COURT FINDS ERIC ARONSON LIABLE FOR OPERATING A PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

District Court Finds Eric Aronson Liable for Operating a Ponzi Scheme, Issues Permanent Injunctions Against Remaining Individual Defendants and Grants Other Relief

The Securities and Exchange Commission today announced that U.S. District Court Judge Jed S. Rakoff has ruled that Defendant Eric Aronson violated the antifraud and other provisions of the federal securities laws. In addition, the Court entered orders of permanent injunctions against Defendants Vincent Buonauro and Fredric Aaron and further imposed officer and director and penny stock bars against Aaron. Furthermore, the Court ordered Aronson's wife, Relief Defendant Caroline Aronson, to disgorge the ill-gotten gains she received from her husband.

The Commission's Complaint, filed in October 2011, alleged that, from 2006 to 2010, PermaPave Industries and its affiliates raised more than $26 million from the sale of promissory notes and "use of funds" agreements to over 140 investors. Eric Aronson, Vincent Buonauro and others told investors that there was a tremendous demand for the product - permeable paving stones - and that investors would be repaid from the profits generated by guaranteed product sales. In reality, there was little demand for the product, and defendants used investors' money to make "interest" and "profit" payments to earlier investors and to fund management's lavish lifestyles. In addition, shortly after an affiliate of PermaPave Industries acquired a majority stake in Interlink-US-Network, Ltd., Eric Aronson, Fredric Aaron - who was the attorney for Eric Aronson and the entity defendants - and others issued a press release stating that a company that had never heard of Interlink intended to invest $6 million in Interlink.

On August 6, 2013, the Court granted in part the Commission's motion for summary judgment. Finding that the Commission proved an "almost endless fraud" with evidence that Eric Aronson and others raised millions from investors, misappropriated the funds raised, and then converted the investments several times over to delay and ultimately avoid repayment, the Court ruled that Eric Aronson, age 45 and resident of Syosset, New York, violated Sections 5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Subsequently, on December 11, 2013, the Court granted the Commission's motion for reconsideration of the Court's summary judgment order and ruled that Eric Aronson also violated Section 20(e) of the Exchange Act by aiding and abetting Interlink's violations of Exchange Act Sections 10(b) and 13(a) and Rules 10b-5, 12b-20 and 13a-11. Relief for these violations will be determined at a later date.

The Court also granted summary judgment on the Commission's claim for disgorgement against Caroline Aronson, age 43 and resident of Syosset, New York. On December 23, 2013, the Court issued a final judgment ordering Caroline Aronson to pay the full disgorgement amount sought, $296,262.

Also on December 23, 2013, the Court issued judgments as to Vincent Buonauro, age 42 and resident of West Islip, New York, and Fredric Aaron, age 49 and resident of Plainview, New York. Vincent Buonauro agreed to consent to the judgment as to him, which enjoins him from violating Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a) and Rule 10b-5. Fredric Aaron also agreed to consent to the judgment as to him, which enjoins him from violating Exchange Act Section 10(b) and Rule 10b-5 and from aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20 and 13a-11. The judgment as to Fredric Aaron also imposes five year officer and director and penny stock bars. The Commission's claims for monetary relief against Vincent Buonauro and Fredric Aaron will be determined at a later date.

The Commission's civil action also continues against Relief Defendant Deborah Buonauro. The Court previously issued final judgments against all entity defendants and entity relief defendants on January 19, 2012 and against Defendant Robert Kondratick on October 17, 2012.

SEC ANNOUNCES NEW CHIEF OF ENFORCEMENT DIVISION FOR INVESTIGATING COMPLEX FINANCIAL INSTRUMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced that Michael J. Osnato, Jr. has been named chief of the Enforcement Division unit that conducts investigations into complex financial instruments.

Mr. Osnato, who joined the SEC staff in 2008 and has served as an assistant director in the New York Regional Office since 2010, has played a key role in a number of significant SEC enforcement actions.  For instance, Mr. Osnato helped spearhead the SEC’s case against JPMorgan Chase & Co. and two former traders for fraudulently overvaluing a complex trading portfolio in order to hide massive losses, and the subsequent action in which the bank admitted that it violated federal securities laws.

Mr. Osnato will now lead a Complex Financial Instruments Unit that is comprised of attorneys and industry experts working in SEC offices across the country to investigate potential misconduct related to asset-backed securities, derivatives, and other complex financial products.  The unit was created along with four other specialized enforcement units in 2010, and was formerly known as the Structured and New Products Unit.

