JUDGEMENT ENTERED AGAINST OFFSHORE BOILER ROOM DEFENDANTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Defendants Charged with Perpetrating $35 Million International Boiler Room Scheme

The Securities and Exchange Commission announced that the United States District Court for the Central District of California entered a final, settled judgment against defendants Nicholas Louis Geranio, The Good One, Inc., and Kaleidoscope Real Estate, Inc. for their roles in a $35 million scheme to manipulate the market and to profit from the issuance and sale of certain U.S. companies' stock through offshore boiler rooms.

Pursuant to the judgment issued on November 1, 2013, the court ordered Geranio, The Good One and Kaleidoscope jointly and severally to pay disgorgement of $2,135,000, prejudgment interest thereon of $427,270, and a civil penalty of $500,000, barred them from participating in any offering of penny stock, and permanently enjoined them from violations of the antifraud provisions of the federal securities laws. The judgment also barred Geranio from acting as an officer or director of any public company and ordered him to pay an additional $279,000 in disgorgement plus prejudgment interest thereon of $55,835, representing monies received by another defendant, Keith Field, provided that the SEC shall not obtain double recovery from Geranio and Field. Finally, the judgment ordered relief defendant BWRE Hawaii, LLC to pay, jointly and severally with Geranio, The Good One, and Kaleidoscope, an additional $240,000 in disgorgement plus prejudgment interest thereon of $55,295.

The SEC's complaint, filed on May 16, 2012, alleged that defendants' scheme worked as follows:

From approximately April 2007 to October 2009, Geranio organized eight U.S. companies: Green Energy Live, Inc.; Spectrum Acquisition Holdings, Inc.; United States Oil & Gas Corp.; Mundus Group, Inc.; Blu Vu Deep Oil & Gas Exploration, Inc.; Wyncrest Group, Inc.; Microresearch Corp.; and Power Nanotech, Inc. (the "Issuers"), installed management, and entered into consulting agreements with them through his alter-ego entities The Good One and Kaleidoscope.
Geranio then set up a common system to raise money through the Issuers' sale of Regulation S shares to investors by offshore boiler rooms that Geranio recruited, and also directed traders to engage in matched orders and manipulative trades to establish artificially high prices for at least five of the Issuers' stock.
The boiler rooms used high-pressure sales tactics and materially false statements and omissions to induce the investors, many of them elderly and from the United Kingdom, to buy the Regulation S stock. The boiler rooms received 60% to 75% of investors' funds as undisclosed sales markups, while Geranio received $2,135,000 through The Good One and Kaleidoscope and BWRE Hawaii received $240,000. Defendant Keith M. Field remains a defendant in the case.

SEC ANNOUNCES SANCTIONS AGAINST AUDIT FIRM, FOUNDER, TWO PARTNERS AND AUDIT MANAGER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced sanctions against a New York-based audit firm, its founder, two other partners, and an audit manager for their roles in the failed audits of three China-based companies publicly traded in the U.S.

An SEC investigation found that Sherb & Co. LLP and its auditors falsely represented in audit reports that they had conducted the audits in accordance with U.S. auditing standards when it fact they were riddled with failures and improper professional conduct.  One of the companies they audited – China Sky One Medical Inc. – has since been charged by the SEC with financial fraud.

To settle the SEC’s charges, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC.  The firm agreed to pay a $75,000 penalty.

“Auditors are critical gatekeepers in the financial reporting process, but Sherb & Co. and its auditors failed to live up to their professional obligations in multiple audits during a five-year period,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement.

According to the SEC’s order instituting settled administrative proceedings, the flawed audits involved China Sky One Medical, China Education Alliance Inc., and Wowjoint Holdings Ltd.  The individuals responsible for the audits were the firm’s founder Steven J. Sherb, fellow partners Christopher A. Valleau and Mark Mycio, and audit manager Steven N. Epstein.  They failed to properly plan and execute the audits, and they did not obtain sufficient competent evidential matters concerning sales, revenue, or bank balances.  They ignored clear red flags and failed to exercise professional skepticism and due care.  They also failed to maintain complete audit work papers.

