SEC ANNOUNCES ENFORCEMENT ACTIONS AGAINST 23 FIRMS FOR SHORT SELLING VIOLATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced enforcement actions against 23 firms for short selling violations as the agency increases its focus on preventing firms from improperly participating in public stock offerings after selling short those same stocks.  Such violations typically result in illicit profits for the firms.

The enforcement actions are being settled by 22 of the 23 firms charged, resulting in more than $14.4 million in monetary sanctions.

The SEC’s Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering.  The rule applies regardless of the trader’s intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity.  The rule therefore helps prevent short selling that can reduce offering proceeds received by companies by artificially depressing the market price shortly before the company prices its public offering.

The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.

“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement.  “Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.”

The SEC’s National Examination Program simultaneously has issued a risk alert to highlight risks to firms from non-compliance with Rule 105.  The risk alert highlights observations by SEC examiners focusing on Rule 105 compliance issues as well as corrective actions that some firms proactively have taken to remedy Rule 105 concerns.

“This coordination between the enforcement and examination programs reaffirms that market participants must be in compliance with Rule 105 to preserve and protect the independent pricing mechanisms of the securities markets,” said Andrew Bowden, Director of the SEC’s National Exam Program.

In a litigated administrative proceeding against G-2 Trading LLC, the SEC’s Division of Enforcement is alleging that the firm violated Rule 105 in connection with transactions in the securities of three companies, resulting in profits of more than $13,000.  The Enforcement Division is seeking full disgorgement of the trading profits, prejudgment interest, penalties, and other relief as appropriate and in the public interest.

The SEC charged the following firms in this series of settled enforcement actions:

Blackthorn Investment Group – Agreed to pay disgorgement of $244,378.24, prejudgment interest of $15,829.74, and a penalty of $260,000.00.
Claritas Investments Ltd. – Agreed to pay disgorgement of $73,883.00, prejudgment interest of $5,936.67, and a penalty of $65,000.00.
Credentia Group – Agreed to pay disgorgement of $4,091.00, prejudgment interest of $113.38, and a penalty of $65,000.00.
D.E. Shaw & Co. – Agreed to pay disgorgement of $447,794.00, prejudgment interest of $18,192.37, and a penalty of $201,506.00.
Deerfield Management Company – Agreed to pay disgorgement of $1,273,707.00, prejudgment interest of $19,035.00, and a penalty of $609,482.00.
Hudson Bay Capital Management – Agreed to pay disgorgement of $665,674.96, prejudgment interest of $11,661.31, and a penalty of $272,118.00.
JGP Global Gestão de Recursos – Agreed to pay disgorgement of $2,537,114.00, prejudgment interest of $129,310.00, and a penalty of $514,000.00.
M.S. Junior, Swiss Capital Holdings, and Michael A. Stango – Agreed to collectively pay disgorgement of $247,039.00, prejudgment interest of $15,565.77, and a penalty of $165,332.00.
Manikay Partners – Agreed to pay disgorgement of $1,657,000.00, prejudgment interest of $214,841.31, and a penalty of $679,950.00.
Meru Capital Group – Agreed to pay disgorgement of $262,616.00, prejudgment interest of $4,600.51, and a penalty of $131,296.98.00.
Merus Capital Partners – Agreed to pay disgorgement of $8,402.00, prejudgment interest of $63.65, and a penalty of $65,000.00.
Ontario Teachers’ Pension Plan Board – Agreed to pay disgorgement of $144,898.00, prejudgment interest of $11,642.90, and a penalty of $68,295.
Pan Capital AB – Agreed to pay disgorgement of $424,593.00, prejudgment interest of $17,249.80, and a penalty of $220,655.00.
PEAK6 Capital Management – Agreed to pay disgorgement of $58,321.00, prejudgment interest of $8,896.89, and a penalty of $65,000.00.
Philadelphia Financial Management of San Francisco – Agreed to pay disgorgement of $137,524.38, prejudgment interest of $16,919.26, and a penalty of $65,000.00.
Polo Capital International Gestão de Recursos a/k/a Polo Capital Management – Agreed to pay disgorgement of $191,833.00, prejudgment interest of $14,887.51, and a penalty of $76,000.00.
Soundpost Partners – Agreed to pay disgorgement of $45,135.00, prejudgment interest of $3,180.85, and a penalty of $65,000.00.
Southpoint Capital Advisors – Agreed to pay disgorgement of $346,568.00, prejudgment interest of $17,695.76, and a penalty of $170,494.00.
Talkot Capital – Agreed to pay disgorgement of $17,640.00, prejudgment interest of $1,897.68, and a penalty of $65,000.00.
Vollero Beach Capital Partners – Agreed to pay disgorgement of $594,292, prejudgment interest of $55.171, and a penalty of $214,964..
War Chest Capital Partners – Agreed to pay disgorgement of $187,036.17, prejudgment interest of $10,533.18, and a penalty of $130,000.00.
Western Standard – Agreed to pay disgorgement of $44,980.30, prejudgment interest of $1,827.40, and a penalty of $65,000.00.
The SEC’s investigations were conducted by Conway T. Dodge, Anita B. Bandy, Lauren B. Poper, Christina M. Adams, Allen A. Flood, Kevin J. Gershfeld, Wendy Kong, Mary S. Brady, Ian S. Karpel, Kimberly L. Frederick, and J. Lee Robinson.  The SEC’s litigation will be led by James A. Kidney.  The SEC appreciates the ongoing assistance of the Financial Industry Regulatory Authority.

