FROM: COMMODITY FUTURES TRADING COMMISSION
Federal Court in New York Imposes a $1 Million Fine and other Sanctions against Kevin Cassidy, Former CEO of Optionable Inc.
Cassidy settles CFTC charges of defrauding the Bank of Montreal
Washington, DC — The Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring Defendant Kevin Cassidy, formerly of Bedford Hills, New York, former CEO of Optionable Inc., to pay a $1 million civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC Regulations. The order was entered on May 28, 2013, by the Honorable George B. Daniels of the U.S. District Court for the Southern District of New York.
The Order stems from a CFTC Complaint filed on November 18, 2008 (see CFTC Press Release 5571-08). The Complaint charged David P. Lee, a former trader for the Bank of Montreal (BMO), for mis-marking and mis-valuing BMO’s natural gas options book and deceiving BMO and charged Lee and Cassidy for deceiving BMO, from 2003 through April 2007, by fabricating purportedly independent broker quotes delivered to BMO’s back office for price and skew verification.
Previously, on April 30, 2012, Judge Daniels entered an Amended Partial Consent Order for Permanent Injunction and Other Equitable Relief finding that Cassidy violated Section 4c(b) of the Act, 7 U.S.C. § 6c(b) (2002), and CFTC Regulations 33.10 (a)-(c), 17 C.F.R. § 33.10 (a)-(c) (2008). The Amended Partial Consent Order also imposed permanent trading and registration bans on Cassidy and prohibited him from violating the CEA, as charged.
In relation to the same underlying conduct, in August 2011 Cassidy entered a plea of guilty in the Southern District of New York to one criminal count of conspiracy. In April 2012, Cassidy was sentenced to 30 months imprisonment followed by three years of supervised release.
Defendant Lee settled the CFTC action against him in November 2009 (see CFTC Press Release 5745-09, November 6, 2009). In November 2008, in the Southern District of New York, Lee entered a plea of guilty to four criminal counts: Conspiracy to Commit Wire Fraud and to Make False Bank Entries, Wire Fraud, False Statements to a Bank, and Obstruction of Justice. Lee has not yet been sentenced.
Defendant Robert Moore settled the CFTC’s litigation on March 8, 2010 (see CFTC Press Release 5788-10).
The CFTC thanks the Manhattan District Attorney’s Office, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the Southern District of New York for their assistance.
CFTC staff members are responsible for this case are Christine Ryall, Eugene Smith, Patricia Gomersall, Joan Manley, and Paul Hayeck.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Remarks at Joint News Conference on National Financial Capability Study
by
Chairman Mary Jo White
U.S. Securities and Exchange Commission
Washington, D.C.
May 29, 2013
The FINRA Investor Education Foundation’s 2012 National Financial Capability Study provides a wealth of data regarding the financial knowledge, attitudes, and behaviors of Americans. It gives us a great sense of what Americans know, what they feel, and how they act when making investments and other financial decisions.
As Chair of the agency whose core mission is protecting investors and promoting capital formation, the results of this study remind us that we can do more to increase the financial capability of all Americans.
People who have limited knowledge of the financial system are less likely to enter the financial markets, and are unlikely to benefit from America’s economic growth. This reality makes it more difficult for entrepreneurs and dynamic companies to access the capital they need to thrive and create jobs.
Many Americans may needlessly struggle in retirement or miss the chance to purchase a home or graduate from college debt-free, simply because they were never exposed to the basics of finance. Others may suffer disproportionate losses when markets tumble because they failed to diversify their holdings, or see their net worth decline sharply because they engaged in high-risk investing strategies.
At the SEC, we passionately believe in the importance of improving Americans’ financial capability so that they can optimize the chance of reaching their personal savings and investing goals. For this to happen, more Americans should learn about the "magic" of compound interest, the virtue of diversification, and the value of planning for retirement.
Unfortunately, not all investors do what they should to be as informed as possible. For instance, few investors pick up the phone or go online to do a simple background check. It seems that we are almost more likely to go on Angie’s List to check out our plumber than we are to go onto the SEC’s website to investigate the background of an individual to whom we’re about to entrust our life savings. There is obviously something wrong with this picture.
