SEC PROPOSES NEW RULES TO PROTECT MARKETS FROM TECHNOLOGY ISSUES

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., March 7, 2013 — The Securities and Exchange Commission today unanimously proposed new rules to require certain key market participants to have comprehensive policies and procedures in place surrounding their technological systems.

The SEC’s proposal called Regulation SCI would replace the current voluntary compliance program with enforceable rules designed to better insulate the markets from vulnerabilities posed by systems technology issues.

Self-regulatory organizations, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and surveil systems that are integral to their operations. The proposed rules would require them to ensure their core technology meets certain standards, conduct business continuity testing, and provide certain notifications in the event of systems disruptions and other events.

"While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors," said SEC Chairman Elisse B. Walter. "Reg SCI would provide more explicit technology and control standards to help ensure that our markets remain resilient against technological vulnerabilities."

The SEC will seek public comment on Reg SCI for 60 days following its publication in the Federal Register.

FACT SHEET

Improving Systems Compliance and Integrity

SEC Open Meeting
March 7, 2013

Background

Today’s securities markets rely extensively on technology more than ever before. As with any industry, the consequences can be significant when technology goes awry.

The high-speed automated trading that occurs both on national securities exchanges and alternative trading systems has heightened the potential for a technological problem to broadly impact the market.

Following the Flash Crash in May 2010, the SEC approved a series of measures to help limit the impact of such technological errors. For instance, the SEC approved rules to halt trading when a stock price falls too far, too fast as well as rules to provide certainty in advance of when an erroneous trade would be broken and rules to eliminate stub quotes.

Additionally, the SEC approved a rule known as the market access rule, which requires brokers and dealers with market access to put in place risk management controls and supervisory procedures designed to manage the financial, regulatory, and other risks posed to the markets by a malfunctioning of their technological systems.

Automation Review Policy

There are no mandatory rules governing the automated systems of self-regulatory organizations, such as national securities exchanges, clearing agencies, FINRA, and the MSRB. Instead, for the past two decades, they have followed a voluntary set of principles articulated in the SEC’s Automation Review Policy and participated in what is known as the ARP Inspection Program.

Recent technological issues in the securities markets including those that arose during the initial public offerings of Facebook and BATS Global Markets as well as the Knight Capital trading incident have shown that investors can be put at risk when technology fails, and confidence in the markets can falter.

The SEC convened a roundtable in October 2012 to discuss how market participants could prevent or at least mitigate systems issues, and how the response to such issues could be improved. The market closures following Superstorm Sandy also highlight the importance of having a robust market technology infrastructure. These events and discussions have helped shape the development of the rulemaking being proposed today.

Proposed Rule — Regulation SCI

The set of rules proposed by the Commission — called Regulation Systems Compliance and Integrity (Regulation SCI) — would formalize and make mandatory many of the provisions of the SEC’s Automation Review Policy that have developed during the last two decades. The proposed rule applies the policy and proposes additional measures to entities at the heart of U.S. securities market infrastructure in order to protect that infrastructure.

Regulation SCI would seek to ensure:
Core technology of national securities exchanges, significant alternative trading systems, clearing agencies, and plan processors meet certain standards.
These entities conduct business continuity testing with their members or participants.
These entities provide certain notifications regarding systems disruptions and other types of systems issues.
Regulation SCI is intended to reduce the chance of technology problems occurring in the first place and ensure that key entities are well-positioned to take appropriate corrective action if problems do occur.

SEC COMMISSIONER LUIS A. AGUILAR SPEAKS ABOUT AUTOMATED SYSTEMS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Developing Solutions to Ensure that the Automated Systems of Our Marketplace are Secure, Robust, and Reliable
byCommissioner Luis A. Aguilar
U.S. Securities and Exchange CommissionWashington, D.C.
March 7, 2013


In recent years, the securities markets have undergone significant changes, and none has had more impact than the development of technology systems with ever-increasing speed and capacity. These systems are so fast that, in a blink of an eye, millions of trades can take place and billions of dollars can be transferred from buyers to sellers.<sup>Unfortunately, these systems can just as quickly become a destructive force with devastating consequences.

