This is a photo of the National Register of Historic Places listing with reference number 7000063
Sunday, March 23, 2014
Friday, March 21, 2014
LAW FIRM, OTHERS CHARGED IN $5.6 MILLION FOR ROELS IN INSIDER TRADING SCHEME
FROM: SECURITIES AND EXCHANGE COMMISSION
SEC Charges Law Firm Managing Clerk and Stockbroker in $5.6 Million Insider Trading Scheme
The Securities and Exchange Commission today charged a managing clerk at a law firm and a stockbroker with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.
The SEC alleges that Steven Metro and Vladimir Eydelman were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, a managing clerk at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm's computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met with his stockbroker, Eydelman, near the clock at the information booth in Grand Central Station. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. Eydelman bolstered his unlawful profits with commissions from those trades. The middleman allocated a portion of his ill-gotten profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.
In a parallel action, the U.S. Attorney's Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.
According to the SEC's complaint filed in U.S. District Court for the District of New Jersey, the scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks. When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt. Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked. As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius. Eydelman expressed similar concern about Sirius' struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm. Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, "Nice trade." The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a "thank you" for the information. Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro's behalf based on confidential information that he planned to pass him in the future.
According to the SEC's complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction. Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired. Metro also conveyed the approximate price of the transaction and the approximate announcement date. The middleman then communicated to Eydelman that they should meet. Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction. Eydelman watched the middleman chew or eat the tip to destroy the evidence. Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.
The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company. He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.
The SEC's complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.
The SEC's investigation, which is continuing, has been conducted by Jason Burt and Carolyn Welshhans in the Market Abuse Unit. John Rymas, Mathew Wong, Daniel Koster, and Leigh Barrett assisted with the investigation. The case was supervised by Mr. Hawke and Mr. Cohen. The SEC's litigation will be led by Stephan Schlegelmilch and Bridget Fitzpatrick. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.
SEC Charges Law Firm Managing Clerk and Stockbroker in $5.6 Million Insider Trading Scheme
The Securities and Exchange Commission today charged a managing clerk at a law firm and a stockbroker with insider trading around more than a dozen mergers or other corporate transactions for illicit profits of $5.6 million during a four-year period.
The SEC alleges that Steven Metro and Vladimir Eydelman were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, a managing clerk at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm's computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met with his stockbroker, Eydelman, near the clock at the information booth in Grand Central Station. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. Eydelman bolstered his unlawful profits with commissions from those trades. The middleman allocated a portion of his ill-gotten profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.
In a parallel action, the U.S. Attorney's Office for the District of New Jersey today announced criminal charges against Metro, who lives in Katonah, N.Y., and Eydelman, who lives in Colts Neck, N.J.
According to the SEC's complaint filed in U.S. District Court for the District of New Jersey, the scheme began in early February 2009 at a bar in New York City when Metro met the middleman and other friends for drinks. When Metro and the middleman separated from the rest of their friends and began discussing stocks, the middleman expressed concern about his holdings in Sirius XM Radio and his fear that the company may go bankrupt. Metro divulged that Liberty Media Corp. planned to invest more than $500 million in Sirius, and said he obtained this information by viewing documents at the law firm where he worked. As a result, the middleman later called Eydelman and told him to buy additional shares of Sirius. Eydelman expressed similar concern about Sirius' struggling stock, but the middleman assured him that his reliable source was a friend who worked at a law firm. Following the public announcement of the deal, whose news coverage noted that Simpson Thacher acted as legal counsel to Sirius, Eydelman acknowledged to the middleman, "Nice trade." The middleman told Metro following the announcement that he had set aside approximately $7,000 for Metro as a "thank you" for the information. Instead of taking the money, Metro told the middleman to leave it in his brokerage account and invest it on Metro's behalf based on confidential information that he planned to pass him in the future.
According to the SEC's complaint, Metro tipped and Eydelman traded on inside information about 12 more companies as they settled into a routine to cloak their illegal activities. Metro shared confidential nonpublic information with the middleman by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction. Metro pointed to the names or ticker symbols to indicate which company was the acquirer and which was being acquired. Metro also conveyed the approximate price of the transaction and the approximate announcement date. The middleman then communicated to Eydelman that they should meet. Once at Grand Central Station, the middleman walked up to Eydelman and showed him the post-it note or napkin containing the ticker symbol of the company whose stock price was likely to increase as a result of the corporate transaction. Eydelman watched the middleman chew or eat the tip to destroy the evidence. Eydelman also learned from the middleman an approximate price of the transaction and an approximate announcement date.
The SEC alleges that Eydelman then returned to his office and typically gathered research about the target company. He eventually e-mailed the research to the middleman along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction.
The SEC's complaint charges Metro and Eydelman with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 as well as Section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment ordering Metro and Eydelman to pay disgorgement of their ill-gotten gains plus prejudgment interest and penalties, and permanent injunctions from future violations of these provisions of the federal securities laws.