There is some good news in the study: individuals owning stocks, bonds, mutual funds, or other securities (outside of retirement accounts) scored better than non-investors on the study’s financial literacy quiz.
On the other hand, the study found that even though they did better than non-investors, most investors still are not aware of the fundamental that market interest rates and bond prices move in opposite directions. In fact, only 43 percent of investors and 22 percent of non-investors knew that bond prices typically fall when interest rates rise. This kind of clear gap in investor knowledge is why the SEC’s Office of Investor Education and Advocacy recently created a series of investor bulletins on investing in bonds.
The study also indicates that despite a troubling lack of basic knowledge, Americans are now willing to take on more risk than they were in 2009. Higher risk investments can be an important part of an investor’s portfolio, but willingness to take on risk without a clear understanding of the potential consequences can lead to disastrous results.
Empowering Americans with the knowledge and the tools that they need to make sound financial decisions can also produce significant economic and social benefits. Individuals with both the opportunity and the ability to invest infuse the markets with vital capital resources that help both businesses and the economy grow stronger. These investments ensure that new and creative technologies have a chance to develop and flourish.
That is why our investor education and outreach efforts are so important.
At the SEC, our Office of Investor Education and Advocacy is creating a nationwide program focused on teaching individuals how to make better decisions about investing in our capital markets.
And, importantly, it also teaches them how to spot the securities frauds that we work so hard to uncover, investigate and punish.
In addition to educating investors at in-person events, our investor education office staff assists tens of thousands of investors every year with questions and complaints, produces a wide variety of print publications, issues investor alerts and bulletins on topical subjects, and even tweets.
We also created a website — Investor.gov — that is focused exclusively on investor education.
On Investor.gov, you can research public companies and other filers using our EDGAR database — you can find, for example, annual corporate filings, mutual fund prospectuses, and information on variable insurance products.
Less experienced investors can find out how to read these filings, using materials that explain the disclosures in more detail. Investors also can conduct those background checks on financial professionals with whom they’re considering working. We provide information aimed at investors with particular investment needs such as members of the military, students, teachers, and retirees.
While we don’t — and can’t — provide investment advice, we do offer analyses of different types of investments — the benefits and the risks of investment vehicles including stocks, bonds, mutual funds and REITs — all on Investor.gov.
Informed investors are a critical pillar of our financial system and the economy as a whole. They are more likely to create wealth for themselves and their families — providing for themselves and for the next generation. And informed investors help make available the capital that fuels growth and contributes to a healthy and dynamic economy.
So I thank the FINRA Investor Education Foundation for its excellent and very important work.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Remarks at the 32nd Annual SEC and Financial Reporting Institute Conference
by
Paul Beswick
Chief Accountant, Office of the Chief Accountant
U.S. Securities and Exchange Commission
Pasadena, California
May 30, 2013
As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.
I would like to thank Randy (Beatty) for the kind invitation to speak at this conference. I think this conference provides an excellent chance for members of the SEC staff to leave the East Coast and interact with registrants from this part of the country. I do need to take a moment to provide the staff disclaimer for not only myself, but for all of the SEC staff who are speaking at this program today.
With my time this morning, I thought I would focus on the following topics:
Why the U.S. needs a strong IASB and what are we doing about it
Definition of a successful implementation of an accounting standard
PCAOB accomplishments
Internal Controls and the new COSO Framework
This does not mean I am limited to these topics. In fact, there is the Q&A session later in the day if you have specific questions you would like me to address. Although if the question starts with a FASB codification reference, you might want to consider taking advantage of our pre-filing consultation process to have your question answered.
Why the U.S. needs a strong IASB and what are we doing about it
I thought I would spend several minutes talking about why the United States has a vested interest in making sure that the International Accounting Standards Board (IASB) continues to function as a strong and independent accounting standard setter. However, it is important to highlight that these remarks are not intended to forecast what the Office of the Chief Accountant (OCA) might recommend to the Commission or what the Commission might be thinking in terms of next steps for IFRS for domestic issuers. The consideration of IFRS for domestic issuers is a complex issue. There also are several recent and future anticipated changes at the Commission level. So despite that "double disclaimer," the focus of my remarks is why IFRS matters in today’s U.S. capital markets and not trying to predict or give an indication of what might happen next.
Put simply, the reason that IFRS matters to the U.S. is that the U.S. is heavily invested in companies that prepare their financial statements using IFRS. Let me illustrate through an example. Recently, I was reviewing my financial holdings, and I was once again struck by the fact that in one of my mutual fund holdings I pay foreign taxes every time I receive a dividend from the fund. This time, I decided to look at the underlying holdings of the fund. When I reviewed the holdings of the fund, I found that the holdings were dominated by companies that prepare their financial statements using IFRS. I imagine your personal experience is very similar.
But let me start with a quick history lesson on the use of IFRS in the U.S. In 2007, the Commission removed the requirement for foreign private issuers to reconcile financial statements prepared using IFRS to U.S. GAAP. Outside the U.S., the removal of the reconciliation requirement was hailed as a significant event in the context of the development of IFRS. In the adopting release, the Commission noted,
"IFRS as issued by the IASB and U.S. GAAP are both sets of high-quality accounting standards that are similar to one another in many respects, and the convergence efforts to date have progressed in eliminating many differences."
The fact that the Commission required IFRS as issued by the IASB without any sort of ongoing endorsement mechanism or suitability test is notable. Most other large jurisdictions utilize some sort of endorsement mechanism to ensure suitability. To me, this represents a significant amount of confidence placed in the IASB as an institution, and its governance, to produce high-quality accounting standards.
So what do we know about the current use of IFRS in the United States? In the context of foreign private issuers, there are over 450 filers who use IFRS without reconciliation to U.S. GAAP. The market capitalization of these filers is in the multiple of trillions of U.S. dollars. The Division of Corporation Finance has an Assistant Director (AD) group dedicated to large financial institutions. Of the banks included in this AD group, approximately forty percent of them file financial statements prepared using IFRS. Finally, there are undeterminable amounts of capital invested through mutual funds and direct financial investments in jurisdictions that require or permit use of IFRS.
There are a number of things the Commission, the Commission’s staff, and others are doing to protect investors who are investing in entities with financial statements utilizing IFRS within our markets, but there are also network benefits to the global financial reporting community at large. These efforts take many forms: from working to help ensure that the IASB’s standards are the highest quality standards possible, to helping ensure that IFRS is consistently applied. In fact the staff’s involvement in the process has increased over the past several years. Let me explain several of these, and these are all steps beyond the important convergence work between the Financial Accounting Standards Board (FASB) and the IASB, which I will speak about later.
First, from a governance perspective, the Chair of the SEC is a member of the IFRS Monitoring Board. In this role, the Chair endeavors to fulfill the mission of the Monitoring Board, which in part includes,
"To monitor and reinforce the public interest oversight function of the IFRS Foundation, while preserving the independence of the IASB."
Second, the staff works to monitor the development of IFRS through observing the IASB standard setting process. This observation manifests itself in many different ways, including following all of the IASB’s standard setting projects and providing feedback on the projects where appropriate. The staff also participates in working groups of the IASB; for example, an SEC staff member is a member of the IASB’s Consultative Group - Methodology for Fieldwork & Effect Analyses.
Third, the staff works to promote consistent application of IFRS on a global basis. As will be discussed later in the conference, the Division of Corporation Finance reviews the filings of foreign private issuers and issues comment letters on the filings. The comment letters and responses are made public following the same process the Division uses for domestic registrants. Global accounting firms and other regulators look to these comments to see areas where the staff is focusing their efforts.
In OCA, we consider pre-filing accounting consultation requests on IFRS matters from registrants and their auditors. This is an opportunity for us to interact not only with the registrants and their auditors, but also with our regulatory counterparts. The staff is increasing its interactions with our regulatory counterparts in a number of different ways—both formal and informal—including outreach to our counterparts on specific registrant issues and discussions on broad policy matters.
