SEC CHARGES SUBSIDIARY OF RBS WITH MISLEADING INVESTORS RELATED TO SUBPRIME RMB OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Royal Bank of Scotland Subsidiary with Misleading Investors in Subprime Rmbs Offering

The Securities and Exchange Commission today charged RBS Securities Inc., a subsidiary of the Royal Bank of Scotland plc, with misleading investors in a 2007 subprime residential mortgage-backed security (RMBS) offering. RBS agreed to settle the matter and pay more than $150 million, which the SEC will use to compensate investors for harm suffered as a result of RBS's conduct.

The SEC alleges that RBS said the loans backing the offering "generally" met the lender's underwriting guidelines even though nearly 30 percent fell so short of the guidelines that RBS should have excluded them from the offering entirely. Stamford, Connecticut-based RBS, then known as Greenwich Capital Markets, quickly reviewed a very small portion of the loans and was paid approximately $4.4 million for its work as the lead underwriter on the transaction, the SEC said in a complaint filed in federal court in Connecticut.

RBS told investors the loans backing the offering were "generally in accordance with" the lender's underwriting guidelines, which consider the value of the home relative to the mortgage and the borrower's ability to repay the loan. RBS knew or should have known that was false because due diligence before the offering showed that almost 30% of the loans underlying the offering did not meet the underwriting guidelines. In its complaint, the SEC said RBS gave investors a misleading impression of the quality of the loans backing the offering and the likelihood of their repayment.

The SEC's complaint charges Stamford-based RBS with violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. RBS, without admitting or denying the SEC's allegations, has agreed to a final judgment that orders it to disgorge $80.3 million, plus prejudgment interest of $25.2 million, and pay a civil penalty of $48.2 million.

The SEC thanks the federal-state Residential Mortgage-Backed Securities Working Group for its assistance in this matter. The SEC's investigation was conducted by members of the SEC's Complex Financial Instruments Unit and the Boston Regional Office - Kerry Dakin, Jim Goldman, Rua Kelly, and Kevin Kelcourse.

SEC FILES SUBPOENA ENFORCEMENT ACTION IN PRE-IPO SOLICITATIONS CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Files Subpoena Enforcement Action Against Anthony Coronati for Failure to Produce Documents and Appear for Testimony in Investigation of Solicitations Relating to Pre-Ipo Securities

The Securities and Exchange Commission announced today that it has filed a subpoena enforcement action in the U.S. District Court for the Southern District of New York against Anthony Coronati and that the Court entered an order directing Coronati to show cause why he should not be ordered to comply with the subpoenas. According to the application, the SEC is investigating whether Coronati and others have violated or are violating registration, anti-fraud, or other provisions of the federal securities laws in connection with a business known as Bidtoask.com.

The SEC's application alleges that Bidtoask.com, apparently created by Coronati, solicits investments relating to the securities of sought-after private companies that investors hope will soon hold initial public offerings, such as Facebook Inc., Twitter Inc., and Dropbox Inc. The nature and extent of investors' interests once they purchase these purported pre-IPO shares is part of the investigation. The application further alleges that certain investor funds have been commingled with other funds in an account controlled by Coronati and that personal expenses appear to have been paid out of that account. The SEC staff is investigating whether any investor funds have been misappropriated or otherwise misused.

As part of its investigation, the staff in the SEC's New York Regional office served Coronati with a document subpoena in July 2013, and served a further subpoena for documents and sworn testimony in early October 2013. The SEC's application alleges that Coronati has ignored the subpoenas: he never produced any documents, appeared for testimony, or otherwise responded to the subpoenas.

The SEC's application seeks an order from the federal district court compelling Coronati to comply fully with the subpoenas. The SEC is continuing its fact-finding investigation and, to date, has not concluded that anyone has violated the securities laws.

FDIC, BANK OF ENGLAND AND OTHERS WANT UNIFORM LANGUAGE IN DERIVATIVE CONTRACTS

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION

Federal Deposit Insurance Corporation, Bank of England, German Federal Financial Supervisory Authority and Swiss Financial Market Supervisory 

Authority Call for Uniform Derivatives Contracts Language 
Change Would Facilitate the Resolution of a Global Systemically Important Financial Institution

The Federal Deposit Insurance Corporation (FDIC), together with the Bank of England, the German Federal Financial Supervisory Authority (BaFin), and the Swiss Financial Market Supervisory Authority (FINMA), have authored a joint letter to encourage the International Swaps and Derivatives Association, Inc. (ISDA) to adopt language in derivatives contracts to delay the early termination of those instruments in the event of the resolution of a global systemically important financial institution (G-SIFI).

In the letter, the resolution authorities express support for the adoption of changes to ISDA's standard documentation to provide for short-term suspension of early termination rights and other remedies in the event of a G-SIFI resolution. The adoption of such changes would allow derivatives contracts to remain in effect throughout the resolution process following the implementation of a number of potential resolution strategies. By minimizing the disorderly unwinding of such contracts, these changes would place resolution authorities in a better position to resolve G-SIFIs in a manner that promotes financial stability while providing market certainty and transparency.

