PENNY STOCK PROMOTER CHARGED FOR ATTEMPTING TO GENERATE FALSE APPEARANCE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges San Diego-Based Promoter in Penny Stock Scheme

The Securities and Exchange Commission today charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that David F. Bahr of Rancho Santa Fe, Calif., artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn't know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.
In a parallel action, the U.S. Attorney's Office for the Southern District of California today filed criminal charges against Bahr.

The SEC also has issued an order to suspend trading in iTrackr securities.
According to the SEC's complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr's success and future profits.

According to the SEC's complaint, Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers' accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr's stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the SEC's complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr's trading volume during that time. Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.
The SEC's complaint alleges that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks financial penalties, a penny stock bar, and a permanent injunction against Bahr.

The SEC's investigation, which is continuing, has been conducted by Marc Blau and Sara Kalin of the Los Angeles Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of California, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

SEC CHARGES PENNY STOCK PROMOTER WITH FRAUD

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., June 18, 2013 — The Securities and Exchange Commission charged a penny stock promoter in the San Diego area for fraudulently arranging the purchase of $2.5 million worth of shares in a penny stock company in an attempt to generate the false appearance of market interest and induce other investors to purchase the stock.

The SEC alleges that David F. Bahr of Rancho Santa Fe, Calif., artificially increased the trading price and volume of iTrackr Systems stock when he conspired with a purported businessman with access to a network of corrupt brokers. What Bahr didn’t know was that the purported businessman was actually an undercover FBI agent. During a test run of their arrangement, Bahr paid a $3,000 kickback in exchange for the initial purchase of $14,000 worth of iTrackr shares.

In a parallel action, the U.S. Attorney’s Office for the Southern District of California today filed criminal charges against Bahr.

"Bahr tried to artificially inflate the price and volume of iTrackr shares to the detriment of retail investors who wouldn’t have known the real story behind the flurry of market activity," said Michele Wein Layne, Director of the SEC’s Los Angeles Office. "Working with criminal authorities, we were able to stop Bahr’s misconduct before he could seriously impact the markets and harm investors."

According to the SEC’s complaint filed in federal court in San Diego, Bahr set out to give the markets a false impression of supply and demand in iTrackr stock where none actually existed. He coordinated the purchase of iTrackr shares so the stock price could remain high enough for him to effectively promote it at a later date and artificially inflate the price even higher. Bahr arranged for the dissemination of promotional material that overstated the likelihood of iTrackr’s success and future profits.

According to the SEC’s complaint, Bahr connected with the undercover agent in November 2012 and was told that that he represented a group of registered representatives who had trading discretion over certain client accounts. In exchange for a 30 percent kickback, the brokers could arrange to purchase iTrackr stock through their customers’ accounts and hold the shares for up to a year in order to avoid sales that might decrease iTrackr’s stock price. Bahr agreed to pay the kickback and sought the purchase of 10 million iTrackr shares at an average of 25 cents per share for a total of $2.5 million. Bahr agreed not to disclose the kickback to any iTrackr investors.

According to the SEC’s complaint, Bahr agreed to a test run involving the purchase of modest amounts of iTrackr stock on the open market, and Bahr would then pay a small commission. During the first week of December 2012, a total of 135,000 iTrackr shares were purchased, which represented approximately 32 percent of iTrackr’s trading volume during that time.

Bahr was then informed that the test purchases totaled approximately $14,000, and he owed a $4,000 commission. Bahr paid $3,000 through a wire transfer, and he asked another person to pay the remaining $1,000.

The SEC’s complaint alleges that Bahr violated Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks financial penalties, a penny stock bar, and a permanent injunction against Bahr.

The SEC’s investigation, which is continuing, has been conducted by Marc Blau and Sara Kalin of the Los Angeles Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of California, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

HEDGE FUND MANAGER FOUND GUILTY OF SECURITIES FRAUD

FROM: SECURITIES AND EXCHANGE COMMISSION

Hedge Fund Manager James Fry, Previously Sued by the SEC for Fraud, Found Guilty of Securities Fraud, Wire Fraud, and Making False Statements to the SEC


The Securities and Exchange Commission announced that on June 12, 2013 a jury found Minneapolis-area hedge fund manager James Fry guilty of five counts of securities fraud, four counts of wire fraud, and three counts of making false statements to the SEC during investigative testimony. Sentencing on these charges will be held on a later date. The U.S. Attorney's Office for the District of Minnesota had filed criminal charges against Fry on July 19, 2011.


