FROM: COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Gary Gensler Before the International Monetary Fund Conference
March 20, 2013
Good afternoon. Thank you, José, for the kind introduction. I also want to thank the International Monetary Fund and Christine Lagarde for the invitation to speak today at your conference on commodity markets.
Derivatives Markets
Farmers, ranchers, producers, commercial companies and other end-users across the globe depend on well-functioning derivatives markets. These markets are essential so that end-users seeking to hedge a risk can lock in a future price of a commodity and thus focus on what they do best – efficiently producing commodities and other goods and services for the economy.
Derivatives markets have existed in the United States since the time of the Civil War. Initially, there were futures on agricultural commodities, including wheat, corn and cotton.
Futures allowed farmers to get price certainty on their crops. As they were planting their fields, farmers could lock in a price for harvest time. Farmers and producers also benefited from prices established in a central market, rather than just relying on competition for their harvested crops among local merchants.
In these central markets, hedgers seeking to reduce risk may meet other hedgers, but often meet speculators on the other side of the transaction.
In the 1920s, Congress brought the first federal oversight to the futures market. These reforms included bringing transparency to the marketplace by requiring that all grain futures be traded on central exchanges.
A federal regulator was established within the U.S. Department of Agriculture to oversee the grain futures market.
During the 1930s, President Roosevelt and Congress strengthened the common-sense rules of the road for these markets by adopting new prohibitions against manipulation, protections for customer funds and speculative position limits to promote market integrity.
By the 1970s, the futures market had expanded to include contracts on additional agricultural commodities, as well as metals.
Market participants also were considering further innovations to trade contracts on other risks in the economy, such as on energy products and financial instruments.
Congress understood this and broadened oversight of the futures markets to all commodities, including any that might be developed in the future.
The Commodity Futures Trading Commission (CFTC) was established as in independent regulator in 1975, and took on this broader role from our predecessor in the Department of Agriculture.
The word commodity in our oversight regime covers agricultural, metals, energy and financial commodities, as well as any other future to manage risk based on any "services, rights and interests."
Thus, the word "commodity" in our oversight regime is more expansive than you are generally discussing at this conference.
In 1981, a new derivatives product emerged. These derivatives, called swaps, were initially transacted bilaterally, off-exchange. While the futures market has been regulated by the CFTC, the swaps marketplace in the United States, Europe and Asia lacked oversight.
What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by the 1930s reforms, weathered the financial crisis.
President Obama and Congress responded and crafted the swaps provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
They borrowed from what has worked best in the futures market for decades – clearing, oversight of intermediaries and transparency. The law gave the CFTC responsibility for swaps and the Securities and Exchange Commission responsibility for security-based swaps.
CFTC Mission
As of last year, the CFTC is charged with overseeing both the commodity futures market and the swaps market.
The CFTC is not a price-setting agency.
The mission of the CFTC is to ensure market transparency – both pre- and post-trade. Transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.
The mission of the CFTC is to promote market integrity – to ensure that that the price discovery process is open, competitive and efficient.
The mission of the CFTC is to police the derivatives markets for fraud, manipulation and other abuses.
The mission of the CFTC is to lower the risks to the economy of clearinghouses and intermediaries, as well as ensuring for the protection of customer funds.
And the mission of the CFTC is to ensure these markets work for the real economy – the non-financial side that employs 94 percent of private sector jobs – so that hedgers and investors may use them with confidence.
Three years after the passage of the Dodd-Frank Act, the CFTC is nearly complete with the law’s swaps market reforms. The swaps marketplace is increasingly shifting to implementation of these common-sense rules of the road. For the first time, the public is benefiting from:
Greater access to the swaps market and the risk reduction that comes from centralized clearing.
Oversight of swap dealers; and
The transparency of seeing the price and volume of each swap transaction, available free of charge on a website like a modern-day tickertape.
Looking forward, it’s a priority that the Commission finishes rules to promote pre-trade transparency, including those for a new swaps trading platform, called swap execution facilities (SEFs), and the block rule for swaps.
Pre-trade transparency will allow buyers and sellers to meet and compete in the marketplace, just as they do in the futures and securities marketplaces. SEFs will allow market participants to view the prices of available bids and offers prior to making their decision on a swap transaction.