According to the SEC’s order, Sherb engaged in improper professional conduct as the concurring partner for the China Sky audit and as concurring partner and engagement quality review (EQR) partner for the Wowjoint audits.  Valleau engaged in improper professional conduct as the engagement partner for the China Sky audit and four of five Wowjoint audits, and as the EQR for the China Education audit.  Mycio engaged in improper professional conduct as the engagement partner for the China Education audit and one of the Wowjoint audits.  Epstein engaged in improper professional conduct as the senior audit manager on the China Sky audit, China Education audit, and four of five Wowjoint audits.

The SEC order finds that Sherb & Co., Sherb, Valleau, Mycio, and Epstein violated Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and Section 4(C) of the Securities Exchange Act of 1934.  The SEC’s order also finds that Sherb & Co. and Mycio violated Exchange Act Section 10A(b)(1).  Sherb & Co. and Mycio are ordered to cease and desist from committing or causing any violations of Section 10A(b)(1) of the Exchange Act.  Sherb, Valleau, and Mycio are prohibited from practicing before the SEC as an accountant for at least five years, and Epstein is barred for at least three years.

The SEC’s investigation has been conducted by Rhoda Chang, Junling Ma, C. Dabney O’Riordan, Kam Lee, Osman Handoo, Yuri Zelinsky, Neil Welch, and Gregory Faragasso.

CFTC CHAIRMAN GENSLER'S STATEMENT ON AGGREGATION PROVISIONS FOR LIMITS ON SPECULATIVE POSITONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Statement of Support by Chairman Gary Gensler: Aggregation Provisions for Limits on Speculative Positions

November 5, 2013

I support the proposed rule that would modify the CFTC’s aggregation provisions for limits on speculative positions.

As we move forward on position limits for futures and swaps, it is important to concurrently implement reforms to the Commission’s current regulations regarding which positions are totaled up as being owned or controlled by a particular entity. These total, aggregated positions under common control are then subject to the speculative position limits, taking into consideration any relevant exemptions.

We live in a time when companies often have numerous affiliated entities, sometimes measured in the hundreds or thousands. Thus, it is appropriate to look at how speculative position limits apply across the enterprise. When Lehman Brothers failed, it had 3,300 legal entities within its corporate family. The question is – do you count all those 3,300 legal entities that Lehman Brothers once controlled, or do you apply a limit for each and every one of the 3,300? If we chose the second, that would be, in practice, a loophole around congressional intent. That's why this issue of aggregation comes into play.

The proposal generally provides for aggregation when various entities are under common control. For instance, if the ownership interest is greater than 50 percent, it will be presumed to be aggregated and part of the group.

The proposal provides for certain exemptions from aggregation for the following reasons:

Where sharing of information would violate or create reasonable risk of violating a federal, state or foreign jurisdiction law or regulation;
Where an ownership interest is less than 50 percent and trading is independently controlled;
Where an ownership interest is greater than 50 percent in a non-consolidated entity whose trading is independently controlled, and an applicant certifies that such entity’s positions either qualify as bona fide hedging positions or do not exceed 20 percent of any position limit; or
Where ownership of less than 50 percent results from broker-dealer activities in the normal course of business.
Last Updated: November 9, 2013

COMMODITY POOL OPERATOR GETS RESTRAINING ORDER FOR ALLEGEDLY MISAPPROPRIATING POOL FUNDS

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Obtains Restraining Order against Commodity Pool Operator and Commodity Trading Advisor, AlphaMetrix, LLC, Alleging Misappropriation of Pool Funds and Sending False or Misleading Statements

CFTC Complaint Also Names AlphaMetrix’s Parent Company, AlphaMetrix Group, LLC, as Relief Defendant

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that it filed a Complaint in the U.S. District Court for the Northern District of Illinois on November 4, 2013, against AlphaMetrix, LLC (AlphaMetrix), a Chicago-based Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA). The Complaint alleges that AlphaMetrix misappropriated funds belonging to commodity pools it operated and sent false or misleading account statements to at least some of the pool participants. On November 5, 2013, Federal District Judge Joan H. Lefkow issued a consent restraining Order that freezes AlphaMetrix’s assets, protects books and records, and appoints a corporate monitor to oversee the distribution of pool funds to participants.