CFTC COMMISSIONER O'MALIA'S OPENING STATEMENT AT CFTC TECHNOLOGY ADVISORY COMMITTEE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Commissioner Scott D. O’Malia, Chairman of the CFTC Technology Advisory Committee, Washington, DC

September 12, 2013

I would like to welcome our TAC members, members of the Subcommittee on Automated and High Frequency Trading, and other guests. I thank you all for joining us here. Our discussion today will include three panels: (1) SDR data harmonization, (2) the Commission’s recently published Concept Release on automated trading, and (3) SEF registration and compliance, and MAT submissions.

When I reinstated the Technology Advisory Committee (TAC) not long after I joined the Commission, I did so with the goal of providing a means by which the industry and the Commission could work together to discuss and resolve the challenges imposed on the marketplace by the Dodd-Frank Act. For the past two years, I have held regular meetings of the TAC to foster open discussion and find innovative solutions to technological issues with respect to pre-trade functionality,1 data standards,2 automated and high frequency trading,3 and customer protection.4

Panel I: Swap Data Reporting

This year, we have been confronted by serious problems related to the CFTC’s acceptance, aggregation, and analysis of data submitted to the Swap Data Repositories (SDRs). This is not a surprise—one of the first topics addressed by the TAC was data standardization—but the challenges have really hit home now, with SDR reporting fully underway.

In January 2012, the Commission finalized Parts 435 and 456 of Commission regulations for both real-time and regulatory reporting of swap transactions. However, because of inconsistencies and errors in these rules and the data, the Commission has been unable to effectively utilize the reported data.

Accordingly, at the April 30 meeting of the TAC, I asked Commission staff and the three temporarily-registered SDRs to work on harmonizing the data reporting process, field-by-field, in order to ensure that the data submitted to the Commission by SDRs is consistent and usable, regardless of how this data was submitted to the SDRs. This will ensure that we can aggregate data across the SDRs and perform the necessary analysis. Alignment may also identify new reporting requirements that should be considered and implemented in order to improve the data reporting process.

Further, I have asked that this work be carried out through the TAC so that the process can be open to the public and benefit from thoughtful consideration by the industry. In fact, I will use the TAC to demonstrate the harmonization progress that has been achieved so far, and to accept comments on the proposed modifications. Using this feedback, we can hand over the work done by the TAC to the Commission for possible adoption in the future. Today, we will post the data harmonization chart on the TAC website for public review and invite comment. I have also included links to the SDRs’ real-time ticker data as well.

I am pleased that our first panel today will begin with John Rogers, Director of the Office of Data and Technology (ODT), to report on the progress made by the harmonization working group. Next, we will hear from Richard Berner, the Director of Treasury’s Office of Financial Research (OFR), to discuss federal agency coordination. Then, we will hear from Nicolas Gauthier, Policy Officer, Internal Markets and Services with the European Commission (EC), who will provide the European perspective on cross-border data issues. Mr. Gauthier will also provide an international perspective on trading platforms and execution this afternoon as part of our SEF panel. We are honored to have Mr. Gauthier, who has traveled a considerable distance to participate in this meeting, with us today.

