MAN TO PAY DISGORGEMENT AND PENALTY TO SETTLE INSIDER TRADING CHARGES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

On February 6, 2014, the Securities and Exchange Commission filed insider trading charges against Hao He a/k/a Jimmy He alleging He purchased short-term put option contracts in the securities of Sina Corporation ("Sina"), a foreign private issuer headquartered in Shanghai, China.

The SEC's complaint, filed in the federal district court in Atlanta, Georgia, alleges that He, between October 10, 2012 and November 13, 2012, obtained material nonpublic information concerning Sina's upcoming, negative, future earnings guidance while visiting China and/or through phone calls to China. Based on this information, He purchased approximately $162,000 in short-term put options on November 13 and November 14, 2012, which contracts expired on November 17, 2012. Given the cost and nature of those trades, Sina's stock had to decline within a short time frame in order for He's trades to be profitable.

On November 15, 2012, Sina issued an announcement noting that it had beaten analyst forecasts for third quarter earnings, but also announced unexpected negative guidance for the fourth quarter of 2012. As a result of this negative guidance, analysts downgraded the stock and, upon opening on November 16, 2012, Sina's stock price declined approximately 8.5%, opening at $48.60 compared to the previous day's close of $53.10, and ultimately closed at $45.06.

Following the announcement and decline in the stock price, He sold all of his put option contracts on November 16, 2012 for $331,530.83, generating illicit profits of $169,819.10.

The SEC's complaint alleges that He violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

He has consented, without admitting or denying the Commission's allegations, to the entry of a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and requiring him to pay $169,819.10 in disgorgement plus prejudgment interest of $6,155.36, and a penalty of $169,819.10. The settlement with He is subject to court approval.

The SEC's investigation was conducted by Grant Mogan and Peter Diskin of the Atlanta Regional Office.

DEFENDANTS TO PAY OVER $5 MILLION TO SETTLE CHARGES IN OFF-EXCHANGE PRECIOUS METALS TRANSACTIONS CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Federal Court in Florida Orders James Burbage, Frank Gaudino, and Their Companies to Pay over $5 Million in Restitution and Penalties to Settle Charges Related to Illegal, Off-Exchange Precious Metals Transactions

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that Judge Donald M. Middlebrooks of the U.S. District Court for the Southern District of Florida in Miami entered a final judgment and permanent injunction Order against Florida residents James Burbage and Frank Gaudino and their companies, Lloyds Commodities, LLC, Lloyds Commodities Credit Company, LLC, and Lloyds Services, LLC (the Lloyds Defendants), who the CFTC had sued for their role in a multi-million dollar precious metals scheme orchestrated by Hunter Wise Commodities, LLC and related companies (Hunter Wise) (see CFTC Press Release 6447-12 and the Complaint).

The Order, entered on February 5, 2014, requires the Lloyds Defendants to pay a civil monetary penalty of $2,215,000, and Burbage and Gaudino to pay civil penalties of $423,000 and $263,000, respectively. The Order also requires the Lloyds Defendants to pay restitution for the benefit of customers totaling $1,476,690, and Burbage and Gaudino to pay restitution of $423,000 and $263,000, respectively. The Order specifies that the restitution payments are to be made to Melanie Damian, a Court-appointed Special Monitor and Corporate Manager, in the name of the “Hunter Wise Settlement/Restitution Fund.” The Order also imposes permanent solicitation, trading, and registration bans on the Lloyds Defendants, Burbage, and Gaudino and prohibits them from further violating the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The Order finds that, from at least July 16, 2011 until February 25, 2013, the Lloyds Defendants, operating under the common ownership and control of Burbage and Gaudino, held themselves out as a “leading wholesaler of precious metals,” such as gold, silver, platinum, palladium, and copper. According to the Order, the Lloyds Defendants acted as an intermediary that accepted orders and funds from customers of telemarketing firms for the purchase of physical precious metals on a leveraged basis (retail commodity transactions). The Order finds that the Lloyds Defendants would then transmit the customer orders and funds to Hunter Wise. The Order further finds that the Lloyds Defendants also recruited telemarketing firms to solicit retail customers until February 25, 2013, when the Court entered a preliminary injunction Order against Hunter Wise, the Lloyds Defendants, Burbage, Gaudino, and the other Defendants named in the CFTC Complaint (see CFTC Press Release 6522-13 and Order).