Fry is a defendant in a pending civil injunctive action filed by the SEC on November 9, 2011 in the United States District Court for the District of Minnesota. The charges leveled by the SEC stem from the same set of facts alleged by the U.S. Attorney's Office. The SEC's complaint alleged that Fry fraudulently funneled more than $600 million of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters. During the period in which he invested with Petters, Fry and his hedge fund management company collected more than $42 million in fees. The SEC's complaint further alleged that Fry falsely assured investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds he managed, Fry concealed it from investors by secretly executing note extensions with Petters.

On February 14, 2012, the Hon. Richard H. Kyle, U.S. District Judge for the District of Minnesota, stayed the SEC's action against Fry pending the resolution of his criminal case.



 

NORM CHAMP'S REMARKS AT 2013 INSURED RETIREMENT INSTITUTE GOVERNMENT, LEGAL & REGULATORY CONVERENCE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Remarks to the 2013 Insured Retirement Institute Government, Legal & Regulatory Conference

by

Norm Champ

Director, Division of Investment Management
U.S. Securities and Exchange Commission
Washington, D.C.
June 18, 2013

Introduction


Good morning and thank you for inviting me to speak to you today. Before I begin, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, any of the Commissioners, or any of my colleagues on the staff of the Commission.


This is a challenging time for our nation’s investors, so many of whom are at a turning point in their investing career. As you know, probably better than most, a large and growing number of the nation’s investors are reaching retirement age and are shifting their focus from the accumulation of retirement assets to the challenge of income management. This translates into a challenge for those of you who issue and sell investment products that provide income solutions, and of course I’m thinking primarily of variable annuities. This in turn raises a challenge for regulators – to provide effective oversight and to protect investors as the landscape changes, with evolving investor needs and new products designed to meet those needs. Many of these challenges are a matter of communication, and improved communication is the key to much of what the staff has accomplished recently, and hopes to accomplish going forward.

With that as a backdrop, I would like to discuss with you some of the important developments in our work to protect investors, including some exciting developments at the Division of Investment Management. As I talk about what’s happening at the Commission, keep in mind that the Commission does not – cannot – work in a vacuum. It is essential that we all work together to protect Americans’ investments. The Commission’s mandate is clear – to protect investors, ensure fair and orderly markets, and promote capital formation. The variable products industry has to do its part by offering products that are well designed to meet investors’ needs and that provide investors the fair deal that they expect and deserve.

The Division is very focused on the way in which our work fits in with the Commission’s mandate. The Division works to protect investors, promote informed investment decisions, and facilitate appropriate innovation in investment products and services through regulating the asset management industry. This mission statement was drafted with the help of the entire Division, and we are firmly committed to that mission.

For the past year, the Division has been engaged in a program of change to develop a culture of continuous improvement. If we are to best serve investors, we need to continue what we are doing well and improve what isn’t working as well. Today I would like to focus on communication as a key area for continuous improvement – our ability to watch, listen, and learn about market developments; our communications with investors and industry participants; and our internal communications at the Commission. I’ll close with some observations about your communications with investors.

One area where we are seeking to improve is enhancing our awareness, and being more in tune with industry developments and investors’ experiences. This effort involves getting a better and more first-hand understanding of the workings of the investment management industry. It also involves expanding our sources of knowledge so that it doesn’t come from sitting at desks in Washington, but from interacting with you and your colleagues who are directly serving America’s investors.


The Staff’s Ability to Watch, Listen, and Learn About Market Developments

A primary tool in our work towards better awareness is the Division of Investment Management’s new Risk and Examinations Office or "REO."

REO supports the Division’s work primarily through two functions. First, REO maintains an industry monitoring program which provides ongoing financial analysis of the investment management industry, including in particular the risk-taking activities of investment advisers and investment companies. The REO monitoring program’s work includes analysis of the information the industry provides through various regulatory reports, including Form ADV, Form PF, and Form N-MFP. The REO monitoring program also maintains an ongoing dialogue with certain strategically important industry participants. Second, REO conducts an examination program which gathers additional information from the investment management industry to inform the Division’s policy making. All of REO’s work will inform the initiatives that the Division devotes resources to and help inform the rules we are drafting.

REO represents a new area of focus for the Division of Investment Management, and I expect REO to complement the work of the SEC as a whole. I am excited at the prospect that REO can help the staff to be proactive and get out in front of industry trends, rather than reacting to practices that have long ago "left the station."

