed the same pattern: Dynkowski and his accomplices agreed to sell large blocks of shares for penny stock companies in exchange for a portion of the proceeds. The shares were put in nominee accounts that Dynkowski and his accomplices controlled. The defendants artificially inflated the market price of the stocks through wash sales, matched orders and other manipulative trading, often timed to coincide with false or misleading press releases, and then sold shares obtained from the issuers and divided the illicit proceeds.
As alleged in the complaint, Dynkowski orchestrated the manipulation scheme involving Xtreme Motorsports of California, Inc. stock in 2007. The complaint alleges that in this scheme Dynkowski and an accomplice engaged in wash sales, matched orders and other manipulative trading. As alleged in the complaint, Rosengard acted as a nominee account holder in the scheme. Specifically, he gave Dynkowski access to a brokerage account for the purpose of selling shares of Xtreme Motorsports stock. The complaint alleges that this scheme generated approximately $257,646 in illicit profits.
To settle the SEC’s charges, Rosengard consented to a final judgment that permanently enjoins him from violating Section 5 of the Securities Act; orders disgorgement of $165,646 with prejudgment interest of $21,297; and bars Rosengard from participating in any offering of a penny stock. No civil penalty was imposed, and part of the disgorgement obligation was waived, in light of Rosengard’s financial condition.
The SEC thanks the following agencies for their cooperation and assistance in connection with this matter: the U.S. Attorney’s Office for the District of Delaware; the Delaware State Police; United States Immigration and Customs Enforcement, Department of Homeland Security, Homeland Security Investigations; and the Department of the Treasury, Internal Revenue Service, Criminal Investigation.
Defendant Adam S. Rosengard Settles SEC Charges in Penny Stock Manipulation Case
The Securities and Exchange Commission announced today that Chief Judge Gregory M. Sleet of the United States District Court for the District of Delaware entered a final judgment against Defendant Adam S. Rosengard on February 25, 2013 in SEC v. Dynkowski, et al., Civil Action No. 1:09-361, a stock manipulation case the SEC filed on May 20, 2009. The SEC’s complaint alleges that Defendant Pawel P. Dynkowski and others engaged in market manipulation schemes involving at least four separate stocks. The complaint alleges that Rosengard violated Section 5 of the Securities Act of 1933 by acting as a nominee account holder in one of the schemes.
As alleged in the complaint, the schemes generally followed the same pattern: Dynkowski and his accomplices agreed to sell large blocks of shares for penny stock companies in exchange for a portion of the proceeds. The shares were put in nominee accounts that Dynkowski and his accomplices controlled. The defendants artificially inflated the market price of the stocks through wash sales, matched orders and other manipulative trading, often timed to coincide with false or misleading press releases, and then sold shares obtained from the issuers and divided the illicit proceeds.
As alleged in the complaint, Dynkowski orchestrated the manipulation scheme involving Xtreme Motorsports of California, Inc. stock in 2007. The complaint alleges that in this scheme Dynkowski and an accomplice engaged in wash sales, matched orders and other manipulative trading. As alleged in the complaint, Rosengard acted as a nominee account holder in the scheme. Specifically, he gave Dynkowski access to a brokerage account for the purpose of selling shares of Xtreme Motorsports stock. The complaint alleges that this scheme generated approximately $257,646 in illicit profits.
To settle the SEC’s charges, Rosengard consented to a final judgment that permanently enjoins him from violating Section 5 of the Securities Act; orders disgorgement of $165,646 with prejudgment interest of $21,297; and bars Rosengard from participating in any offering of a penny stock. No civil penalty was imposed, and part of the disgorgement obligation was waived, in light of Rosengard’s financial condition.
The SEC thanks the following agencies for their cooperation and assistance in connection with this matter: the U.S. Attorney’s Office for the District of Delaware; the Delaware State Police; United States Immigration and Customs Enforcement, Department of Homeland Security, Homeland Security Investigations; and the Department of the Treasury, Internal Revenue Service, Criminal Investigation.
Saturday, March 2, 2013
CHINA-BASED COMPAN Y AND CFO CHARGED BY SEC WITH DISCLOSURE VIOLATIONS
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Feb. 28, 2013 — The Securities and Exchange Commission today charged a China-based petrochemical company and its former chief financial officer with accounting and disclosure violations, and they agreed to pay more than $1 million combined to settle the charges.
The SEC alleges that Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.
The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.
"By omitting related party transactions from its financial statements, Keyuan deprived investors of a true representation of the company’s business dealings," said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. "As CFO, Li failed to right these wrongs."
According to the SEC’s complaint filed in federal court in Washington D.C., the related party transactions that Keyuan failed to disclose between May 2010 and January 2011 in accordance with U.S. Generally Accepted Accounting Principles (GAAP) included sales of products, purchases of raw materials, loan guarantees, and short-term financing. As a consequence of using an off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in-progress, interest income, other income, and general and administrative expenses were misstated. In October 2011, Keyuan filed restatements of the financial statements contained in its Form 10-Qs for the second and third quarters of 2010 that disclosed the related party transactions and off-balance sheet accounting for the first time.
The SEC’s complaint charges Keyuan with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 under the Exchange Act. The SEC’s complaint charges Li with violations of Section 13(b)(5) of the Exchange Act and aiding and abetting Keyuan’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13.
Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.
The SEC’s investigation, which is continuing, has been conducted by Fuad Rana, Avron Elbaum, and Melissa A. Robertson with assistance from the SEC’s Cross Border Working Group, which has representatives from each of the SEC’s major divisions and offices and focuses on U.S. companies with substantial foreign operations. Through the work of the Cross Border Working Group, the SEC has filed fraud cases involving more than 40 foreign issuers and executives, and deregistered the securities of more than 50 companies. The SEC’s Enforcement Division also has taken a series of actions against China-based audit firms that have refused to produce documents for SEC investigations into clients whose securities trade in U.S. markets.
Washington, D.C., Feb. 28, 2013 — The Securities and Exchange Commission today charged a China-based petrochemical company and its former chief financial officer with accounting and disclosure violations, and they agreed to pay more than $1 million combined to settle the charges.
The SEC alleges that Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.
The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.
"By omitting related party transactions from its financial statements, Keyuan deprived investors of a true representation of the company’s business dealings," said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. "As CFO, Li failed to right these wrongs."
According to the SEC’s complaint filed in federal court in Washington D.C., the related party transactions that Keyuan failed to disclose between May 2010 and January 2011 in accordance with U.S. Generally Accepted Accounting Principles (GAAP) included sales of products, purchases of raw materials, loan guarantees, and short-term financing. As a consequence of using an off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in-progress, interest income, other income, and general and administrative expenses were misstated. In October 2011, Keyuan filed restatements of the financial statements contained in its Form 10-Qs for the second and third quarters of 2010 that disclosed the related party transactions and off-balance sheet accounting for the first time.
The SEC’s complaint charges Keyuan with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 under the Exchange Act. The SEC’s complaint charges Li with violations of Section 13(b)(5) of the Exchange Act and aiding and abetting Keyuan’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13.
Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.
The SEC’s investigation, which is continuing, has been conducted by Fuad Rana, Avron Elbaum, and Melissa A. Robertson with assistance from the SEC’s Cross Border Working Group, which has representatives from each of the SEC’s major divisions and offices and focuses on U.S. companies with substantial foreign operations. Through the work of the Cross Border Working Group, the SEC has filed fraud cases involving more than 40 foreign issuers and executives, and deregistered the securities of more than 50 companies. The SEC’s Enforcement Division also has taken a series of actions against China-based audit firms that have refused to produce documents for SEC investigations into clients whose securities trade in U.S. markets.
Friday, March 1, 2013
SEC CHARGES HEDGE FUND MANAGERS WITH SECURITIES FRAUD
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Connecticut Hedge Fund Managers With Securities Fraud
In February 26, 2013, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Connecticut against Connecticut-based hedge fund managers David Bryson and Bart Gutekunst ("Gutekunst") and their advisory firm, New Stream Capital, LLC, ("New Stream") for lying to investors about the capital structure and financial condition of their hedge fund. New Stream was an unregistered investment adviser based in Ridgefield, Connecticut that managed a $750-plus million hedge fund focused on illiquid investments in asset-based lending. The SEC also charged New Stream Capital (Cayman), Ltd. ("Cayman Adviser"), a Caymanian adviser entity affiliated with New Stream, Richard Pereira ("Pereira"), New Stream’s former CFO, and Tara Bryson, New Stream’s former head of investor relations, for their role in the scheme. Tara Bryson has agreed to a proposed settlement relating to her conduct in this matter.
According to the SEC’s complaint, in March 2008, David Bryson and Gutekunst, New Stream’s lead principals and co-owners, decided to revise the fund’s capital structure to placate their largest investor, Gottex Fund Management Ltd. ("Gottex"), by giving Gottex and certain other preferred offshore investors priority over other investors in the event of a liquidation. Gottex had threatened to redeem its investment in the New Stream hedge fund because a wholesale restructuring of the fund just a few months earlier had created two new feeder funds and -- without Gottex’s knowledge -- granted equal liquidation rights to all investors, thereby eliminating the preferential status previously enjoyed by Gottex. Gottex’s investment totaled nearly $300 million at the time.
The SEC alleges that, even after revising the capital structure to put Gottex ahead of other fund investors, David Bryson and Gutekunst directed New Stream’s marketing department, led by Tara Bryson, to continue to market the fund as if all investors were on the same footing, fraudulently raising nearly $50 million in new investor funds on the basis of these misrepresentations. The marketing documents failed to disclose the March 2008 revisions to the capital structure to the new investors. In addition, Pereira, New Stream’s CFO, falsified the hedge fund’s operative financial statements to conceal the March 2008 revisions to the capital structure.
As further alleged in the complaint, disclosure of the March 2008 changes to the capital structure would have made it far more difficult to continue to raise money through the new feeder funds and would have spurred further redemptions from existing investors in the new feeder funds. As such, disclosure of the March 2008 changes would have adversely affected the defendants’ own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007. The defendants also misled investors about the increased level of redemptions after Gottex submitted its massive redemption request in March 2008. When asked by prospective investors about redemption levels, New Stream did not include the Gottex redemption and others that followed. For example, Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.