The SEC's investigation, which is continuing, has been conducted by Jason Burt and Carolyn Welshhans in the Market Abuse Unit. John Rymas, Mathew Wong, Daniel Koster, and Leigh Barrett assisted with the investigation. The case was supervised by Mr. Hawke and Mr. Cohen. The SEC's litigation will be led by Stephan Schlegelmilch and Bridget Fitzpatrick. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey, Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.
Thursday, March 20, 2014
KEYNOTE ADDRESS AT INVESTMENT COMPANY INSTITUTE 2014 MUTUAL FUNDS AND INVESTMENT MANAGEMENT CONFERENCE
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SPEECH
Keynote Address at the Investment Company Institute 2014 Mutual Funds and Investment Management Conference
Craig M. Lewis, Chief Economist and Director,
Division of Economic and Risk Analysis
Orlando, FL
March 18, 2014
Encouraging Economic Discourse
Thank you for inviting me here today to deliver the keynote address at this important conference. I am particularly pleased to be sharing this honor with Norm Champ, the Director of the Division of Investment Management. As I will touch on today, my Division’s work with him and his staff exemplifies the type of detailed and in-depth economic thinking that I believe currently is – and should continue to be – a hallmark of the SEC’s approach to rulemaking. Before I go further, however, let me remind you that the remarks I make today are my own and do not necessarily reflect the views of the Commission, Commissioners, or of SEC staff.[1]
The Impact of the Guidance
Two years ago this month – in a memorandum dated March 16, 2012 to be exact – my Division and the Office of the General Counsel laid out what we believed to be best practices in performing economic analysis in support of Commission rulemaking. That memorandum, now publicly available and entitled Current Guidance on Economic Analysis in SEC Rulemaking – known as “the Guidance” for short – was, on paper at least, limited in its scope. At its base, the Guidance does just two things. First, it lays out the basic principles underlying a robust and transparent economic analysis in support of rulemaking. Second, it states the fundamental precept that economists are part of the rulemaking process from the very start, and thus involved in those crucial policy discussions that occur before words are ever committed to paper.
You can see how in one version of the world the Guidance could have remained a document with a limited purpose, one that provided useful tips on structuring an economic analysis within a rule release and got DERA economists invited to more meetings. But the Guidance of this world is much more than that. Let me be clear: The Commission has always considered the economic effects of its rules and policy choices. But over the past three years that I have been Chief Economist and the last two that I have overseen my Division’s work with the Guidance, I have come to believe that this seemingly simple document has focused and enhanced how the Commission and its staff approach economic thought and utilize the expert staff of DERA. Today I’d like to talk about the Guidance a bit, and also consider what it might mean for the public’s engagement with the Commission.
So stepping back for a moment, in case not all of you have committed the Guidance to memory, let me take a few moments to review what the document actually says. The document emerged from a particular moment in time, when the Commission was reviewing its approach to economic analysis in rulemaking, and Congress and other constituencies were asking questions about the integration of economics into the rulemaking process. During this time, with the passage of the Dodd-Frank Act, the Commission was responsible for promulgating a large number of rules covering a vast array of topics. So after months and months of work, my staff and staff in the Office of the General Counsel circulated the Guidance within the Commission.
Clocking in at 17 pages, the Guidance explains the four basic elements of a robust economic analysis. First, identify the need for the regulatory action. Second, articulate the “baseline” against which any potential economic effects can be measured. (In other words, describe what the world looks like today, in the absence of the regulatory action.) Third, explain alternative approaches to reaching the regulatory goal. And fourth, lay out the economic impacts, including the costs and benefits, of the regulatory action and its principal regulatory alternatives. The Guidance concludes with a discussion of the integration of economic analysis into the rulemaking process. To quote the Guidance, “[DERA] economists should be fully integrated members of the rulewriting team, and contribute to all elements of the rulewriting process.”
And that’s the recipe for an SEC economic analysis. Sensible and straight-forward. But just like with many recipes, there is a secret to the success of the Guidance. A secret ingredient that isn’t listed. As you may have heard, my time at the Commission is drawing to a close and with that comes certain freedoms. And so I’m going to give away that secret.
The truth is that the Guidance would never have been successful without the incredible staff at the Commission.
Of course, I must acknowledge the unwavering support for these efforts that was given by former Chairmen Schapiro and Walter, as well as by Chair White. Each of the Commissioners also has been crucial in ensuring that our rule releases have complete and even-handed economic analyses. And senior staff from all Divisions are due credit for consistently emphasizing the importance of the Guidance.
But the people who deserve most of the credit are the staff attorneys and staff economists who do the vast majority of the work to actually implement the Guidance. These were the individuals who, cloistered in windowless conference rooms, hammered out the narratives that added up into the high-quality economic analyses that the public eventually sees. I would be remiss if I did not take this opportunity to publicly express my heartfelt admiration for all of those who were and continue to be part of the success of the Guidance.
As a result of all that hard work, I believe our rules are strong, robustly supported, and transparently demonstrate the unparalleled expertise of the Commission and its staff.