It’s also a priority that the Commission ensures the cross-border application of swaps market reform appropriately covers the risk of U.S. affiliates operating offshore.
If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with Bear Stearns, which failed five years ago this month, AIG, Lehman Brothers, Citigroup and Long-Term Capital Management.
Thus, as the CFTC completes guidance regarding the cross-border application of swaps market reform, I believe it’s critical that the Dodd-Frank Act’s swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S. Where there are comparable and comprehensive home country rules and enforcement of those rules abroad, we can look to substituted compliance, but the transactions would still be covered.
Changing Markets
Since the 1980s, the swaps market has grown in size and complexity. It is now eight times as big as the futures market. From total notional amounts of less than $1 trillion in the 1980s, the notional value now ranges around $250 trillion in the United States.
Together, the notional value of the U.S. futures and swaps markets is approximately $300 trillion – or roughly$20 of derivatives for every dollar of goods and services produced in the U.S. economy.
The futures market has changed dramatically as well.
There has been a significant increase in electronic trading. Instead of face-to-face trading on an exchange floor, more than 85 percent of the futures volume in 2012 was traded electronically.
In addition, the makeup of the market has changed. While the futures market has always been where hedgers and speculators meet, today a significant majority of the market is made up of financial actors, such as swap dealers, hedge funds, pension funds and other financial entities.
For example, based upon CFTC data as of last week, only about 14 percent of long positions and about 13 percent of short positions in the crude oil market (NYMEX WTI contracts) were held by producers, merchants, processors and other users of the commodity.
Similarly, only about 18 percent of gross long positions and about 27 percent of gross short positions in the Chicago Board of Trade wheat market were held by producers, merchants, processors and other users of the commodity.
Furthermore, CFTC data published in 2011 shows the vast majority of trading volume in key futures markets – more than 80 percent in many contracts – is day trading or trading in calendar spreads.
Only a modest proportion of average daily trading volume results in reportable traders changing their net long or net short futures positions for the day. This means that about 20 percent or less of the trading is done by traders who bring a longer-term perspective to the market on the price of the commodity.
Modern technology has led to other dramatic changes in the markets. With advancements in cell phone technology, a farmer in Africa or Asia can see the world prices for these markets, whether set in Chicago or elsewhere. This technological advancement greatly increases access to the markets. Farmers around the globe can more fully benefit from the competitive market.
But modern technology also more tightly connects us all and highlights why we have to ensure the markets are transparent and free of fraud, manipulation, and other abuses.
Position Limits and Enforcement Authority
Since the reforms of the 1930s, the CFTC’s predecessor and now the CFTC have promoted market integrity with position limits, as well as the agency’s enforcement authority to police manipulative conduct.
Position Limits
Since the 1930s, Congress has prescribed position limits to protect against the burdens of excessive speculation, including those that may be caused by large concentrated positions.
When the CFTC set position limits in the past, the agency sought to ensure that the markets were made up of a broad group of participants.
At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring that markets do not become too concentrated.
Position limits are a critical tool to ensure that a single trader does not accumulate an outsize position that could potentially affect integrity or liquidity in the marketplace.
As required by Congress in the Dodd-Frank Act, in October 2011 the CFTC finalized a rule to establish position limits for futures, options and swaps on 28 physical commodities.
A group of financial associations is challenging this rule in court. I believe it’s critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities.
Enforcement Authority
In the United States, we have strong prohibitions against misconduct that can affect the integrity of our markets, which were further strengthened by Congress in the Dodd-Frank Act.
Our laws prohibit successful manipulations, where the wrongdoer intended to and actually did manipulate a price.
But we also cover a much broader swath of misconduct.
Our laws prohibit all attempts at manipulation, and all manipulative or deceptive schemes, where the wrongdoer acted recklessly. In addition, our laws prohibit the transmission of false information that may tend to affect the price of a commodity.
These laws, aggressively and fairly enforced, are designed to protect market participants and the integrity of our markets. The international community can draw on these provisions to enhance their own regulatory regimes.
International Coordination
Other market jurisdictions have made progress on position limits and attempted manipulation provisions.
In November 2011, the G-20 leaders endorsed an International Organization of Securities Commissions (IOSCO) report noting that market regulators should have and use formal position management authorities, including the power to set position limits, to prevent market abuses.
