SEC ANNOUNCES FRAUD CHARGES, EMERGENCY ASSET FREEZE RELATED TO ALLEGED REAL ESTATE INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against a group of Pasadena, Calif.-based companies at the center of an ongoing real estate investment scheme.

The SEC alleges that Yin Nan (Michael) Wang and Wendy Ko have raised more than $150 million from approximately 2,000 investors by selling promissory notes issued through Velocity Investment Group, which manages a series of investment funds entitled the Bio Profit Series.  Each of the Bio Profit Series funds purports to be primarily in the business of making real estate-related loans in California, but in reality Wang and Ko have used money received from newer investors to make the promised quarterly interest payments to earlier investors in Ponzi-like fashion.

“The SEC sought emergency action to prevent the further dissipation of investor assets through an expected set of upcoming Ponzi-like payments,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “Wang falsified financial records and used another company to create the illusion of legitimate economic activity.”

According to the SEC’s complaint unsealed today in U.S. District Court for the Central District of California, Wang and Velocity Investment Group have been raising money since at least 2005.  Wang is the sole owner of Velocity Investment Group, and the Bio Profits Series fund accounts are controlled by Wang and Ko, who transferred some investor funds to make quarterly interest payments to other investors. The SEC’s complaint says Wang has admitted that Velocity was using new investor money to pay earlier investors.

The SEC alleges that Wang directed one of the Bio Profit Series funds to provide its outside accountant with inaccurate financial information that materially overstated its mortgage loans receivable and mortgage income figures.  The more than $9.8 million of mortgage loan income shown in those financial statements included accrued interest that Wang knew that the fund would never actually receive. Wang told Velocity’s accounting manager that investors would flee if they were told the true numbers, and it would be difficult for him to raise money.

The SEC further alleges that Wang and Ko used transactions between the Bio Profit Series funds and another company charged in the complaint – Rockwell Realty Management – with the apparent purpose of concealing the fraud.  These transactions appear to have had no purpose other than to obfuscate the amount of transfers among the various funds.

The SEC’s complaint charges Wang and his companies as well as Ko with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The Honorable John A. Kronstadt of the U.S. District Court for the Central District of California granted the SEC’s request for a temporary asset freeze against Velocity, Bio Profit Series I, Bio Profit Series II, Bio Profit Series III, Bio Profit Series V, and Rockwell Realty Management.  Judge Kronstadt’s order prohibits the destruction of documents, requires the defendants to provide accountings, and allows expedited discovery.  A court hearing has been scheduled for December 9 on the SEC’s motion for a preliminary injunction.

The SEC’s investigation was conducted by M. Lance Jasper, Peter F. Del Greco, and Dora Zaldivar in the Los Angeles office.  The SEC’s litigation will be led by Lynn M. Dean and David J. Van Havermaat.

CFTC COMMISSIONER CHILTON'S SPEECH TO REGULATORY COMPLIANCE ASSOCIATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
“Polls, Pols and Poltergeists”

Speech of Commissioner Bart Chilton Before the Regulatory Compliance Association, New York City

October 31, 2013

We Just Don’t Care Polling

“One ringy dingy…two ringy dingies. Goodness gracious (snort) hello, I’m from We Just Don’t Care…Polling. We Just Don’t Care Polling, that’s us.”

Happy Halloween! I’m so jacked up for the opportunity to spend some time with you. We are going to talk about some cha cha changes and imagine—imagine—some neat stuff. Part of that will be through our polling. All of your answers will be kept strictly confidential. The lawyers ask me to say that—your answers will be kept confidential—but in reality, we just don’t care—We Just Don’t Care Polling.

This is a large crowd, I'm told around 1,000 people. That affords us a few “pretty, pretty, pretty good” polling opportunities; things we can't accomplish in smaller focus groups. We’re going to use our size to surmise what we think about a few things.

Halloweeener

Ready go. Let's start with this: the Rock and Roll Hall of Fame will be inducting new members in December. I’m going to give you three of the nominees and ask for a round of applause for each. The loudest response will be our Halloweeener.

Let’s test our applause meter so that our results won’t be skewed. I’d rather not say, “You can do better than that.” Let’s get it right the first time, shall we? Try it now, applause, applause, applause. See, we don’t even need an “applause” sign like the talk show hosts.

I’ll let you know who they, the nominees, are first, and then we’ll find out what our survey says. Here they are: Linda Ronstadt, Yes, or Hall and Oates. Here we go, by applause, who should be inducted into the Rock and Roll Hall of Fame: Linda Ronstadt? Yes? Hall and Oates? Let’s say Yes we have a winner—a Halloweeener, in a Roundabout way.

About now, you might be asking what this has to do with the financial sector or markets, well—“Absolutely nothing, Say it again y'all. War, huh, good God, What is it good for, absolutely nothing.” I’ll say it again, We Just Don’t Care Polling.

Pols: War of Words

Actually, as long as we stumbled upon war, let’s move to the war of words that we’ve been hearing from the Washington “pols”—the politicians. Many seem to think that in order to get a leg up they’ve go to tear others down. We’ve heard that war of words despite a lot of efforts to tune it out—nah, nah, nah, I can’t hear you. But a bit of that made it through to most of us.