The SEC further alleges that by the end of September 2008, as the U.S. financial crisis worsened, the New Stream hedge fund was facing $545 million in redemption requests, causing it to suspend further redemptions and cease raising new funds. After several attempts at restructuring failed, New Stream and affiliated entities filed Chapter 11 bankruptcy petitions in March 2011. Based on current estimates, the defrauded investors are expected to receive approximately 5 cents on the dollar -- substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive.
The SEC’s complaint charges New Stream, David Bryson and Gutekunst with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8 thereunder. The Cayman Adviser is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC’s complaint charges Pereira and Tara Bryson with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The SEC also contends that David Bryson, Gutekunst and Pereira are each also liable pursuant to Section 20(a) of the Exchange Act as a controlling person for New Stream’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and David Bryson and Gutekunst are each further liable pursuant to Section 20(a) of the Exchange Act as a controlling person for the Cayman Adviser’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Finally, the SEC charges that David Bryson, Gutekunst, Pereira, and Tara Bryson are each also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting each other’s violations, and New Stream and the Cayman Adviser’s violations, of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; David Bryson and Gutekunst are each further liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting each other’s violations, and New Stream’s violations, of Sections 206(1) and 206(2) of the Advisers Act; and, in addition, David Bryson, Gutekunst, Pereira and Tara Bryson are each also liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder by New Stream, the Cayman Adviser, David Bryson and Gutekunst.
The complaint seeks a final judgment permanently enjoining the defendants from committing future violations of these provisions, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and imposing financial penalties.
In offering to settle the SEC’s charges, without admitting or denying the allegations, Tara Bryson consented to the entry of a final judgment that permanently enjoins her from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The settlement is subject to court approval. Tara Bryson also consented to the entry of a Commission order barring her from associating with any investment adviser, broker-dealer, municipal securities dealer, or transfer agent.
SEC Charges Connecticut Hedge Fund Managers With Securities Fraud
In February 26, 2013, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Connecticut against Connecticut-based hedge fund managers David Bryson and Bart Gutekunst ("Gutekunst") and their advisory firm, New Stream Capital, LLC, ("New Stream") for lying to investors about the capital structure and financial condition of their hedge fund. New Stream was an unregistered investment adviser based in Ridgefield, Connecticut that managed a $750-plus million hedge fund focused on illiquid investments in asset-based lending. The SEC also charged New Stream Capital (Cayman), Ltd. ("Cayman Adviser"), a Caymanian adviser entity affiliated with New Stream, Richard Pereira ("Pereira"), New Stream’s former CFO, and Tara Bryson, New Stream’s former head of investor relations, for their role in the scheme. Tara Bryson has agreed to a proposed settlement relating to her conduct in this matter.
According to the SEC’s complaint, in March 2008, David Bryson and Gutekunst, New Stream’s lead principals and co-owners, decided to revise the fund’s capital structure to placate their largest investor, Gottex Fund Management Ltd. ("Gottex"), by giving Gottex and certain other preferred offshore investors priority over other investors in the event of a liquidation. Gottex had threatened to redeem its investment in the New Stream hedge fund because a wholesale restructuring of the fund just a few months earlier had created two new feeder funds and -- without Gottex’s knowledge -- granted equal liquidation rights to all investors, thereby eliminating the preferential status previously enjoyed by Gottex. Gottex’s investment totaled nearly $300 million at the time.
The SEC alleges that, even after revising the capital structure to put Gottex ahead of other fund investors, David Bryson and Gutekunst directed New Stream’s marketing department, led by Tara Bryson, to continue to market the fund as if all investors were on the same footing, fraudulently raising nearly $50 million in new investor funds on the basis of these misrepresentations. The marketing documents failed to disclose the March 2008 revisions to the capital structure to the new investors. In addition, Pereira, New Stream’s CFO, falsified the hedge fund’s operative financial statements to conceal the March 2008 revisions to the capital structure.
As further alleged in the complaint, disclosure of the March 2008 changes to the capital structure would have made it far more difficult to continue to raise money through the new feeder funds and would have spurred further redemptions from existing investors in the new feeder funds. As such, disclosure of the March 2008 changes would have adversely affected the defendants’ own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007. The defendants also misled investors about the increased level of redemptions after Gottex submitted its massive redemption request in March 2008. When asked by prospective investors about redemption levels, New Stream did not include the Gottex redemption and others that followed. For example, Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.
The SEC further alleges that by the end of September 2008, as the U.S. financial crisis worsened, the New Stream hedge fund was facing $545 million in redemption requests, causing it to suspend further redemptions and cease raising new funds. After several attempts at restructuring failed, New Stream and affiliated entities filed Chapter 11 bankruptcy petitions in March 2011. Based on current estimates, the defrauded investors are expected to receive approximately 5 cents on the dollar -- substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive.