Panel II: Concept Release on Automated Trading

Our discussion will next address the Commission’s recently published Concept Release on Risk Controls and System Safeguards for Automated Trading Environments.7 We will begin the second panel with an overview of the Concept Release by Sebastian Pujol-Schott, Associate Director of the Division of Market Oversight (DMO), and then begin general discussion by the TAC members. Given that the Concept Release was published earlier this week and asks over a hundred questions about very specific trading controls and their deployment in the market, I realize that TAC and subcommittee members may not have had the chance to engage in a full analysis. Nevertheless, I encourage you to participate in this discussion by sharing your immediate reactions to the Concept Release generally, addressing any of the questions it poses, and asking questions of the staff—in short, I welcome any input to help make this a productive discussion.

As I noted earlier, the TAC has spent its time and resources to help strengthen the Commission’s understanding of automated markets. I would like to thank all the TAC members, as well as the members of the Subcommittee on Data Standardization and the Subcommittee on Automated and High Frequency Trading, for their hard work on issues related to automated trading systems and pre-trade functionality. This body of work includes a working definition of “high frequency trading,” as well as a recent TAC reference document that compiled existing standards and recommendations in the market today.8

Today, I would like to build on the TAC’s past work and now focus on better understanding the following issues presented by automated trading systems and high frequency trading:

First, I’d like to learn more about the technology that is deployed today, as well as its effectiveness.

Second, I would like to understand whether there is a need for regulatory action with regard to any of the measures currently in the market. In other words, should the Commission federalize any current industry practices/standards?

Finally, it would be beneficial to receive feedback on the possibility of a registration requirement for firms operating automated trading systems that are not otherwise registered with the Commission. The Concept Release cites the definition of “floor broker” as the potential basis for such a requirement. I am interested to get public input on whether this, or any other provision in the Commission’s statute or regulations, can serve as a legal basis for registration.

Panel III: SEFs / MAT Submissions

Last but not least, I have added a special panel to discuss the status of SEF registration applications, as well as to raise various issues that both SEFs and SEF participants are facing because of the fast-approaching SEF compliance date.

We are only twenty days away from October 2. This means that we are only twenty days away from the SEFs’ ribbon-cutting ceremony, and only twenty days away from the official shutdown of Exempt Commercial Markets (ECMs) and Exempt Boards of Trade (EBOTs). As of today, the staff has temporarily registered three SEFs and has to review fifteen more applications before October 2.

In the midst of this transitional period, we have heard many concerns from different market participants (including SEFs, dealers, clearing members, and other SEF participants) regarding various interpretations of the SEF rules and a number of operational challenges. I would like to have an open discussion of a number of issues surrounding on-boarding, clearing certainty, uniformity of SEF rulebooks, and the status of Made Available to Trade (MAT) determinations. To address these issues, David Van Wagner, the Chief Counsel of DMO, is here to answer your questions.

Thank you all for attending today’s meeting of the TAC. I look forward to addressing these important issues as the Commission continues to implement Dodd-Frank and consider its practical and technological challenges.

1 TAC Pre-Trade Functionality Subcommittee of the CFTC Technology Advisory Committee Report, “Recommended Practices for Trading Firms, Clearing Firms and Exchanges Involved in Direct Market Access,” March 1, 2011, available at

http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs1.pdf;

“Compilation of Existing Testing and Supervision Standards, Recommendations and Regulations,” Technology Advisory Committee Meeting, Oct 30, 2012, available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_reference.pdf.

2 See TAC Meetings Transcript for December 13, 2011 and March 29, 2012, available at, http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.

3 See TAC Meetings Transcript for March 1, 2011, June 20, 2012, and October 30, 2012, available at http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.

4 See TAC Meeting Transcripts for July 26, 2012, October 30, 2012, and April 30, 2012, available at http://www.cftc.gov/About/CFTCCommittees/TechnologyAdvisory/tac_meetings.

