MORGAN STANLEY SMITH BARNEY LLC SETTLES CFTC CHARGES RELATED TO SEGREGATED AND SECURED FUNDS ALLEGED RULE VIOLATIONS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Orders Morgan Stanley Smith Barney LLC to Pay $490,000 to Settle Charges Relating to Rules and Regulations Pertaining to Segregated and Secured Amount Funds

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Morgan Stanley Smith Barney LLC (MSSB), a registered Futures Commission Merchant (FCM), for violating CFTC rules governing secured funds of foreign futures and option customers, commingling customer and firm funds, failing to prepare accurate daily computations of its segregated and secured funds, failing to properly title account statements for four customer segregated accounts, and failing to diligently supervise its employees handling of matters related to its business as a CFTC registrant. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires MSSB to pay a $490,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act and CFTC Regulations, as charged.

Specifically, the CFTC’s Order finds that on April 8, 2013, MSSB erroneously transferred approximately $16 million from a customer secured funds bank account resulting in a deficiency in MSSB’s secured funds of approximately $9.27 million. MSSB discovered the error the next day and cured the deficiency, the Order finds. After its secured deficiency in April 2013, MSSB independently engaged KPMG LLP to review its policies and procedures with respect to segregated and secured accounts. KPMG subsequently issued a report recommending changes to MSSB’s policies and procedures, which MSSB has substantially implemented, according to the Order.

The CFTC’s Order also finds that for approximately a six-month period in 2012, MSSB commingled customer segregated and firm funds in a customer segregated bank account.

In addition, for approximately an eight-month period in 2012, MSSB failed to prepare accurate daily computations of its segregated and secured funds, according to the Order. None of the errors caused MSSB to fall below its required segregated or secured funds; however, MSSB was required to refile 120 daily statements as a result of the errors, the Order finds.

Finally, the CFTC’s Order finds that during several months in 2012, account statements for four MSSB segregated accounts were improperly titled as customer secured accounts.

CFTC Division of Enforcement staff responsible for this matter are Allison Passman, David Terrell, Joseph J. Patrick, Ava Gould, Scott R. Williamson, and Rosemary Hollinger. The Division thanks the Commission’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.

DEFENDANTS ORDERED TO PAY $2.2 MILLION FOR INVOLVEMENT IN FOREIGN CURRENCY PONZI SCHEME

FROM:  COMMODITY FUTURES TRADING COMMISSION 
An Ohio Federal Court Rules against Defendants in CFTC Fraud Action and Orders Patrick Cole and Global Strategic Marketing, Inc. to Pay over $2.2 Million in Sanctions in Connection with Foreign Currency Ponzi Scheme

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that Judge David D. Dowd Jr. of the U.S. District Court for the Northern District of Ohio granted summary judgment and issued a Memorandum Opinion, a Judgment Entry, and a permanent injunction Order (collectively Order) against Defendants Patrick Cole of Ontario, Canada, and his company, Global Strategic Marketing, Inc. (GSM) in a CFTC enforcement action and finds that the Defendants committed fraud in connection with a multi-million dollar off-exchange foreign currency (forex) Ponzi scheme (see CFTC Release 5921-10, October 7, 2010).

The court’s Order, issued February 26, 2014, imposes disgorgement of $1,146,399 and also requires Cole and GSM to pay civil monetary penalties of $1,146,399. The Order further imposes permanent trading and registration bans on Cole and GSM, and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.

Specifically, the court’s Order finds that in marketing a fraudulent forex investment program offered by another Defendant, Complete Developments, LLC (CDL), GSM recklessly made repeated false statements including claims about low risk of loss; guaranteed return of principal; high rates of return on investment; and purported experience of CDL’s forex trading team. The Order further finds that GSM made the false statements based on information from CDL principal, Defendant Kevin Harris, and that GSM did not independently verify the accuracy of that information. The Order also finds that GSM made false statements about its own conduct, including telling potential investors that GSM had done its “homework” regarding CDL, when in fact GSM had not verified the accuracy of its representations to potential investors.

The Order finds that GSM’s misrepresentations to potential investors were false, misleading, and material and that GSM’s conduct, including not conducting adequate due diligence about GSM and ignoring investor complaints, establishes that GSM acted with reckless disregard as to whether its statements to potential investors were true. The Order also finds that Cole is liable for GSM’s violations because he controlled GSM and “had actual knowledge of all of GSM’s activities at all levels with respect to CDL, and was the decision-maker regarding GSM’s activities upon which the primary violation of the Act is based.”