Some of the pols have made linguistic gymnastics an art form. For example, many who voted for the government shutdown are now spinning that they didn’t do so. It’s one thing to have a difference of opinion and to stand up for one’s beliefs, but to run from the previous post, claim they fought to keep government open, point their fingers in the opposite direction claiming, “He did it. She did it. Wasn’t me!” To rewrite the facts afterward, treating the people who bankroll government paychecks as dummies? That doesn’t clear even the lowest integrity bar.

This war of words is fueled and fouled by 24/7/365 television, and the inflated rhetoric that seems part and parcel to contemporary programming. The lines between being a policy advocate and a thespian (much less those between news and entertainment) have been so badly blurred, average Americans can’t see through the fuzz. It has turned people off and tuned people out.

Many of those sticking with it, those still tuned in and watching their one-sided network of choice, find themselves altogether intolerant of others. Some see wimpy weasels weakening the fiber and fortitude of the founding fathers. Others see swine swigging from 80 proof bottles of patriotism and behaving badly. Here’s what many have in common: they can’t stand; they can’t stand people on the other side of an issue. It’s a sad shame that so many Americans have zero tolerance for those with differing points of view.

The result of the current circumstance, including the war of words, is that Washington can’t complete the most basic of responsibilities—such as passing an annual budget or paying our bills. Its dysfunction junction and it can’t function.

The American people understand that much. An NBC News/Wall Street Journal poll a few weeks ago found that 60 percent of Americans say every Member of Congress should be fired. Who said we don’t need Donald Trump? “You’re fired!”

Tip, Gipper & Nixon

By the way, if you want to know how things should work, get the new Chris Matthews book, Tip and the Gipper: When Politics Worked. Those gentlemen leaders, Speaker O’Neill and President Reagan, got along even though they disagreed on more than they agreed. I’ve been fortunate to witness a lot of great bipartisan work over the last few decades. During the Clinton Administration, landmark bipartisan legislative collaboration produced accomplishments, like on welfare reform. Despite the impeachment proceedings, some modicum of bipartisanship carried on into the first few years of the Bush Administration, but since then, well…not so much.

Let’s do a lightning round pol poll for the heck of it. Which US president signed the Endangered Species Act into law—Kennedy, Nixon or LBJ? Kennedy? Nixon? LBJ? Ah, President Nixon. Despite the intense times and political divide, Nixon was able to work with Democrats on that and several other initiatives. It was good for the country, and very good for some Livin’ On The Edge critters, including the snail darters! We need that sort of attitude again in DC (the working together attitude, not the creepy impeachable stuff).

Pickers & Ethics

Back to polling. How about a reality television question? Three choices for which reality television show you like most: American Pickers, you know with Mike and Frank searching for rusty gold; Storage Wars, the original; or Duck Dynasty…happy, happy, happy. Let’s go: American Pickers? Storage Wars? Duck Dynasty? And, Duck Dynasty is the number one show on television.

Most of the people on those reality shows seem to have fairly decent standards and above average ethics. I recall Mike Wolf on American Pickers giving a fellow twice what the guy had asked for on an item because it was worth more than the seller knew. Trustworthy. That’s integrity. He often times pays a bit more than he’d like to on a first buy, just to break the ice and get the negotiations going. Fair. Honest. Smart. Successful.

So, let’s move on to ethics. Which profession has the highest ethics? Three choices: politicians, the pols we just spoke about; those working on Wall Street like many of you, or…wait for it: sanitation? Let’s go. Politicians? Okay, how about Wall Streeters? And, finally, sanitation workers?

Ah, “my, my, hey, hey” sanitation workers win the day.

Wall Streeters

So let’s move to the other also-rans, the Wall Streeters.

First, “OMG”, we are blasted almost daily with this firm or that individual doing something illegal. Here’s a data point for you that gives an idea of how bad it is out there: the CFTC collected about $1.5 billion in civil monetary penalties from those who broke the law last year. Our annual budget is roughly $200 million. Who knew? We are a profit center!

Another survey question: Which profession has generated more profits than all others since the fall of 2008: food services, internet technology, or the financial sector? Here we go: Food services? Internet technology? The financial sector?

Yep, it’s the financial sector. They’ve been killing it, but good, for a good long time.

“And isn’t it ironic…don’t you think” that those who helped create the economic calamity have made more than all others. At the same time, we’ve seen unprecedented malfeasance by the same lot. “Who would’ve thought…it figures.” (Alanis [Morissette] isn’t eligible for the Rock and Roll Hall of Fame until 2016.)

The Remedy

The remedy to all the malfeasance in the financial sector is three-fold. First, we need serious and significant penalties that aren’t just considered a cost of doing business. Next, if folks do the crime, they should do the time, not just pay the fine. And third, this is going to take a culture shift which starts with the firm executives and boards of directors.

The first thing firms should do, and perhaps some of you can help in this regard, if they or you haven’t already, is take a step back and look at it from the average person’s viewpoint; from the perspective of all stakeholders, not only financial investors and shareholders.

The scandals and greed driven improprieties have been plastered on the pages of the papers and our screens. I spoke with someone last week who said one of their colleagues couldn’t “look her relatives in the eye and tell them she worked for the financial sector.” Wow. That’s tough stuff.

