COURT ORDER MAN AND COMPANY TO PAY $2.2 MILLION FOR COMMODITY POOL FRAUD

FROM:   COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders Boston Resident John B. Wilson and His Company, JBW Capital LLC, to Pay a Civil Penalty of More than $2.8 Million for Commodity Pool Fraud

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that the Honorable Richard G. Stearns of the U.S. District Court for the District of Massachusetts entered a Final Judgment against Defendants John B. Wilson and his company, JBW Capital LLC (JBW) (collectively, the Defendants), both of Boston, Massachusetts, for fraud and registration violations of the Commodity Exchange Act (CEA). The court’s Final Judgment orders the Defendants, jointly and severally, to pay a $2.86 million civil penalty; it permanently enjoins the Defendants from further violations of the CEA, as charged; and it imposes permanent trading and registration bans on the Defendants.

The court’s action stems from a CFTC Complaint filed on September 28, 2012, that charged Defendants with violating the anti-fraud provisions of the CEA in connection with a commodity pool by falsely representing to investors on multiple occasions the pool’s Net Asset Value (NAV). The Complaint also charged Defendants with failing to register with the CFTC as Commodity Pool Operators (CPOs) (see CFTC Complaint and Press Release 6372-12).

On May 16, 2014, the court granted Summary Judgment to the CFTC and found that Defendants had defrauded and deceived their pool participants by misrepresenting on multiple occasions the NAV of the pool. For example, in September 2008, the Defendants falsely represented the pool’s NAV to be $2,475,941, when the actual NAV was $1,149,628, according to the court’s findings. The court also found that Defendants had illegally acted as unregistered CPOs.

The CFTC acknowledges the assistance of the Massachusetts Securities Division in this matter.

CFTC staff members responsible for this matter include W. Derek Shakabpa, Judith M. Slowly, David W. Oakland, Patryk Chudy, David Acevedo, Lenel Hickson, Jr., and Manal M. Sultan.

SEC ANNOUNCES INSIDER TRADING CHARGES AGAINST NEW JERSEY MAN IN MONEY IN A SHOE-BOX CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

10/24/2014 01:35 PM EDT

The Securities and Exchange Commission today announced insider trading charges against a New Jersey man who generated nearly $700,000 in illicit profits trading in the securities of two pharmaceutical companies that were about to be acquired.  The SEC charged his source of nonpublic information earlier this month.

The SEC alleges that David Post of Livingston, N.J., was tipped with confidential details about the impending deals by his former business school classmate who was tasked with evaluating potential acquisitions in his financial analyst job at a major pharmaceutical company.  Post and his friend, Zachary Zwerko, used prepaid “burner” cell phones to exchange coded text messages in advance of Post’s trading.  They also used a dummy e-mail account they could both access to draft an e-mail message in code and leave it in the draft folder for the other to read and then delete.  In exchange for the illegal tips, Post paid Zwerko $7,000 at a Halloween party following his profitable trading in 2012, and gave him $50,000 in a shoebox when Zwerko visited his home after additional insider trading occurred earlier this year.

The U.S. Attorney’s Office for the Southern District of New York announced parallel insider trading cases against Post today and against Zwerko earlier this month.

“Post and Zwerko tried to keep law enforcement authorities in the dark by using prepaid cell phones and a dummy e-mail account to communicate inside information, and Post doled out the kickbacks inside his own home,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “But in the end, the SEC staff’s investigative expertise helped in bringing yet another audacious insider trading scheme to light.”

According to the SEC’s amended complaint filed in U.S. District Court for the Southern District of New York, Post traded on the basis of confidential details about two acquisition targets of the pharmaceutical company where Zwerko then worked.  The insider trading first occurred in 2012 when Zwerko learned his employer was among several other pharmaceutical companies in a competitive bidding process for Ardea Biosciences Inc.  In the several weeks leading up to Ardea’s public announcement, Post received regular updates from Zwerko about the status of confidential negotiations and purchased $227,000 worth of Ardea securities – the most he had ever invested in a single company.  Post had never before purchased Ardea securities.  After Ardea publicly announced that it had accepted an acquisition bid and its stock price rose by 51 percent, Post sold all of his shares and reaped profits of approximately $105,000.