Early stage work of REO has involved meetings that REO staff and I have had with senior management and fund boards at some of the larger, strategically important fund complexes. We have made it a point not to bring folks into our offices for meetings, but to visit their headquarters, giving the staff a first-hand view of systems, controls, personnel, and even a sense of a firm’s culture and approach to compliance. This illustrates our commitment to effective dialogue and two-way communication. We will be better regulators to the extent that we better understand the workings of the industry we regulate. And if firms see our willingness to reach out and to listen, hopefully they will respond with increased cooperation and more effective communication.

As I noted, the visits thus far have been with fund complexes. I can see similar exercises with variable product issuers as a likely evolution of this strategic work of outreach and communication with important market participants. In addition, the head of REO, Jon Hertzke, will be working closely with the staff of the Insured Investments Office to determine ways in which REO can help with the important work that group does. The expertise of REO staff regarding complex financial instruments is expected to be an invaluable resource to the Insured Investments staff.


Staff Communications with Investors and Industry Participants

The flip side of improving the staff’s awareness is improving the industry and investing public’s awareness of us, or in other words, improving our outside communications. In furtherance of this goal, the Division recently hired a Communications Counsel, Derek Newman to manage our external communications, working with others on the staff to prepare and disseminate public releases, alerts, reports, joint regulatory reports, and key speeches. In addition, we will reach out to you, the industry, to find out what you need additional guidance on or where you have uncertainty about the law. We will then work diligently to get the appropriate guidance out there.

Another way in which we hope to improve communications is through modernizing our website. The Division website has been redesigned to make it more user-friendly, while at the same time making its contents more comprehensive. There is a portion devoted to IM news so that you can stay up to date on developments in IM. We have organized various materials chronologically and topically, which should make it easier to find what you are looking for. We have also created a "Guidance Update" section of the website, which we plan to use as a way to get more information out more quickly. In the "Contact" part of the site, we included an organization chart for the Division, which helps point you to the Division office that might best assist you on a given matter. Our overall goal is to make our positions and our organization more transparent.

We anticipate that the new website will be a valuable resource for the industry and other SEC stakeholders, and I urge you to check it out if you have not done so already.

In addition, the Commission’s Office of Investor Education and Advocacy maintains an investor-focused website, called investor.gov. This site provides user-friendly information for investors, much of which is relevant to seniors and other investors planning for retirement. This includes a brochure on variable annuities and information on topics such as managing lifetime income and avoiding retirement fraud. There is information on senior specialist designations, which imply that financial professionals are expert at advising seniors on financial issues, as well as a link to FINRA’s helpful information on this subject. The site also features investor alerts and bulletins covering such matters as investment scams and settlements of periodic income streams. Our Insured Investments Office has been working together with the Office of Investor Education and Advocacy and others to update the materials on the website, with a view to keeping them relevant and up to date.


Communication at the Commission

The Division of Investment Management is also focused on better communications with our colleagues throughout the Commission. Shortly after I joined the Division, we undertook a series of conversations with our counterparts in other offices, with a view to obtaining their feedback and enhancing their awareness of who we are and what we do. As a result, staff members in other offices are now better able to attach a name and a face in the Division with an area of our work that affects what they do.

The Division has also worked intentionally towards better coordination and cooperation with other offices in connection with major initiatives. We are doing this as an integral part of the process, rather than a late stage check-in with another office after the essential work on the matter has been completed. This involves comparing notes with others on our initiatives early and often, seeking meaningful substantive input at all stages of a major undertaking like a rulemaking.

A great example of this is the proposal for rule amendments for money market funds that was approved by the Commission two weeks ago. Every stage of the process of developing those recommendations involved close collaboration with the Division of Risk, Strategy, and Financial Innovation, recently renamed the Division of Economic and Risk Analysis, and with the offices of each of the commissioners. The proposal was informed by a robust study that the Commission’s economists undertook to address concerns raised last year by commissioners, which allowed the proposal to be rooted in a thorough analysis of data and economics. Our collaborations with the Division of Economic and Risk Analysis, as well as with the Office of the General Counsel and others, resulted in careful consideration of risks, costs, and benefits that characterized the development of those rule recommendations. The Division hopes to continue this collaborative approach to rulemaking as we move forward with upcoming rulemaking priorities.


Issuers’ Communications with Investors

Now I’d like to turn from our communications to your communications.


