Statement at Open Meeting Regarding Money Market Fund Reform

Statement at Open Meeting Regarding Money Market Fund Reform

Remarks to the Practicing Law Institute, Hedge Fund Management Seminar 2014

Remarks to the Practising Law Institute, Hedge Fund Management Seminar 2014

SEC CHARGES OF ACCOUNTING AND DISCLOSURE FRAUD AGAINST DELAWARE BANK HOLDING COMPANY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

September 11, 2014

The Securities and Exchange Commission announced accounting and disclosure fraud charges against a Delaware-based bank holding company for failing to report the true volume of its loans at least 90 days past due as they substantially increased in number during the financial crisis.

An SEC investigation found that as the real estate market declined in 2009 and 2010 and its construction loans began to mature without repayment or completion of the underlying project, Wilmington Trust Company did not renew, extend, or take other appropriate action for 90 days or more on a material amount of its matured loans.  Instead of fully and accurately disclosing the amount of these accruing loans as required by accounting guidance, Wilmington Trust improperly excluded the matured loans from its public financial reporting.

Wilmington Trust, which was acquired by M&T Bank in May 2011, has agreed to pay $18.5 million in disgorgement and prejudgment interest to settle the SEC’s charges.

“Improper application of accounting principles by Wilmington Trust had the effect of misleading investors about a key credit quality metric during a time of significant upheaval and financial distress for the bank,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Investors must know when banking institutions are unable to recover on material amounts of outstanding loans, which means those institutions must carefully adhere to relevant accounting rules.”

Andrew M. Calamari, Director of the SEC’s New York Regional Office, added, “By failing to fully disclose the actual volume of accruing loans past due 90 days or more, Wilmington Trust prevented investors from learning the full scope of the troubles in its commercial real estate loan portfolio.”

According to the SEC’s order instituting a settled administrative proceeding, Wilmington Trust omitted from its disclosures in the third and fourth quarters of 2009 approximately $338.9 million and $330.2 million, respectively, in matured loans 90 days or more past due.  Instead, it disclosed just $38.7 million in such loans for the third quarter and only $30.6 million in its annual report following the fourth quarter.  Wilmington Trust also materially misreported this category of loans in the first and second quarters of 2010.  Furthermore, Wilmington Trust failed to accurately disclose during the second half of 2009 the amount of non-accruing loans in its portfolio, and materially understated its loan loss provision and allowance for loan losses during this same period.

Wilmington Trust consented to the entry of the order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  In addition to the monetary sanctions, Wilmington Trust agreed to cease and desist from committing or causing any violations and any future violations of these provisions.

The SEC’s investigation, which is continuing, has been conducted by Margaret Spillane, James Addison, and Michael Osnato of the New York Regional Office.  The SEC appreciates the assistance of the U. S. Attorney’s Office for the District of Delaware, Federal Bureau of Investigation, Federal Reserve, and Office of the Special Inspector General for the Troubled Asset Relief Program.

WHAT WE HAVE HERE IS A FAILURE TO SUPERVISE*

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Zulutrade Inc. to Pay $150,000 Penalty and Disgorge Profits of $80,000 to Settle Charges of Failure to Supervise Activities Relating to Its Business as a CFTC Registrant

Zulutrade is a CFTC-registered Introducing Broker located in Piraeus, Greece

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Zulutrade, Inc., a CFTC-registered Introducing Broker located in Piraeus, Greece, for failure to diligently supervise activities relating to its business as a CFTC registrant. Specifically, the CFTC’s Order found that for at least a three-year period from October 2010 to October 2013, Zulutrade failed to follow its procedures for screening for accountholders from the U.S. Department of the Treasury’s Office of Foreign Assets Control’s (OFAC) targeted countries. The Order requires Zulutrade to pay a $150,000 civil monetary penalty and disgorge $80,000 in commissions and fees it earned from accounts that were related to the supervisory failure.

OFAC administers and enforces economic and trade sanctions against targeted foreign countries based on U.S. foreign policy and national security goals. U.S. persons and entities are generally prohibited from doing business with persons and entities from OFAC targeted countries. During the relevant period, Zulutrade had a procedure to screen for potential accountholders from OFAC targeted countries. That procedure provided that Zulutrade could delegate implementation of OFAC screening to third party service providers or agents provided Zulutrade had a written agreement with the service provider outlining the third party’s responsibilities, and that Zulutrade would actively monitor the delegation to assure that the procedures are being conducted in an effective manner.