The SEC’s complaint charges New Stream, David Bryson and Gutekunst with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 206(4)-8 thereunder. The Cayman Adviser is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC’s complaint charges Pereira and Tara Bryson with violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The SEC also contends that David Bryson, Gutekunst and Pereira are each also liable pursuant to Section 20(a) of the Exchange Act as a controlling person for New Stream’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and David Bryson and Gutekunst are each further liable pursuant to Section 20(a) of the Exchange Act as a controlling person for the Cayman Adviser’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Finally, the SEC charges that David Bryson, Gutekunst, Pereira, and Tara Bryson are each also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting each other’s violations, and New Stream and the Cayman Adviser’s violations, of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; David Bryson and Gutekunst are each further liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting each other’s violations, and New Stream’s violations, of Sections 206(1) and 206(2) of the Advisers Act; and, in addition, David Bryson, Gutekunst, Pereira and Tara Bryson are each also liable pursuant to Sections 209(d) and 209(f) of the Advisers Act for aiding and abetting violations of Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder by New Stream, the Cayman Adviser, David Bryson and Gutekunst.
The complaint seeks a final judgment permanently enjoining the defendants from committing future violations of these provisions, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and imposing financial penalties.
In offering to settle the SEC’s charges, without admitting or denying the allegations, Tara Bryson consented to the entry of a final judgment that permanently enjoins her from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The settlement is subject to court approval. Tara Bryson also consented to the entry of a Commission order barring her from associating with any investment adviser, broker-dealer, municipal securities dealer, or transfer agent.
Thursday, February 28, 2013
SEC OFFICIAL'S COMMENTS AT THIRD ANNUAL INTERNATIONAL REGULATORY SUMMIT
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION,
Crisis and Conflicts
by
Ethiopis Tafara
Director, Office of International Affairs
U.S. Securities and Exchange Commission
Director, Office of International Affairs
U.S. Securities and Exchange Commission
International Centre for Financial Regulation
Third Annual International Regulatory Summit
Regulation and Policy Priorities: Growth, Stability and Sustainability
25-26 September, 2012
Thank you, Barbara (Ridpath), and thanks to the International Center for Financial Regulation for inviting me here today. Before I get into any substance, I should give the SEC’s standard disclaimer that these remarks are my own views and do not necessarily represent the views of the Securities and Exchange Commission or other members of the Commission staff.
When I was first told about the topic of the conference, "Growth, Stability and Sustainability," I was intrigued by the combination of several seemingly mutually exclusive concepts; a "we can have it all" approach befitting election year campaigning in the United States, but perhaps problematic in real-life.
But upon reflection, this trinity makes sense. We are right now still recovering from the worst financial crisis since the 1920s and 30s. Financial instability has depressed economic growth around the world – just as in the 1920s and 30s. And recent labor reports in the United States and economic growth reports in Europe and Asia suggest that economic growth is not enough. It is about stable and sustainable economic growth. After several years of global economic weakness, with high and persistent unemployment, it is no comfort to the millions of unemployed workers that many countries are no longer technically in a recession. We may have growth, but if you can’t count on the source of your next paycheck, or even whether there will be a next paycheck, life is very unstable.
Growth, Sustainability and Stability and Capital Markets
Global prosperity depends of on economic growth and we know from history that financial markets are essential to that growth. This is a truism. But that doesn’t lessen the importance of the corollary that a return to economic growth depends on a strong financial market.
As for "sustainability," it is a term we hear overused quite a bit these days – calling into question its meaning. The meaning of sustainability in the context of a limited but renewable resource is clear: Don’t cut down a forest faster than new trees can grow; don’t continually plant the same crop on the same land lest you deplete the soil’s nutrients. But what "sustainability" means in the context of a market is less clear. Financial markets have seen bubbles and resulting financial crises on a periodic, very unpleasant, yet quite sustainable basis for almost 300 years now. A fan of economists such as Schumpeter or Minsky might even suggest that it is these very financial crises that correct for market over-exuberance and make financial markets sustainable.
As for "stability," for those of us involved in the financial markets, it is one of the most common terms we hear these days. Following the financial crisis, we saw the creation of the Financial Stability Board and the formation of the Financial Stability Oversight Council in the United States and the European Financial Stability Facility. The US Treasury Department even formed a new webpage, financialstability-dot-gov. The 2008 financial crisis has been defined as a crisis of instability – as if any fraud, poorly designed incentive structures, regulatory holes, and macro-economic structural problems were fundamentally problems because they introduce instability to the system, like a restaurant table with one of its legs a bit too short. And if only we could wedge a folded up supervisory napkin under that leg, in the form of better prudential controls and greater capital requirements, the system would be "stable." As you may have guessed, I don’t agree with that view.
Risk Avoidance and Risk Promotion
It’s true that the 2008 financial crisis was fundamentally a banking crisis. And the fears that keep banking supervisors up at night are fears of instability – bank runs and contagion, and the inherent maturity mismatch between banking assets and liabilities. However, the financial system is more than just the banking system. In our rush to prevent another banking crisis, the banking system has become the lens through which the entire financial system is viewed. And improving "financial stability" has come to mean porting traditional banking supervisory concepts over into other areas of the financial system, often in ways for which they are ill-suited and possibly quite harmful.
We can already see the effects on the broader economy. Banking supervision is, at its heart, about managing risk. The recent financial crisis shows what happens when banks, and entities engaging in bank-like behavior, take on excessive risk. So it’s natural that banking supervisors will want to oversee bank risk and monitor bank capital. After all, banks are often investing insured deposits, sometimes in illiquid assets. Catastrophe is always just around the corner if depositors lose faith in the banking system and collectively withdraw their assets.