5 See 17 C.F.R. § 43, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-33173a.pdf.

6 See 17 C.F.R. § 45, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2011-33199a.pdf.

7 This document is available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister090913.pdf.

8 This document is available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_reference.pdf.

Last Updated: September 20, 2013

COURT ORDERS MAN AND COMPANY TO PAY OVER $2.4 MILLION IN FOREIGN CURRENCY SCHEME

FROM:   COMMODITY FUTURES TRADING COMMISSION 
Federal Court Orders Alex Ekdeshman and Paramount Management, LLC, to Pay over $2.4 million in Restitution and a Fine for Fraudulent Foreign Currency Scheme
Court Order Stems from a CFTC Complaint that Charged Defendants with Solicitation Fraud and Misappropriation of Customer Funds

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent Order against Defendants Alex Ekdeshman of Holmdel, New Jersey, and Paramount Management, LLC (Paramount), requiring them to pay $1,146,000 in restitution to their defrauded customers and a $1,337,000 civil monetary penalty. The Consent Order of Permanent Injunction also imposes permanent trading and registration bans against the Defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

The Order was entered on September 9, 2013, by U.S. District Judge Colleen McMahon of the Southern District of New York and stems from a CFTC Complaint filed against the Defendants on June 26, 2013. The CFTC’s Complaint charged Ekdeshman, individually and as the agent of Paramount, with solicitation fraud and misappropriating “the vast majority” of customer funds for business expenses. Specifically, the Complaint charged the Defendants with operating a fraudulent scheme that solicited more than $1.3 million from approximately 110 retail customers to engage in leveraged or margined foreign currency (forex) transactions with unregistered off-shore counterparties. The Defendants allegedly advised customers that forex trading accounts would be opened in the customer’s name and would be traded by the Defendants on behalf of the customer.

Furthermore, the Defendants, through a telemarketing sales force and a “Performance Record” linked to their website, touted Paramount’s successful trading record as having yielded an average monthly return of 4.6% over a 20-month period, based on the performance of Paramount’s proprietary trading software system, according to the Complaint.

However, the court’s Order finds that, contrary to the claims made during the solicitations, the Defendants did not manage or trade any customer account, and thus Paramount’s customers neither made actual purchases of any forex nor received delivery of forex. The Order also finds that the Defendants misappropriated all customer funds for Ekdeshman’s personal benefit and failed to disclose to actual or prospective customers that they were misappropriating customer funds. To conceal their fraud, the Order finds that, during all phases of the scheme, the Defendants issued false account statements to their customers, as no individual customer accounts were ever created and no profits were ever generated.

The CFTC appreciates the assistance of the United Kingdom Financial Conduct Authority, the Financial Services Commission Mauritius, and the Financial Services Board of the Republic of South Africa.

Further, the CFTC appreciates the assistance of the Wisconsin Department of Financial Institutions, the National Futures Association, and the Federal Trade Commission.

CFTC Division of Enforcement staff members responsible for this matter are Thomas Kelly, Michael Amakor, Michael Geiser, Melanie Devoe, George Malas, Timothy J. Mulreany, Paul Hayeck, and Joan Manley.

CFTC ORDERS BROKER EMPLOYEE TO PAY PENALTY FOR MAKING FALSE STATEMENTS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Futures Broker Employee Susan Butterfield to Pay $50,000 Penalty in Settlement of Charges of Making False Statements to the CFTC During Her Investigative Testimony

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it entered an Order requiring Susan Butterfield of New Lenox, Illinois, to pay a $50,000 civil monetary penalty for making false statements of material fact in testimony to CFTC staff during a CFTC Division of Enforcement investigation. The Order enforces the false statements provision of the Commodity Exchange Act (CEA), which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).

According to the CFTC’s Order, Butterfield, an employee of a company registered with the Commission as an introducing broker (the IB), handled various clerical and administrative responsibilities concerning trading on the floor of the Chicago Board of Trade (CBOT). Her responsibilities included accepting and recording customer orders. When done properly, this involved time-stamping paper order tickets contemporaneously with the receipt of a customer commodity futures or options order to accurately record the time of day when the IB received the order.

On January 31, 2013, Butterfield gave sworn testimony in an investigation being conducted by the CFTC’s Division of Enforcement. The CFTC Order finds that during that testimony, Butterfield knowingly made false and misleading statements regarding whether she had improperly pre-stamped order tickets, i.e., whether she stamped order tickets in blank, prior to the time when a customer order was actually received. As the Order states, this testimony was significant in that use of pre-stamped order tickets may violate Commission Regulations and CBOT rules and also may facilitate unlawful trade allocation schemes in which brokers decide who will receive trades only after they are executed, potentially allowing them to profit at their customers’ expense.