In May 2013, the court entered a Judgment requiring Defendants CDL, its principals and controlling persons Kevin Harris, Keelan Harris, and Karen Starr, and Defendant Investment International Inc., to pay over $23 million in civil monetary penalties and restitution in connection with this fraudulent forex Ponzi scheme

SUMMARY JUDGEMENT OBTAINED IN MARKET MANIPULATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Summary Judgment Against Defendant Jonathan Curshen in Market Manipulation Case

The Securities and Exchange Commission announced that on March 21, 2014, the Honorable Paul G. Gardephe, United States District Court Judge for the Southern District of New York, granted the Commission's motion for summary judgment against defendant Jonathan Curshen, permanently enjoining Curshen from future violations of Sections 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The Court also: (i) held Curshen jointly and severally liable with Defendant Bruce Grossman for $76,000 in disgorgement, plus $18,599.86 in prejudgment interest; (ii) ordered Curshen to pay a $65,000 civil penalty; and (iii) permanently barred Curshen from participating in an offering of penny stock.

On November 13, 2012, the Court entered a final judgment by consent against Defendant Bruce Grossman. The final judgment permanently enjoined Grossman from future violations of Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act. and Rule 10b-5 thereunder, and ordered Grossman jointly and severally liable with Curshen for disgorgement of $76,000, which liability was deemed fully satisfied by Grossman's criminal forfeiture order in United States v. Grossman, 09-cr-136 (PGG) (SDNY). The final judgment also barred Grossman from participating in an offering of penny stock.

On September 10, 2008, the SEC filed its complaint against Bruce Grossman and Jonathan Curshen (collectively, the "Defendants") alleging that from at least June 2008, the Defendants engaged in a fraudulent broker bribery scheme designed to manipulate the market for the common stock of Industrial Biotechnology Corp. The complaint alleges that the Defendants engaged in an undisclosed kickback arrangement with an individual who claimed to represent a group of registered representatives with trading discretion over the accounts of wealthy customers.

For further information, please see Litigation Release Number 20712 (September 11, 2008) [SEC Charges Two Stock Promoters with Market Manipulation] and Litigation Release Number 22532 (November 16, 2012) [Court Enters Final Judgment by Consent against SEC Defendant Bruce Grossman]

Keynote Address at the 2014 Angel Capital Association Summit

Keynote Address at the 2014 Angel Capital Association Summit

CFTC FILES CHARGES FOR OPERATING PONZI SCHEME AGAINST TWO SOUTH CAROLINA RESIDENTS

FROM:  COMMODITY FUTURES TRADING COMMISSION 
CFTC Charges South Carolina Residents Robert S. and Amy L. Leben with Commodity Pool Fraud for the Operation of a Multi-Million Dollar Ponzi Scheme

Federal Court Issues Emergency Order Freezing Defendants’ Assets and Protecting Books and Records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced today that, on March 14, 2014, Judge Terry L. Wooten of the U.S. District Court for the District of South Carolina issued an emergency Order freezing assets under the control of Robert S. Leben and Amy L. Leben (Lebens) of Columbia, South Carolina, in connection with a commodity pool called Structured Finance Group Corporation (SFG).  The Order also prohibits the Lebens from destroying books and records and allows the CFTC immediate access to those records.

This court’s emergency Order arises out of a CFTC enforcement action filed under seal on March 12, 2014, charging the Lebens with fraudulently soliciting and/or accepting at least $3.2 million from pool participants in connection with their operation of the SFG commodity pool from August 2008 to the present.  The CFTC Complaint also charges the Lebens with misappropriating pool participant funds and failing to register with the CFTC as Commodity Pool Operators in connection with their operation of SFG.  In addition, the complaint charges Amy Leben with improper operation of the pool.

The Lebens allegedly misappropriated at least $1.77 million for their personal use

According to the Complaint, the Lebens misappropriated at least $1.77 million of pool participant funds for their personal use, including to purchase their residence and a swimming pool, among other things.  The Complaint also charges Robert Leben with fraudulently guaranteeing pool participants’ principal investment against risk of loss, guaranteeing annual returns of 14 percent, and bolstering these guarantees by issuing written false statements to pool participants.  In addition, to perpetuate their fraud, the Lebens operated SFG as a Ponzi scheme through which they used pool participant funds to pay other pool participants a total of approximately $1 million as purported profits, according to the Complaint.

In its continuing litigation, the CFTC seeks a permanent injunction from future violations of federal commodities laws, permanent registration and trading bans, full restitution to defrauded pool participants, disgorgement of any ill-gotten gains, and civil monetary penalties.

The CFTC appreciates the cooperation of the South Carolina Attorney General’s Office, the U.S. Marshals Service, and the Office of the U.S. Attorney for the District of South Carolina in this matter.