Faith in the system is also critical to our capital markets, but it is always a very different sort of faith. For financial markets, some degree of instability has to be assumed. After all, economic growth is predicated on risk-taking, of some sort or another. A new company founded, a new product line launched, a new factory built always involves risk. And to paraphrase the guys on an American TV show called "Mythbusters," risk implies that failure is always an option.
Of course, banks and banking supervisors know that risk implies potential failure. They also recognize the risks this poses to the financial system – the "instability" it produces. But the effects of risk are quite different where capital markets are concerned. Capital markets qua markets – and by this I mean real capital markets, not banking activity masquerading as capital market activity – assume this risk and distribute it according to risk tolerance. While we all know that a run on a money market fund may look very much like a bank run, investor panic, by itself, does not necessarily affect the viability of, say, a mutual fund or a broker-dealer the way it would a bank. Where properly regulated, segregated investor assets are liquidated, and investors assume their losses. Capital may become dearer as a result, but there is no systemic contagion the way there is with a bank run. Investor assets may be insured against broker-dealer operational risk, but investors bear the market risk of their investments themselves – a fact of which they are aware.
Market Integrity, Information Asymmetry and Conflicts of Interest
As a consequence, capital markets play a very different role in our financial markets. Capital markets – and by this I mean both the public and private markets – are places where the large risks are financed. Failure is commonplace and accounted for in the cost of raising capital. Consequently, the issue that keeps securities regulators up at night isn’t necessarily contagion in the banking sense – where concerns about the solvency of one firm leads to a run on otherwise solvent firms everyone, creating a self-fulfilling prophecy of bank failures. It’s not concern about faith in the stability of the system, where stability means solvency and capital adequacy. Rather, what keeps us securities regulators up at night are fears about a widespread loss of faith in the integrity of the market – that is, a loss of investor confidence. Investor confidence in a market’s integrity is central to the integrity of the overarching financial system, but integrity and investor confidence mean very different things to a securities regulator than financial market integrity might mean for a banking supervisory. Risk, itself, is not necessarily a problem. It’s not so much that investors might fear that a particular issuer isn’t as healthy as they previously thought. It’s not so much that investors don’t happen to be winning. That occurs every day. No, the problems arise when investors begin to think that the market is a rigged game that they cannot win.
For securities regulators, this is systemic risk, and it’s a type of system risk that the normal tools of banking supervision do not address. The problems that we have seen in our capital markets as a result of the financial crisis fall squarely into this category. Many banks around the world were certainly under-capitalized and making risky investments without acknowledging or perhaps even understanding the risks they were taking. But investor losses were different. In many cases, investors either weren’t informed about critical information regarding securities they were investing in, or they were not aware of – and in some cases could not be aware of – underlying conflicts of interest that would have an impact on the performance of their investments.
Regulators need to refocus on conflicts of interest and information asymmetries facing all market participants, rather than imposing a banking supervisory approach to regulation of markets and market intermediaries ill-suited to such a model. In doing so, we will rebuild investor confidence, to the benefit of issuers and investors alike. Fortunately, securities regulators have tools at their disposal to address information asymmetry. Indeed, where problems potentially might arise from a lack of critical information, securities regulators have nearly 80 years of experience in devising disclosure requirements to address them. Not only are the disclosure requirements in a major market such as the United States’ extensive, but there exists an overarching regulatory principle in the form of something like the SEC’s Rule 10b-5 that acts as a catchall to cover contingencies that investors and regulators might not yet imagine.
Rule 10b-5 plays a critical component in the vast majority of SEC enforcement cases and is at the heart of the SEC’s oversight of issuers and markets. As regulators go, it is a model of simplicity. It says – and I am paraphrasing the entire rule minimally:
It shall be unlawful for any person to lie, by admission or omission, cheat or steal in connection with the purchase or sale of any security."
Rule 10b-5 applies in the US to both the public and private markets. And when you combine it with the SEC’s mandatory initial and ongoing disclosure requirements for publicly traded securities, and the sophistication requirements for actors involved in the US private markets, "information asymmetries" between buyers and sellers is not so great today as to pose a serious risk to market integrity. This does not mean that fraud doesn’t exist – and, as we saw with Enron, Bernie Madoff and others, information asymmetries as a result of fraud are a serious threat to the integrity of any market. But this is fraud, and a violation of existing laws and rules. These threats have to be addressed with better detection and deterrence.
The Crisis, Conflicts and Controls
By contrast, what we have seen arising out of the recent financial crisis often had less to do with lack of disclosure about critical information regarding a given security or issuer, and more to do with conflicts of interest among key market participants. We saw accusations of just these kinds of conflicts of interest with credit rating agencies and asset-backed security originators "rating shopping" to get higher credit ratings; with mortgage brokers, who got paid by the number of mortgages they arranged, regardless of the credit quality of those taking out the mortgages. We saw these accusations with banks and ABS originators themselves, who lent money for mortgages which were then packaged into asset-backed securities in such a way that the banks and originators had no incentive to police the quality of those mortgages. And we have seen accusations of such conflicts of interest in the way employees of banks are compensated, where big, highly leveraged bets that pay off in the short term are heavily rewarded, regardless of the risks they pose to the firm over the medium and long-term.
Of course, these types of conflicts of interest are hardly new – even if the exact form of the conflict of interest may be. Given that conflicts of interest are endemic to any market, disclosure itself has often proven to be the best tool to combat the problems created by these conflicts. But disclosure itself is not always enough. We have seen lots of new conflicts of interest over the past decade or so – the use of special purpose entities with pernicious effects on the incentives management of an issuer face, interlocking chains of market participants involved in designing, marketing and selling a particular security; the increasing reliance by retail investors on institutional investors when participating in the market, etc. They all have translated into a landscape of conflicts of interest that evolves too fast and involves so many permutations that, in order to address them, disclosure requirements alone would either have to be so extensive that even professional investors could not read through and understand them all, or else so broad that they would lose their usefulness.
We all recognize the problem in one form or another, and we can see how regulators have tried to grapple with this problem over the past decade. After Enron, we required new disclosures and new checks on the auditing system. We prohibited some kinds of clearly conflicted relationships, such as public audit firms providing consulting services to their audit clients. Following the recent crisis, we have developed a raft of new requirements for market participants, designed to limit or manage the conflicts of interest that led to the financial meltdown.
But, to some degree, all of these efforts are an attempt to close the barn doors after the horses have fled. As the old saying goes, it’s tough to make predictions, especially about the future. But I will offer one up here – the next financial crisis will not involve the same conflicts of interest as this last one, anymore than this last one.
Because we are always going to be playing catch-up, I suggest we change tack and approach conflicts of interest with the simplicity that we approach the disclosure of material information. And by that, I mean through a principle similar to Rule 10b-5. In other words, rather than trying, to nail down every potential conflict of interest and develop a formal policy towards it – prohibit it, disclose it, or manage it in some way – we shift the onus into the relevant market participants themselves. If a market participant involved in selling, buying, underwriting, or arranging securities on behalf of others, should have an obligation to identify conflicts of interest that might affect their relationship with clients or customers, and address them in an adequate manner.
This might be through disclosure. It might be through other means. But the obligation would be the market participant’s. Because this would be a principle-based rule like 10b-5 rather than a check-the-box style rule, if a conflict later appears that the market participant should have recognized and should have addressed, the regulator can take appropriate action. And it could take this action without necessarily having to identify the conflict before the conflict becomes a problem, in much the same way that a regulator such as the SEC doesn’t necessarily have to identify every form of mistruth before bringing an enforcement action under Rule 10b-5.
Of course, Rule 10b-5, in some cases, already captures some common conflicts of interest, since issuers, in particular, must disclose material information about the securities they are selling and known conflicts of interest clearly fall under these disclosure requirements. But issuers are not the only market participants facing dangerous conflicts of interest. As the past few decades have shown, such conflicts are rife throughout the market – and arguably, some cases unavoidable. But even where unavoidable, they need to be identified and addressed, in one form or another.
As part of the Commission’s Technical Assistance Program, my office works with a range of different governments. We advise them that their capital markets are necessary for sustainable economic growth and that these markets are distinct from credit markets. The formula for success in designing a capital market requires attention to information asymmetry and conflicts of interest. We also warn them against regulating capital markets in the interest of banks – to the detriment of market finance for the benefit of operating companies. Developed economics would do well to heed the same advice.
Crisis and Conflicts
by
Ethiopis Tafara
Director, Office of International Affairs
U.S. Securities and Exchange Commission
Director, Office of International Affairs
U.S. Securities and Exchange Commission
International Centre for Financial Regulation
Third Annual International Regulatory Summit
Regulation and Policy Priorities: Growth, Stability and Sustainability
25-26 September, 2012
Thank you, Barbara (Ridpath), and thanks to the International Center for Financial Regulation for inviting me here today. Before I get into any substance, I should give the SEC’s standard disclaimer that these remarks are my own views and do not necessarily represent the views of the Securities and Exchange Commission or other members of the Commission staff.
When I was first told about the topic of the conference, "Growth, Stability and Sustainability," I was intrigued by the combination of several seemingly mutually exclusive concepts; a "we can have it all" approach befitting election year campaigning in the United States, but perhaps problematic in real-life.
But upon reflection, this trinity makes sense. We are right now still recovering from the worst financial crisis since the 1920s and 30s. Financial instability has depressed economic growth around the world – just as in the 1920s and 30s. And recent labor reports in the United States and economic growth reports in Europe and Asia suggest that economic growth is not enough. It is about stable and sustainable economic growth. After several years of global economic weakness, with high and persistent unemployment, it is no comfort to the millions of unemployed workers that many countries are no longer technically in a recession. We may have growth, but if you can’t count on the source of your next paycheck, or even whether there will be a next paycheck, life is very unstable.
Growth, Sustainability and Stability and Capital Markets
Global prosperity depends of on economic growth and we know from history that financial markets are essential to that growth. This is a truism. But that doesn’t lessen the importance of the corollary that a return to economic growth depends on a strong financial market.
As for "sustainability," it is a term we hear overused quite a bit these days – calling into question its meaning. The meaning of sustainability in the context of a limited but renewable resource is clear: Don’t cut down a forest faster than new trees can grow; don’t continually plant the same crop on the same land lest you deplete the soil’s nutrients. But what "sustainability" means in the context of a market is less clear. Financial markets have seen bubbles and resulting financial crises on a periodic, very unpleasant, yet quite sustainable basis for almost 300 years now. A fan of economists such as Schumpeter or Minsky might even suggest that it is these very financial crises that correct for market over-exuberance and make financial markets sustainable.
As for "stability," for those of us involved in the financial markets, it is one of the most common terms we hear these days. Following the financial crisis, we saw the creation of the Financial Stability Board and the formation of the Financial Stability Oversight Council in the United States and the European Financial Stability Facility. The US Treasury Department even formed a new webpage, financialstability-dot-gov. The 2008 financial crisis has been defined as a crisis of instability – as if any fraud, poorly designed incentive structures, regulatory holes, and macro-economic structural problems were fundamentally problems because they introduce instability to the system, like a restaurant table with one of its legs a bit too short. And if only we could wedge a folded up supervisory napkin under that leg, in the form of better prudential controls and greater capital requirements, the system would be "stable." As you may have guessed, I don’t agree with that view.
Risk Avoidance and Risk Promotion
It’s true that the 2008 financial crisis was fundamentally a banking crisis. And the fears that keep banking supervisors up at night are fears of instability – bank runs and contagion, and the inherent maturity mismatch between banking assets and liabilities. However, the financial system is more than just the banking system. In our rush to prevent another banking crisis, the banking system has become the lens through which the entire financial system is viewed. And improving "financial stability" has come to mean porting traditional banking supervisory concepts over into other areas of the financial system, often in ways for which they are ill-suited and possibly quite harmful.
We can already see the effects on the broader economy. Banking supervision is, at its heart, about managing risk. The recent financial crisis shows what happens when banks, and entities engaging in bank-like behavior, take on excessive risk. So it’s natural that banking supervisors will want to oversee bank risk and monitor bank capital. After all, banks are often investing insured deposits, sometimes in illiquid assets. Catastrophe is always just around the corner if depositors lose faith in the banking system and collectively withdraw their assets.
Faith in the system is also critical to our capital markets, but it is always a very different sort of faith. For financial markets, some degree of instability has to be assumed. After all, economic growth is predicated on risk-taking, of some sort or another. A new company founded, a new product line launched, a new factory built always involves risk. And to paraphrase the guys on an American TV show called "Mythbusters," risk implies that failure is always an option.
Of course, banks and banking supervisors know that risk implies potential failure. They also recognize the risks this poses to the financial system – the "instability" it produces. But the effects of risk are quite different where capital markets are concerned. Capital markets qua markets – and by this I mean real capital markets, not banking activity masquerading as capital market activity – assume this risk and distribute it according to risk tolerance. While we all know that a run on a money market fund may look very much like a bank run, investor panic, by itself, does not necessarily affect the viability of, say, a mutual fund or a broker-dealer the way it would a bank. Where properly regulated, segregated investor assets are liquidated, and investors assume their losses. Capital may become dearer as a result, but there is no systemic contagion the way there is with a bank run. Investor assets may be insured against broker-dealer operational risk, but investors bear the market risk of their investments themselves – a fact of which they are aware.
Market Integrity, Information Asymmetry and Conflicts of Interest
As a consequence, capital markets play a very different role in our financial markets. Capital markets – and by this I mean both the public and private markets – are places where the large risks are financed. Failure is commonplace and accounted for in the cost of raising capital. Consequently, the issue that keeps securities regulators up at night isn’t necessarily contagion in the banking sense – where concerns about the solvency of one firm leads to a run on otherwise solvent firms everyone, creating a self-fulfilling prophecy of bank failures. It’s not concern about faith in the stability of the system, where stability means solvency and capital adequacy. Rather, what keeps us securities regulators up at night are fears about a widespread loss of faith in the integrity of the market – that is, a loss of investor confidence. Investor confidence in a market’s integrity is central to the integrity of the overarching financial system, but integrity and investor confidence mean very different things to a securities regulator than financial market integrity might mean for a banking supervisory. Risk, itself, is not necessarily a problem. It’s not so much that investors might fear that a particular issuer isn’t as healthy as they previously thought. It’s not so much that investors don’t happen to be winning. That occurs every day. No, the problems arise when investors begin to think that the market is a rigged game that they cannot win.
For securities regulators, this is systemic risk, and it’s a type of system risk that the normal tools of banking supervision do not address. The problems that we have seen in our capital markets as a result of the financial crisis fall squarely into this category. Many banks around the world were certainly under-capitalized and making risky investments without acknowledging or perhaps even understanding the risks they were taking. But investor losses were different. In many cases, investors either weren’t informed about critical information regarding securities they were investing in, or they were not aware of – and in some cases could not be aware of – underlying conflicts of interest that would have an impact on the performance of their investments.
Regulators need to refocus on conflicts of interest and information asymmetries facing all market participants, rather than imposing a banking supervisory approach to regulation of markets and market intermediaries ill-suited to such a model. In doing so, we will rebuild investor confidence, to the benefit of issuers and investors alike. Fortunately, securities regulators have tools at their disposal to address information asymmetry. Indeed, where problems potentially might arise from a lack of critical information, securities regulators have nearly 80 years of experience in devising disclosure requirements to address them. Not only are the disclosure requirements in a major market such as the United States’ extensive, but there exists an overarching regulatory principle in the form of something like the SEC’s Rule 10b-5 that acts as a catchall to cover contingencies that investors and regulators might not yet imagine.
Rule 10b-5 plays a critical component in the vast majority of SEC enforcement cases and is at the heart of the SEC’s oversight of issuers and markets. As regulators go, it is a model of simplicity. It says – and I am paraphrasing the entire rule minimally:
Rule 10b-5 applies in the US to both the public and private markets. And when you combine it with the SEC’s mandatory initial and ongoing disclosure requirements for publicly traded securities, and the sophistication requirements for actors involved in the US private markets, "information asymmetries" between buyers and sellers is not so great today as to pose a serious risk to market integrity. This does not mean that fraud doesn’t exist – and, as we saw with Enron, Bernie Madoff and others, information asymmetries as a result of fraud are a serious threat to the integrity of any market. But this is fraud, and a violation of existing laws and rules. These threats have to be addressed with better detection and deterrence.
The Crisis, Conflicts and Controls
By contrast, what we have seen arising out of the recent financial crisis often had less to do with lack of disclosure about critical information regarding a given security or issuer, and more to do with conflicts of interest among key market participants. We saw accusations of just these kinds of conflicts of interest with credit rating agencies and asset-backed security originators "rating shopping" to get higher credit ratings; with mortgage brokers, who got paid by the number of mortgages they arranged, regardless of the credit quality of those taking out the mortgages. We saw these accusations with banks and ABS originators themselves, who lent money for mortgages which were then packaged into asset-backed securities in such a way that the banks and originators had no incentive to police the quality of those mortgages. And we have seen accusations of such conflicts of interest in the way employees of banks are compensated, where big, highly leveraged bets that pay off in the short term are heavily rewarded, regardless of the risks they pose to the firm over the medium and long-term.
Of course, these types of conflicts of interest are hardly new – even if the exact form of the conflict of interest may be. Given that conflicts of interest are endemic to any market, disclosure itself has often proven to be the best tool to combat the problems created by these conflicts. But disclosure itself is not always enough. We have seen lots of new conflicts of interest over the past decade or so – the use of special purpose entities with pernicious effects on the incentives management of an issuer face, interlocking chains of market participants involved in designing, marketing and selling a particular security; the increasing reliance by retail investors on institutional investors when participating in the market, etc. They all have translated into a landscape of conflicts of interest that evolves too fast and involves so many permutations that, in order to address them, disclosure requirements alone would either have to be so extensive that even professional investors could not read through and understand them all, or else so broad that they would lose their usefulness.
We all recognize the problem in one form or another, and we can see how regulators have tried to grapple with this problem over the past decade. After Enron, we required new disclosures and new checks on the auditing system. We prohibited some kinds of clearly conflicted relationships, such as public audit firms providing consulting services to their audit clients. Following the recent crisis, we have developed a raft of new requirements for market participants, designed to limit or manage the conflicts of interest that led to the financial meltdown.
But, to some degree, all of these efforts are an attempt to close the barn doors after the horses have fled. As the old saying goes, it’s tough to make predictions, especially about the future. But I will offer one up here – the next financial crisis will not involve the same conflicts of interest as this last one, anymore than this last one.
Because we are always going to be playing catch-up, I suggest we change tack and approach conflicts of interest with the simplicity that we approach the disclosure of material information. And by that, I mean through a principle similar to Rule 10b-5. In other words, rather than trying, to nail down every potential conflict of interest and develop a formal policy towards it – prohibit it, disclose it, or manage it in some way – we shift the onus into the relevant market participants themselves. If a market participant involved in selling, buying, underwriting, or arranging securities on behalf of others, should have an obligation to identify conflicts of interest that might affect their relationship with clients or customers, and address them in an adequate manner.
This might be through disclosure. It might be through other means. But the obligation would be the market participant’s. Because this would be a principle-based rule like 10b-5 rather than a check-the-box style rule, if a conflict later appears that the market participant should have recognized and should have addressed, the regulator can take appropriate action. And it could take this action without necessarily having to identify the conflict before the conflict becomes a problem, in much the same way that a regulator such as the SEC doesn’t necessarily have to identify every form of mistruth before bringing an enforcement action under Rule 10b-5.
Of course, Rule 10b-5, in some cases, already captures some common conflicts of interest, since issuers, in particular, must disclose material information about the securities they are selling and known conflicts of interest clearly fall under these disclosure requirements. But issuers are not the only market participants facing dangerous conflicts of interest. As the past few decades have shown, such conflicts are rife throughout the market – and arguably, some cases unavoidable. But even where unavoidable, they need to be identified and addressed, in one form or another.
As part of the Commission’s Technical Assistance Program, my office works with a range of different governments. We advise them that their capital markets are necessary for sustainable economic growth and that these markets are distinct from credit markets. The formula for success in designing a capital market requires attention to information asymmetry and conflicts of interest. We also warn them against regulating capital markets in the interest of banks – to the detriment of market finance for the benefit of operating companies. Developed economics would do well to heed the same advice.
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