"Uniform contractual language that limits termination rights with respect to derivatives transactions will greatly enhance the success of a resolution of a global systemically important financial institution (G-SIFI) which by its nature will have significant cross-border operations," said FDIC Chairman Martin J. Gruenberg. "The international regulatory community has worked closely to harmonize the statutory approach to this issue and our request to ISDA reinforces this effort. Continued efforts among international regulators to cooperate on cross-border resolution issues such as this will reduce the risk of global financial instability and minimize moral hazard in the event of a G-SIFI resolution."

SEC ANNOUNCES ASSET FREEZE RELATED TO ALLEGED PONZI SCHEME INVOLVING U.S.-NEW ZEALAND COMPANIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced an emergency asset freeze to halt a Ponzi scheme involving U.S. and New Zealand-based companies peddling sham investment opportunities ranging from a bank trading program to kidney dialysis clinics.

The SEC alleges that Christopher A.T. Pedras, who has residences in Turlock, Calif., and New Zealand, misled his initial investors into believing they were investing in a profitable trading platform in which his company served as an intermediary between global banks.  When Pedras and his companies encountered difficulty paying the promised 4 to 8 percent monthly returns, they began steering investors to a different investment program to purportedly increase the value of their investment by 80 percent by funding kidney dialysis clinics in New Zealand.  Pedras’s business partner Sylvester M. Gray II and lead sales representative Alicia Bryan helped him solicit investors for both programs, and the money was never invested as promised.  Earlier investors were paid supposed returns with funds received from newer investors, and Pedras stole more than $2 million and spent another $1.2 million on sales agents.

“Rather than conducting any legitimate business activity, Pedras and his partners were simply operating a Ponzi scheme that was ultimately doomed to collapse,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “This emergency action stops them from fraudulently raising any more money from U.S. investors.”

According to the SEC’s complaint unsealed late Friday in U.S. District Court for the Central District of California, Pedras raised more than $5.6 million from at least 50 investors in the U.S. since July 2010 by selling securities in two phases.  Pedras, Gray, and Bryan first solicited investors for their Maxum Gold Small Cap Trade Program in which Pedras’s company Maxum Gold purportedly serves as the intermediary between banks that can’t legally trade with each other directly, so they use Maxum Gold’s trade platform to do so indirectly.  Maxum Gold purports to share portions of the trading profits with investors. 

The SEC alleges that the Ponzi scheme shifted gears earlier this year when Pedras and others began promoting the FMP Renal Program to Maxum Gold investors.  They characterized it as an investment in a New Zealand company called FMP Medical Services Limited that would be publicly traded and operate kidney dialysis clinics in New Zealand.  Investors were told if they converted their Maxum Gold investments into the FMP Renal Program, they would instantly realize an 80 percent increase in the value of their investment.

According to the SEC’s complaint, Pedras and Bryan routinely communicate with investors via email and also conduct investor conference calls.  Pedras has falsely claimed that Maxum Gold has been doing business for 15 to 20 years with more than 6,000 clients and has been making regular payments to investors.  Pedras conducted at least one in-person seminar at Paramount Studios in Los Angeles.  Investments were falsely touted as risk-free and investor funds were not maintained safely in escrow accounts as described to investors.

The SEC alleges that the Ponzi scheme paid investors more than $2.4 million in “returns” using new investor money.  Pedras stole more than $2 million from investors in the form of cash withdrawals, car and retail purchases, and transfers of investor funds to his various companies.  Approximately $1.2 million in sales commissions were paid to a small network of sales agents who sold the investments to U.S. investors.

According to the SEC’s complaint, during at least one conference call, Pedras advised investors not to respond if contacted by the SEC.  He characterized SEC investor questionnaires as “fake” and stated that the SEC’s investigation was motivated by a “personal vendetta” against him.

The SEC’s complaint charges Pedras, Gray, Bryan and the Maxum Gold and FMP entities 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.  Pedras and Bryan also are charged with violations of Section 15(a) of the Exchange Act, and they and Pedras’s companies are charged with violations of Sections 5(a) and 5(c) of the Securities Act.  The Honorable Gary Feess granted the SEC’s request for a temporary asset freeze against Maxum Gold, FMP, and Pedras.  Judge Feess’s order prohibits the destruction of documents and requires the defendants to provide accountings.  A court hearing has been scheduled for November 8. 

The SEC’s investigation was conducted by J. Cindy Eson, Peter F. Del Greco, and Dora Zaldivar of the Los Angeles office.  The SEC’s litigation will be led by Amy Longo and Karen Matteson.  The SEC appreciates the assistance of the New Zealand Financial Markets Authority.