But now recall what I said about the scope of the Guidance. The Guidance by its terms only applies to the development and drafting of rule releases. While certainly central, rule drafting is only one part of what the Commission does every day. Indeed, there are many other policy initiatives that are bubbling away on the proverbial stove. So if the Guidance has this seemingly limited scope, why did I talk in the beginning about its importance to the agency? To answer that question I need to speak as an economist in the language of economists. In economic theory, there exists the concept of “spillover effects.” Wikipedia tells us that these effects are “externalities of economic activity or processes that affect those who are not directly involved.” In layman’s terms, it’s a secondary effect.
Well, the Guidance has had a rather significant spillover effect. As DERA became larger and the Guidance became integrated into the rulewriting process, it became natural for DERA to similarly be included in the dozens upon dozens of other initiatives that didn’t directly involve drafting a rule. We started proposing projects in a variety of spaces and found receptive audiences across the Commission. To run through the myriad ways that DERA contributes to the mission of the Commission would take all of my time and probably the rest of the day and night, and if I had a captive audience I would be more than happy to regale you with myriad examples. But in an effort to stay within my allotted time, I’ll refrain. But I do not think that it is an overstatement to say that ‘economics’ is a common language that we speak at the Commission. I’ve heard attorneys comfortably and correctly deploy technical terms such as “externalities,” “economic rents,” and “efficient allocation of capital.” (Of course, I’ve also heard my economists engage in arcane legal discussions, so language barriers are dropping on both sides!) But nothing brings greater satisfaction than hearing someone simply say, “Just call DERA.”
Of course this means that DERA has had to up its game as well. It’s all well and good to sit in an ivory tower and talk about economic effects in the abstract. It’s another matter entirely to translate what we studied in graduate school into grounded and meaningful work that directly responds to the hard questions the Commission faces. There are a variety of ways in which we can do that. Most obviously, we can contribute robust analyses to rule proposals and adoptions. For example, in several releases we have worked very hard to describe in quantitative terms current market conditions. We have analyzed the types and levels of capital-raising activities in both the public and private markets. We have performed sophisticated and novel analyses of the credit default swap market. And when analyzing the potential effect of our rules on efficiency, competition, and capital formation, we have sought to describe, in an even-handed manner, the economic trade-offs that often come with effective regulation.
But that is not the only way that DERA has demonstrated the expertise of its staff. I oversee a vibrant culture of original research. By engaging in research on topics of interest in the Commission, my economists stay abreast of the latest techniques and approaches to economic analysis, contribute directly to the intellectual capital of the academic community regarding complex market issues, and showcase the Commission’s sophisticated understanding of the markets it regulates. The DERA website has many white papers, working papers, and links to published articles and I certainly hope you take a quick moment to take a look.
All of these analyses are public. And that’s an important theme here. Encouraging public awareness of and involvement in these economic conversations is central to DERA’s mission. One way we are seeking to ensure public engagement throughout the rulewriting process is by, when appropriate, making analyses of particular economic issues available to the public as we refine and expand our thinking regarding a particular rule. To illustrate our efforts in this regard, I will focus on DERA’s work to assist the Commission as it considers further money market fund reform.
The Example of Money Market Fund Reform
As many of you may know, the Commission has been considering the question of what, if any, further reforms to money market funds may be appropriate. As I’ll describe, this process has been marked with a high level of public engagement with relevant economic issues by DERA.
For example, before any policy choices were even proposed, DERA staff authored a memorandum intended to assist in formulating a well-considered proposal. That memo contained both a quantitative and qualitative analysis responding to certain questions regarding money market funds raised by Commissioners Aguilar, Paredes, and Gallagher. Those questions focused on three issues: (1) What were the determinants of investor behavior and its effect on MMF performance during the 2008 financial crisis; (2) What has been the effect of the 2010 money market fund reforms; and (3) How future reforms might affect the demand for investments in money market fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities, and states that sell their debt to money market funds.[2] That staff memorandum, which was made public, helped inform the subsequent proposal.
Now let’s turn to the proposal itself. The proposing release itself exemplifies the way that the Commission, rulewriters, and economists are working closely together to develop rule releases. The proposal contained a fully integrated qualitative and quantitative analysis. For example, the release contained an analysis of the economics of money market funds, including the combination of MMF features that may create an incentive for their shareholders to redeem shares in periods of financial stress. The release considered the economic consequences of a floating NAV and liquidity fees and gates as well as effects on efficiency, competition, and capital formation. And we examined the potential implications of these proposals on current investments in money market funds and on the short-term financing markets. The analyses indicated, in part, that the economic implications of the floating NAV and liquidity fees and gates proposals depend on investors' preferences, and the attractiveness of investment alternatives.
DERA also placed additional data analyses into the comment file as part of the proposal process. For example, one of the many issues that the Commission thought through as part of the proposal is determining the appropriate size of diversification limits in money market funds. To assist the Commission and to inform the public, DERA staff developed memoranda that quantitatively evaluated the exposure and concentration money market fund portfolios have to the parent companies of guarantors and the parent companies of issuers.[3] Those memos were included in the public comment file.