CFTC Division of Enforcement staff members responsible for this case are Amanda Harding, Elizabeth Davis, Michael Loconte, Erica Bodin, Richard Foelber, and Rick Glaser.

SEC CHAIR WHITE'S OPENING STATEMENT AT ROUNDTABLE MEETING ON CYBERSECURITY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
PUBLIC STATEMENT
 Opening Statement at SEC Roundtable on Cybersecurity
 SEC Chair Mary Jo White
March 26, 2014

Good morning.  Welcome to today’s roundtable on cybersecurity.

Cybersecurity threats come from many sources: criminal and hired hackers, terrorists, state-sponsored intruders, and even misguided computer experts to see what they are able to penetrate.

Cyber threats also pose non-discriminating risks across our economy to all of our critical infrastructures, our financial markets, banks, intellectual property, and, as recent events have emphasized, the private data of the American consumer.

This is a global threat.  Cyber threats are of extraordinary and long-term seriousness.  They are first on the Division of Intelligence’s list of global threats, even surpassing terrorism. And Jim Comey, director of the FBI, has testified that resources devoted to cyber-based threats are expected “to eclipse” resources devoted to terrorism.[1]

What emerges from this arresting view of the cybersecurity landscape is that the public and private sectors must be riveted, in lockstep, in addressing these threats.

The President’s 2013 Cybersecurity Executive Order and the Cybersecurity Framework issued in 2014 by the National Institute of Standards and Technology are reflective of the compelling need for stronger partnerships between the government and the private sector.

The SEC’s formal jurisdiction over cybersecurity is directly focused on the integrity of our market systems, customer data protection, and disclosure of material information.  But it is incumbent on every government agency to be informed on the full range of cybersecurity risks and actively engage to combat those risks in our respective spheres of responsibility.

This roundtable is one aspect of the SEC’s efforts to better inform ourselves, the marketplace, our fellow agencies, and the private sector as to what the risks are and how best to combat them.

As you know, we at the SEC have been focused on cybersecurity-related issues for some time.  In connection with public company disclosures, in October 2011, our  Division of Corporation Finance issued guidance on existing disclosure obligations related to cybersecurity risks and incidents to assist public companies in framing disclosures of cybersecurity issues.  That guidance makes clear that material information regarding cybersecurity risks and cyber incidents is required to be disclosed.

Since we issued that guidance, our staff has continued to study the important and challenging issues that cybersecurity presents to public companies, market participants, and investors, including the intersection of our investor-focused disclosure requirements and the types of information those with national security responsibility need in order to better protect our critical infrastructure.  I am looking forward to hearing the views on this.

Cybersecurity for SROs and large alternative trading systems also is a very important area of focus for our staff.  Part of this focus involves the Commission’s proposed rule on Regulation Systems, Compliance and Integrity, which would require an entity covered by the rule to test its automated systems for vulnerabilities, test its business continuity and disaster recovery plans, notify the Commission of cyber intrusions, and recover its clearing and trading operations within specified time frames.  I expect the Commission to move ahead with Regulation SCI this year.

We also have focused on cybersecurity risk issues for registered investment advisers, broker-dealers, and funds, including, for example, data protection and identity theft vulnerabilities.

In this area, the Commission last year adopted Regulation S-ID, which requires certain regulated financial institutions and creditors to adopt and implement identity theft programs.[2]  Regulation S-ID builds upon the SEC’s existing rules for protecting customer data, in particular Regulation S-P.[3]

I want to thank all of our panelists for participating today and sharing their views on these critical issues.  There is no better way to proceed than by assembling the right people in the same room to discuss and share information, points of view, and best practices.

Each panel consists of a very impressive group of professionals who bring a great deal of expertise and a range of relevant perspectives.

In addition to our panelists, we are joined today by many others who are here in person or watching online. And, of course, we welcome your views as well.  We have set up a comment file on our website for the public to submit views on cybersecurity issues or respond to the questions addressed and the views expressed by our panelists. And I especially look forward to hearing the public’s ideas and input.  Your views are important to us. We and the others here today will benefit immensely from hearing them as we study these issues.

Thank you and enjoy the roundtable.


[1] Homeland Threats and Agency Responses, The Honorable James B. Comey, Jr., Statement of the Federal Bureau of Investigation Before the Committee on Homeland Security and Governmental Affairs, United States Senate (November 14, 2013).

[2] See Identity Theft Red Flags Rules, Release No. 34-69359 (April 10, 2013), available at http://www.sec.gov/rules/final/2013/34-69359.pdf.

[3] See Final Rule: Privacy of Consumer Financial Information (Regulation S-P) (November 13, 2000), available at http://www.sec.gov/rules/final/34-42974.htm