OPEN MEETING STATEMENT BY SEC COMMISSIONER AGUILAR

Statement at Open Meeting
by
Commissioner Luis A. Aguilar

FROM:  U.S. SECURITIES AND EXCHANG COMMISSION  
U.S. Securities and Exchange Commission
Open Meeting
Washington, D.C.
July 10, 2013

Today the Commission votes on a proposal (the “Proposing Release”) that contains a number of changes which would help protect investors and provide the Commission with information it needs to advance its regulatory, oversight, and enforcement functions.

More specifically, the Proposing Release would amend Regulation D to improve the content and timeliness of the Form D notice filing and to require legends and other disclosures in written materials disseminated in offerings utilizing general solicitation. The proposal would also amend Rule 156 to extend certain antifraud guidance to the sales literature of private funds, and would add new Rule 510T to require, on a temporary basis, the submission of written general solicitation materials to the Commission no later than the date of first use of such materials.

The Proposing Release follows the Commission’s adoption of rule amendments to implement Section 201 of the JOBS Act by removing the prohibition on general solicitation in certain exempt offerings (the “General Solicitation Rule”).1

The Proposing Release is intended to address some of the concerns that many commenters have raised regarding general solicitation, including concerns regarding an increase in fraudulent activity, as well as to improve the Commission’s ability to evaluate the development of market practices in Rule 506 offerings.

Although I support the Proposing Release, I would like to emphasize that this proposal is not a “quick fix” to the problems associated with the way the majority of the Commission has decided to implement general solicitation. Nor does this proposal rectify the Commission’s failure to consider commenters’ recommendations in connection with the original proposal of the General Solicitation Rule, or its failure to repropose that rule, so that such recommendations could be taken into account concurrently with the rule’s adoption. As I have said before, I’m afraid that any protections resulting from today’s proposal will come too late, if they come at all, for many investors.

It is ironic that the Proposing Release describes a work plan developed by the Commission staff to monitor, review, and analyze the use of Rule 506(c), including monitoring the Rule 506(c) market for indications of fraud. While I appreciate any effort by the staff to better inform our rulemaking and enforcement efforts, I am struck by the fact that the need for such a work plan is simply further confirmation that the General Solicitation Rule adopted today fails to address the risks to investors arising from the faulty process followed in implementing Section 201 of the JOBS Act.

I hope that the Regulation D enhancements we propose today — as well as needed improvements to the definition of accredited investor — will be adopted promptly. Investors should not be at risk any longer than is necessary.

Before I conclude, I would like to thank the staff who worked on the Proposing Release. I appreciate your efforts.

1 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Facilitating General Solicitation at the Expense of Investors,” Statement at SEC Open Meeting (July 10, 2013). I also recognize the Commission action today to adopt rule amendments to implement Section 926 of the Dodd-Frank Act by disqualifying certain felons and “bad actors” from offerings under Rule 506, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Limiting — But Not Eliminating — Bad Actors from Certain Offerings,” Statement at SEC Open Meeting (July 10, 2013).

CFTC COMMISSIONER CHILTON'S STATEMENT ON CROSS-BORDER GUIDANCE AND EXEMPTIVE ORDER

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
“Just Say’n”

Statement of Commissioner Bart Chilton on Cross-Border Guidance and Exemptive Order, Washington, DC

July 12, 2013

We’ve done a lot of rules and we’ve done way more than other financial regulators. We have final clearing and transparency rules, recordkeeping, reporting, and registration rules, and we’re working hard to finalize other important areas (like, just gotta say, position limits and I hope we more actively engage on Volcker). We’ve done a heckuva job on a lot of issues. All of these are super important. Nothing we’ve done, however, will fully succeed without the critical action that I hope we will take today. Just say’n.

That’s because we don’t live in a void all to ourselves. We live in a world with intricate, inter-connected, interdependent international markets. There is a commonality of connections like never before in history. What happens in one nation impacts another. Risk travels around the globe with a click of the mouse.

We’ve learned that hurting lesson and come to this point where we can move forward. Here are the two key takeaways for me on what we can do today:

1. We can provide certainty to markets and market participants to give needed structure in our rapidly changing financial world;

2. We can do so in a fashion—through phased-in effective dates for rules—that is cognizant of other global regulators, particularly those in the European Union.

Like in the movie Field of Dreams, when the voice from the corn field says, “If you build it, he will come.” I’ve said repeatedly that if we and the E.U. build balanced and fairly harmonized financial regulatory regimes, the rest of the world will come. The rest of the world will build similar regulatory structures. And that’s the ticket to protecting consumers: a network of fairly comparable and comprehensive rules that guard against systemic risks for us, but for other nations as well.