Moreover, as I mentioned earlier, DERA has a strong research program designed to focus on issues of importance to the Commission. Flowing from my work on the money market fund release, I have authored a working paper entitled, The Economic Implications of Money Market Fund Capital Buffers.[4] That working paper has more recently been included in the public comment file. I’ll briefly describe its principal findings. If one considers the possible rationales for employing a capital buffer, which was discussed but ultimately not proposed by the Commission, one possible objective is to protect shareholders from losses related to defaults in concentrated positions, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy. If complete loss absorption is the objective, a substantial buffer would be required. For example, it has been suggested that a 3% buffer would accommodate all but extremely large losses. While such a capital buffer could make a money market fund better able to withstand significant credit events, it would be a costly mechanism from the perspective of the opportunity cost of capital because those contributing to the buffer would deploy valuable scarce resources that are being used elsewhere in presumably more valuable opportunities.
Moreover, a basic precept of financial economics is that rational investors demand compensation for bearing risk. Since a capital buffer is designed to absorb the risk associated with credit events, it follows that those investors contributing funds to a capital buffer will demand compensation for bearing this risk. My paper illustrates that to the extent a capital buffer could insulate money market fund shareholders from adverse credit events, it would have the additional result that money market funds would only be able to offer shareholders returns that mimic those available for government securities, thus effectively converting prime money market funds into “synthetic” Treasury funds.
Looking Ahead to Further Conversations
So now the question is why does any of this matter to you? Why should you care about a simple memorandum on economic analysis authored two years ago? Of course, I imagine that some of you might be interested in the outcome of the Commission’s consideration of money market fund reform. And so at a minimum I hope you can see how much significant, rigorous thought has already gone into that process. But beyond this single rule, I challenge you to become an active part of the Commission’s engagement with economic thought.
As I have described, the Commission and staff are exploring different ways to demonstrate publicly our thinking on various issues. We will continue to have robust and transparent analyses in rule proposals. And importantly, we will continue, as appropriate, to put additional analyses into the comment files. Thus, the most obvious way you can become part of this is through engagement in the comment process. I have said this in many settings and I will say it again – I encourage you to submit comment letters that contain robust qualitative and quantitative economic analyses of our rules.
I too often read a comment letter that engages only with the policy discussions in a rule and see a missed opportunity to respond to the entirety of the rule release. The economic analyses that are crafted as part of the Commission’s rule releases are not simple tabular accountings of costs and benefits that are after-the-fact calculations and monetizations of the effects of our rules. They are wide-ranging, sophisticated analyses that reflect months (or maybe years) of engagement among DERA, the rulewriting staff, the Office of the General Counsel, and the Commissioners. They animate and fully explain the Commission’s thinking on particular policy choices. When commenters offer a rigorous and full engagement with the economic analysis – and I don’t mean with a throw-away line about benefits or burdens – it helps to ensure that the public is fully engaged in the same, economically driven discourse that is flourishing within the walls of the SEC. And the end results of that conversation can only be positive for investors and our markets.
Again, thank you so much for having me here today.
[1] The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
[2] Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (Nov. 30, 2012), available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
[3] See The Exposure Money Market Funds have to the Issuers of Parents (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-20.pdf; Clarification on the memo dated July 10, 2013 entitled “The Exposure Money Market Funds Have to the Parents of Issuers” (July 25, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-38.pdf.; and The Exposure of Money Market Funds Have to the Parents of Guarantors (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-21.pdf.
[4] Available at http://www.sec.gov/divisions/riskfin/workingpapers/rsfi-wp2014-
SPEECH
Keynote Address at the Investment Company Institute 2014 Mutual Funds and Investment Management Conference
Craig M. Lewis, Chief Economist and Director,
Division of Economic and Risk Analysis
Orlando, FL
March 18, 2014
Encouraging Economic Discourse
Thank you for inviting me here today to deliver the keynote address at this important conference. I am particularly pleased to be sharing this honor with Norm Champ, the Director of the Division of Investment Management. As I will touch on today, my Division’s work with him and his staff exemplifies the type of detailed and in-depth economic thinking that I believe currently is – and should continue to be – a hallmark of the SEC’s approach to rulemaking. Before I go further, however, let me remind you that the remarks I make today are my own and do not necessarily reflect the views of the Commission, Commissioners, or of SEC staff.[1]
The Impact of the Guidance
Two years ago this month – in a memorandum dated March 16, 2012 to be exact – my Division and the Office of the General Counsel laid out what we believed to be best practices in performing economic analysis in support of Commission rulemaking. That memorandum, now publicly available and entitled Current Guidance on Economic Analysis in SEC Rulemaking – known as “the Guidance” for short – was, on paper at least, limited in its scope. At its base, the Guidance does just two things. First, it lays out the basic principles underlying a robust and transparent economic analysis in support of rulemaking. Second, it states the fundamental precept that economists are part of the rulemaking process from the very start, and thus involved in those crucial policy discussions that occur before words are ever committed to paper.