Most jurisdictions with commodity derivatives markets have subsequently implemented or are moving forward on position management authorities. For instance, the European legislative bodies are considering a position limit regime for the European Union.
In addition, European legislative bodies are considering proposals that would include attempted market manipulation within its regulatory framework.
As the CFTC works with our global counterparts on swaps market reform, we are advocating for a consistent approach with regard to these reforms.
The Importance of an Effective Market Regulator
In conclusion, farmers, ranchers, producers and consumers need to have confidence that derivatives markets are free of fraud, manipulation and other abuses.
The end-users in the non-financial side of the economy benefit from transparency both before and after the trade. End-users benefit from open and competitive markets where no one party has an outsized position.
The CFTC is nearly complete with the swaps market reforms that have brought clearing, oversight of intermediaries and transparency to the once dark swaps market.
But for the CFTC to effectively ensure market integrity, it is critical for the agency to be well-resourced.
At 684 people, we are just 7 percent larger than we were 20 years ago.
Simply put, the CFTC is not the right size for the new and expanded mission Congress has directed it to perform.
FROM: U.S SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced today that the U.S. District Court for the District of Columbia, on March 21, 2013, entered a settled Final Judgment as to defendant Joseph Grendys, in Securities and Exchange Commission v. Joseph Grendys et al., Civil Action No. 07-120 (D.D.C. filed Jan. 18, 2007). The Commission's complaint alleged, among other things, that Grendys aided and abetting violations of the periodic reporting, books and records, and internal controls provisions of the federal securities laws by Royal Ahold (Koninklijke Ahold N.V.), by signing a materially false audit confirmation letter and sending it to the company's independent auditors. At the time, Royal Ahold was the parent company of U.S. Foodservice, Inc. Grendys owns a vendor, Koch Poultry, which supplied U.S. Foodservice with certain products.
The Commission's complaint alleges that Grendys signed the audit confirmation letter only after a U.S. Foodservice executive signed a private side letter that contradicted the audit confirmation letter. The audit confirmation letter was used in connection with the independent auditors' annual audit of the financial statements of U.S. Foodservice.
Without admitting or denying the allegations in the Commission's complaint, Grendys agreed to settle the action against him by consenting to a Final Judgment permanently enjoining him from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rule 13b2-1 and imposing a $25,000 civil penalty. Grendys' three co-defendants settled with the Commission previously.
The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, and the New York Office of the Federal Bureau of Investigation.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., March 22, 2013 — The Securities and Exchange Commission today announced charges against a Houston-based hedge fund manager and his firm accused of defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO who also is charged in the SEC’s case.
An investigation by the SEC’s Enforcement Division found that George R. Jarkesy Jr., worked closely with Thomas Belesis to launch two hedge funds that raised $30 million from investors. Jarkesy and his firm John Thomas Capital Management (since renamed Patriot28 LLC) inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased. Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds’ auditor and prime broker. Meanwhile, although they shared the same "John Thomas" brand name, Jarkesy’s firm and Belesis’ firm John Thomas Financial were portrayed as wholly independent. Jarkesy led investors to believe that as manager of the funds, he was solely responsible for all investment decisions. However, Belesis sometimes supplanted Jarkesy as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested. Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.
"Jarkesy disregarded the basic standards to which all fund managers are held," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions."
According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis, and their firms, Jarkesy launched the two hedge funds in 2007 and 2009, and they were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II. The funds invested in three asset classes: bridge loans to start-up companies, equity investments principally in microcap companies, and life settlement policies. Jarkesy mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.
According to the SEC’s order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.
According to the SEC’s order, Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial. This only incited further demands by Belesis. For example, in February 2009, Belesis angrily complained via e-mail that Jarkesy was not steering enough money to John Thomas Financial, and Jarkesy responded that "we will always try to get you as much as possible, Everytime [sic] without exception!" On another occasion, Jarkesy reassured Belesis that "[n]obody gets access to Tommy until they make us money!!!!!"
The SEC’s order charges that Jarkesy and John Thomas Capital Management violated and aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8. The SEC’s order further charges that Belesis and John Thomas Financial aided and abetted and caused Jarkesy’s and John Thomas Capital Management’s violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8. The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial including disgorgement and financial penalties.