CFTC PROPOSES RULE REGARDING MEMBERSHIP IN REGISTERED FUTURES ASSOCIATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Issues Proposed Rule to Require All Registered Introducing Brokers, Commodity Pool Operators, and Commodity Trading Advisors to Become and Remain Members of a Registered Futures Association

Washington, DC —The Commodity Futures Trading Commission (CFTC or Commission) proposed a rule today to amend its regulations to require that all persons registered with the Commission as introducing brokers (IBs), commodity pool operators (CPOs), and commodity trading advisors (CTAs) become and remain members of at least one registered futures association (RFA). Currently, the National Futures Association (NFA) is the only RFA.

The Commission is proposing new Section 170.17 to address recent changes to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Commission’s authority to regulate swaps. Currently, under Sections 170.15 and 170.16 of the Commission’s regulations, all registered futures commission merchants (FCMs), swap dealers (SDs) and major swap participants (MSPs) are required to become members of NFA. However, there is no mandatory membership requirement for other registrants. Through the interaction of the Commission’s rules and NFA Bylaw 1101, any IB, CPO or CTA required to be registered with the Commission that desires to conduct business directly with an FCM, SD, or MSP must become a member of NFA, and derivatively, must ensure that it conducts business only with those IBs, CPOs or CTAs that also are NFA members. However, due to the unique nature of swap transactions, it may be possible for certain IBs, CPOs or CTAs to not be captured by the intersection of Sections 170.15 or 170.16 and NFA Bylaw 1101, and therefore, it may be possible for these Commission registrants to serve clients without becoming members of NFA. The Commission intends the proposed rule to avoid this possibility.

The comment period for the proposed rule will remain open for 60 days after publication in the Federal Register.

CFTC COMMISSIONER CHILTON'S STATEMENT ON POSITION LIMITS MEETING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
“At Last”

Statement of Commissioner Bart Chilton, Dodd-Frank Meeting on Position Limits

November 5, 2013

For two reasons, this is a significant day for me.  I am reminded of that great Etta James song, At Last.

The first reason is that, at last, we are considering what I believe to be the signal rule of my tenure here at the Commission; I’ve been working on speculative position limits since 2008. The second reason today is noteworthy is that this will be my last Dodd-Frank meeting.  Early this morning, I sent a letter to the President expressing my intent to leave the Agency in the near future. I’ve waited until now—today—to get this proposed rule out the door, and now—at last—with the process coming nearly full circle, I can leave. It’s with incredible excitement and enthusiasm that I look forward to being able to move on to other endeavors.

With that, here is a bit of history on the position limits journey that has led us, and me, to this day.  The early spring of 2008 was a peculiar time at the Commission.  None of my current colleagues were here.  I and my colleagues at that time watched Bear Stearns fail. We had watched commodity prices rise as investors sought diversified financial havens.  When I asked Commission staff about the influence of speculation on prices, some said speculative positions couldn’t impact prices.  It didn’t ring true, and as numerous independent studies have confirmed since, it was not true.

I began urging the Commission to implement speculative position limits under our then-existing authority.  And I was, at that time, the only Commissioner to support position limits.  Given the concerns, I urged Congress to mandate limits in legislation. A Senate bill was blocked on a cloture vote that summer, but late in the session, the House actually passed legislation.  Finally, in 2010, as part of the Dodd-Frank law, Congress mandated the Commission to implement position limits by early in 2011.

Within the Commission, I supported passing a rule that would have complied with the time-frame established by Congress—by any other name—federal law. A position limits rule was proposed in January of 2011 and finally approved in November.

In September 2012, literally days before limits were to be effective, a federal district court ruling tossed the rule out, claiming the CFTC had not sufficiently provided rationale for imposing the rule.  We appealed and I urged us to address the concerns of the court by proposing and quickly passing another new and improved rule.  I thought and hoped that we could move rapidly.  After months of delay and deferral, it became clear: we could not.

But today—at last—more than three years since Dodd-Frank’s passage, we are here to take it to the limits one more time.

Thankfully, we have it right in the text before us. The Commission staff has ultimately done an admirable job of devising a proposed regulation that should be unassailable in court, good for markets and good for consumers.

I thank everyone who has worked upon the rule: Steve Sherrod, Riva Adriance, Ajay Sutaria, Scott Mixon, Mary Connelly, and many others for their good work.

In addition, I especially thank Elizabeth Ritter, my Chief of Staff, Nancy Doyle, and also Salman Banaei who has left the Agency for greener pastures. I thank them for their tireless efforts on the single most important, and perhaps to me the most frustrating, policy issue of my tenure with the Commission. I have had the true honor of working with Elizabeth since prior to my confirmation. I would be remiss if I did not reiterate here what I have often said; nowhere do I believe there is a brighter, smarter, more knowledgeable and hard-working derivatives counsel. She has served the public and me phenomenally well. Thank you, Elizabeth.

And finally to my colleagues, past and present, my respect to those whom we have been unable to persuade to vote with us on this issue, and my thanks to those who will vote in support of this needed and mandated rule. At last!

Thank you.