You can see how in one version of the world the Guidance could have remained a document with a limited purpose, one that provided useful tips on structuring an economic analysis within a rule release and got DERA economists invited to more meetings. But the Guidance of this world is much more than that. Let me be clear: The Commission has always considered the economic effects of its rules and policy choices. But over the past three years that I have been Chief Economist and the last two that I have overseen my Division’s work with the Guidance, I have come to believe that this seemingly simple document has focused and enhanced how the Commission and its staff approach economic thought and utilize the expert staff of DERA. Today I’d like to talk about the Guidance a bit, and also consider what it might mean for the public’s engagement with the Commission.
So stepping back for a moment, in case not all of you have committed the Guidance to memory, let me take a few moments to review what the document actually says. The document emerged from a particular moment in time, when the Commission was reviewing its approach to economic analysis in rulemaking, and Congress and other constituencies were asking questions about the integration of economics into the rulemaking process. During this time, with the passage of the Dodd-Frank Act, the Commission was responsible for promulgating a large number of rules covering a vast array of topics. So after months and months of work, my staff and staff in the Office of the General Counsel circulated the Guidance within the Commission.
Clocking in at 17 pages, the Guidance explains the four basic elements of a robust economic analysis. First, identify the need for the regulatory action. Second, articulate the “baseline” against which any potential economic effects can be measured. (In other words, describe what the world looks like today, in the absence of the regulatory action.) Third, explain alternative approaches to reaching the regulatory goal. And fourth, lay out the economic impacts, including the costs and benefits, of the regulatory action and its principal regulatory alternatives. The Guidance concludes with a discussion of the integration of economic analysis into the rulemaking process. To quote the Guidance, “[DERA] economists should be fully integrated members of the rulewriting team, and contribute to all elements of the rulewriting process.”
And that’s the recipe for an SEC economic analysis. Sensible and straight-forward. But just like with many recipes, there is a secret to the success of the Guidance. A secret ingredient that isn’t listed. As you may have heard, my time at the Commission is drawing to a close and with that comes certain freedoms. And so I’m going to give away that secret.
The truth is that the Guidance would never have been successful without the incredible staff at the Commission.
Of course, I must acknowledge the unwavering support for these efforts that was given by former Chairmen Schapiro and Walter, as well as by Chair White. Each of the Commissioners also has been crucial in ensuring that our rule releases have complete and even-handed economic analyses. And senior staff from all Divisions are due credit for consistently emphasizing the importance of the Guidance.
But the people who deserve most of the credit are the staff attorneys and staff economists who do the vast majority of the work to actually implement the Guidance. These were the individuals who, cloistered in windowless conference rooms, hammered out the narratives that added up into the high-quality economic analyses that the public eventually sees. I would be remiss if I did not take this opportunity to publicly express my heartfelt admiration for all of those who were and continue to be part of the success of the Guidance.
As a result of all that hard work, I believe our rules are strong, robustly supported, and transparently demonstrate the unparalleled expertise of the Commission and its staff.
But now recall what I said about the scope of the Guidance. The Guidance by its terms only applies to the development and drafting of rule releases. While certainly central, rule drafting is only one part of what the Commission does every day. Indeed, there are many other policy initiatives that are bubbling away on the proverbial stove. So if the Guidance has this seemingly limited scope, why did I talk in the beginning about its importance to the agency? To answer that question I need to speak as an economist in the language of economists. In economic theory, there exists the concept of “spillover effects.” Wikipedia tells us that these effects are “externalities of economic activity or processes that affect those who are not directly involved.” In layman’s terms, it’s a secondary effect.
Well, the Guidance has had a rather significant spillover effect. As DERA became larger and the Guidance became integrated into the rulewriting process, it became natural for DERA to similarly be included in the dozens upon dozens of other initiatives that didn’t directly involve drafting a rule. We started proposing projects in a variety of spaces and found receptive audiences across the Commission. To run through the myriad ways that DERA contributes to the mission of the Commission would take all of my time and probably the rest of the day and night, and if I had a captive audience I would be more than happy to regale you with myriad examples. But in an effort to stay within my allotted time, I’ll refrain. But I do not think that it is an overstatement to say that ‘economics’ is a common language that we speak at the Commission. I’ve heard attorneys comfortably and correctly deploy technical terms such as “externalities,” “economic rents,” and “efficient allocation of capital.” (Of course, I’ve also heard my economists engage in arcane legal discussions, so language barriers are dropping on both sides!) But nothing brings greater satisfaction than hearing someone simply say, “Just call DERA.”