However, Zulutrade failed to ensure that it had written agreements with all such entities. Consequently, Zulutrade opened approximately 400 accounts for accountholders from OFAC targeted countries (primarily Iran, Sudan, and Syria). All of the accounts opened for accountholders from targeted countries were from service providers with which Zulutrade did not have written agreements.

CFTC Division of Enforcement staff members responsible for this matter are Jennifer Diamond, David Terrell, Joy McCormack, Elizabeth M. Streit, Scott R. Williamson, and Rosemary Hollinger. The Division worked closely with staff from OFAC in this matter and wishes to thank OFAC for its assistance. OFAC has concluded a settlement with Zulutrade arising out of the same pattern of conduct.
*Aluding to the quote "What we have here is a failure to communicate," from the movie "Cool Hand Luke."

CFTC REPORTS OTC DERIVATIVES REGULATORS ISSUES REPORT TO G-20

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

OTC Derivatives Regulators Issue Report to the G20

Washington, DC — The Over-the-Counter (OTC) Derivatives Regulators Group (ODRG), which is made up of authorities with responsibility for the regulation of OTC derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland, and the United States, issued a report today that provides an update to the G20 on further progress in resolving OTC derivatives cross-border implementation issues and identifies a cross-border issue that may call for legislative change.

The ODRG provided an update regarding two areas in which it is working to develop approaches to address cross-border issues: (i) potential gaps and duplications in the treatment of branches and affiliates; and (ii) treatment of organized trading platforms and implementation of the G20 trading commitment.

The report also addressed four areas in which it was working to implement understandings reached previously: (i) equivalence and substituted compliance; (ii) clearing determinations; (iii) risk mitigation techniques for non-centrally cleared derivatives transactions (margin); and (iv) data in trade repositories and barriers to reporting to trade repositories.

The ODRG anticipates that it will submit its next report in preparation for the G20 Leaders Summit in November 2014.

MORTGAGE-BACKED SECURITIES DEALER SENTENCED TO PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Connecticut-Based Broker-Dealer Representative Sentenced to Two Years in Prison for Defrauding Investors in Mortgage-Backed Securities

SEC's Enforcement Division Institutes Proceedings to Determine Whether to Bar Him From Securities Industry

The Securities and Exchange Commission announced today that Jesse Litvak, a former managing director of Jefferies & Co., Inc. (Jefferies), a New York-based broker-dealer, was sentenced to 24 months in prison followed by three years of supervised release and a fine of $1,750,000 following his conviction on 10 counts of securities fraud, one count of Troubled Asset Relief Program (TARP) fraud, and four counts of making false statements. The judgment of conviction was entered against Litvak on July 25, 2014. Based on that judgment, the SEC's Enforcement Division instituted administrative proceedings against Litvak on September 2, 2014 to determine what, if any, remedial action is appropriate in the public interest against Litvak. Such action could include a bar from the securities industry.

The SEC had also charged Litvak separately in a civil action with making misrepresentations and engaging in misleading conduct while he sold mortgage-backed securities (MBS) in the wake of the financial crisis. The Commission's civil action against Litvak remains pending. In its civil complaint filed in District Court for the District of Connecticut on January 28, 2013, the SEC alleged that Litvak, a senior trader on Jefferies' MBS Desk who worked at Jefferies' office in Stamford, Connecticut, bought and sold MBS from and to his customers. According to the SEC's civil complaint, on numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, those customers about the price at which Jefferies had purchased the MBS before selling it to another customer and the amount of his firm's compensation for arranging the trades. The SEC alleged that, on some occasions, Litvak also misled his customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies' inventory. According to the SEC's civil complaint, Litvak also misled customers about how much money they were paying in compensation to Jefferies. The customers included investment funds established by the United States government in the wake of the financial crisis to help support the market for MBS as well as other investment funds, including hedge funds.

The SEC's complaint charged Litvak with violating the antifraud provisions of the federal securities laws, particularly Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The SEC's action has been stayed pending the outcome of the criminal proceedings.