The Order finds that the Lloyds Defendants, Burbage, and Gaudino confirmed the execution of, and conducted an office or business in the United States for the purpose of accepting orders for, or otherwise dealing in, retail commodity transactions, thereby violating the requirement of the CEA that such retail commodity transactions be made or conducted on, or subject to, the rules of a regulated exchange.

The CFTC’s litigation continues against Hunter Wise and its principals, as well as the firms from whom the Lloyds Defendants received customer orders and funds.

The CFTC appreciates the assistance of the Florida Office of Financial Regulation.

CFTC Division of Enforcement staff members responsible for this case are Carlin Metzger, Heather Johnson, Brigitte Weyls, Jeff Le Riche, Peter Riggs, Thaddeus Glotfelty, Joseph Konizeski, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.

CFTC O'MALIA'S STATEMENT AT TECHNOLOGY ADVISORY COMMITTEE MEETING

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Commissioner Scott D. O’Malia, 11th Meeting of the Technology Advisory Committee

February 10, 2014

I am pleased to call the 11th TAC meeting to order since we reconstituted it in July 2010. I thank all of our TAC participants for joining us here today after the January 21 meeting was snowed out. I appreciate everyone’s willingness to accommodate the change in date.

I would like to acknowledge that our new Acting Chairman Mark Wetjen is here with us today. Chairman Wetjen has shown a great interest in our technology issues and a real willingness to ensure that the data we are collecting will be used in a thorough and automated manner. I was pleased to join with Chairman Wetjen and Commissioner Chilton a few weeks ago to announce that the Commission is taking concrete steps to address the challenges we face in optimizing our data.1

Specifically, on January 21, the Commission announced the formation of a cross-divisional data team that will focus on identifying problems faced by each division and developing solutions to resolve problems with the Commission’s regulatory data. The data team will also solicit comments from market participants on recommended rule changes to the Commission’s data rules. Based on this input, the data team will make written recommendations on a corrective path forward. Until now, no one in the Commission has taken ownership to fix the problems. This has now changed.

Enhancing the Commission’s swaps reporting rules will improve data quality, minimize confusion regarding reporting workflows, and increase standardization.

In addition, the Commission staff will continue to work on the data standardization effort, led by the Office of Data and Technology. The first phase of this work has been reported to TAC,2 but much work remains to harmonize many more fields and asset classes.

Agenda

Today’s TAC agenda is packed with three very important and timely topics that are also at the top of the Commission’s policy agenda.

Panel I -- Data: Where Does the Commission Stand and How Do We Fix What’s Broken?

First, we will hear from a collection of the Commission’s division directors who have critical market oversight responsibilities, as well as our Office of Data and Technology and our new Chief Economist. They will discuss where the Commission has been successful in utilizing swap data repository data, identify areas that are not working, and explain where changes must be made.

In thinking about our goals, I reviewed the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS / IOSCO) Final Report issued in January 2012 entitled, “Report on OTC derivatives data reporting and aggregation requirements.”3 Significantly, the report identifies key reporting standards and goals for data reporting, aggregation, and sharing among regulators.

The report also establishes several high level objectives for data utilization that the Commission should be able to achieve. These objectives include:

1. Assessing systemic risk and financial stability

2. Conducting market surveillance and enforcement

3. Supervising market participants

4. Conducting resolution activities

5. Bringing greater transparency to OTC markets

While it is clear we have achieved objective 5 with a partially complete swaps data report and a real-time swaps data ticker, I believe we have a long way to go on the other fundamental data objectives.