Of course this means that DERA has had to up its game as well. It’s all well and good to sit in an ivory tower and talk about economic effects in the abstract. It’s another matter entirely to translate what we studied in graduate school into grounded and meaningful work that directly responds to the hard questions the Commission faces. There are a variety of ways in which we can do that. Most obviously, we can contribute robust analyses to rule proposals and adoptions. For example, in several releases we have worked very hard to describe in quantitative terms current market conditions. We have analyzed the types and levels of capital-raising activities in both the public and private markets. We have performed sophisticated and novel analyses of the credit default swap market. And when analyzing the potential effect of our rules on efficiency, competition, and capital formation, we have sought to describe, in an even-handed manner, the economic trade-offs that often come with effective regulation.
But that is not the only way that DERA has demonstrated the expertise of its staff. I oversee a vibrant culture of original research. By engaging in research on topics of interest in the Commission, my economists stay abreast of the latest techniques and approaches to economic analysis, contribute directly to the intellectual capital of the academic community regarding complex market issues, and showcase the Commission’s sophisticated understanding of the markets it regulates. The DERA website has many white papers, working papers, and links to published articles and I certainly hope you take a quick moment to take a look.
All of these analyses are public. And that’s an important theme here. Encouraging public awareness of and involvement in these economic conversations is central to DERA’s mission. One way we are seeking to ensure public engagement throughout the rulewriting process is by, when appropriate, making analyses of particular economic issues available to the public as we refine and expand our thinking regarding a particular rule. To illustrate our efforts in this regard, I will focus on DERA’s work to assist the Commission as it considers further money market fund reform.
The Example of Money Market Fund Reform
As many of you may know, the Commission has been considering the question of what, if any, further reforms to money market funds may be appropriate. As I’ll describe, this process has been marked with a high level of public engagement with relevant economic issues by DERA.
For example, before any policy choices were even proposed, DERA staff authored a memorandum intended to assist in formulating a well-considered proposal. That memo contained both a quantitative and qualitative analysis responding to certain questions regarding money market funds raised by Commissioners Aguilar, Paredes, and Gallagher. Those questions focused on three issues: (1) What were the determinants of investor behavior and its effect on MMF performance during the 2008 financial crisis; (2) What has been the effect of the 2010 money market fund reforms; and (3) How future reforms might affect the demand for investments in money market fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities, and states that sell their debt to money market funds.[2] That staff memorandum, which was made public, helped inform the subsequent proposal.
Now let’s turn to the proposal itself. The proposing release itself exemplifies the way that the Commission, rulewriters, and economists are working closely together to develop rule releases. The proposal contained a fully integrated qualitative and quantitative analysis. For example, the release contained an analysis of the economics of money market funds, including the combination of MMF features that may create an incentive for their shareholders to redeem shares in periods of financial stress. The release considered the economic consequences of a floating NAV and liquidity fees and gates as well as effects on efficiency, competition, and capital formation. And we examined the potential implications of these proposals on current investments in money market funds and on the short-term financing markets. The analyses indicated, in part, that the economic implications of the floating NAV and liquidity fees and gates proposals depend on investors' preferences, and the attractiveness of investment alternatives.
DERA also placed additional data analyses into the comment file as part of the proposal process. For example, one of the many issues that the Commission thought through as part of the proposal is determining the appropriate size of diversification limits in money market funds. To assist the Commission and to inform the public, DERA staff developed memoranda that quantitatively evaluated the exposure and concentration money market fund portfolios have to the parent companies of guarantors and the parent companies of issuers.[3] Those memos were included in the public comment file.
Moreover, as I mentioned earlier, DERA has a strong research program designed to focus on issues of importance to the Commission. Flowing from my work on the money market fund release, I have authored a working paper entitled, The Economic Implications of Money Market Fund Capital Buffers.[4] That working paper has more recently been included in the public comment file. I’ll briefly describe its principal findings. If one considers the possible rationales for employing a capital buffer, which was discussed but ultimately not proposed by the Commission, one possible objective is to protect shareholders from losses related to defaults in concentrated positions, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy. If complete loss absorption is the objective, a substantial buffer would be required. For example, it has been suggested that a 3% buffer would accommodate all but extremely large losses. While such a capital buffer could make a money market fund better able to withstand significant credit events, it would be a costly mechanism from the perspective of the opportunity cost of capital because those contributing to the buffer would deploy valuable scarce resources that are being used elsewhere in presumably more valuable opportunities.
Moreover, a basic precept of financial economics is that rational investors demand compensation for bearing risk. Since a capital buffer is designed to absorb the risk associated with credit events, it follows that those investors contributing funds to a capital buffer will demand compensation for bearing this risk. My paper illustrates that to the extent a capital buffer could insulate money market fund shareholders from adverse credit events, it would have the additional result that money market funds would only be able to offer shareholders returns that mimic those available for government securities, thus effectively converting prime money market funds into “synthetic” Treasury funds.
Looking Ahead to Further Conversations
So now the question is why does any of this matter to you? Why should you care about a simple memorandum on economic analysis authored two years ago? Of course, I imagine that some of you might be interested in the outcome of the Commission’s consideration of money market fund reform. And so at a minimum I hope you can see how much significant, rigorous thought has already gone into that process. But beyond this single rule, I challenge you to become an active part of the Commission’s engagement with economic thought.