Terry Duffy, the Chairman at the CME Group wrote an excellent opinion editorial a few weeks ago in the Wall Street Journal. He worried about the decrease in the number of college students turning to the financial sector and how he’s concerned that trend will continue. Here’s just a little bit of what he wrote:

“…Wall Street has suffered reputational damage, thanks to a few bad actors, that can't be undone simply by waiting for memories to fade and an economic boom to kick in. I'm concerned that those of us in financial services have forgotten who we serve—and that the public knows it…For instance, no matter how much you hear about ‘institutional money,’ there is no such thing. Those funds belong to individuals, and regardless of how many zeros are on the ledger, it is money that real people have entrusted to others for savings, retirement or education. That is a reality too often ignored, and when it is ignored, some Wall Streeters can too easily slip into regarding their work as a kind of money-making game divorced from the concerns of Main Street.”

It is vital for Mr. Duffy’s message to be heard and to be acted upon.

With regard to what else can be done at the firms, instead of rewarding the aggressive “Hey! Hey! Hey, hey, hey! Macho, macho men” traders (many of whom have perverse bonus incentives) how about incentivizing credit and risk managers? How about making those credit and risk professionals a top recruitment priority?

The bottom line is that the financial sector has been somewhat of a scary hot mess for the last few several years. Fortunately, that seems to be on the verge of changing.

Scary Movies—The Blob

Okay, speaking of scary, since it’s Halloween we have a polling question on the scariest movie. Three choices: Carrie (the new or the old one, “If I concentrate hard enough, I can move things.”); Poltergeist (“Carol Anne…Do not go into the light.”); or The Shining (“Here’s Johnny”). Ready? Here we go: Carrie? Poltergeist? The Shining? We have another Halloweeener?

There’s another scary movie. Its way old, so many of you may not have seen it. Anyone remember The Blob?

The Blob was made in 1958 and starred Steve McQueen. A meteorite crashes near a small town and when it’s examined, there’s this oozing jello-like substance, the Blob, which starts coming out. It gets larger and larger and begins to goo through the town. When touched, it’s agonizingly painful and it kills people. As it kills, the Blob keeps getting bigger and bigger and starts to devour the entire populace.

The point here—and I actually have one—is that we’ve seen a few threatening Blob-like changes going on in markets for the last few years.

Markets have morphed from what they once were. We’ve seen institutional investors diversify their portfolios into derivatives and park money in markets like never before. I term these folks Massive Passives because they are very large and fairly price-insensitive in their strategy. I’m not suggesting the Massive Passives are ghouls or anything. They have every right to be in markets and they provide liquidity.

So, what’s the prob, Bob? Well, at times, the Massive Passives have helped put a kind of thumb on the scale when they get in and go long. Generally, they aren’t getting into the crude oil market for a few days or even the summer driving season. They are getting in for a few years. Again, nothing wrong with that, but it has impacted prices. Like the Blob, the Massive Passives are oozing into different markets and when they touch things, it can be painful. (I’m not saying it’s always painful. They aren’t exactly like a 1958 movie, but you guys get the concept.)

Fast

The other Blob-like morphing of markets has taken place with technology. Another quick lightening round polling question: Which has more glitches, financial market exchanges, your laptop, or the ObamaCare website? Okay, that’s rhetorical. We aren’t going to poll that one.

Technology in markets has been a great thing, but not always so. We’ve seen dozens of tech glitches. Even the Geek Squad is awed at how flawed these systems have become.

Then we have our fine furry friends, the high frequency trading Cheetahs. Just like the cheetahs in the wild, these HFT Cheetahs are junglizing markets. Wait, but they are also Blob-like. Let’s just say they are really scary due to how they feed and they are fast.

How fast are they? Let’s find out what the survey says. How many milliseconds are there in a second: 10, 100, or 1,000? Here we go: 10? I’m a French model, bonjour.)

Next question: There is a fiber cable that runs from Chicago to here, to New York City. It takes how long for a trading message to travel the entire length. Is it 1.45 seconds; 145 milliseconds; or 14.5 milliseconds? Here we go: 1.45 seconds? 145 milliseconds? How about 14.5 milliseconds? Yes, it’s the last one. It takes 14.5 milliseconds.

Now, this is how valuable that speed is in today’s Blob-like jungle-whatever trading environment. There’s a new fiber being run from Chicago to New York, but this one is traveling a more direct route. It’s costing tens of millions. This new cable will cut the time down from those 14.5 milliseconds to 13.1 milliseconds. It is going to save only 1.4 milliseconds. We are talking about a thousand parts of a second here. It’s hard to even conceive.

What that means is while the Cheetahs may make more money if they are faster (and they do and they will), there are far more opportunities for bad things to happen at lightning speed. Hmm, there’s a frog or a Blob or something caught in my throat…pardon me, um, Flash Crash, um, Knight Capital. Not that there are any examples of that occurring, but theoretically, like in a move, it might be that we could see a technology glitch or even an intentional cyber-attack that could bring a market down and shred investors. (There are other issues with the Cheetahs, but we’ll leave it at that for today.)

Freeze

In the movie, in The Blob, how they ultimately took care of the thing was to freeze it. I think they took a bunch of fire extinguishers, perhaps from the high school, and froze it. The military put it onto a plane (not sure how, since it was so big, but they did) and flew the Blob to the North Pole or someplace cold, maybe near Governor Palin’s place. That was the end of the Blob (until the remake in 1988).