Working hand-in-hand with the division directors, I want to better understand how we will tackle these key objectives, and further learn about the data priorities of each division and the progress being made to achieve these priorities.

Panel II -- Concept Release on Automated Trading

Our second panel will focus on a question that TAC has extensively discussed over the past three and a half years: What is the appropriate level of pre-trade functionality deployed by traders, futures commission merchants, and exchanges to protect market integrity against rouge trades which can cause market disruption?

The first TAC meeting4 addressed this topic and by the third TAC meeting,5 there were recommendations for minimum standards.6 Subsequently, we established a Subcommittee on Automated and High Frequency Trading to define high frequency trading and explore other policy questions related to automated trading.7

Today, we will discuss the Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments.8 The comment period closed on December 11, 2013,9 but my colleagues have generously agreed to reopen the comment period until February 14, 2014 to include this panel discussion and any additional comments. We have received a variety of comments and ideas regarding these standards, and I have asked four witnesses and Commission staff to participate on this panel. I also encourage our TAC members, many who submitted comments on the concept release, to share their views on this matter.

I recognize that there are very strong opinions regarding automated trading and I believe that we will have a robust discussion.

Panel III – Made Available-to-Trade Determination

Finally, the third panel will address swap execution facilities (SEFs) and the recent Made Available-to-Trade (MAT) determinations.

The Division of Market Oversight (DMO) has deemed certified several MAT submissions for standard interest rate benchmark swaps and credit default swaps. While I am supportive of the MAT determinations for the benchmark contracts, I do not believe that the appropriate research and consideration has been given to package transactions tied to benchmark contracts. I believe that we can transition many of these contracts to mandatory trading in the near future, but we must first complete some additional analysis.

As part of our research and analysis, we are focusing panel III’s discussion on package transactions and the Commission staff will hold a roundtable on February 12.

While I am pleased that the Commission staff is working to provide relief from the mandatory trading requirement for package transactions, I did raise serious concerns with the MAT process in my January 16 statement that was tied to DMO’s announcement that it deemed certified Javelin’s MAT determination.10 My concerns have nothing to do with Javelin as a company or with their offering. They just happened to be the first mover to submit an application, which exposed the flaws in the MAT process. In many respects, it is appropriate for a company called Javelin to be the first mover, or rather the “tip of the spear.”

DMO’s memo to the Commission on the MAT determinations did not include any discussion of the types of package transactions that would be impacted by the MAT determination, nor did it address the concerns regarding technical or operational readiness or the jurisdictional issues involving these transactions.

The only insight provided in the staff memo regarding commenters’ requests for temporary relief for package transactions was the following statement: “[S]uch requests are not appropriate for consideration within the scope of the Commission’s process for reviewing a MAT determination.” (emphasis added).

Thankfully, the memo went on to say, “[t]herefore, the Division is taking these comments into consideration and may provide a future response or guidance as appropriate.” However, that was the extent of the discussion.

While I am frustrated that we are conducting the analysis on package transactions after making the MAT determinations, I am pleased that this TAC meeting will initiate the process for identifying and resolving the issues associated with such transactions.

I would like to see the market continue to benefit from the efficiency of package transactions and encourage the trading of such products on exchange. So, let's begin the process to figure out how to make that happen.

1 Press Release PR6873-14, CFTC to Form an Interdivisional Working Group to Review Regulatory Reporting, January 21, 2014, available at http://www.cftc.gov/PressRoom/PressReleases/pr6837-14.

2 This report is available at http://www.cftc.gov/ucm/groups/public/documents/file/dataharmonization.pdf.

3 The final report is available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf.

4 July 14, 2010 TAC meeting.

5 March 1, 2011 TAC meeting.

6 These recommendations are available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.

7 The subcommittee presentations regarding high frequency trading and automated trading from the October 30, 2012 TAC meeting are available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg1.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg2.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg3.pdf;

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg4.pdf.

8 78 FR 56542 (proposed Sep. 12, 2013).