As I have described, the Commission and staff are exploring different ways to demonstrate publicly our thinking on various issues. We will continue to have robust and transparent analyses in rule proposals. And importantly, we will continue, as appropriate, to put additional analyses into the comment files. Thus, the most obvious way you can become part of this is through engagement in the comment process. I have said this in many settings and I will say it again – I encourage you to submit comment letters that contain robust qualitative and quantitative economic analyses of our rules.
I too often read a comment letter that engages only with the policy discussions in a rule and see a missed opportunity to respond to the entirety of the rule release. The economic analyses that are crafted as part of the Commission’s rule releases are not simple tabular accountings of costs and benefits that are after-the-fact calculations and monetizations of the effects of our rules. They are wide-ranging, sophisticated analyses that reflect months (or maybe years) of engagement among DERA, the rulewriting staff, the Office of the General Counsel, and the Commissioners. They animate and fully explain the Commission’s thinking on particular policy choices. When commenters offer a rigorous and full engagement with the economic analysis – and I don’t mean with a throw-away line about benefits or burdens – it helps to ensure that the public is fully engaged in the same, economically driven discourse that is flourishing within the walls of the SEC. And the end results of that conversation can only be positive for investors and our markets.
Again, thank you so much for having me here today.
[1] The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
[2] Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (Nov. 30, 2012), available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
[3] See The Exposure Money Market Funds have to the Issuers of Parents (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-20.pdf; Clarification on the memo dated July 10, 2013 entitled “The Exposure Money Market Funds Have to the Parents of Issuers” (July 25, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-38.pdf.; and The Exposure of Money Market Funds Have to the Parents of Guarantors (July 10, 2013), available at http://www.sec.gov/comments/s7-03-13/s70313-21.pdf.
[4] Available at http://www.sec.gov/divisions/riskfin/workingpapers/rsfi-wp2014-
Wednesday, March 19, 2014
NEW YORK STATE COMMON RETIREMENT FUND "PAY TO PLAY" DEFENDANTS SETTLE FRAUD CHARGES
FROM: SECURITIES AND EXCHANGE COMMISSION
Seven Defendants Settle SEC Fraud Charges in "Pay to Play" Case Involving New York State Common Retirement Fund
On March 3, 2014, the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York, entered final judgments against seven defendants in the pending enforcement action arising from the "pay-to-play" scheme involving the New York State's Common Retirement Fund ("Common Fund"). Starting on March 19, 2009, the Commission filed securities fraud and related charges against several participants in the scheme, including Henry Morris ("Morris"), the top political advisor to former New York State Comptroller Alan Hevesi, and David Loglisci ("Loglisci"), formerly the Deputy Comptroller and the Common Fund's Chief Investment Officer. Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged seventeen defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals. The civil action had been stayed pending the outcome of the New York Attorney General's Office's parallel criminal action against some of the defendants charged by the Commission.
In addition to the judgments entered in the federal court action, administrative orders were issued by the Commission on March 10, 2014 imposing remedial sanctions against Morris, Loglisici and Julio Ramirez ("Ramirez"), a former broker who facilitated certain of the payments made to Morris. The judgments and administrative orders imposed the following relief, to which the defendants consented:
Morris, who previously pled guilty to parallel criminal charges and was sentenced to a multi-year prison term and ordered to forfeit $19 million in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating 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, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). The Commission's administrative order also bars Morris from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; (ii) participating in any offering of a penny stock; and (iii) appearing or practicing before the Commission as an attorney.
Loglisci, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. The Commission's administrative order also bars Loglisci from appearing or practicing before the Commission as an attorney.
Ramirez, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $289,875 in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. In addition, the Commission's administrative order bars Ramirez from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and (ii) participating in any offering of a penny stock, subject to a right to reapply after three years.
Nosemote LLC and Pantigo Emerging LLC, two shell companies through which payments to Morris were funneled, consented to entry of a judgment in the federal court action that, like Morris, permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.
Tuscany Enterprises LLC and W Investment Strategies LLC, two entities previously associated with defendant Barrett Wissman, against whom a consent judgment was previously entered imposing permanent injunctive relief, consented to entry of a judgment that ordered them to disgorge $3,083,500 in ill-gotten gains and pay $321,272 in prejudgment interest. The judgment also permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.
The Commission's claims against defendant Saul Meyer remain pending. The Commission acknowledges the assistance and cooperation of the New York Attorney General's Office in this matter.