Well, hold on. That was the end of the Blob at least until Vice President Gore gets a hold of the thing given global warming. It could thaw! Uh oh. The Blob, Part II, maybe coming to a theatre near you! The meltdown begins…boom, boom, boom. And then, in the dark with the screen all black, you’d hear that gross slurping sort of sound the Blob made…in Dolby surround-sound. I’m creeping myself out. Don’t do, Mr. Vice President!

But I digress. I am all for innovation. I don’t think we should freeze the HFT Cheetahs, they should be able to continue to operate; but they do need some fairly pedestrian requirements.

First, let’s ensure that they are registered with the CFTC. Not all of them are, and if the Agency needs information, there shouldn’t be a wait for lawyers to get a judge to provide a subpoena. Registration is a very basic, and needed first step.

They should be required to test their programs, and ensure that they have operating kill switches.

Some in the European Union have suggested, and are putting forth legislation to slow the Cheetahs down. I’m not sure that’s the right answer, but it is worthy of consideration. At this point, we need more information.

These two Blob-like market morphing matters—the Massive Passives and the Cheetahs—are things we need to not only be cognizant of, but things that deserve thoughtful policy provisions which ensure that traders, markets and consumers are protected as best we can, without inhibiting legitimate trading.

Imagineer

It’s that legitimate trading and our financial sector as a whole with which I want to conclude.

Oscar Wilde, the flamboyant and quick-witted cultural commentator said, “To expect the unexpected shows a thoroughly modern intellect”. He made the statement in the late 1800’s. Back then, people tooled around in buggies and homes didn’t have electricity. At the same time, there were some things being invented that really caught people by surprise: typewriters, seismographs, escalators, contact lenses, dishwashers and washing machines, cash registers, and even radars and metal detectors.

Just think for a moment what it must have been like with all of these changes! Think about computers and smart phones and the internet and how we have been dealing with our own technology change. Then think about all those changes from the late 1800s. It was a whirlwind and a blur then as well.

It was within that context and timeframe that Wilde made his comment about the thoroughly modern intellect. Expect the unexpected.

Expecting the unexpected readies us for adapting to change, whether it’s a change in government funding through a shutdown, a change in political office holders and administrations, a change in product offerings or players, like the Cheetahs and the Massive Passives, a change in regulations or business environments like those emerging from Dodd-Frank and related financial regulations around the world.

Change is challenging and most of us resist it in one way or another. Some of the naysayers complained that Dodd-Frank would slow the economic recovery. Guess what? The reverse is happening: new businesses are being created. New market products are being offered. New technologies are being used. Take for example Swaps Execution Facilities, SEFs, they are just up and running now, earlier this month. These are the regulated venues where previously unregulated swaps are being traded. They are doing gangbusters. They are taking off.

To effectively drive change requires more than merely “expecting the unexpected”. It requires arguably more than adaptation and change management…though shared goals and expectations among all stakeholders—lawmakers, regulators, business, investors and consumers—would be a great starting point.

In today’s global economy—and I will spare you the Halloween headless horseman analogies—the world, not simply your employers and the United States, but the world, is looking for leadership. Character. Ethics. Trust. Creativity coupled with solutions.

I deeply believe that the financial sector, if it can respond to the best and most noble in us, can and will do more than expect the unexpected. You can be Imagineers.

It’s an interesting word, isn’t it? Imagineers. Growing our isolated local economies dependent on wagons, buggies and telegraphs to a global one utilizing high speed rail and iPhones required thousands of Imagineers—people who combined imagination with engineering. It’s a phrase popularized not in the 1950s and 60s by Walt Disney, but a decade earlier in the 40’s by Alcoa to describe their own innovation process. Alcoa described is as “letting your imagination soar, and then engineering it down to earth”; Letting our imaginations soar, and then engineering them down to earth. Reengineering the way we move forward, and redefining the markets and the way in which we function in them. Driving change.

(Incidentally, I met with Klaus Kleinfeld, the Chairman and CEO of Alcoa earlier this month. We didn’t discuss the word, but they are still Imagineering. He said when they look at building a plant; they look at it over 50 years and 100 years. Wow, that’s visionary.)

Contemplate

So, no polling question, contemplate this one. Ask yourself this: Is your professional field—the financial sector—and each of you as individual professionals within it—on the cusp of imagining the markets as they can be? Or, are you waiting to find what will come your way? Are you thinking about engineering the products, the services and parameters of the marketplace in a way that energizes your firm, our nation and the global economy?

Here’s why that’s an important to consider, and why I’m so high on the future. The financial sector has always been a change agent our economy needed throughout history. Some say the railroads built the nation, and there is no denying they played a pivotal role. But the banks and the financial sector built the businesses, the homes and the communities on those rail lines and everywhere else in the nation. They helped fuel the economic engine of our democracy.

It’s not like a few very bad years with some horrible consequences are going to take away the need for a vibrant financial sector. We need it. We want it. We gotta have it. As change agents and Imagineers, you are each in a position to step up and help get us back to where we need to be.

Five Years and the Future

The next five years will set the stage for how the financial sector operates for the next 20 or 30 years. That’s because the entire world is going through regulatory reforms. We in the United States are ahead of others in this endeavor. That’s a competitive advantage for you. Take it!