Now, before I finish, there’s a key concept I want to highlight for all the naysayers out there. The economy crashed in 2008. Dodd-Frank was passed in 2010 and required—required—us to implement it in 2011. The G-20 even agreed that swaps reform should be done in 2012. We’ve had a guidance document floating around here for half-a-year. My point, and I do have one, is this: it isn’t like this regulatory reform or this guidance snuck up on us. And, there isn’t any reason for folks to come down with acute Reguphobia at this state of play—paranoia will destroya.

At the same time, we’re always going for balance, so let me highlight the important comment period here: 75 days. We want them, we need them, gotta have ‘em! I hope and expect to hear from the public on any and all issues relating to our implementation of Dodd-Frank—on all fronts. We all are down in the weeds implementing these things, and if we need to tweak or adjust, work on a few kinks, on any issue, from implementation of cross-border trading requirements to indemnification guidance—let us know. And to that end, let me reiterate something I said in October and repeated in December: during this interim period of phased in compliance, I cannot envision nor would I support the agency taking any action against an entity engaging in good faith compliance, nor can I envision an action in the future taken retroactively for non-compliance in this interim period. We’ve all gotta use a common sense, reasonable man standard here.

(Oh, and by the way, while your commenting, please feel free to tell us if we got something right, as well!)

We all know that once in a while regulators can leave a thread hanging loose, ‘cause ooh, we aren’t always perfect. In this regard, I plan to engage the Global Markets Advisory Committee (GMAC) during this comment period to ensure we have a live-action forum to hear from folks (not that people have been shy about airing their concerns to date).

Finally, I express my sincere gratitude to the Chairman for his tireless work on all of these issues. I also thank my colleagues, Commissioner Sommers (whom we will miss), Commissioners O’Malia and Wetjen and their staffs. Finally, special heartfelt thanks to the professional agency staff who have worked exceedingly hard on this key component of financial reform. We need to honor your tireless work by passing this thing—the guidance and phased-in compliance—today. Not to do so would allow consumers and our economy to be unprotected. That just wouldn’t be right. Just say’n.

Thank you.

SEC FREEZES TRADER ASSETS FOR ALLEGED INSIDER TRADING IN ONYX PHARMA STOCK

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Freezes Assets of Insider Traders in Onyx Pharmaceuticals

On July 3, 2013, the Securities and Exchange Commission obtained an emergency court order to freeze the assets of traders using foreign accounts to reap approximately $4.6 million in potentially illegal profits by trading in advance of the Sunday, June 30, 2013 announcement that Onyx Pharmaceuticals, Inc. had received, but rejected an acquisition offer from Amgen, Inc.

The SEC alleges that unknown traders took risky bets that Onyx’s stock price would increase by purchasing call options on June 26, 27 and 28, the three trading days before the announcement. Through quick, cross country coordination between the agency’s Los Angeles and New York offices, the SEC took emergency action to freeze the traders’ assets before courts closed for the holiday.

According to the SEC’s complaint filed in federal court in Manhattan, on June 30, 2013 Onyx announced that it had received, but rejected, an unsolicited proposal from Amgen to acquire all of Onyx’s outstanding shares and share equivalents for $120 per share in cash. The Announcement also stated that Onyx’s board of directors rejected Amgen’s proposal and that Onyx had authorized its financial advisors to contact potential acquirers who may have an interest in a transaction with Onyx. Amgen’s $120 per share price offer represented a 38% premium to Onyx’s closing share price on Friday June 28, 2013. The complaint further alleges that as a result of the announcement, Onyx’s share price increased from a close of $86.82 on over 51% on Monday July 1 compared with the prior trading day’s closing price, and that the trading volume of its stock increased by over 900% that day. The complaint alleges that the traders, as a result of these well-timed trades, collectively earned a profit of approximately $4.6 million in just three days.

The SEC alleges that certain unknown traders were in possession of material nonpublic information about the offer to acquire Onyx at a substantial premium over the stock price at the time they purchased Onyx call options, many of which were out-of-the-money, in the three trading days before the announcement. According to the complaint, the timing and size of the trades were highly suspicious because they constituted large increases over the historical volume for those call options purchased.

The emergency court order obtained by the SEC freezes the traders’ assets related to the Onyx call options transactions and prohibits the traders from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to the emergency relief, the Commission is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and permanently bar them from future violations.

CRIMINAL CHARGES FILED AGAINST MASSACHUSETTS INVESTMENT ADVISER

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Criminal Charges Filed Against Massachusetts Investment Adviser For Defrauding Investors


The Securities and Exchange Commission announced that, on July 1, 2013, the United States Attorney’s Office for the District of Massachusetts filed a criminal Information against Jeffrey A. Liskov (Liskov) of Plymouth, Massachusetts. The one-count criminal Information charged Liskov with willfully violating Section 206 of the Investment Advisers Act of 1940 (Advisers Act). The Commission previously filed a civil action against Liskov and his advisory firm, EagleEye Asset Management, LLC (EagleEye), for defrauding advisory clients in connection with foreign currency exchange (forex) investments. The factual allegations in the criminal Information are substantially similar to those in the Commission’s complaint in the civil case.