Seven Defendants Settle SEC Fraud Charges in "Pay to Play" Case Involving New York State Common Retirement Fund
On March 3, 2014, the Honorable Katherine Polk Failla, United States District Judge for the Southern District of New York, entered final judgments against seven defendants in the pending enforcement action arising from the "pay-to-play" scheme involving the New York State's Common Retirement Fund ("Common Fund"). Starting on March 19, 2009, the Commission filed securities fraud and related charges against several participants in the scheme, including Henry Morris ("Morris"), the top political advisor to former New York State Comptroller Alan Hevesi, and David Loglisci ("Loglisci"), formerly the Deputy Comptroller and the Common Fund's Chief Investment Officer. Morris and Loglisci orchestrated a scheme to extract sham finder fees and other payments and benefits from investment management firms seeking to do business with the Common Fund. In all, the Commission charged seventeen defendants, including various nominee entities through which payments were funneled and certain of the investment management firms and their principals. The civil action had been stayed pending the outcome of the New York Attorney General's Office's parallel criminal action against some of the defendants charged by the Commission.
In addition to the judgments entered in the federal court action, administrative orders were issued by the Commission on March 10, 2014 imposing remedial sanctions against Morris, Loglisici and Julio Ramirez ("Ramirez"), a former broker who facilitated certain of the payments made to Morris. The judgments and administrative orders imposed the following relief, to which the defendants consented:
Morris, who previously pled guilty to parallel criminal charges and was sentenced to a multi-year prison term and ordered to forfeit $19 million in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating 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, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). The Commission's administrative order also bars Morris from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; (ii) participating in any offering of a penny stock; and (iii) appearing or practicing before the Commission as an attorney.
Loglisci, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. The Commission's administrative order also bars Loglisci from appearing or practicing before the Commission as an attorney.
Ramirez, who also pled guilty to parallel criminal charges and was sentenced to a term of conditional discharge due to his cooperation with law enforcement authorities and ordered to forfeit $289,875 in fees, consented to entry of a judgment in the federal court action that permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act. In addition, the Commission's administrative order bars Ramirez from (i) associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and (ii) participating in any offering of a penny stock, subject to a right to reapply after three years.
Nosemote LLC and Pantigo Emerging LLC, two shell companies through which payments to Morris were funneled, consented to entry of a judgment in the federal court action that, like Morris, permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.
Tuscany Enterprises LLC and W Investment Strategies LLC, two entities previously associated with defendant Barrett Wissman, against whom a consent judgment was previously entered imposing permanent injunctive relief, consented to entry of a judgment that ordered them to disgorge $3,083,500 in ill-gotten gains and pay $321,272 in prejudgment interest. The judgment also permanently enjoins them from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1) and 206(2) of the Advisers Act.
The Commission's claims against defendant Saul Meyer remain pending. The Commission acknowledges the assistance and cooperation of the New York Attorney General's Office in this matter.
Tuesday, March 18, 2014
SEC ENCOURAGES ISSUERS, UNDERWRITERS OF MUNICIPAL SECURITIES TO SELF-REPORT VIOLATIONS OF SECURITIES LAWS
FROM: SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.
“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative. Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”
Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.
Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data. The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.
“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”
The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement. For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.
The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.
“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative. Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”
Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.
Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data. The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.
“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit. “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”
The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement. For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.
Monday, March 17, 2014
EMERGENCY ASSET FREEZE ACTION FILED AGAINST MICROCAP STOCK SCALPING PROMOTER
FROM: SECURITIES AND EXCHANGE COMMISSION
SEC Files Emergency Action Against Promoter Behind Microcap Stock Scalping Scheme, Obtains Asset Freeze
The Securities and Exchange Commission yesterday filed an emergency action ex parte against John Babikian, a promoter behind a platform of affiliated microcap stock promotion websites. The Complaint alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively "APS," to commit a brand of securities fraud known as "scalping." The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West's share price and trading volume, which Babikian exploited by unloading shares of America West's stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.
According to documents filed simultaneously with the SEC's complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC's emergency request to preserve these assets by issuing an asset freeze order.
According to the Commission's complaint, America West's stock was both low-priced and thinly traded prior to Babikian's mass dissemination of the APS e-mails promoting it. America West's trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian's e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West's share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.
The court's order, among other things, freezes Babikian's assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the Commission has taken immediate action to freeze Babikian's U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.
The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers, the Financial Industry Regulatory Authority, and OTC Markets Group Inc.
The Commission's investigation of this matter is continuing.
SEC Files Emergency Action Against Promoter Behind Microcap Stock Scalping Scheme, Obtains Asset Freeze
The Securities and Exchange Commission yesterday filed an emergency action ex parte against John Babikian, a promoter behind a platform of affiliated microcap stock promotion websites. The Complaint alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively "APS," to commit a brand of securities fraud known as "scalping." The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West's share price and trading volume, which Babikian exploited by unloading shares of America West's stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.
According to documents filed simultaneously with the SEC's complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC's emergency request to preserve these assets by issuing an asset freeze order.
According to the Commission's complaint, America West's stock was both low-priced and thinly traded prior to Babikian's mass dissemination of the APS e-mails promoting it. America West's trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian's e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West's share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.
The court's order, among other things, freezes Babikian's assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the Commission has taken immediate action to freeze Babikian's U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.
The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers, the Financial Industry Regulatory Authority, and OTC Markets Group Inc.
The Commission's investigation of this matter is continuing.
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