“Michael is a natural leader who brings keen investigative instincts and exceptional judgment to his work,” said Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement.  “He has been a valuable part of our efforts to punish misconduct related to complex financial instruments, and we are pleased that he will bring his considerable talents and skills to the unit.”

Among other SEC enforcement actions under Mr. Osnato’s purview have been charges against four former investment bankers and traders at Credit Suisse Group in a scheme to overstate the prices of $3 billion in subprime bonds, and actions related to operators of the Reserve Primary Fund.

“I am honored and gratified to have this opportunity to lead the Complex Financial Instruments Unit,” said Mr. Osnato.  “The unit has targeted fraud in some of the most challenging areas of the markets, and I look forward to working with the many talented professionals in the unit to keep the Enforcement Division on the cutting edge of today’s financial markets.”

Prior to joining the SEC enforcement staff, Mr. Osnato worked at Shearman & Sterling LLP and later at Linklaters LLP in New York.  He earned his bachelor’s degree from Williams College and his law degree from Fordham Law School.

PRESIDENT OBAMA'S STATEMENT ON JANET YELLEN'S CONFIRMATION AS FEDERAL RESERVE CHAIR

FROM:  THE WHITE HOUSE 

Statement by the President on the Confirmation of Janet Yellen as Chair of the Federal Reserve

With the bipartisan confirmation of Janet Yellen as the next Chair of the Federal Reserve, the American people will have a fierce champion who understands that the ultimate goal of economic and financial policy making is to improve the lives, jobs and standard of living of American workers and their families. As one of our nation’s most respected economists and a leading voice at the Fed for more than a decade – and Vice Chair for the past three years – Janet helped pull our economy out of recession and put us on the path of steady growth. Janet is committed to the Fed’s dual mandate of keeping inflation in check while also addressing our most important economic challenge by reducing unemployment and creating jobs. And she understands that fostering a stable financial system will help the overall economy and protect consumers. I am confident that Janet will stand up for American workers, protect consumers, foster the stability of our financial system, and help keep our economy growing for years to come.

CFTC COMMISSIONER O'MALIA'S DISSENTING STATEMENT ON NON-U.S. SWAP DEALERS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Dissenting Statement by Commissioner Scott D. O’Malia

Request for Comment on Application of Commission Regulations to Swaps Between Non-U.S. Swap Dealers and Non-U.S. Counterparties Involving Personnel or Agents of the Non-U.S. Swap Dealers Located in the United States

January 2, 2014

If you thought that the Commission’s approach last year regarding cross-border issues resulted in an unsound rulemaking process, the start of 2014 is no better.

Today’s announcement of the request for comment on a staff Advisory abrogates the Commission’s fundamental legal obligations under the Administrative Procedure Act (“APA”) and provides another example of the Commission’s unsound rule implementation process.

Making matters worse, today’s request for comment is completely outside the scope of the cross-border Guidance and the Exemptive Order as the Commission did not address the issue relating to swaps negotiated between non-U.S. swap dealers (“SDs”) and non-U.S. counterparties acting through agents of the non-U.S. SDs located in the United States. This is simply a strategic move by the Commission to try to duck blame for consistently circumventing the fundamental tenets of the APA and failing to adhere faithfully to the express congressional directive to limit the extraterritorial application of the Dodd-Frank Act to foreign transactions that “have a direct and significant connection with activities in, or effect on, commerce of the United States.”1

Moreover, I question why the Commission has decided to request comment on a narrow issue of the extraterritorial application of Dodd-Frank, while essentially ignoring the dozens of comments already filed as part of the Commission’s cross-border Exemptive Order.2 Simply requesting comment on a staff Advisory does not endorse the validity of the cross-border Guidance or the staff Advisory issued based on the Guidance.

Additionally, I have serious concerns with the evolving jurisdictional application of the Commission’s authority over cross-border trades. It appears based on the staff Advisory, that the Commission is applying a “territorial” jurisdiction test to elements of a trade between non-U.S. entities. To better understand the legal underpinnings of this position, I have included several additional questions to be considered as part of the overall comment file. It is my hope that public comments will provide greater clarity regarding our cross-border authority and identify areas where we must harmonize global rules with our international regulatory partners in the near future. It makes no sense to apply guidance or staff advisories that do not enjoy the full support and authority provided through rulemakings based on the Commodity Exchange Act (“CEA”).

