NEW CFTC CHAIRMAN SWORN IN

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Timothy Massad Sworn In as Chairman of the U.S. Commodity Futures Trading Commission

Washington, DC — Timothy Massad was officially sworn in today, after being confirmed by the U.S. Senate on June 3, to serve as the Chairman of the U.S. Commodity Futures Trading Commission (CFTC), the federal agency that oversees the commodity futures, options and swaps industry. Mr. Massad will assume his responsibilities immediately.

Mr. Massad joined the agency after serving as the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury. In that capacity, Mr. Massad oversaw the Troubled Asset Relief Program (TARP), the principal U.S. governmental response to the 2008 financial crisis designed to help stabilize the economy and provide help to homeowners. Prior to joining Treasury, Mr. Massad served as a legal advisor to the Congressional Oversight Panel for the Troubled Asset Relief Program, under the leadership of now Sen. Elizabeth Warren. He was also a partner in the law firm Cravath, Swaine & Moore in New York.

Mr. Massad has a B.A. from Harvard College and J.D. from Harvard Law School. He and his wife, Charlotte Hart, live in Washington with their two children.

4TH INSIDER TRADING ACTION FILED BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Brings Fourth Insider Trading Action Relating to Mercer Insurance Group

On May 27, 2014, the Securities and Exchange Commission filed an action in the U.S. District Court for the Eastern District of North Carolina charging Ronald L. Drewery with insider trading in the stock of a publicly-traded insurance company shortly before the announcement of that company's acquisition.

The SEC alleges that Defendant Drewery misappropriated material nonpublic information regarding the impending acquisition of Mercer Insurance Group, Inc. ("Mercer"), an insurance company formerly traded on the NASDAQ, from a longtime friend who was then a member of Mercer's board of directors. On the basis of the information regarding the impending acquisition, and in disregard of his duty of trust and confidence owed to the board member, Drewery purchased 3,500 shares of Mercer between October 13, 2010 and November 19, 2010 at a weighted average cost of $17.95. Following the November 30, 2010 announcement of Mercer's acquisition, Mercer's share price rose sharply closing at $27.89 per share, approximately 48% over its November 30, 2010 closing share price. Drewery subsequently sold the 3,500 shares he controlled at prices between $28.05 and $28.25 per share, realizing illicit profits of at least $35,730.

The SEC's complaint alleges that Drewery violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In settling the SEC's charges, Drewery agreed to fully disgorge ill-gotten gains of $35,730, plus pay prejudgment interest of $3,646.50, as well as pay a penalty of $35,730. Drewery neither admits nor denies the allegations, and his settlement is subject to court approval. This is the third action that the SEC has brought in the U.S. District Court for the Eastern District of North Carolina, and the fourth total action brought, relating to this matter.

The SEC's investigation was conducted in its Atlanta Regional Office by Assistant Regional Director Aaron W. Lipson, and the litigation has been led by Senior Trial Counsel Paul Kim. The SEC thanks the U.S. Attorney's Office of the Eastern District of North Carolina and the Financial Industry Regulatory Authority (FINRA) for their assistance in this matter.

Enhancing Our Equity Market Structure

Enhancing Our Equity Market Structure

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Statement on 2nd Circuit Decision

ALLEGED INVENTORY OVER-STATER GETS CHARGED WITH ACCOUNTING FRAUD BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Former CFO of Dallas-Based Jewelry and Collectibles Company with Accounting Fraud

The Securities and Exchange Commission today filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles. Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold. Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data. The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores. As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance. The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars. Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE. Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE. Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings. Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 10(b), 13(a), and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2(a) thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. DGSE is charged with violating Section 17(a)(2) of the Securities Act, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder. DGSE and Benson each consented to injunctions against future violations of these provisions. DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies.

The SEC’s investigation was conducted by Chris Davis, Keith Hunter, and Joann Harris of the Fort Worth Regional Office.

FORMER ARTHROCARE CORPORATION CEO, CFO CONVICTED FOR ROLES IN $400 MILLION SECURITIES FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, June 2, 2014

Former CEO and CFO of Arthrocare Corporation Convicted for Orchestrating $400 Million Securities Fraud Scheme

A federal jury convicted the former chief executive officer and the former chief financial officer of ArthroCare Corporation, a publicly traded medical device company based in Austin, Texas, for orchestrating a fraud scheme that resulted in shareholder losses of over $400 million.

Principal Deputy Assistant Attorney General Marshall L. Miller and Special Agent in Charge Christopher Combs of the FBI’s San Antonio Field Office made the announcement.

“These corporate executives cooked the books to prop up their stock, and when the truth came out investors lost more than $400 million,” said Principal Deputy Assistant Attorney General Miller.   “Today’s convictions are the first step in holding them accountable for undermining our financial markets for their own personal gain.”

“This case demonstrates the FBI’s commitment to unraveling elaborate and complex fraud schemes leaving no financial stone unturned,” said FBI SAC Combs. “Those who abuse their position of trust to illegally enrich themselves, at the expense of shareholders and members of the investing public, will be held accountable for their actions.”

After a four-week trial, a jury in the Western District of Texas found the former CEO, Michael Baker, 55, guilty of conspiracy to commit wire and securities fraud, wire fraud, securities fraud and false statements.   Michael Gluk, 56, the former CFO, was found guilty of conspiracy to commit wire and securities fraud, wire fraud and securities fraud.   Baker and Gluk were charged in a superseding indictment returned on April 1, 2014.

Evidence at trial demonstrated that Baker and Gluk, along with their co-conspirators, masterminded and executed a scheme to artificially inflate sales and revenue through a series of end-of-quarter transactions involving several of ArthroCare’s distributors beginning in 2005 and continuing until 2009.   Co-conspirators John Raffle and David Applegate, both former senior vice presidents of ArthroCare, pleaded guilty to multiple felonies in 2013 in connection with their participation in the scheme.

Baker, Gluk and other ArthroCare employees determined the type and amount of product to be shipped to distributors based on ArthroCare’s need to meet Wall Street analyst forecasts, rather than distributors’ actual orders.   Baker, Gluk and others then caused ArthroCare to “park” millions of dollars’ worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter.   ArthroCare then reported these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

Evidence at trial further showed that ArthroCare’s distributors agreed to accept shipment of millions of dollars of products in exchange for special conditions, including substantial, upfront cash commissions, extended payment terms and the ability to return products, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.

Baker, Gluk and others used DiscoCare, a privately owned Delaware corporation, as one of the distributors to cover shortfalls in ArthroCare’s revenue.   Evidence at trial showed that, at Baker and Gluk’s direction, ArthroCare shipped product to DiscoCare that far exceeded DiscoCare’s needs.

Baker, Gluk and others lied to investors and analysts about ArthroCare's relationships with its distributors, including DiscoCare.   Baker and Gluk caused ArthroCare to acquire DiscoCare specifically to conceal from the investing public the nature and financial significance of ArthroCare’s relationship with DiscoCare.

Evidence at trial also established that Baker lied when he was deposed by the U.S. Securities and Exchange Commission in November 2009 about the DiscoCare relationship.

Between December 2005 and February 2009, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.   On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.   The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Following today’s verdict, U.S. District Judge Sam Sparks remanded Baker into custody.    A sentencing date for Baker and Gluk has not yet been scheduled.

This case was investigated by the FBI’s San Antonio Field Office. The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William S.W. Chang of the Criminal Division’s Fraud Section.   The Department appreciates the substantial assistance of the U.S. Securities and Exchange Commission.