The SEC further alleges that Zwerko tipped Post with confidential details about his employer’s nonpublic negotiations to acquire Idenix Pharmaceuticals Inc. earlier this year.  Although not directly involved in the deal, Zwerko accessed confidential files in the company’s database during the negotiations and gleaned additional nonpublic information in his communications with others at the company.  Post, who had never before purchased Idenix securities, made purchases totaling $219,000 from May 21 to June 6.  After a public announcement was made on June 9, Post sold his Idenix securities for a profit of approximately $579,000.

The SEC’s amended complaint charges Zwerko and Post with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The complaint seeks permanent injunctive relief, disgorgement with prejudgment interest on a joint and several liability basis, and financial penalties.

The SEC’s investigation, which is continuing, has been conducted by Dominick D. Barbieri, Neil Hendelman, and Charles D. Riely.  The SEC’s litigation will be led by Mr. Barbieri.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

SEC CHARGES HEDGE FUND MANAGER WITH INSIDER TRADING USING MATERIAL, NONPUBLIC INFORMATION IN ADVANCE OF NEWS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23118 / October 24, 2014

Securities and Exchange Commission v. Stephen E. Slawson, Civil Action No. Number1:14-cv-3421

SEC Charges New Jersey-Based Hedge Fund Manager with Insider Trading in Carter's Stock

The Securities and Exchange Commission today filed insider trading charges against a New Jersey-based hedge fund manager who allegedly used material, nonpublic information to trade in advance of market-moving news concerning Carter's Inc.

Stephen Slawson, who lives in Lebanon, N.J., and was co-founder and former manager to a hedge fund named TCMP3 Partners L.P., becomes the eighth individual that the SEC has charged in connection with the agency's investigation into insider trading and other misconduct involving the securities of the Atlanta-based marketer of children's clothing.

According to the SEC's complaint filed in federal court in the Northern District of Georgia, Slawson conducted insider trading on at least eight occasions in the hedge fund's accounts or personal accounts belonging to him or other family members. Slawson was initially tipped with nonpublic information about Carter's by a hedge fund investment consultant named Dennis Rosenberg, who received the inside information from a Carter's executive. Slawson later communicated directly with that executive: Eric Martin, who at the time was vice president and director of investor relations.

The SEC alleges that based on the illegal tips that Slawson received from Rosenberg and Martin, his insider trading in Carter's stock generated more than $500,000 in profits or avoided losses.

The SEC's complaint alleges that Slawson violated the antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a permanent injunction, disgorgement with prejudgment interest and civil monetary penalties pursuant to Section 21A of the Exchange Act.

Previously, the U.S. Attorney's Office for the Northern District of Georgia announced that a grand jury had indicted Slawson and charged him with one count of conspiracy to commit securities fraud and wire fraud, 25 counts of securities fraud, and nine counts of wire fraud, based on substantially similar conduct as alleged in the SEC's complaint. He is awaiting a trial in the criminal case.

The SEC, whose investigation continues into insider trading of Carter's stock, appreciates the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Financial Industry Regulatory Authority.

SEC ANNOUNCES FISCAL YEAR 2014 "A STRONG YEAR FOR ENFORCEMENT"

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that in fiscal year 2014, new investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry.  

In the fiscal year that ended in September, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures.  In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties.  In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.

The agency’s enforcement actions also included a number of first-ever cases, including actions  involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

 “Aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets,” said SEC Chair Mary Jo White.  “The innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions that resulted in stiff monetary sanctions.”

“Time and again this past year, the Division’s staff applied its tremendous energy and talent, uncovered misconduct, and held accountable those who were responsible for wrongdoing,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “I am proud of our excellent record of success and look forward to another year filled with high-impact enforcement actions.”