The CFTC Order finds that prior to her CFTC testimony Butterfield told her supervisor, who was a principal at the IB, that “we pre-stamp orders and it’s something that is – that we should not be doing.” However, on January 31, 2013, when the Division of Enforcement staff questioned Butterfield on the IB’s pre-stamping practice, Butterfield falsely told the staff that she “never pre-stamped any [order] tickets.” Later during the course of her testimony the same day, Butterfield admitted to various instances of pre-stamping order tickets, but only after she was confronted by documents that plainly contradicted her initial false testimony. Ultimately, having been confronted with evidence that demonstrated her falsehoods, Butterfield admitted by the end of her testimony that it was in fact her daily practice to pre-stamp order tickets from multiple futures commission merchants throughout the trading session, in numbers amounting to dozens of order tickets every day.

David Meister, the CFTC’s Enforcement Director, stated: “When a witness walks into CFTC testimony he or she should plan to tell the truth to every question or face the consequences. We will use the new Dodd-Frank false statements provision against witnesses who provide false or misleading information to make sure it is well understood that lying is not an option.”

In addition to the $50,000 civil monetary penalty, the CFTC Order requires Butterfield to cease and desist from violating the relevant provision of the CEA, to never apply for or claim exemption from registration with the CFTC or engage in any activity requiring such registration or exemption, and to never act as a principal or officer of any entity registered or required to be registered with the CFTC.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Theodore Z. Polley III, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

SEC.gov | Statement at the SEC Open Meeting

SEC.gov | Statement at the SEC Open Meeting

SEC CHARGES OWNER OF INVESTMENT ADVISORY WITH DEFRAUDING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the owner of a New York-based investment advisory firm with defrauding investors while grossly exaggerating the amount of assets under his management.

The SEC alleges that Fredrick D. Scott of Brooklyn, N.Y., registered his firm ACI Capital Group as an investment adviser and then embarked on a series of fraudulent schemes targeting individual investors and small businesses.  Scott repeatedly touted ACI’s registration under the securities laws and falsely claimed the firm’s assets under management to be as high as $3.7 billion to bolster his credibility when offering too-good-to-be-true investment opportunities.  As Scott solicited funds from investors after promising them very high rates of return, he simply stole their money almost as soon as they deposited it with ACI.  Scott paid no returns to investors and illegally used their money to fund such personal expenses as his children’s private school tuition, air travel and hotels, department store purchases, and several thousand dollars in dental bills.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today announced Scott has pleaded guilty to criminal charges.  Among the charges to which Scott has pleaded guilty is making false statements to SEC examiners when they questioned whether Scott and ACI had accepted loans from investors.  SEC examiners notified the agency’s Enforcement Division, which began investigating and referred the matter to criminal authorities.

“Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”

According to the SEC’s complaint filed in federal court in Brooklyn, one variation of Scott’s fraud was a so-called advance fee scheme – Scott promised investors that ACI would provide multi-million dollar loans to people seeking bank financing.  But investors were told that they first needed to advance ACI a percentage of the loan amount, and once they did so they would receive the remaining balance of the amount that Scott promised to pay.  Scott had no intention of ever returning the money, nor did he repay it.

The SEC alleges that in another iteration of his fraud, Scott offered investors the opportunity to make a bridge loan to a third-party entity.  The investor was told to fund one portion of the loan, and ACI would supposedly fund the remaining balance.  In exchange, the investor would supposedly receive a substantial return on his initial investment.  In this scheme as with each of his others, investors never received returns and Scott stole the money.

The SEC’s complaint charges Scott with violating Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 207 of the Investment Advisers Act for filing a false Form ADV, and aiding and abetting ACI’s improper registration in violation of Section 203A of the Advisers Act.

The SEC’s investigation was conducted in the New York office by Sharon Binger, Adam Grace, Justin Alfano, Elzbieta Wraga, and Jordan Baker.  The investigation stemmed from a referral by the SEC’s examination staff including Raymond Slezak, Michael O’Donnell, Kathleen Raimondi, and Ken Fong.  The SEC’s litigation will be led by Alexander Vasilescu.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation.