ICAP EUROPE LIMITED CHARGED BY SEC WITH ATTEMPTED MANIPULATION OF YEN LIBOR

FROM:   COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges ICAP Europe Limited, a Subsidiary of ICAP plc, with Manipulation and Attempted Manipulation of Yen Libor
ICAP Europe Limited Ordered to Pay a $65 Million Civil Monetary Penalty

Washington, DC -- The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order against ICAP Europe Limited (ICAP), an interdealer broker, bringing and settling charges of manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ manipulation and attempted manipulation, relating to the London Interbank Offered Rate (LIBOR) for Yen. LIBOR is a critical benchmark interest rate used throughout the world as the basis for trillions of dollars of transactions. ICAP is a subsidiary of U.K.-based ICAP plc.

The CFTC’s Order finds that for more than four years, from at least October 2006 through at least January 2011, ICAP brokers on its Yen derivatives and cash desks knowingly disseminated false and misleading information concerning Yen borrowing rates to market participants in attempts to manipulate, at times successfully, the official fixing of the daily Yen LIBOR. ICAP brokers, including one known as “Lord LIBOR” or “Mr. LIBOR,” did so to aid and abet their highly valued client, who was a senior Yen derivatives trader (Senior Yen Trader) employed at UBS Securities Japan Co., Ltd. (UBS) and later at another bank, in his relentless attempts to manipulate Yen LIBOR to benefit his derivatives trading positions tied to this benchmark. On limited occasions, ICAP Yen brokers engaged in this unlawful conduct to benefit other derivatives traders as well. (See excerpts of relevant broker communications as a Related Link.)

The Order requires ICAP, among other things, to pay a $65 million civil monetary penalty, and cease and desist from further violations as charged. Pursuant to the Order, ICAP and ICAP plc also agree to take specified steps to ensure the integrity and reliability of benchmark interest rate-related market information disseminated by ICAP and certain other ICAP plc companies.

“ICAP and other interdealer brokers are expected to be honest middlemen,” said David Meister, the CFTC’s Director of Enforcement. “Here, certain ICAP brokers were anything but honest. They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of LIBOR. As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate must be held accountable.”

Yen LIBOR is fixed daily based on rates contributed by panel banks for Yen LIBOR that are supposed to reflect each bank’s assessment of costs of borrowing unsecured funds in the London interbank market. ICAP, as an interdealer broker, intermediates cash and LIBOR-based derivatives transactions between banks and other institutions. As a service to clients and to solicit and maintain business, ICAP also provides banks with market insight, including projections of likely LIBOR fixings, which are implicitly represented as ICAP’s unbiased assessment of borrowing costs and market pricing based on objective, observable data, some of which was uniquely in ICAP’s possession.

According to the CFTC’s Order, the UBS Senior Yen Trader called on ICAP Yen brokers more than 400 times for assistance in manipulating Yen LIBOR. ICAP brokers often accommodated the requests by issuing, via a Yen cash broker, group emails to panel banks and others containing “Suggested LIBORs” for Yen LIBOR. But rather than providing an honest and objective assessment of how Yen LIBOR would fix, the Suggested LIBORs reflected the preferred rates that would benefit the Senior Yen Trader.

The Order finds that almost all of the Yen LIBOR panel banks received the Suggested LIBORs, and several relied on them in making their Yen LIBOR submissions, particularly during the financial crisis of 2007-2009. Even panel banks that tried to make truthful Yen LIBOR submissions may have passed on false or misleading submissions, because they used ICAP brokers’ purportedly unbiased Suggested LIBORs to inform their LIBOR submissions.

According to the Order, the ICAP brokers referred to the panel bank submitters as “sheep” when they copied the Yen cash broker’s Suggested LIBORS. In fact, the Order finds that at least two banks’ submissions mirrored the Suggested LIBORs up to 90% of the time.

The Order further finds that the ICAP Yen Brokers provided these “LIBOR services” to keep the Senior Yen Trader’s business, which accounted for as much as 20% of the Yen derivatives desk’s revenue. “Mr. LIBOR,” the Yen cash broker who disseminated the false Suggested LIBORs, demanded compensation from the Yen derivatives desk for his “LIBOR services” or “no more mr libor.” This grew from dinners and champagne, to additional commission-generating trades, to “kick backs” totaling $72,000.

The Order further finds that this unlawful, manipulative conduct continued for more than four years, in part because ICAP’s supervision, internal controls, policies and procedures were inadequate. For example, ICAP never audited the Yen derivatives desk and left compliance oversight to the Yen derivatives desk head, who was complicit in the misconduct.

ICAP plc and ICAP Must Strengthen Internal Controls to Ensure Integrity and Reliability of Benchmark Interest Rate-Related Market Information

In addition to imposing a $65 million penalty, the CFTC Order requires ICAP and ICAP plc to implement and strengthen internal controls, policies and procedures governing benchmark interest rate-related market information that ICAP and certain ICAP plc companies send to market participants. Among other things, the Order requires ICAP and ICAP plc to:

• Base written benchmark interest rate-related predictions on certain factors;

• Document and retain basis for market publications;

• Require certain disclosures, including that certain market information reflects the opinions of the author, sources of information or data upon which opinion is based; and use of any models, correlated markets or related trading instruments;

• Review certain electronic and audio communications;

• Implement auditing, monitoring and training measures;

• Report to the CFTC on its compliance with the terms of the Order; and

• Continue to cooperate with the CFTC

The CFTC Order also recognizes the cooperation of ICAP Europe Limited with the Division of Enforcement in its investigation.

In a related action, the United Kingdom Financial Conduct Authority (FCA) issued a Final Notice regarding its enforcement action against ICAP Europe Limited and imposed a penalty of £14 million, the equivalent of approximately $22.4 million.

The CFTC acknowledges the valuable assistance of the FCA, the U.S. Department of Justice and the Washington Field Office of the Federal Bureau of Investigation.

*******

With this Order, the CFTC has now imposed penalties of just under $1.3 billion on entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates. See In the Matter of The Royal Bank of Scotland plc and RBS Securities Japan Limited, Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (February 6, 2013) ($325 Million penalty) (see CFTC Press Release 6510-13); In the Matter of UBS AG and UBS Securities Japan Co., Ltd., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (December 19, 2012) ($700 Million penalty) (see CFTC Press Release 6472-12); and In the Matter of Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, As Amended, Making Findings And Imposing Remedial Sanctions (June 27, 2012) ($200 million penalty) (see CFTC Press Release 6289-13). In the actions against the panel banks, the CFTC Orders also require the banks to comply with undertakings specifying the factors upon which benchmark interest rate submissions should be made, and requiring implementation of internal controls and policies needed to ensure the integrity and reliability of such communications.

CFTC Division of Enforcement staff members responsible for this case are Aimée Latimer-Zayets, Anne M. Termine, Maura M. Viehmeyer, James A. Garcia, Boaz Green, Kassra Goudarzi, Rishi K. Gupta, Jonathan K. Huth, Timothy M. Kirby, Terry Mayo, Elizabeth Padgett, Michael Solinsky, Philip P. Tumminio, Jason T. Wright, Gretchen L. Lowe, and Vincent A. McGonagle.

FROM:  COMMODITY FUTURES TRADING COMMISSION
Statement of Chairman Gary Gensler on Settlement Order against ICAP
September 25, 2013

Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler today made the following statement on the CFTC’s enforcement action that requires ICAP Europe Limited to pay a $65 million penalty for unlawful conduct related to LIBOR for yen:

“Today’s Order against ICAP once again shows how LIBOR, a critical benchmark interest rate not anchored in sufficient transactions, has been readily rigged. Unfortunately, this is yet another reminder of why we have to coordinate internationally to transition to an alternative to LIBOR to best restore the integrity to markets.

“Today’s Order also highlights the importance of Congress’ reforms through the Dodd-Frank Act to bring oversight to swaps trading platforms.  Required registration of swap execution facilities becomes a reality next week, finally closing exemptions that had allowed for unregistered, multilateral swaps trading platforms."

FROM:  COMMODITY FUTURES TRADING COMMISSION
“Champagne and Ferraris”

Statement of CFTC Commissioner Bart Chilton on the ICAP Order

September 25, 2013

Here we are, sadly, with traders again behaving badly. Another bust, another one bites the dust.

In this instance, ICAP brokers attempted to falsely report Libor rates in order to advantage another trader. This was insolent conduct impacting a benchmark rate that influences almost anything consumers buy on credit.  These benchmarks are just too important to become a playground for some big-talking bad guys.

Email exchanges exhibit total disregard for proper protocols. In one case, champagne was promised for a favorable fixing.  Some sought increased kickbacks or free meals—a curry meal for currying favors.  One even mentioned (perhaps in jest) a Ferrari as payment for the favors.  “They are making fortunes with these high fixings,” said one communication.

The attempts to manipulate Libor have been a black eye for our global financial system.  It’s good that we have made progress at cleaning up this monstrous mess.  I congratulate our Division of Enforcement for cracking yet another of these cases and appreciate the cooperative working relationship we have had with the Financial Conduct Authority in the U.K.

Let's hope other would-be crooks learn a lesson here and stay clear of future violations.