In addition to the first-ever cases, Chair White noted that the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative was an important effort that began in the last fiscal year.  The SEC reached a settlement with a California school district for charges of misleading bond investors, making it the first settlement under the initiative targeting municipal disclosure. 

Director Ceresney added that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment adviser and municipal securities cases, microcap fraud, insider trading, and cases against gatekeepers.

SEC Enforcement in Fiscal Year 2014

Combatting Financial Fraud and Enhancing Issuer Disclosure

Charged more than 135 parties with violations relating to reporting and disclosure.  Cases include actions against Bank of America Corporation;Fifth Third Bancorp and its former CFO; snack food maker Diamond Foods Inc. and its former CEO and CFO; five executives and finance professionals from collapsed law firm Dewey & LeBoeuf LLP; animal feed company AgFeed Industries Inc. and eight executives; and CVS Caremark Corp. and its retail controller.

Continued to devote resources to combat market manipulation and microcap fraud, including by filing multiple actions against penny stock promoters and others who created a false appearance of genuine interest in various stocks, and by using trading suspensions to neutralize threats to investors after questions arise concerning the adequacy or accuracy of an issuer’s disclosures.  The SEC also suspended trading in hundreds of dormant shell companies that were ripe for abuse in the over-the-counter market.

Filed several actions to halt international investment frauds, including those that spread through social media and targeted, among others, immigrant communities.  These cases include actions against 11 operators and promoters in a scheme known as CKB and CKB168, plus related entities; against World Capital Market Inc., WCM777 Inc., and their founder; and against eight operators and promoters of TelexFree, Inc. and related entities.  The Enforcement Division will continue to root out pyramid and Ponzi schemes that prey on vulnerable investors.

Brought coordinated charges against 34 individuals and companies for violating laws requiring them to promptly report information about their holdings and transactions in company stock, under a new initiative using quantitative analytics to identify especially high rates of filing deficiencies.

Ensuring Exchanges, Traders and Other Market Participants Operate Fairly

Brought first-ever actions under a rule requiring firms to establish adequate risk controls before providing customers with market access.  One action was resolved against Knight Capital Americas LLC, and another is continuing against Wedbush Securities Inc. and two of its executives. 

Obtained the largest penalty to date against an alternative trading system, Lavaflow Inc.

Charged dark pool operator Liquidnet Inc. with improperly using subscribers’ confidential trading information in marketing its services. Also charged the co-owner of brokerage firm Visionary Trading LLC with manipulative trading, and charged the owner, two firms, and four other individuals with registration violations.

Imposed the largest penalty ever for net capital rule violations, in a case against high frequency trading firm Latour Trading LLC and a former senior executive.

Charged four officials from clearing firm Penson Financial Services, including its CEO and CCO, relating to violations of Regulation SHO arising from its securities lending practices.

Filed significant enforcement actions against the New York Stock Exchange and brokerage subsidiaries for their failure to comply with exchange rules; brokerage subsidiaries and former employees of ConvergEx Group, including its former CEO, for deceiving brokerage customers with hidden fees; and Wells Fargo Advisors LLC, in the Commission’s first case against a broker-dealer for failing to protect a customer’s material nonpublic information.

Uncovering Misconduct by Investment Advisers and Investment Companies

Brought first-ever action under investment adviser “pay-to-play” rule, charging private equity firm TL Ventures Inc. with providing certain services within two years after an associate made contributions to two political candidates.  Also charged this firm and an affiliated adviser with improperly acting as unregistered investment advisers.

Filed first action arising from a focus on fees and expenses charged by private equity firms.  The Commission instituted an action against private equity firm Clean Energy Capital LLC and its president, alleging fraud in the allocation of expenses to the firm’s funds.

Charged three investment advisory firms with failures to maintain adequate controls on the custody of customer accounts.  The misconduct at Further Lane Asset Management, GW & Wade, and Knelman Asset Management Group involved failures to maintain client assets with a qualified custodian or to engage an independent public accountant to conduct surprise exams as required by the custody rule.  Also charged the CEO of Further Lane and the CEO and chief compliance officer of Knelman for custody rule and other violations.

Pursued other types of wrongdoing by asset managers, and leveraged proactive risk identification initiatives such as the Aberrational Performance Inquiry that uses proprietary analytics to identify hedge funds with suspicious returns.

Increasing Activity in Whistleblower Program

The program awarded nine whistleblowers with total awards of approximately $35 million in FY 2014.

Brought the first charges ever under new authority to bring anti-retaliation enforcement actions.  The SEC charged hedge fund advisory firmParadigm Capital Management with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the Commission, and charged the firm’s owner in connection with the principal transactions.

Awarded more than $30 million to a whistleblower who provided key original information that led to a successful enforcement action, making it the largest-ever whistleblower award.

Holding Gatekeepers Accountable

Held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry. 

Cases include an action against Ernst & Young LLP relating to auditor independence rules, and against audit firm Sherb & Co. LLP and four of its auditors for their roles in the failed audits of three China-based companies.

The Commission charged two Florida-based attorneys for their roles in an offering fraud conducted by a transfer agent, and charged transfer agent Registrar and Transfer Company and its CEO for violations involving improper distributions of billions of shares of unregistered stock.

In its fraud case against animal feed company AgFeed Industries Inc., the Commission charged the company’s audit committee chair, who learned of the misconduct in question and failed to take meaningful action to investigate it or disclose it to investors after learning of it.

Rooting Out Insider Trading 

Charged 80 people in cases involving trading on the basis of inside information. The Commission also is implementing and developing next generation analytical tools to help identify patterns of suspicious trading.

Among those charged are a former hedge fund trader, a portfolio manager, the co-chairman of a board, an investment banker, an investor relations executive, an accountant, husbands who traded on information they learned from their wives, and a group of golfing buddies and other friends.

Upholding Disclosure Standards in Municipal Securities

Focused on upholding appropriate standards of disclosure in securities issuances by local and state governments.  Cases this year included an emergency court order against a Chicago suburb and its comptroller, featuring the Commission’s first emergency action to halt a municipal bond offering; charges against the state of Kansas; and the first penalty imposed against a municipal issuer.

Announced the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, which encourages and rewards self-reporting of certain violations by municipal issuers and underwriters.  Under the MCDC Initiative, these parties may self-report inaccurate statements in bond offerings about their prior compliance with certain continuing disclosure obligations.  In exchange, they may receive settlement terms that reflect credit for their self-reporting.  In the first action to arise from this Initiative, the Commission reached a settlement with a California school district for charges of misleading bond investors.

Cracking Down on Misconduct Involving Complex Financial Instruments

Filed enforcement actions against RBS Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and three Morgan Stanley entities for misconduct involving mortgage-backed securities and collateralized debt obligations.  The SEC also held global investment bank and brokerage firm Jefferies LLC responsible for its failure to properly supervise trading on its mortgage-backed securities desk.

Combatting Foreign Corrupt Practices and Obtaining Highest-Ever Penalties Against Individuals

Filed significant actions under the Foreign Corrupt Practices Act (FCPA) against Alcoa Inc., Weatherford International Ltd., the Archer-Daniels-Midland Company, and the Hewlett-Packard Company.  Additionally, in concluding its case against former Siemens executives who were charged with bribery in Argentina, the SEC also obtained the highest-ever FCPA penalties against individuals.

Demanding Admissions in Important Cases Enhancing Public Accountability

Demanded and obtained acknowledgements of wrongdoing under the admissions policy announced in the previous fiscal year.  Cases from this fiscal year involved fraud on clients concerning trading prices, a longstanding failure to comply with registration provisions, and failures to provide the Commission with accurate information during its investigations, among other things. 

Staff considers requiring admissions in cases where the violation of the securities laws includes particularly egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct obstructs the Commission’s investigation, where an admission can send a particularly important message to the markets, or where the wrongdoer poses a particular future threat to investors or the markets. 

Successful Litigation

Obtained a jury verdict against Samuel Wyly and the estate of the late Charles Wyly in a matter alleging a longstanding fraudulent scheme to use offshore trusts to conceal their ownership of tens of millions of shares of public companies.  This was the first litigation in which a defendant testified at trial against his co-defendants after agreeing to settle on terms requiring a written acknowledgement of wrongdoing.  The court issued a preliminary decision under which defendants are required to pay disgorgement of approximately $187 million and substantial prejudgment interest.

Obtained a jury verdict against a Minneapolis attorney and entities he controls for fraud in connection with unregistered offerings in a real estate fund.  The court ordered almost $20 million of monetary relief.

Obtained a jury verdict finding a Connecticut hedge fund manager liable for fraud after he funneled money to a Ponzi scheme.  The court ordered more than $80 million of monetary relief.

Obtained a jury verdict against Massachusetts advisory firm Sage Advisory Group, LLC and its principal in a case charging a scheme to induce the principal’s former brokerage customers to transfer their assets to his new advisory firm.  The court will later determine whether and what relief to impose against the defendants.

Additional data on the SEC’s FY 2014 enforcement results will be available as part of the SEC’s upcoming Agency Financial Report.

SEC ANNOUNCES SETTLEMENT WITH BROTHER OF RAJ RAJARATNAM

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that former hedge fund manager Rajarengan “Rengan” Rajaratnam has agreed to pay more than $840,000 and accept securities industry bars in order to settle the agency’s insider trading case against him.

The SEC filed civil charges in March 2013 against Rengan Rajaratnam for his role in the widespread insider trading scheme conducted by his brother Raj Rajaratnam and hedge fund advisory firm Galleon Management.  The insider trading occurred in securities of more than 15 companies for illicit gains totaling nearly $100 million.  The SEC has now obtained court judgments or settlements in Galleon-related enforcement actions against 35 defendants, resulting in approximately $165 million in monetary sanctions.

“We are pleased to have reached a favorable proposed resolution of our insider trading charges against Rengan Rajaratnam,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “The settlement ensures he’s out of the industry and paying a serious price for breaking the law.”

Rengan Rajaratnam, who became a portfolio manager at Galleon after co-founding hedge fund advisory firm Sedna Capital Management, neither admitted nor denied the SEC’s allegations in agreeing to the settlement that is subject to court approval.  The proposed final judgment would permanently enjoin Rengan Rajaratnam from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and require him to pay $372,264.42 in disgorgement, $96,714.27 in prejudgment interest, and a $372,264.42 penalty.  Under the settlement, he also would be barred from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent with the right to apply for reentry after five years.

The SEC’s investigation was conducted by John Henderson, Matthew Watkins, Diego Brucculeri, and James D’Avino in the New York Regional Office.  The case has been supervised by Sanjay Wadhwa, Senior Associate Director of the New York office, and Joseph Sansone, Deputy Chief of the Enforcement Division’s Market Abuse Unit.

6 GOVERNMENT AGENCIES APPROVE FINAL RISK RETENTION RULE

FROM:  U.S. FEDERAL DEPOSIT INSURANCE CORPORATION 

Six Federal Agencies Jointly Approve Final Risk Retention Rule

Six federal agencies approved a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The final rule is being issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. As provided under the Dodd-Frank Act, the Secretary of the Treasury, as Chairperson of the Financial Stability Oversight Council, played a coordinating role in the joint agency rulemaking.

The final rule largely retains the risk retention framework contained in the proposal issued by the agencies in August 2013 and generally requires sponsors of asset-backed securities (ABS) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

As required by the Dodd-Frank Act, the final rule defines a "qualified residential mortgage" (QRM) and exempts securitizations of QRMs from the risk retention requirement. The final rule aligns the QRM definition with that of a qualified mortgage as defined by the Consumer Financial Protection Bureau. The final rule also requires the agencies to review the definition of QRM no later than four years after the effective date of the rule with respect to the securitization of residential mortgages and every five years thereafter, and allows each agency to request a review of the definition at any time. The final rule also does not require any retention for securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.