9 All comment letters on the concept release are available through the Commission’s website at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1402.

10 The statement is available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement011614

CONNECTICUT-BASED FUND MANAGER LOSES JURY TRIAL IN CASE INVOLVING PETTERS PONZI SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Wins Jury Trial Against Connecticut-Based Fund Manager Who Facilitated Petters Ponzi Scheme

The Securities and Exchange Commission today announced that a jury has found Connecticut-based fund manager Marlon M. Quan and his firms liable for securities fraud in connection with a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.

Following a two-week civil trial before the Hon. Ann D. Montgomery in federal court in Minneapolis, the jury reached a verdict that Quan and his firms Stewardship Investment Advisors LLC, Acorn Capital Group LLC and ACG II LLC violated Sections 17(a)(2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).

Based on the jury verdict, the SEC is seeking an entry of a court order of permanent injunction against Quan and his firms as well as an order of disgorgement, prejudgment interest, and financial penalties.

The SEC filed its complaint against Quan and his firms in March 2011, alleging that he facilitated the Petters fraud and funneled several hundred million dollars of investor money into the scheme. The SEC further alleged that Quan and his firms invested hedge fund assets with Petters while pocketing millions in fees. Quan and his firms falsely assured investors that their money would be protected by use of a number of safeguards including a "lock box account" into which third-party retailers made payments and Quan purportedly monitored against defaults. When Petters was unable to make payments on investments held by the funds that Quan managed, Quan and his firms embarked on a series of convoluted transactions to conceal Petters's defaults from investors.

The SEC's case was litigated by John E. Birkenheier, Charles J. Kerstetter, Timothy S. Leiman and Michael Mueller, assisted by Donald A. Ryba, Sara Renardo, Sally Hewitt, Mark Sabo and Estera Cardos.

SEC.gov | Statement on Verdict in Jury Trial of Fund Manager Involved in Petters Ponzi Scheme

SEC.gov | Statement on Verdict in Jury Trial of Fund Manager Involved in Petters Ponzi Scheme

CONVICTED EMBEZZLER CHARGED IN SECURITIES FRAUD CASE

FROM: SECURITIES AND EXCHANGE COMMISSION 
SEC Charges James Y. Lee for Defrauding His Advisory Clients

On February 13, 2014, the Securities and Exchange Commission filed charges against James Y. Lee, a resident of La Jolla, California, alleging he defrauded his advisory clients.

The SEC's complaint, filed in federal district court in San Diego, alleges that Lee portrayed himself to prospective clients as a highly successful financial industry expert. According to the complaint, Lee recruited clients to open online brokerage accounts, including margin accounts in which he had discretionary authority to trade in options. He also charged his clients a management fee of as much as 50% of their monthly realized profits and promised clients that he would share equally in 50% of their realized losses. But when Lee's clients suffered large realized losses, he failed to reimburse most of them for his promised share.

The complaint alleges that Lee defrauded his clients in several ways. He charged some clients fees for the month of February 2011 based on false performance and concealed from them that they had actually incurred realized losses that month. In addition, he misled clients about his background, including failing to disclose a criminal conviction for embezzlement and an SEC cease-and-desist order for his role in illegal unregistered penny stock offerings. He also misled clients about his promise to share in realized losses and the risks of his options trading strategy. Furthermore, he traded in penny stocks in client accounts outside of his discretionary authority, and fraudulently induced one client to loan money to a penny stock company.

The complaint charges Lee with violating the antifraud provisions of the federal securities laws - Section 17(a) of the Securities Act of 1933, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and Section 206(1) and (2) of the Investment Advisors Act of 1940. The SEC is seeking a permanent injunction as well as disgorgement, prejudgment interest and civil penalties against Lee.

The complaint names several relief defendants including Lee's girlfriend, his son and his close business associate as well as their respective companies. According to the complaint, Lee diverted investor funds to all of the relief defendants to avoid holding assets in his own name.