Accurate Prospectus Disclosure

As insurance products become more complex, effective communication among issuers, producers, and investors about how the products work becomes more important. Also important is communication about how the products may not work to meet investors’ needs, by which I mean how investment objectives can be frustrated, or totally undermined. I think this point is illustrated perfectly by the Massachusetts Mutual Life Insurance Co. settled Commission order issued by the Commission this past November.

The variable annuity contracts at issue in that matter offered a minimum income benefit. As you know, this type of benefit promises that the contract value will, in time, reach a minimum amount, and thus provide a minimum income stream in the payout phase of the contract. The income benefit offered by the insurer was capped at a specified level. A key feature of this contract that was not sufficiently explained to investors provided that, once the cap was reached, withdrawals under the contract could potentially deplete the income benefit to zero.

Not only did the prospectus neglect to sufficiently explain this, but a number of the agents selling the contracts did not understand it themselves. In some cases, in fact, the agents understood the exact opposite, mistakenly telling customers they could maximize their income benefit by taking withdrawals after allowing their income benefit values to reach the cap. In fact, that strategy would, under certain circumstances, have resulted in reductions in the benefit value, reducing and potentially eliminating future income payments. The order also indicated that there were indications that sales agents and others did not understand this product feature that should have alerted the insurance company to the fact that its disclosures were inadequate. MassMutual did take remedial steps that included eliminating the cap on the minimum income benefit. The Commission considered these remedial steps in arriving at the settlement that was announced last fall.

The moral of this story is that your investors’ retirement income should not be put at risk because of complexities in your contracts that are not clearly disclosed. The staff of the Insured Investments Office takes this message to heart in its review of disclosure filings, working on a daily basis to elicit clear and effective communication about ever more complex insurance products. But only you know whether your disclosure accurately describes your contracts. And of course, if there are red flags putting you on notice that your disclosure is not doing the job, for example, if your sales force does not understand your contracts, it is incumbent on you to take appropriate remedial action immediately.


Disclosure Challenges for New Products

In its work, the staff pays close attention to the way in which issuers communicate the material features, risks, and costs of new types of annuities. For example, in the past year the staff has reviewed several filings for index annuities that have features similar to structured notes and that have registered with the Commission as a result of the potential for significant downside loss. These contracts generally provide returns linked to an index, such that if the index goes up, investors benefit in proportion to the increase, subject to a cap. Investors bear the risk of loss in excess of a specified amount of loss protection offered under the annuity. In addition, these annuities apply an adjustment to early withdrawals using often complex formulas. The staff has noted that sometimes these formulas can result in a loss of principal, even if the reference index has appreciated at the time of the withdrawal.

In its reviews of prospectuses for these annuities, the staff has focused on clear disclosure to investors of: (1) the total amount that they can lose; (2) the limits on what they can gain; and (3) the potential for principal loss on early withdrawal. The staff has also insisted upon prominent disclosure when the contract provides that the investor is automatically rolled at the end of a term into a new term with different, possibly less favorable benefits, as well as how investors can opt out of such automatic rollovers. Also, given the potentially dramatic impact of early withdrawals, the staff has asked for plain English disclosure concerning the methods used for calculating early withdrawal amounts. These calculations are complex, and the challenge for issuers is conveying in simple terms what the calculations are designed to accomplish and explaining clearly how that goal is achieved.

Finally, the staff has focused on the names of these products. While investors should never rely on a product name as the sole source of information about it, a name can communicate a great deal. Given the significant downside risk of some of these recently registered index annuities, the staff is careful to watch for names that might suggest that the product is without such risk, and has in fact asked for name changes in certain cases. Note that our goal is not to discourage the use of descriptive names for new products, but rather to see that product names do not suggest a level of safety that they do not provide.

As you prepare filings for new products, keep in mind the vital importance of clearly conveying how the products work and what the important points of disclosure should be. I applaud your efforts to find innovative solutions to the problems investors are facing in the retirement space, but at the same time I urge you to make every effort to accurately and fully communicate to investors exactly what they are buying - not just the benefits, but the risks, as well.


Variable Annuity Summary Prospectus

Another area of staff focus is a new rule that would create a summary prospectus for variable annuities. We are working hard to fashion a framework for disclosure that would help you communicate concise, user-friendly information to investors considering these products. As you know, the features and pricing of variable annuities can be complex and difficult to understand. We continue to be committed to attacking the problem of long and complex disclosure about variable annuities, while at the same time, facilitating disclosure for each variable annuity that will tell the full story – the key facts that investors need to know about the limitations and costs, as well as the benefits, of their investment.