Looking forward into this year, the CFTC needs to do away with the reflexive rule implementation process via staff no-action and advisories that are not voted on by the Commission. It should be the goal of the Commission to develop rules that adhere to the APA and ensure proper regulatory oversight, transparency and promote competition in the derivatives space.

In this regard, I would like to seek additional comment on the following points:

1. Please provide your views on whether Covered Transactions with non-U.S. persons who are not guaranteed or conduit affiliates of U.S. persons meet the direct and significant test under CEA section 2(i).3  Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on whether a non-U.S. SD is a guaranteed affiliate or a conduit affiliate of a U.S. person?

2. CEA section 2(a)(1)4 provides for the general jurisidiction of the Commission. Please provide your views on whether Covered Transactions with non-U.S. persons who are not guaranteed or conduit affiliates of U.S. persons fall within the Commission’s jurisdiction under CEA section 2(a)(1) or any other provision of the CEA providing for Commission jurisdiction. Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on the nature of the non-U.S. SD (i.e., whether it is a guaranteed affiliate or a conduit affiliate of a U.S. person)?

3. To the extent that Covered Transactions fall within the Commission’s jurisdiction, should a non-U.S. SD be required to comply with all, or only certain, Transaction-Level Requirements? Please provide a detailed analysis of any such view and its effect on other aspects of the Commission’s cross-border policy, if any. Would your view change depending on the nature of the non-U.S. SD (i.e., whether it is a guaranteed affiliate or a conduit affiliate of a U.S. person)?

4. In the open meeting to consider the cross-border final guidance and cross-border phase-in exemptive order, I asked about the Commission’s enforcement and legal authority under the cross-border guidance. The Commission’s General Counsel replied, “[T]he guidance itself is not binding strictly. We couldn’t go into court and, in a count of the complaint, list a violation of the guidance as an actionable claim.”5 If the Commission adopts the staff Advisory as Commission policy (and not through the rulemaking process), please provide your views on the Commission’s ability to enforce such policy.

CFTC MOVES ON COMMENT REQUEST REGARDING NON-U.S. SWAP DEALERS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Approves Request for Comment on Application of Commission Regulations to U.S. Activities of Non-U.S. Swap Dealers

Washington, DC — The Commodity Futures Trading Commission (Commission) today approved the issuance of a notice of request for public comment on a staff advisory regarding the applicability of certain Commission regulations to the activity in the United States of registered, non-U.S. swap dealers when entering into swaps with non-U.S. persons.

The Commission seeks comment on all aspects of the November 14, 2013 staff advisory 13-69 in view of the complex legal and policy issues involved. Comments must be received within 60 days after publication of the notice in the Federal Register.

CFTC & FERC SIGN MEMORANDUM OF UNDERSTANDING REGARDING INVESTIGATIONS AND SURVEILLANCE

FROM:  COMMODITY FUTURES TRADING COMMISSION 

January 2, 2014

FERC, CFTC Sign MOUs on Jurisdiction and Information Sharing

Washington, DC — The Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) have signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect energy market competitors and consumers.

The jurisdiction MOU sets out a process under which the agencies will notify each other of activities that may involve overlapping jurisdiction and coordinate to address the agencies’ regulatory concerns. The new information sharing MOU establishes procedures through which the agencies will share information of mutual interest related to their respective market surveillance and investigative responsibilities, while maintaining confidentiality and data protection. In support of the new information sharing MOU, CFTC Chairman Gary Gensler and FERC Acting Chairman Cheryl LaFleur also agreed that the agencies will work together to share appropriate data relating to financial markets for gas and electricity on an ongoing basis.

“These memoranda will further strengthen FERC’s ability to perform its market oversight and enforcement responsibilities,” said Acting Chairman LaFleur. “As FERC’s role in overseeing the competitive energy markets has grown since the passage of the Energy Policy Act of 2005, our need to coordinate with the CFTC is increasingly important. I appreciate Chairman Gensler’s work on these agreements and look forward to continued cooperation between our agencies.”

“I’m so pleased that with Acting Chairman LaFleur, our two agencies have been able to enter into these Memoranda of Understanding,” said CFTC Chairman Gensler. “These memoranda will help lead to better protection of the nation’s energy markets and increase cooperation between the agencies.”

Congress directed the CFTC and FERC to develop the MOUs as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The agencies have been operating under a 2005 MOU that allowed information exchange related to oversight or investigations.