The Commission’s complaint in the civil case, filed on September 8, 2011, alleged that, between at least November 2008 and August 2010, Liskov made material misrepresentations to several advisory clients to induce them to liquidate investments in securities and instead invest in forex. The forex investments resulted in client losses totaling nearly $4 million, while EagleEye and Liskov came away with over $300,000 in performance fees, in addition to other management fees they collected from clients. The Commission alleged that Liskov’s strategy was to generate temporary profits on client forex investments to enable him to collect performance fees, after which client forex investments invariably quickly declined in value.

According to the Commission’s complaint, Liskov made material misrepresentations or failed to disclose material information to clients concerning the nature of forex investments, the risks involved in forex, and Liskov’s poor track record in forex trading for himself and other clients. The Commission’s complaint further alleged that, as to two clients, without their knowledge or consent, Liskov liquidated securities in their brokerage accounts and transferred the proceeds to their forex trading accounts where he lost nearly all their funds, but not before first collecting performance fees on temporary profits in these clients’ forex accounts. The complaint alleged that Liskov accomplished the unauthorized transfers by using "white out" correction fluid to change dates, amounts, and other data on asset transfer documentation. Liskov also opened multiple forex trading accounts in the name of one client, without obtaining the client’s consent, thereby maximizing his ability to earn performance fees on the client’s forex investments.

As result of the foregoing conduct, the Commission alleged that EagleEye and Liskov violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. The Commission also alleged that EagleEye failed to maintain certain books and records required of investment advisers in violation of Section 204 of the Advisers Act and Rule 204-2 thereunder, and that Liskov aided and abetted EagleEye’s violations of these recordkeeping provisions.

On November 26, 2012, after an eight-day trial in the Commission’s civil action, a jury found that EagleEye and Liskov violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(1) of the Advisers Act. After a further hearing, U.S. District Court Judge William G. Young found violations by EagleEye and Liskov of Section 204 of the Advisers Act and Rule 204-2 thereunder, concerning their recordkeeping obligations relating to EagleEye’s advisory business. On December 12, 2012, the court entered a final judgment against EagleEye and Liskov in the Commission’s civil action, ordering that they be permanently enjoined from future violations of the foregoing provisions of the securities laws. The court further ordered EagleEye and Liskov, jointly and severally, to pay disgorgement of their ill-gotten gains in the amount of $301,502.26, plus pre-judgment interest on that amount of $29,603.59, and the court also ordered EagleEye and Liskov each to pay a civil penalty of $725,000.

On December 27, 2012, the Commission instituted public administrative proceedings against each of EagleEye and Liskov to determine what sanctions against them, if any, may be appropriate and in the public interest.







 

THOMAS HOENIG'S STATEMENT ON BASEL III AND FINANCIAL STABILITY

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION 
Statement by Thomas Hoenig: Basel III Capital Interim Final Rule and Notice of Proposed Rulemaking

I wish to thank the many individuals from the U.S. and international communities involved in the Basel process for their efforts to improve the capital standard: its definition, measures of risk, and levels of protection. I am particularly aware that our FDIC staff shared a heavy burden in the work, and they deserve our thanks.

Despite this impressive effort, I am able to support only one of the two proposals before us today.

It is often suggested that Basel III provides more and better capital than earlier versions of the Basel standards. However, this is not a worthy standard of comparison given Basel II's contribution to the last crisis. To compare nearly any standard to Basel II will show improvement.

I support more and better capital; however, the Basel III standard without a binding leverage constraint remains inadequate to the task of assuring the American public, who paid a high price for the financial crisis, that our capital standards are adequate to contribute to financial stability. A capital standard, to be useful, must be understandable and enforceable and must be sufficient to absorb unexpected loss. Unfortunately, the Basel III interim final rule, as proposed, fails to fully meet these criteria.

The interim final rule continues the disparity in capital requirements between and among banks, and affects operational and competitive positions within the financial industry. This disparity has been confirmed as recently as last week in a study released by the Basel Committee.

While Basel III strengthens the definition of capital, its primary reliance on a risk-weighted asset standard employs the same techniques as Basel II with ratios that remain unduly complex, difficult to compute and requiring a vast number of calculations just begging to be gamed. This result is well illustrated when considering that the percentage of risk-weighted assets to total assets for the world's largest banks has systematically declined almost since the introduction of the Basel standards. The result has been confusion instead of clarity among the public and among bank directors who have a responsibility to oversee these firms.