The Division continues to believe that the mutual fund summary prospectus, adopted in 2009, and now used successfully by so many funds, may offer a useful model for providing the disclosure that variable annuity investors need. The mutual fund summary prospectus may serve as a model for the concept of providing key information in a concise and user-friendly format, and for the concept of "layered" disclosure, that is, an approach in which the key information is sent or given to an investor and more detailed information is provided online and in paper upon request. We believe that this approach can maximize effective use of modes of communication -- paper or electronic -- and can make it easier for investors to choose between them. Just as important, it can help make information readily available 24/7 -- whenever the investor needs it.

In connection with our efforts to develop a variable annuity summary prospectus, we are seriously considering ways of improving delivery of information to both investors contemplating the purchase of a new contract and investors considering additional investments in an existing contract. Ideally, each investor would have ready access to information that is tailored to his or her information needs. The Division is looking at ways to achieve that result.


Conclusion

I hope I have conveyed some of the ways that the Division is working to improve the communications that are key to the success of our work. The establishment of the Risk and Examinations Office is an exercise in proactive listening and watching; having our ear to the rail if you will, so that we are not blindsided by market trends and industry developments. Several of the changes in the Division, including revamping our website, are aimed at better communicating with you and with the investing public. The Division’s efforts to communicate more effectively with our colleagues throughout the Commission have already borne fruit, most notably in the Commission’s recent money market fund proposal. The disclosure issues I have discussed highlight the central importance of your disclosure documents as key communication tools for reaching your investors. And the staff is excited about the possibilities for a summary variable annuity prospectus, and the layered disclosure approach generally, to make that communication effort more effective.

Of course, it takes two for communication to take place, and I hope I have also conveyed the importance of your role in all of this. We expect you to take to heart our invitation, indeed our earnest expectation, that you who design, offer, and sell these important products will communicate your concerns and your ideas as we work together to serve the needs of America’s investors.










 

MAN AND COMPANY ORDERED TO PAY RESTITUTION AND PENATIES TO SETTLE FOREX FRAUD CHARGES

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

Federal Court in Puerto Rico Orders Angel F. Collazo, ACJ Capital, Inc., and Solid View Capital LLC to Pay over $1.5 Million to Settle Forex Fraud Charges in CFTC Enforcement Action

Court also orders Fernando Clemente and Felgi Investments Corp. to pay $150,000 in restitution and penalties and to disgorge over $120,000


Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court consent order requiring defendants Angel F. Collazo, formerly of Salinas, Puerto Rico, and his companies, ACJ Capital, Inc. (ACJ) and Solid View Capital LLC (Solid View), both of San Juan, Puerto Rico, jointly and severally to pay $843,444 in restitution and to pay a $750,000 civil monetary penalty for fraudulently soliciting customers to participate in an off-exchange leveraged foreign currency (forex) pool, misappropriating pool participant funds, and issuing false statements to conceal trading losses and misappropriation.

The CFTC also obtained a second federal court consent order, requiring defendants Fernando Clemente, of Weston, Florida, and his company, Felgi Investments Corp. (Felgi) of Caguas, Puerto Rico, to pay $30,000 in restitution, to disgorge $120,933 in pool participant funds to which they were not legitimately entitled, and to pay a $120,000 civil monetary penalty.

The Orders also impose permanent trading and registration bans against all defendants and prohibit them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The orders, entered by Judge Jose A. Fuste of the U.S. District Court for the District of Puerto Rico on February 13, 2013 and June 10, 2013, respectively, stem from a CFTC complaint originally filed in February of 2012 (see CFTC Press Release 6180-12, February 15, 2012). In July 2012, the CFTC complaint was amended to include defendants Clemente and Felgi. Clemente and Felgi were also named as relief defendants for receiving funds from ACJ, Solid View, and Collazo to which they were not legitimately entitled.


The February 13, 2013 Order finds that Collazo and his companies fraudulently solicited commodity pool participants by falsely claiming profitable returns, while minimizing and failing to fully disclose the risks of trading leveraged forex. The Order also finds that Collazo, ACJ, and Solid View misappropriated pool funds to make payments to pool participants and for personal uses, failed to disclose their intended uses of pool participant funds, misrepresented the profitability of pool trading accounts, and distributed statements to ACJ and Solid View pool participants that contained false account values, including showing consistent trading profits.