The SEC’s investigation was conducted by Igor Rozenblit, Kathy Murdocco, and Michael Osnato in the New York Regional Office. The SEC’s litigation will be led by Todd Brody. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., March 21, 2013 — The Securities and Exchange Commission today charged Rajarengan "Rengan" Rajaratnam for his role in the massive insider trading scheme spearheaded by his older brother Raj Rajaratnam and hedge fund advisory firm Galleon Management.
The SEC alleges that from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.
"Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion," said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Rengan Rajaratnam profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated."
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rengan Rajaratnam.
According to the SEC’s complaint filed in federal court in Manhattan, Rengan Rajaratnam repeatedly received valuable insider tips from his brother that he used for illegal trading in the securities of Polycom, Hilton Hotels, Clearwire Corporation, Akamai Technologies, and AMD. For example, in July 2007, he made substantial profits trading Hilton stock in his personal account based on a timely insider trading tip from Raj Rajaratnam that Hilton was about to be taken private. Rengan Rajaratnam quickly loaded up on Hilton stock, and the price of Hilton shares jumped more than 25 percent after the news became public. Rengan Rajaratnam cashed in his recently acquired position for an illicit profit of more than $675,000.
According to the SEC’s complaint, after Raj Rajaratnam tipped him about an upcoming transaction involving Clearwire Corporation in March 2008, Rengan Rajaratnam complained to his brother that certain nonpublic information they had used to begin accumulating a position in Clearwire stock was about to be reported by the media before they could establish a larger position. Rengan Rajaratnam nevertheless profited by more than $100,000 in his personal brokerage account and more than $230,000 for Galleon hedge funds based on trades in Clearwire securities.
The SEC’s complaint charges Rengan Rajaratnam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently enjoining Rajaratnam from future violations of these provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay financial penalties.
The SEC’s investigation, which is continuing, has been conducted by John Henderson and Joseph Sansone — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Diego Brucculeri, and James D’Avino of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.
The SEC has now charged 33 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders located throughout the country. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.
FROM: COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Oregon-based System Capital, LLC and its President Joshua Wallace to Pay $840,000 for Solicitation Fraud and Making False Statements to the National Futures Association
In a related criminal action, Wallace pled guilty to criminal commodities fraud
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York entered a default judgment and permanent injunction Order against Defendants System Capital, LLC (System Capital) and its founder and president, Joshua Wallace, both of Lake Oswego, Oregon. The Order requires System Capital and Wallace to each pay a $420,000 civil monetary penalty, imposes permanent trading and registration bans against them, and prohibits them from violating the Commodity Exchange Act, as charged.
The court’s Order stems from a CFTC Complaint filed on November 23, 2010, charging the defendants with solicitation fraud regarding the trading of E-Mini S&P 500 futures contracts and making false statements to the National Futures Association (NFA). The case is U.S. Commodity Futures Trading Commission v. System Capital, LLC, et al., Case No.10 Civ. 8850 (KBF).
The Order finds that the Defendants, among other things, falsely represented to prospective and actual clients that the Defendants had a successful history of trading futures contracts and that System Capital had assets of at least $29 million under management. As a result of these fraudulent solicitations, System Capital and Wallace retained at least 17 clients, managed approximately $3.5 million of client funds, and directed the trading of clients’ commodity futures accounts, the Order finds.
The Order also finds that Wallace, on behalf of System Capital and himself, knowingly provided false information and documents to the NFA. In April or May 2010, Wallace sent a Disclosure Document to the NFA containing false information. During an NFA audit in May 2010, Wallace repeatedly made false statements to NFA’s auditors regarding the Disclosure Document, System Capital’s promotional materials, a forged report purportedly authored by a major accounting firm regarding defendants’ trading history, and other documents used to solicit clients, according to the Order.
On November 27, 2012, Wallace pled guilty to criminal commodities fraud in connection with the fraudulent scheme described above and to other, unrelated charges (United States v. Joshua Wallace, No. S1 11 Cr. 124 (LTS) (S.D.N.Y.)). Sentencing in the criminal case is scheduled for April 18, 2013.
The CFTC thanks the NFA, the Federal Bureau of Investigation, and the U. S. Attorney’s Office for the Southern District of New York for their assistance.
CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, and Stephen J. Obie.
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