According to the CFTC Complaint, AlphaMetrix operates approximately 90 pools that had approximately $700 million in assets under management as of August 31, 2013. The Complaint alleges that AlphaMetrix had agreements with some participants in which AlphaMetrix agreed to rebate certain fees by reinvesting the funds in the pools for the participants. However, as alleged, between at least January 1 and October 31, 2013, AlphaMetrix failed to reinvest at least $2.8 million of the rebates owed to participants and instead transferred the funds to its parent company, AlphaMetrix Group, LLC, which had no legitimate claim to those funds and is named as a Relief Defendant in the Complaint. The Complaint states that AlphaMetrix nevertheless sent the participants account statements, which included the funds that were supposed to have been invested in calculating the net asset value of their interests, and, as a result, misstated to participants the true value of their investments.

In its continuing litigation, the CFTC seeks preliminary and permanent injunctions against AlphaMetrix, enjoining AlphaMetrix from committing further violations of the Commodity Exchange Act, as charged, and ordering it to pay restitution, disgorgement, and a civil monetary penalty, among other appropriate relief. The CFTC also seeks an Order requiring AlphaMetrix Group, LLC, to disgorge funds it received as a result of AlphaMetrix’s unlawful conduct.

CFTC Division of Enforcement staff members responsible for this case are Stephanie Reinhart, David Terrell, Joseph Patrick, Scott Williamson, and Rosemary Hollinger. The Division thanks the CFTC’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

TRADER CHARGED BY CFTC WITH VIOLATING CATTLE FUTURES SPECULATIVE POSITION LIMITS

FROM:  U.S. COMMODITY FUTURE TRADING COMMISSION 
CFTC Charges Illinois Resident, CME Floor Broker and Trader James C. Yadgir with Violating Live and Feeder Cattle Futures Speculative Position Limits

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it filed an enforcement action in the U.S. District Court for the Northern District of Illinois against James C. Yadgir of Palatine, Illinois, charging Yadgir with exceeding the Chicago Mercantile Exchange’s (CME) speculative position limits in live cattle futures contracts in April 2011 and in feeder cattle futures contracts in May 2012. As the CFTC approved the CME speculative position limits for both futures contracts, the Complaint alleges that Yadgir, a CME Floor Broker and Trader, violated the Commodity Exchange Act, which prohibits any person from holding futures contract positions or options on such contracts in excess of established CFTC-approved speculative position limits.

According to the CFTC’s Complaint, on April 6, 2011, Yadgir held an open net position in April 2011 live cattle future contracts that exceeded his 550 contracts long spot month spread exemption position limit by 70 contracts.

The Complaint further alleges that on May 23 and 24, 2012, Yadgir violated the CME’s speculative position limits in feeder cattle futures contracts. As charged in the Complaint, Yadgir’s aggregate futures equivalent net position in May 2012 feeder cattle futures on May 23, 2012 exceeded the speculative position limit of 300 contracts in the last 10 days of trading by over 81 contracts. Yadgir also allegedly exceeded the feeder cattle futures speculative position limit on May 24, 2012, the expiration day of the May 2012 contract. According to the Complaint, Yadgir admitted to the violations alleged in the Complaint.

Yadgir has been registered with the CFTC as a floor trader since 1993 and as a floor broker since 2007.

The federal Complaint seeks a permanent injunction in addition to other remedial relief, including a trading ban and a civil monetary penalty.

CFTC Division of Enforcement staff members responsible for this case are Mark A. Picard, Michael R. Berlowitz, Elizabeth Pendleton, David Acevedo, Trevor Kokal, Lenel Hickson, Jr., Stephen J. Obie, Manal Sultan, and Vincent A. McGonagle, with assistance from Margaret Sweet of the CFTC Office of Data Technology.

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.