I head our Global Markets Advisory Committee for the CFTC. Last week in Chicago I met with a group of international regulators to talk about how to harmonize rules and regulations. The work is going on now and it will be done over the next few years. Once those are in place, and harmonized to the greatest extent practicable, those will be the rules.

What that means is the changes that are taking place now, just like in the 1800s and in the post-war 1940s, will have a monumental impact upon our financial sector and upon markets. Instead of being scared or spooked by the changes, let’s embrace the change, define and drive the change for the better. Let’s be Imagineers.

What that means for individual firms is that you need more than a compliance officer reacting to final rules, “expecting the expected.” You need visionary folks expecting Oscar Wilde’s unexpected, helping to manage the change in a way that makes and takes that competitive advantage of the rules and regulations here and around the globe. You need corporate cultures, like those of Alcoa in the 1940s and Disney back as early as the 1950s and still today, that encourage ethics, trust, integrity, interdisciplinary collaboration, social responsibility and Imagineering.

Final Question

So, here’s our final polling question: who thinks American’s best days are ahead of us and who thinks they are behind us. Only two choices. Ready, go: America’s best days ahead of us? And, behind us? Bravo for the optimists, the Imagineers!

In a Rasmussen Reports national telephone survey two weeks ago, only 31 percent of U.S. voters think American’s best days are still to come, down from a high of 47 percent a year ago September. I think you guys, newly enlisted Imagineers, are actually more positive than average Americans, and props to you.

So, keep on being positive. I love it.

The Analysis

Alright, after all of this polling I’ve come to a conclusion that I wouldn’t normally share, since we just don’t care, but here’s the two part takeaway, the thoughtful analysis. One, it’s clear from our research that we’re all here, but we’re not always all there. Let’s blame it on Halloween. Two, for those who do dare to care, the Imagineers, there are a lot of positive opportunities out there. We just need to be nimble and quick and keep looking around the corner.

The financial sector is on the threshold of a very, very exciting change. I encourage each of you here to be there, to expect the unexpected, and dare to create stronger, more ethical, more sustainable markets and a flourishing financial sector for the future. You easily can transcend the war of words of the pol, as well as the pitiful polls. You can manage the occasional poltergeist, Blob and Cheetah. You can Imagineer and help grow healthier economies around the globe. Why would you not?

I thank you for those efforts that you are, and will be, making. I appreciate your time, attention and your participation in our polls. I’m told we have some lovely parting gifts. Oh, what? We don’t? Sorry, forget that. You have my appreciation.

It’s been a scream. Thanks all y’all.

Last Updated: October 31, 2013

SEC CHARGES NY MAN WITH INSIDER TRADING

FROM:  U.S. SECURITIES EXCHANGE COMMISSION 
SEC Charges New York Investment Professional with Insider Trading

On October 29, 2013, the Securities and Exchange Commission filed a civil injunctive action in federal court in the Northern District of Georgia against Dennis Rosenberg ("Rosenberg"). The Commission alleges that Rosenberg traded in the securities of Carter's Inc., ("Carter's), the Atlanta-based public issuer and clothing marketer, on the basis of material non-public information provided by a former Carter's executive, and tipped two investment advisers about this information.

The Commission's complaint alleges that, between 2005 and 2010, Rosenberg, a retired hedge fund investment consultant and market analyst who had previously covered the stock of Carter's, traded in advance of market-moving news concerning Carter's anticipated earnings, after having been tipped by a former Carter's executive regarding the substance of the upcoming announcements. Rosenberg also disclosed this information to two investment advisers for two separate hedge funds, according to the complaint, who then also traded on the inside information. Rosenberg's total ill-gotten gains, losses avoided, and consulting fees (based on tips to one hedge fund client) totaled approximately $500,000, according to the complaint, while the combined losses avoided and profits by Rosenberg's tippees totaled approximately $2 million.

The Commission's complaint alleges that Rosenberg violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5. Without admitting or denying any of the allegations in the complaint, Rosenberg consented to the entry of an order enjoining him from future violations of these provisions, and ordering him to disgorge approximately $500,000 of ill-gotten gains and approximately $108,000 in prejudgment interest. The amount of civil monetary penalties to be imposed, if any, will be decided at a later date.

This is the second insider trading case that the Commission has brought in connection with its ongoing investigation of trading in the securities of Carter's, see SEC v. Eric Martin, et al.,http://www.sec.gov/litigation/litreleases/2012/lr22458.htm, and the Commission's fifth overall case as part of its broader Carter's investigation.See SEC v. Joseph Elles,http://www.sec.gov/litigation/litreleases/2010/lr21784.htm, SEC v. Joseph Pacifico, Http://www.sec.gov/litigation/litreleases/2012/lr22517.htm, SEC v. Michael Johnson,http://www.sec.gov/litigation/litreleases/2012/lr22520.htm.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter.
 SEC Complaint

SEC ANNOUNCES SENTENCE OF ANDREW FRANZ RELATING TO MISAPPROPRIATION OF CLIENT FUNDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Commission announced that on October 23, 2013, the Honorable Christopher A. Boyko sentenced Andrew J. Franz (“Franz”) to 57 months imprisonment, to be followed by three years of supervised release, as well as $357,068.77 in criminal restitution. U.S. v. Andrew J. Franz, Criminal Action No. 1:13-cr-00331 (N.D. Ohio). Previously, on July 23, 2013, Franz pled guilty to ten counts, including counts of mail fraud, securities fraud, investment adviser fraud, and income tax evasion. The criminal information in this action alleged, among other things, that Franz stole hundreds of thousands of dollars from advisory clients at Ruby Corporation, a registered investment adviser with which he was associated.

Previously, the SEC filed an action against Franz in the U.S. District Court for the Northern District of Ohio. SEC v. Andrew J. Franz, Civil Action No. 5:12-cv-00642 (N.D. Ohio). The SEC’s complaint alleged that Franz operated a fraudulent scheme in which, through forgery and other fraudulent means, he misappropriated approximately $865,969 from clients of Ruby Corporation, including $779,418 from family members and $86,551 from other clients. The complaint alleged that Franz kept a net of approximately $354,000 in stolen funds. According to the SEC complaint, Franz violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and aided and abetted violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act).

At the SEC’s request for emergency relief, on March 15, 2012, the Honorable Benita Y. Pearson, United States District Court, Northern District of Ohio, entered an order of permanent injunction against further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Sections 206(1) and (2) of the Advisers Act, as well as an order freezing all assets under Franz’s control and other emergency relief. Finally, on March 15, 2013, Franz was permanently barred from the securities industry.

CFTC CHAIRMAN GENSLER'S STATEMENT ON CUSTOMER PROTECTION REFORMS IN DERIVATIVES MARKET PLACE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Chairman Gary Gensler: Open Meeting to Consider Customer Protection Reforms
October 30, 2013

Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission (CFTC). I’d like to welcome members of the public, market participants and members of the media, as well as those listening to the meeting on the phone or watching the webcast.

I would like to thank Commissioners Chilton, O’Malia and Wetjen for their contributions to the rule-writing process and the CFTC’s hardworking and dedicated staff.

This is a public meeting that is partially related to the Dodd-Frank Wall Street Reform and Consumer Protection Act related because it relates to swaps funds. This meeting is about customer funds and customer protections.

Segregation of customer fund is the core foundation of the commodity futures and swaps markets. Segregation must be maintained at all times. That means every moment of every day.

Market events, though, of these last two years highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and protection of customer funds.

And today's reforms are the sixth set of rules to be finalized by this Commission, if we move forward to finalize them, during a two-year process to ensure that customers have confidence that their funds are segregated and protected. These reforms benefit from the Commission's thorough review of existing customer protection rules – looking for any gaps in those rules and the oversight of these markets.

They benefit from significant public input, including staff roundtables and the Technology Advisory Committee, Agricultural Advisory Committee meetings, and numerous reports submitted by market participants.

They also benefit from input through a coordinated effort of the CFTC with other regulators; the self-regulatory organizations (SROs), such as the CME and the National Futures Association (NFA); as well as Congressional reports and input on these matters.

I will be supporting today's rules, in summary, for at least for six reasons. They are quite comprehensive, but here are six points I want to highlight:

First, FCMs, clearing members, have to significantly enhance their supervision of and accounting for customer funds. They will have to put in place additional policies and procedures for these new protections.

Second, significant enhancements around outside accounting and auditing – regarding the actual accountants or certified public accountants that audit futures commission merchants (FCMs), and also regarding the SROs and how they audit the FCMs.

Third, significant customer fund protections with regard to how funds are moved around. Basically, when a firm moves money within a firm, how can they move that money around? Some of these reforms were adopted by SROs last year, such as requiring senior management signoff, and the pre-approval of moving those monies. There are also significant new protections coming from changes in the required acknowledgment letters from the banks and custodians.

Fourth, reforms related to investing in international futures accounts. Our Part 30 regime really had not kept pace with protections for domestic futures accounts. With these reforms and the reforms that the NFA had put in place last year, investing in foreign futures accounts will be significantly aligned with the domestic protections. They won't be identical, but they will be significantly aligned with the protections for domestic futures accounts.

Fifth, there's significant new transparency. Transparency to the regulators – we will be able to see electronically custodial accounts and cash accounts on a daily basis. There is transparency to the public, as well, with the twice-a-month statements of the details of their funds in the investment accounts. These reforms also have been put in place by the SROs, but it is important that we do this at the federal level as well, and put it in our rules.

Sixth, the final rules include provisions on capital and residual interest of the FCMs themselves. This was quite possibly the most debated feature of these reforms, but I think they are important. In response to commenters on this provision, we are phasing in compliance to smooth implementation. As the staff will present, this section calls for significant new studies and roundtables and provides for a five-year phase in on these matters.

It is important that we look very closely at the law and ensure that one customer's funds or property are not used in some way to secure or guarantee other people's accounts.
Prior to this final rule set, the Commission had already made important improvements to protections for customers. In a longer statement for the record I go through those. But this is really a remarkable achievement, and I want to thank my fellow Commissioners

I also wanted to address three other matters.

This morning, unanimously as a Commission, we actually finalized two other rule sets. Since they were noticed for this meeting, I just wanted to inform the public about them. The first is one of the five other matters that we did to help customers and protect their funds. It relates to the choice that customers will have to segregate their collateral and funds -- the initial margin standing behind swaps that are not cleared. Congress gave the clear right to counterparties of swap dealers that they can chose to have those funds segregated. I'm pleased to report that we unanimously moved that this morning. It’s a key tenant of customer protection.

Another rule that we moved on was from the Division of Market Oversight, the Office of the Chief Economist and all of our surveillance teams across the agency. It is called ownership and control reporting. This has been on our docket for four-plus years. We had an advanced notice of proposed rulemaking, and then a proposal. We re-proposed it after some staff roundtables.

I'm glad to say we again reached conclusion, and I want to thank Commissioner O'Malia for his doggedness on this. We will finally have in our rulebook that it is required to file these various forms electronically -- no longer by mail and fax. I also want to thank staff.

Many of the things in this document that we are considering today also relate to filing things electronically, which is the right place to be in the 21st century.

The ownership and control reporting will give us a greater window into those parties that actually own accounts and control those accounts -- not only for positions, but also, in the world of high frequency trading, for accounts that have high volume on a particular day, but might end the day flat or without a position.

For the first time, we'll have this enhanced ability to oversee markets.

I also wanted to give a public thanks to my friend, my colleague and a wonderful head of the Division of Enforcement, David Meister. Today is, in fact, his last day of service at the CFTC.

David, you have brought tremendous energy, wisdom, talent, and, yes, expertise from the Southern District of New York. I think you've shown how to be a tough but fair prosecutor, and you've led a remarkable team, often strapped with not enough resources. I wish you well in your next professional adventures.

Note: this transcript was edited for clarity.

CFTC GARY GENSLER'S REMARKS AT 2013 ANNUAL GLAUBER LECTURE AT HARVARD UNIVERSITY

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler at the 2013 Annual Glauber Lecture at Harvard University
October 29, 2013

Thank you, Bob, for that kind introduction. I also would like to thank you and Harvard University for the invitation to speak today. I’m particularly pleased to be here as Bob and I are both examples that there is life after serving as an undersecretary of the Treasury.

Five years ago, the U.S. economy was in a free fall.

Five years ago, the swaps market was at the center of the crisis. It cost middle-class Americans – and hardworking people around the globe – their jobs, their pensions and their homes.

Five years ago, the swaps market contributed to the financial system failing corporate America and the economy as a whole. Thousands of businesses closed their doors.

President Obama met in 2009 with the G-20 leaders in Pittsburgh. They committed to bringing the swaps market into the light through transparency and oversight.

The President and Congress in 2010 gave the task of implementing swaps market reform to the Commodity Futures Trading Commission (CFTC) and security-based swaps market reform to the Securities and Exchange Commission.

With the CFTC’s near completion of these reforms, the shift to a transparent, regulated marketplace benefitting investors, consumers and businesses is fully in motion.

The CFTC’s 62 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.

There are bright lights and robust safety measures in place that didn’t exist in 2008.

With these reforms, farmers, ranchers, producers and commercial companies can continue to rely on transparent, competitive markets to lock in a price or a rate and focus on what they do best – innovating, producing goods and services for the economy, and creating jobs.

These reforms are not based on new ideas. Economists have written about them for centuries. Just start with Adam Smith in the Wealth of Nations where he wrote about the benefits of lowering the price of information and the price of access. In essence, if you make information free, the economy benefits. Similarly, if access to the market is free, everybody gets to compete.

Transparency

Thus, in line with Adam Smith, the first critical component of swaps market reform is transparency.

Today, the public can see the price and volume of each swap transaction as it occurs on a website, like a modern-day tickertape.

This transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.

Regulators have benefited as well. Nearly $400 trillion in market facing swaps are being reported into data repositories.

This transparency spans the entire marketplace – cleared as well as bilateral or customized swaps. Every product, without exception, now must be reported.

Further, starting this month, the public is benefitting as swap trading platforms come under new common-sense rules of the road.

Over time, market participants will benefit from the enhanced pre-trade transparency and competition of these new trading platforms, called swap execution facilities (SEFs).

SEFs are required to provide all market participants – dealers and non-dealers alike – with impartial access, once again following Adam Smith’s observations on how to benefit the economy.

Further, SEFS provide the ability to compete by leaving live, executable bids or offers in an order book.

Requiring trading platforms to be registered and overseen by regulators was central to the swaps market reform President Obama and Congress included in the Dodd-Frank Wall Street Reform and Consumer Protection Act. They expressly repealed exemptions, such as the so-called “Enron Loophole,” for unregistered, multilateral swap trading platforms.

Seventeen SEFs are temporarily registered. This is truly a paradigm shift – a transition from a dark to a lit market. It’s a transition from a mostly dealer-dominated market to one where others have a greater chance to compete.

Clearing

Another key component of completed swaps reforms is bringing transactions among financial institutions into central clearing.

This month, mandatory clearing of interest rate and credit index swaps is a reality for swap dealers, hedge funds and other financial institutions.

Clearinghouses lower risk and promote access for market participants.

As of October 25, 80 percent of new interest rate swaps were cleared. In total, over $190 trillion of the approximately $340 trillion market facing interest rate swaps market, or 57 percent, was cleared. This compares to only 21 percent of the market in 2008.

Earlier this month, the guaranteed affiliates and branches of U.S. persons were required to come into central clearing. Further, hedge funds and other funds whose principal place of business is in the United States or that are majority owned by U.S. persons are required to clear as well. No longer will a hedge fund with a P.O. Box in the Cayman Islands for its legal address be able to skirt the important reforms Congress put in place.

Swap Dealer Oversight

The third key component of swaps market reform is bringing oversight to swap dealers.

In 2008, swaps activity was basically not regulated in the United States, Europe or Asia. Among the reasons for this, it was claimed that financial institutions did not need to be specifically regulated for their swaps activity, as they or their affiliates already were generally regulated as banks, investment banks or insurance companies.

AIG’s downfall was a clear example of what happens with such limited oversight.

Today, we have 88 swap dealers and two major swap participants registered. This group includes the world’s 16 largest financial institutions in the global swaps market, commonly referred to as the G16 dealers. It also includes a number of energy swap dealers.

Swap dealer oversight helps protect the public. It lowers risk and increases market integrity. Swap dealers throughout this year have had to report their transactions and comply with sales practice and other business conduct standards.

International Coordination on Swap Market Reform

Since the 2009 meeting in Pittsburgh, the CFTC has been consistently coordinating with our international counterparts on swaps market reform. The United States, Europe, Japan and the largest provinces in Canada all have made substantial progress.

As the CFTC and the international regulatory community move forward with reform, we all recognize that risk knows no geographic border. AIG nearly brought down the U.S. economy through the operations of its offshore guaranteed affiliate.

It wasn’t the only U.S. financial institution that brought risk back home from its far-flung operations during the 2008 crisis.

It was also true at Lehman Brothers, Citigroup, and Bear Stearns. Ten years earlier, it was true at Long-Term Capital Management.

The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. When a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders.

The U.S. Congress was clear in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that the far-flung operations of U.S. enterprises are to be covered by reform.

The CFTC, coordinating closely with global regulators, completed guidance on the cross-border application of the Dodd-Frank Act in July. Swaps market reform covers transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates.

The guidance embraces the concept of substituted compliances, or relying on another country’s rules when they are comparable and comprehensive.

This guidance is critical to protecting the public from the risk of foreign-affiliate failures in the future.

Benchmark Interest Rates

Today, the CFTC announced its fifth settlement against a bank for pervasively rigging key interest rate benchmarks, LIBOR and Euribor.

LIBOR and Euribor are critical reference rates for global futures and swaps markets. In the U.S., LIBOR is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.

Unfortunately, we once again see how the public trust can be violated through bad actors readily manipulating benchmark interest rates.

Through hundreds of manipulative acts spanning six years, in six offices, and on three continents, more than two dozen Rabobank employees, including a senior manager, manipulated, attempted to manipulate and falsely reported crucial reference rates in global financial markets. Rabobank employees also aided and abetted other banks to manipulate benchmark interest rates.

I wish I could say that this won’t happen again, but I can’t.

LIBOR and Euribor are not sufficiently anchored in observable transactions. Thus, they are basically more akin to fiction than fact. That’s the fundamental challenge so sharply revealed by Rabobank and our prior cases.

This fifth instance of benchmark manipulative conduct highlights the critical need to find replacements for LIBOR and Euribor – replacements truly anchored in observable transactions.

Though addressing governance and conflicts of interest regarding benchmarks is critical, that will not solve the lack of transactions in the market underlying these benchmarks.

That is why the work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is so important. The CFTC looks forward to continuing to work with the international community on much-needed reforms.

Resources

I’d like to close on one of the greatest challenges to well-functioning swaps and futures markets. That challenge is that the agency tasked with overseeing these markets is not sized to the task at hand.

At 675 people, we are only slightly larger than we were 20 years ago. Since then though, Congress gave us the job of overseeing the $400 trillion swaps market, which is more than 10 times the market we oversaw just four years ago. Further, the futures market itself has grown fivefold since the 1990s.

You might not have liked the umpire’s call in the game this week on obstruction, but would you want Major League Baseball to expand tenfold and not add to its corps of umpires?

We’ve basically completed the task of writing all the reforms and are past the initial market implementation dates. We’ve brought the largest and most significant enforcement cases in the Commission’s history.

These successes, however, should not be confused with the agency having sufficient people and technology to oversee these markets.

We need people to examine the clearinghouses, trading platforms and dealers. We need surveillance staff to actually swim in the new data pouring into the data repositories. We need lawyers and analysts to answer the many hundreds of questions that are coming in from market participants about implementation. We need sufficient funding to ensure this agency can closely monitor for the protection of customer funds. And we need more enforcement staff to ensure this vast market actually comes into compliance and go after bad actors in the futures and swaps markets.

The President has asked for $315 million for the CFTC. This year we’ve been operating with only $195 million.

Worse yet, as a result of continued funding challenges, sequestration and a required minimum level Congress set for the CFTC’s outside technology spending, the CFTC already has shrunk 5 percent, and just last week, was forced to notify employees that they would be put on administrative furlough for up to 14 days this year.

I recognize that Congress and the President have real challenges with regard to our federal budget. I believe, though, that the CFTC is a good investment for the American public. It’s a good investment to ensure the country has transparent and well-functioning markets.

Thank you, and I look forward to your questions.