The supervisory world has been made aware through a growing body of research that risk-weighted capital measures correlate poorly with actual future losses, reflecting the reality that complexity does not assure predictability nor enable individuals to know in advance how risks will shift among assets. Despite these flaws, the interim final rule continues to rely on risk-based measures, ignoring the usefulness of the leverage ratio to constrain excess risk taking for the largest, most complex institutions.

To that point, Basel III provides for a 3 percent supplemental leverage ratio applicable to advanced approach firms. This ratio measures capital against total assets and a portion of off-balance sheet exposures. It is important to know that just prior to the crisis these firms held tangible capital averaging just under 3 percent of assets, an amount that proved woefully inadequate. That a 3 percent leverage ratio is too low was appropriately noted by the Board of Governors during its July 2 discussions of this topic.

Also, a wide variety of studies and data accumulated during the comment period provide further evidence of the significant contribution that a stronger leverage ratio would bring to these firms' balance sheets. Thus, failure to include an adequate leverage ratio in the interim final rule leaves a gaping hole in the Basel III standard that has been pointed out to policymakers for months.

Moreover, nothing is accomplished by acting now and failing to wait an extra 60 or 90 days to receive comment and then implement a complete rule with a stronger leverage ratio. All of the largest, most complex U.S. firms currently meet the requirements of the interim final rule. It does nothing in the interim to strengthen the balance sheets of U.S. banks. Thus, by separating the implementation of Basel III from the supplemental leverage ratio proposal, we gain little and risk a stronger leverage ratio being delayed, or worse, not being adopted.

In summary, I support the FDIC's leadership in proposing to raise the supplemental leverage ratio for the eight largest financial holding companies in the U.S. to 6 percent for the banks and 5 percent for the holding company. I also would encourage comment on whether these capital levels are sufficient. I cannot support the interim final rule because without a binding leverage ratio, it is incomplete and inadequate. You cannot have a strong capital standard without an adequate leverage ratio, and it should be part of any rule we adopt, even on an interim basis.

Finally, I have voiced my concerns with the inadequacies of Basel III and have advocated for a stronger leverage ratio over the past year in hopes of creating a capital program that serves the broader economy. My divided vote today signals my continued concern for what is left undone. I remain fully committed to engaging with my colleagues to strengthen U.S. capital standards and to ensure that promised improvements are realized.

CANADIAN COURT ENFORCES U.S. JUDGEMENT IN OTC MARKET MANIPULATION CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Canadian Court Enforces U.S. Judgment Award in Market Manipulation Case Against William Todd Peever and Phillip James Curtis


The Securities and Exchange Commission today announced that on June 20, 2013, the Honorable Justice Peter J. Rogers of the Supreme Court of British Columbia, Canada granted summary judgment in favor of the Commission to recognize and enforce judgments previously entered in U.S. District Court for the Southern District of New York against William Todd Peever ("Peever") and Phillip James Curtis ("Curtis"), both of whom are Canadian citizens residing in British Columbia. Those U.S. judgments held Peever and Curtis jointly and severally liable for $2,894,537.48 in disgorgement and $1,611,998.18 in prejudgment interest for their respective roles in a fraudulent scheme to manipulate the stock price of SHEP Technologies, Inc. ("SHEP") f/k/a Inside Holdings Inc. ("IHI"), whose shares traded on the Over-the-Counter Bulletin Board.


The Commission’s complaint in SEC v. Brian N. Lines, et al., 1:07-CV-11387 (DLC) (S.D.N.Y. Dec. 19, 2007), filed in U.S. federal court, had alleged, in pertinent part, that during 2002 and 2003, defendants Peever and Curtis, together with certain co-defendants, engaged in a scheme to secretly obtain control of the publicly traded shell company IHI, through use of nominees. The scheme involved merging IHI with a private company to form SHEP, secretly paying touters to promote the IHI/SHEP stock, and then selling SHEP stock into the ensuing demand. During the first half of 2003, Peever, Curtis, and certain other defendants sold over 3 million SHEP shares into this artificially-stimulated demand, generating about $4.3 million in illegal proceeds. As part of the scheme, Peever and Curtis failed to file required reports with the Commission regarding their beneficial ownership of IHI and SHEP stock to conceal that they, among others, owned substantial positions in, and had been selling, SHEP stock.

Curtis and Peever challenged the Commission’s attempt to enforce the U.S. court judgments in Canada by contending: (1) the judgments had been procured by fraud; and (2) that the disgorgement award was penal in nature and, therefore, could not be recognized under Canadian law. The Canadian court rejected both of the Defendants’ arguments, and held that there was no basis to bar enforcement of the judgments against the Defendants in Canada.