The June 10, 2013 Order finds that Clemente and Felgi, misappropriated $30,000 in customer funds that were to have been provided by Felgi to Solid View for personal uses and failed to disclose their intended uses of pool participant funds. The Order also finds that Clemente and Felgi retained $120,933 in purported trading profits to which they were not entitled.

The CFTC appreciates the assistance of the U.S. Attorney’s Office of the District of Puerto Rico in this matter.

CFTC Division of Enforcement staff members responsible for this case are Kara Mucha, James A. Garcia, Michael Solinsky, Gretchen L. Lowe, and Vincent A. McGonagle.

CFTC ORDERS ABN AMRO TO PAY $1 MILLION TO SETTLE CHARGES

FROM: COMMODITY FUTURES TRADING COMMISSION

CFTC Orders ABN AMRO Clearing Chicago LLC to Pay $1 Million to Settle Charges of Segregated and Secured Fund Deficiencies, a Minimum Net Capital Violation, Books and Records Violation, and Supervision Failures


Washington, DC –The U.S. Commodity Futures Trading Commission (CFTC) issued an Order on June 18, 2013, filing and settling charges against ABN AMRO Clearing Chicago LLC (ABN AMRO) of Chicago, Illinois, for failing to segregate or secure sufficient customer funds; failing to meet the minimum net capital requirements, failure to maintain accurate books and records, and failure to supervise its employees.

According to the CFTC Order, during the period March 19, 2009, through January 2012, ABN AMRO reported three instances of under-segregated customer funds in violation of Section 4d(a)(2) of the Commodity Exchange Act (CEA), 7 U.S.C. § 6d(a)(2) (2006 & Supp. V 2012), and Commission Regulation 1.20(a), 17 C.F.R. § 1.20(a) (2011) and one instance of under-secured customer funds in violation of Section 4d(a)(2) of the CEA, 7 U.S.C. § 6d(a)(2) (2006 & Supp. V 2012), and CFTC Regulation 30.7, 17 C.F.R. § 30.7 (2011). Each of these violations was the result of clerical errors and/or a lack of adequate policies and procedures related to customer movement of funds.

The Order also states that during a CME Group routine audit of ABN AMRO’s books and records as they were on the close of business on May 31, 2011, the CME Group found that ABN AMRO had improperly used a customer’s withdrawn warehouse receipts as collateral for margining purposes. Without these warehouse receipts, the customer’s accounts were under-margined on several occasions, and ABN AMRO had to reduce its adjusted net capital by an amount equal to the margin deficits. Once these reductions were calculated, it was determined that ABN AMRO failed to meet the minimum net capital requirements for a single month-end, in violation of Section 4f(b) of the Act, 7 U.S.C. § 6f(b) (2006), and Regulation 1.17(a)(1)(i), 17 C.F.R. § 1.17(a)(1)(i) (2011).

Also, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) Examination staff conducted a limited review of ABN AMRO beginning January 27, 2012. According to the Order, at that time, ABN AMRO was unable to produce a complete and accurate margin report listing for a very limited number of certain types of accounts (e.g., omnibus accounts that offset margin requirements for certain spread transactions). The Order finds that ABN AMRO violated Section 4g(a) of the CEA, 7 U.S.C. § 6g(a) (2006), and CFTC Regulation 1.35(a), 17 C.F.R. § 1.35(a) (2011), when it failed to keep accurate books and records sufficient to determine the margin status of each customer.

The Order finds that each of these violations was a result of ABN AMRO’s insufficient controls, reflecting a lack of supervisory controls over commodity interest accounts and/or other activities of its partners, employees, and agents relating to its business as a Commission registrant in violation of CFTC Regulation 166.3, 17 C.F.R. § 166.3 (2011).

Based on these violations of the CEA and CFTC Regulations, the Order imposes a $1 million civil monetary penalty, a cease and desist order, and requires ABN AMRO to retain an independent consultant to review and evaluate the effectiveness of its existing internal controls and policies and procedures and adopt any recommendations for improvement made by the consultant.

The CFTC thanks the CME Group for its assistance with this matter.

CFTC Division of Enforcement staff responsible for this action are Allison Baker Shealy, John Einstman, Paul G. Hayeck, and Joan Manley. Kevin Piccoli, Melissa Hendrickson, Carrie Coffin, and Michael Guritz of DSIO also assisted in this matter.