Fourth, it is not just the SEC staff that is working to improve the quality of IFRS. As Russ (Golden) will discuss in a couple minutes, the FASB is a member of the IASB’s new Accounting Standards Advisory Forum, or ASAF. The objective of ASAF is to provide an advisory forum where members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards.
Successful implementation of an accounting standard
Turning to the FASB and its work with the IASB, over the next 18 months the two Boards will complete some of the most fundamental projects on their respective agendas, and by that I mean the high priority convergence projects. As I mentioned in a speech last December, successful implementation of these standards is of paramount importance. From my perspective, it is never too early to start focusing on making sure we take the steps necessary to make implementation of these standards as successful as possible.
Some may ask, however, how do I define a successful implementation of a standard? I think a successful implementation is when the standards are applied consistently among registrants and their auditors to the benefit of investors. To the extent there are judgments applied, the standards should result in those judgments being clearly disclosed to investors so they can factor that into their analysis.
At the SEC, the staff already is beginning to think about how we are going to manage implementation of these standards. This includes some critical fundamentals, such as training for SEC staff across the Commission. It also includes thinking about what sort of outreach we plan to have with preparers and auditors to identify any issues during the implementation period. I am encouraged that for the revenue standard, the FASB will be using an implementation group to address issues as they arise. I am sure we will talk about this group in the convergence panel in a later session. The creation of an implementation group can greatly reduce the likelihood that we will need to consider supplemental guidance during the implementation period.
One final quick thought on this subject. One thing that I believe will be helpful is for the FASB and the IASB to provide long implementation periods on these projects given the amount of effort that will be required to implement them successfully.
PCAOB Accomplishments
One of OCA’s roles is to assist the Commission in discharging its oversight responsibilities over the Public Company Accounting Oversight Board (PCAOB). Over the last decade, the PCAOB has had many accomplishments, and I believe there is no question that investors have benefited overall. While it is good to reflect on past accomplishments, it is equally, if not more, important to reflect on what we have learned from the last decade and think about what we can improve for the future.
So I’ll start by acknowledging the significant progress the PCAOB has made in reaching new cooperative agreements and developing stronger relationships with a growing number of non-U.S. regulators. This progress has enabled the PCAOB to conduct inspections of audits in increasing numbers of jurisdictions around the world. The PCAOB, under the SEC’s oversight, has achieved significant successes in the past couple of years in advancing international coordination in its inspections program. The PCAOB has now conducted inspections in 40 foreign jurisdictions. New arrangements are now in place with a number of countries, including France, Germany, Finland and Spain, to perform on-site inspections of auditors located in those countries.
I believe a strong, global inspection program is a critical component to the Board’s overall evaluation of auditor performance. It also provides important information to inform the PCAOB about the current level of audit quality and where improvement is needed. Inspection results should also inform the PCAOB’s standard setting activities. My Professional Practice Group Deputy, Brian Croteau, often refers to this as "the audit performance feedback loop."
Global coordination in audit oversight continues to be important. Audit regulators around the world are advancing a new paradigm for working together. The U.S. plays an important role through the PCAOB’s leadership roles in the International Forum of Independent Audit Regulators (IFIAR). In April, PCAOB Board Member Lewis H. Ferguson took office as Chair of IFIAR. Through IFIAR, individual regulators can get a better window on the global landscape of audit practice and financial reporting.
But let’s not forget about the important role of auditors themselves. As Commissioner Walter [who is speaking later today] has mentioned many times, auditors have the important role as gatekeepers to the public securities markets. With far-reaching audit policy considerations taking place around the world, auditors need to stay focused on investor needs for reliable financial reporting. I strongly believe that auditors should stay focused on their important role in auditing historical financial statements, rather than trying to predict the future, as I have heard some suggest from time to time.
Internal Controls and the New COSO Framework
Increased attention on internal control over financial reporting was an important element of the Sarbanes-Oxley Act of 2002, and I believe it continues to be important now and will remain so in the future. In December, the Board issued a report on its observations from 2010 inspections of annually-inspected firms regarding deficiencies in audits of internal control over financial reporting (ICFR). This report includes information about the nature and frequency of deficiencies in firms’ audits of ICFR detected during the PCAOB’s 2010 inspections of eight large annually-inspected firms. It would not surprise me if some of the audit deficiencies around ICFR may also be indicative of deficiencies in management’s own internal controls.