Note: Ponzimonium: How Scam Artists are Ripping Off America, is now available in a FREE EBOOK edition.

MAN INDICTED IN $20 MILLION PROMISSORY NOTE FRAUD CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Joseph Paul Zada Indicted for Fraud

The Securities and Exchange Commission announced today that on September 4, 2013, a Grand Jury sitting in the United States District Court for the Southern District of Florida returned an Indictment charging Joseph Paul Zada with 21 counts of mail fraud, two counts of wire fraud, two counts of money laundering, and two counts of interstate transportation of stolen property. The Indictment also seeks forfeiture of properties obtained as a result of the alleged criminal violations.

The Indictment alleges that from at least January 1998 through August 2009, Zada caused over twenty investors to invest over $20 million based on materially false statements and omissions. According to the Indictment, Zada attracted investors by projecting an image of great wealth, portraying himself as a successful businessman and investor with connections to Saudi Arabian oil ventures. He also hosted extravagant parties, drove expensive luxury vehicles, and maintained expensive homes in Wellington, Florida and Grosse Pointe, Michigan. The investors sent money to Zada with the understanding that he would use the funds to invest in various oil ventures on their behalf. The investors usually received promissory notes reflecting the principal amount of their investment. Zada deposited investors' funds into bank accounts he controlled. Instead of investing the funds in oil ventures, Zada used the money to support his lavish lifestyle and to make purported returns on investments to prior investors.

The Indictment's allegations are based on the same conduct underlying the Commission's November 10, 2010 Complaint against Zada in the United States District Court for the Eastern District of Michigan. The Commission charged Zada with violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. On July 31, 2013, the Court granted the Commission's motion for summary judgment against Zada, finding that Zada had violated the provisions alleged by the Commission in its Complaint. The Court set a hearing for October 9, 2013 on the Commission's claims for disgorgement and civil penalties against Zada.

SEC VOTES ON RULES TO ESTABLISH REGISTRATION REGIME FOR MUNICIPAL ADVISORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today voted unanimously to adopt rules establishing a permanent registration regime for municipal advisors as required by the Dodd-Frank Act.

State and local governments that issue municipal bonds frequently rely on advisors to help them decide how and when to issue the securities and how to invest proceeds from the sales.  These advisors receive fees for the services they provide.  Prior to passage of the Dodd-Frank Act, municipal advisors were not required to register with the SEC like other market intermediaries.  This left many municipalities relying on advice from unregulated advisors, and they were often unaware of any conflicts of interest a municipal advisor may have had.

After the Dodd-Frank Act became law, the SEC established a temporary registration regime.  More than 1,100 municipal advisors have since registered with the SEC.

The new rule approved by the SEC requires a municipal advisor to permanently register with the SEC if it provides advice on the issuance of municipal securities or about certain “investment strategies” or municipal derivatives.

“In the wake of the financial crisis, many municipalities suffered significant losses from complex derivatives and other financial transactions, and their investors were left largely unprotected from these risks,” said SEC Chair Mary Jo White.  “These rules set forth clear, workable requirements and guidance for municipal advisors and other market participants, which will provide needed protections for investors in the municipal securities markets.”

The new rules become effective 60 days after they are published in the Federal Register.

SEC CHARGES MONEY MANAGER FOR ALLEGEDLY USING INVESTOR FUNDS FOR PERSONAL USE

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Charges Purported Money Manager in New York Who Schemed Investors and Lied to SEC Examiners

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 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.

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.

CFTC COMMISSIONER CHILTON'S ASSESSMENT OF LOOMING GOVERNMENT SHUTDOWN

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Boom, Boom, Out Go the Lights

Statement of CFTC Commissioner Bart Chilton

September 20, 2013

On September 30th, at the stroke of midnight, our country will face a government shutdown unless a continuing resolution to fund it is adopted.  That would be grave news for consumers.

Under a shutdown scenario, government regulators will be handcuffed in our ability to go after crooks who are trying to evade our oversight and protection of markets.  You can bet the “do-badders” are licking their chops.

The dark markets that Dodd-Frank brought into the light of day will go dark again.  The lights will go out.  Given the huge growth in the derivatives industry and our new oversight of swaps, CFTC’s market oversight functions are more important than ever.  Taking our cops off the beat for even a few days could have disastrous impacts on these markets that consumers depend upon.

In the longer term, I remain concerned about the stagnant budgetary circumstances and am convinced that a targeted transaction fee on trading, like the one the President has proposed to Congress, is needed to fund the agency and keep the markets safe.  But for now, let’s avoid a “Boom, Boom, Out Go the Lights” debacle, and hope a deal can be reached to keep the lights on.

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.