Some of the better-known examples of recent system-related issues include:
The Flash Crash of May 6, 2010.
 During the flash crash, in just a matter of minutes, certain equities experienced severe price movements — both up and down — with more than 20,000 trades in over 300 securities executed at prices more than 60% away from their market values. In just a few minutes, nearly $1 trillion in market value evaporated, before making a partial recovery.
The October 2011 system errors at Direct Edge exchanges where, in just over four minutes, the exchanges caused about 27 million shares of excess trading. These shares had an approximate market value of $773 million across roughly one thousand securities. The exchanges realized a net loss of $2.1 million in connection with the positions that were assumed and liquidated.
 The Commission sanctioned the Direct Edge entities for violations of the federal securities laws. In its Order, the Commission noted that the "violations occurred against the backdrop of weaknesses in Respondents’ systems, processes, and controls."6
Knight Capital Group Inc.’s $440 million trading loss in August 2012.
 In just 45 minutes, Knight Capital’s computers rapidly bought and sold millions of shares. Those trades pushed the value of many stocks up, and the company’s losses appear to have occurred when it had to sell the overvalued shares back into the market at a lower price. As a result, Knight Capital lost approximately $10 million per minute, almost had to go into bankruptcy, and subsequently agreed to be purchased.8
The systems issues associated with the initial public offerings of BATS Global Markets, Inc., and Facebook, Inc., in March and May 2012, respectively.
 As a result of systems issues, the BATS IPO was abandoned, and the Facebook fiasco resulted in NASDAQ offering up to $62 million to accommodate members for losses attributable to the systems issues.
The recent admission by BATS that, for a period of more than four years, its computer systems for two equity exchanges and an options platform allowed trades to take place at prices that violated the Commission’s regulations, which require exchanges to ensure that investors receive the best price.


These recent events highlight the need for the Commission to develop a secure, robust, and reliable regulatory framework to ensure that our capital markets develop and maintain systems with sufficient capacity, integrity, resiliency, availability, and security.

Today’s rule proposal, Regulation SCI (Systems Compliance and Integrity), is a step in the right direction. It is an important step forward from the purely voluntary program we have today as a result of the Commission’s 1989 policy statement, which states that SROs, on a voluntary basis, should establish comprehensive planning and assessment programs to determine systems capacity and vulnerability. At that time, the Commission noted the impact that systems problems and failures could have on public investors, broker-dealer risk exposure, and market efficiency.
 Clearly, the voluntary program has failed, as the above examples illustrate.

The proposed rule would move beyond the current voluntary program and requires entities to, among other things, (i) establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its systems have adequate levels of capacity, integrity, resiliency, availability, and security to maintain the entity’s operational capability and promote the maintenance of fair and orderly markets; (ii) mandate participation in scheduled testing of the operation of the entity’s business continuity and disaster recovery plans, including backup systems, and coordinate such testing on an industry- or sector-wide basis with other entities; and (iii) make, keep, and preserve records relating to the matters covered by Regulation SCI, and provide them to Commission representatives upon request. The proposal also would require that entities submit all required written notifications and reports to the Commission electronically using new proposed Form SCI. These are all welcomed improvements.

However, although this is a positive step in the right direction, I am concerned that today’s rule proposal does not:
Mandate compliance with a specific set of Commission-identified minimum standards to ensure that entities establish, maintain, and enforce written policies and procedures reasonably designed to ensure that the entity’s systems provide adequate levels of capacity, integrity, resiliency, availability, and security. While the rule proposal provides a set of model policies and procedure for entities to consider, it fails to require minimum standards for policies and procedures. As a result, the rule proposal may not provide enough assurance that the resulting policies and procedures will meet the goals of the rule.
Require that an external review of compliance with Regulation SCI be conducted on a periodic basis by an independent third party in order to reduce the risk of conflicts of interests. Simply stated, an internal review may not be as robust and complete due to competing internal business pressures.
Provide for an entity’s senior officers to certify, in writing, that (i) the entity has processes in place to establish, document, maintain, review, test, and modify controls reasonably designed to achieve compliance with Regulation SCI; and (ii) that the annual budget and staffing levels are adequate for the entity to comply with its obligations under Regulation SCI. As Congress noted in connection with the CEO and CFO Certifications mandated by Section 302 of the Sarbanes-Oxley Act of 2002, "managers should be held accountable for the representations made by their company."
I believe that senior officer certifications would be an important tool to ensure compliance with today’s proposed rule.

Moreover, I am concerned that today’s rule proposal would allow an explicit safe harbor for entities and their employees that establish and maintain policies and procedures that are reasonably designed to comply with Regulation SCI. Although it is not stated in today’s release, I have been told by senior staff that the Commission has never previously included an explicit safe harbor in a Commission rule requiring that regulated entities maintain policies and procedures designed to achieve a particular objective.

In my view, an unprecedented safe harbor in a rule that does not require clear, identifiable, and meaningful standards, and that does not require policies and procedures to be reviewed by an independent third party and certified by senior officers, will result in a rule proposal that falls short of its goal — which is to ensure that our capital markets develop and maintain appropriate systems.

The rule proposal asks a number of important questions that were incorporated at my request to solicit comments from the public. These questions were designed to generate information and assist the Commission in thinking through issues associated with the rule proposal. This is an important part of the Commission’s rulemaking process, which is based on a "notice and comment" procedure. I hope that the comments generated will help make this a better rule.

Despite my concerns, I am willing to support today’s rule proposal because Regulation SCI would apply to more entities than the Commission’s current ARP Inspection Program, and the proposed rule would place obligations on entities not currently included in the Commission’s ARP policy statements. The havoc caused by recent events highlight the need to have an updated and formalized regulatory framework for ensuring that the U.S. securities trading markets maintain systems with sufficient integrity, resiliency, and security. Although, I have concerns, I am hopeful they will be addressed at the adoption stage. By then, we should have a full five-member Commission.

Today’s rulemaking is a positive step in addressing the systems challenges posed by large, automated, complex, and fragmented trading centers. As the country’s capital markets regulator, the SEC must be at the forefront of proactively addressing changes in our capital market structure. The SEC should not merely respond to events that have occurred. Regulation SCI is one such proactive effort.

In closing, I want to thank the staff for its efforts. I look forward to the comments we will receive on this proposal.

Thank you.</sup>

SEC FILES INJUCTIVE ACTION RELATED TO FRAUDULENT OFFER OF LIMITED PARTNERSHIP INTESESTS IN TWO HEDGE FUNDS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Advisers to the RAHFCO Hedge Funds with Fraud
The Securities and Exchange Commission ("Commission") filed a civil injunctive action on March 1, 2013, in the United States District Court for the Southern District of New York relating to the fraudulent offer and sale of limited partnership interests in two hedge funds -- RAHFCO Funds LP and RAHFCO Growth Fund LP (collectively "RAHFCO Hedge Funds"). The Commission charged RAHFCO Management Group, LLC ("RAHFCO Management"), a Delaware corporation and general partner of RAHFCO Hedge Funds; its principal, Randal Kent Hansen of Sioux Falls, South Dakota; Hudson Capital Partners Corporation (HCP), a New York corporation, the sub-adviser/portfolio manager of RAHFCO Hedge Funds; and Vincent Puma of Morganville, New Jersey, the principal of HCP, with securities fraud, among other violations of the securities laws, for engaging in a fraudulent scheme that defrauded investors out of more than $10 million.

The Commission's complaint alleges that the RAHFCO Hedge Funds raised approximately $23.5 million from over 100 investors nationwide between 2007 and the funds' collapse in about May 2011. Additionally, the complaint alleges that the primary function of the Defendants' scheme was to convince investors to invest in fraudulent pooled investments that purportedly traded in options and futures on the S&P 500 Index and in equities, then the Defendants siphoned off the invested funds for the Defendants' own purposes. The complaint also alleges that, in furtherance of their fraud, Defendants engaged in schemes to defraud investors and made material misrepresentations to investors and others.

The Commission's complaint alleges that all of the defendants violated the antifraud provisions of the securities laws in Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The complaint also alleges that Hansen and RAHFCO Management violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 and that Puma and HCP aided and abetted these violations. Finally, the complaint alleges that Hansen and RAHFCO Management violated Section 15(a) of the Exchange Act by acting as unregistered broker-dealers. The Commission's complaint seeks permanent injunctions, third-tier civil penalties, disgorgement plus prejudgment interest, and other relief against all of the

THE CASE OF ILLEGAL LEGAL OPINIONS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Mar. 7, 2013 — The Securities and Exchange Commission today charged a California-based lawyer who has been fraudulently churning out baseless legal opinion letters for penny stocks through his website without researching and evaluating the individual stock offerings.

Legal opinion letters are issued to transfer agents on behalf of holders of restricted stock seeking to sell the stock freely in the public markets. Transfer agents typically require a lawyer’s opinion explaining the legal basis for lifting the restriction on the stock and allowing it to be freely traded.

The SEC alleges that Brian Reiss of Huntington Beach, Calif., set up 144lettera.com to promote his legal opinion letter business and advertise "volume discount" rates while noting "penny stocks not a problem." Reiss steered potential customers to his website by making bids on search terms through Google’s AdWords, and then relied on a computer-generated template to draft his opinion letters within minutes absent any true analysis of the facts behind each stock offering. The letters from Reiss ultimately made false and misleading statements and facilitated the sale of securities in violation of the registration provisions of the federal securities laws.

"Reiss flouted his responsibilities as a gatekeeper in the issuance of stock, and churned out opinion letters to make a quick buck," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "Attorneys who act as gatekeepers in our markets have a solemn responsibility to ensure that they provide accurate information to the marketplace."

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Reiss falsely claimed he had conducted investigations into various stocks and determined them to be exempt from registration under the securities laws. He misrepresented critical facts, and our enforcement action seeks to bring Reiss’s opinion mill to an end."

According to the SEC’s complaint filed in federal court in Manhattan, Reiss began issuing the fraudulent legal opinion letters in 2008. He advertised a $285 rate for each letter and a "volume discount" rate of $195 per letter. Reiss routinely made inaccurate statements bearing on whether the restriction should be lifted, and failed to conduct even a token inquiry into the underlying facts. He knew or recklessly disregarded the fact that shareholders seeking his opinion letters intended to sell their stock in the public markets, and that transfer agents would rely on his opinion letters to issue stock certificates without restrictive legends.

According to the SEC’s complaint, the false and misleading statements that Reiss made in opinion letters induced transfer agents for several public companies to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public. Reiss provided the opinion letters to transfer agents who required assurances in the form of a legal opinion that the transactions qualified for an exemption from the registration requirements under the federal securities laws. With Reiss’s baseless assurances, the transfer agents issued stock certificates without restrictive legends and enabled the stock to be traded freely.

The SEC’s complaint charges Reiss with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC seeks disgorgement of ill-gotten gains with prejudgment interest and financial penalties. The SEC seeks to bar Reiss from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act. The SEC also seeks permanent injunctions – including an injunction prohibiting Reiss from providing legal services in connection with an unregistered offer or sale of securities.

The SEC’s investigation was conducted by Charles D. Riely and Amelia A. Cottrell – members of the SEC Enforcement Division’s Market Abuse Unit – along with Shannon A. Keyes and Kathy Murdocco of the SEC’s New York Regional Office. The SEC’s litigation will be led by Mr. Riely and Ms. Keyes. The New York office’s broker-dealer examination team of Richard Heaphy, Michael McAuliffe, and Simone Celio, Jr. provided assistance with the investigation.

The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

INJUNCTIONS ENTERED IN PRECIOUS METALS COMMODITY FRAUD SCHEME CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION

Federal Court in Florida Enters Preliminary Injunction Order against Hunter Wise Commodities, LLC, Lloyds Commodities, LLC, and 18 Other Defendants in Connection with Operating a Multi-Million Dollar Fraudulent Precious Metals Scheme

Finding that new Dodd-Frank anti-fraud authority applies, Court freezes defendants’ assets and appoints special corporate monitor for corporate defendants

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that the Honorable Donald M. Middlebrooks of the U.S. District Court for the Southern District of Florida entered a Preliminary Injunction Order against Defendants Hunter Wise Commodities, LLC; Hunter Wise Services, LLC; Hunter Wise Credit, LLC; Hunter Wise Trading, LLC; Lloyds Commodities, LLC; Lloyds Commodities Credit Company, LLC; Lloyds Services, LLC; C.D. Hopkins Financial, LLC; Hard Asset Lending Group, LLC; Blackstone Metals Group, LLC; Newbridge Alliance, Inc.; United States Capital Trust, LLC; Harold Edward Martin, Jr.; Fred Jager; James Burbage; Frank Gaudino; Baris Keser; Chadewick Hopkins; John King; and David A. Moore that prohibits the Defendants from offering investments in physical metals to the retail public.

The Court’s decision stems from the CFTC’s December 5, 2012 Complaint charging the Defendants with fraudulently soliciting and accepting at least $46 million from hundreds of customers since July 2011 to invest in physical precious metals, such as gold, silver, platinum, palladium, and copper. (See CFTC Press Release 6447-12, December 5, 2012). According to the CFTC Complaint, the Defendants claimed to sell physical metals to customers who made a down payment on the amount of physical metals they wished to buy, usually 25 percent of the total purchase price. Defendants allegedly claimed to arrange loans for the balance of the purchase price, and advised customers that their physical metals would be stored in a secure depository. The Complaint alleges that these statements were false because the Defendants did not own, purchase or store any metal for their customers, and that the Defendants cheated and defrauded customers by charging customers interest on loans which were never made, and storage and insurance fees on metals that did not exist. In addition, the Complaint alleges that the offering of these investments in physical metals constituted illegal, off-exchange retail commodity contracts in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

Following a hearing on February 22, 2013, Judge Middlebrooks found that the CFTC had shown a likelihood of success in proving the allegations of the Complaint. In the Court’s Order issued on February 25, Judge Middlebrooks described Hunter Wise as "the conductor of th[e] orchestra, with the other Defendants playing instruments at Hunter Wise’s direction." According to the Order, Hunter Wise provided reports to customers that were misleading because they created the "illusion that actual commodities are being transferred into or out of their accounts, when in reality, no real metals are being transferred as a result of the transaction." According to the Order, "Hunter Wise does not actually buy, sell, loan, store, or transfer physical metals in connection with these retail commodity transactions. Instead, Hunter Wise records and tracks customer orders and trading positions, and then manages its exposure to these retail customer trading positions by using the customer’s funds to trade derivatives – such as futures, forwards and rolling spot contracts – in its own margin trading accounts."

The Court’s Order prohibits the Defendants from trading, soliciting orders, committing fraud or engaging in business activity related to contracts or transactions regulated by the CFTC. In its continuing litigation against the Defendants, the CFTC is seeking a permanent civil injunction, in addition to other remedial relief, including restitution to customers.

The Court’s Order also froze all the defendants’ assets, and appointed Melanie Damian, Esq. as Special Corporate Monitor to assume control over the corporate defendants. The CFTC has established a website that will be updated periodically with information about the ongoing proceedings and has other relevant information for consumers and other victims, http://www.cftc.gov/ConsumerProtection/CaseStatusReports/hunterwise.

The Dodd-Frank Act expanded the CFTC’s jurisdiction over transactions in physical metals, like these, and requires that such transactions be executed on or subject to the rules of a board of trade, exchange or commodity market, according to the Complaint. This new requirement took effect on July 16, 2011. The Complaint alleges that all of the Defendants’ financed commodity transactions after July 16, 2011, were illegal. The Complaint also alleges that the Defendants defrauded customers in all of these financed commodity transactions.

In January 2012 the CFTC issued a Consumer Fraud Advisory regarding precious metals fraud, saying that it had seen an increase in the number of companies offering customers the opportunity to buy or invest in precious metals. The CFTC’s Consumer Fraud Advisory specifically warned that frequently companies do not purchase any physical metals for the customer, instead simply keep the customer’s funds. The Consumer Fraud Advisory further cautioned consumers that leveraged commodity transactions are unlawful unless executed on a regulated exchange.

The CFTC thanks the Florida Office of Financial Regulation, the Florida Department of Agriculture and Consumer Services, and the United Kingdom Financial Services Authority for their assistance in this matter.

The CFTC Division of Enforcement staff responsible for this action are Carlin Metzger, Heather Johnson, Joseph Konizeski, Jeff LeRiche, Peter Riggs, Jennifer Chapin, Steven Turley, Brigitte Weyls, Joseph Patrick, Susan Gradman, Thaddeus Glotfelty, William Janulis, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

SEC CHARGES CANADIAN STOCK PROMOTER WITH DISSEMINATING FALSE AND MISLEADING INFORMATION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
On March 4, 2013, the Securities and Exchange Commission filed a civil action in the United States District Court for the District of Utah charging Canadian stock promoter Colin McCabe with disseminating false and misleading information to investors when recommending penny stocks to them.

In its complaint, the Commission alleges that, from at least early 2008 through 2011, McCabe, among other things: made false and misleading claims about how he selected recommended stocks; failed to disclose to his newsletter subscribers that he was being paid substantial sums to recommend some of the same stocks in his other publications; and made false and misleading statements about the assets of one of the issuers he recommended.

According to the complaint, McCabe falsely claimed that his publications were the result of extensive research conducted by researchers with relevant expertise and contacts, when, in fact, McCabe’s research was limited to reviewing issuers’ filings with the Commission, press releases, and issuer websites, and he did not have any assistance in researching stocks or writing his publications. The complaint alleges that while touting the quality of his stock picking research, McCabe failed to disclose to his newsletter subscribers that he was being paid substantial sums, a total of more than $16 million between early 2008 and 2011, to promote some of the same stocks he recommended to them in his other publications.

The complaint further alleges that McCabe falsely represented that Guinness Exploration Inc. ("Guinness") had acquired a mining property well before discoveries in May 2009 turned the region into "a red-hot area play," when, in fact, the property was not acquired until months later in November 2009. According to the complaint, McCabe’s claims that Guinness’ property held "an estimated recoverable resource in excess of 1 million ounces of gold" were also false and misleading.

The complaint alleges that McCabe, doing business as Elite Stock Report, The Stock Profiteer and Resource Stock Advisor, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission seeks a final judgment permanently enjoining McCabe from future violations of the federal securities laws and ordering him to pay civil penalties and disgorgement of ill-gotten gains plus prejudgment interest.