It is important to remember that management and auditors both have responsibilities with respect to ICFR, regardless of whether the company is exempt from the requirement to have an auditor’s attestation on ICFR under Section 404(b) of the Sarbanes-Oxley Act. It also is important to recognize that the benefits to reliable financial reporting are dependent upon the ongoing commitment by management to maintaining effective ICFR.
There is new guidance that management may find helpful in implementing and evaluating its internal control. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently released its updated internal control framework, which is intended to provide more comprehensive and relevant conceptual and practical guidance by focusing on 17 principles to help management focus on important aspects of the components of internal control.
I understand that COSO intends to supersede their 1992 Framework as of December 15, 2014, and we expect there will be questions about whether the SEC will provide management with any transition or implementation guidance to change from the existing framework to the new framework. COSO has publicly stated its belief that "users should transition their applications and related documentation to the updated Framework as soon as is feasible under their particular circumstances" and that "the key concepts and principles embedded in the original framework are fundamentally sound and broadly accepted in the marketplace, and accordingly, continued use of the 1992 framework during the transition period (May 14, 2013 to December 15, 2014) is acceptable." COSO further explained "the COSO Board’s goal in updating the original Framework has been to reflect changes in the business and operating environments, to formalize more explicitly the principles embedded in the original framework that facilitate development of effective internal control and assessment of its effectiveness, and to increase the ease of use when applied to an entity objective."
SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate at some point in the future. However, at this time, I’ll simply refer users of the COSO framework to the statements COSO has made about their new framework and their thoughts about transition.
Conclusion
Once again, I would like to thank you for the invitation to speak to you today at this conference. Enoy the rest of the conference.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders FCStone LLC to Pay a $1.5 Million Civil Monetary Penalty for Failing to Have Risk Controls, in Violation of Supervision Obligations
Washington, DC - The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against FCStone LLC, a Futures Commission Merchant (FCM) headquartered in New York, New York, for failing to diligently supervise its officers and employees relating to its business as an FCM in violation of Commission Regulation 166.3, 17 C.F.R. § 166.3 (2008). FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 and part of 2009, allowing one account (Account) to acquire a massive options position that it could not afford to maintain. Ultimately, FCStone was forced to take over the Account, and lost approximately $127 million. The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.
The Order finds that from January 1, 2008 through March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the Account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two Account owners accumulated a massive position -- more than 2.5 million relatively illiquid commodity option contracts, which the Account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the Account owners were unable to meet their financial obligations with respect to the Account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions, FCStone ended up suffering $127 million in losses. The Commission found that FCStone violated Regulation 166.3 by failing to diligently supervise in a manner designed to mitigate risks associated with customer accounts, such as the risks arising from unsatisfied margin obligations, negative account balances, and the handling of large relatively illiquid positions.
David Meister, the CFTC’s Director of Enforcement stated, "The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order."
The CFTC thanks and acknowledges the Securities and Exchange Commission for its assistance in this matter and the CME Group for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Joan Manley, Allison Baker Shealy, Traci Rodriguez, George Malas and Paul Hayeck. CFTC staff from the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, including Thomas Bloom, Ryan Goodman, Kevin Piccoli and Jan Ripplinger, also provided assistance in this matter.
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2013 — The Securities and Exchange Commission today charged NASDAQ with securities laws violations resulting from its poor systems and decision-making during the initial public offering (IPO) and secondary market trading of Facebook shares. NASDAQ has agreed to settle the SEC’s charges by paying a $10 million penalty – the largest ever against an exchange.
Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.
According to the SEC’s order, several members of NASDAQ’s senior leadership team convened a "Code Blue" conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.
"This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, "Our focus in this investigation was on the design limitation in NASDAQ’s system and the exchange’s decision-making after that limitation came to light. Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern."
The matching of buy and sell orders in an IPO is referred to as "the cross." According to the SEC's order, the systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by NASDAQ, whose IPO cross application calculated the price and volume of the cross based on the orders and cancellations received up until 11:11 a.m. This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11 a.m. and 11:30:09 a.m. to not be included in the cross. Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were "stuck" orders. Immediately prior to the cross, NASDAQ officials noticed a discrepancy between the final indicative pricing and volume totals and the actual totals on NASDAQ’s internal systems. This discrepancy indicated that there was still a problem with the cross and that some cross-eligible orders may not have been handled properly. But NASDAQ failed to address this issue during the minutes and hours following the cross. NASDAQ’s Facebook issues also caused problems in the trading of Zynga shares, and NASDAQ failed to execute 365 orders for Zynga shares in accordance with the price/time priority requirements.
According to the SEC’s order, NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ’s rules do not permit it to use an error account for any purpose. NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules. NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga trading.
The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.
In separate incidents unrelated to the Facebook IPO, the SEC’s order additionally charges NASDAQ with violations of Regulation NMS and Regulation SHO based on its failure to appropriately monitor and enforce compliance with price-test restrictions in October 2011 and August 2012.
The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. Additionally, NASDAQ violated Rule 201(b) of Regulation SHO during two separate incidents in October 2011 and August 2012 and also violated Rule 611 of Regulation NMS during the October 2011 incident. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.
The SEC’s investigation was conducted by Michael Holland, Daniel Marcus, and Amelia A. Cottrell, who are members of the Market Abuse Unit in New York. They were assisted by Brendan Hamill, George Makris, Mark Donohue, Jon Hertzke, and Kristen Lever in the National Exam Program’s Office of Market Oversight under the supervision of John Polise. The case was supervised by Daniel M. Hawke, who is the Market Abuse Unit's Chief, and Sanjay Wadhwa, who is Senior Associate Director of the SEC’s New York Regional Office.
FROM: U.S. JUSTICE DEPARTMENT
Thursday, May 23, 2013
Owner of Investment Company Pleads Guilty to Engaging in a Fradulent Investment Scheme
The owner of an investment company pleaded guilty today for his role in an investment scheme involving false promises, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, U.S. Attorney for the Eastern District of Virginia Neil H. MacBride, and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office.
David Eugene Howard II, 34, of Queens Village, N.Y., pleaded guilty before U.S. District Judge T. S. Ellis III in the Eastern District of Virginia to one count of mail fraud.
According to the plea documents, from in or about March 2008 through in or about April 2009, Howard falsely represented to investors that his company, Flatiron Systems LLC, traded pooled equity accounts using a proprietary trading system called "Pathfinder." Through distributing false and misleading letters, operating agreements, account statements and other materials, he caused investors to send investments of at least $5,000, which were deposited into an account that he exclusively controlled and which he later misappropriated for his own benefit and the benefit of others.
Over the course of his scheme, Howard directly misappropriated approximately $373,000 of $1.8 million in investor funds. Howard’s misappropriation included approximately $86,000 in transfers to his personal bank account, cash withdrawals and personal expenditures made with his company debit card, to include approximately $34,500 in charges at a night club and approximately $3,600 in charges towards the purchase of a Tiffany necklace for Howard’s girlfriend at the time.
According to court documents, in December 2008, Howard falsely informed investors that trading had been voluntarily halted so that an independent audit could be performed. Nonetheless, Howard continued to transfer approximately $26,500 in investor funds to his personal bank account, along with additional cash withdrawals and personal expenditures over the course of the following four months. Howard followed up with another letter which falsely advised investors of prolonged audit and tax procedures, which his nonexistent attorneys and accountants were purportedly diligently working on.
At sentencing, Howard faces a maximum penalty of 20 years in prison, a fine of $250,000 or twice the gross gain or loss, and full restitution. Sentencing is scheduled for Sept. 20, 2013.
In a related action, the U.S. Securities and Exchange Commission (SEC) filed a civil enforcement action against Howard on March 21, 2011.
This prosecution is the result of an investigation by the FBI’s Washington Field Office, along with a parallel investigation by the SEC. The case is being prosecuted by Trial Attorneys Mark Grider, N. Nathan Dimock, and Luke B. Marsh of the Justice Department Criminal Division’s Fraud Section, and by Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia.
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