CFTC CHAIRMAN MASSAD'S STATEMENT BEFORE CFTC AGRICULTURE ADVISORY COMMITTEE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Chairman Tim Massad before the CFTC Agriculture Advisory Committee Meeting
December 9, 2014

As Prepared for Delivery

Thank you all for coming. I want to welcome you to this meeting of the CFTC’s Agricultural Advisory Committee. This forum is a valuable opportunity to discuss evolving market issues relevant to our work.

Let me begin by thanking the CFTC staff involved in planning this gathering. Thank you to them, and to all of our professional staff, whose hard work on behalf of the American public is extraordinary. Thank you also to Dr. Randy Fortenbery for serving as Committee Chair. He flew all the way from Lewiston, Idaho to get here, and I appreciate his extensive knowledge and ability to keep us running on time. I’d also like to thank our guest, Secretary Vilsack, for being generous with his time. His coming here today demonstrates the importance of the Department and the CFTC working together. We’ll do more of an introduction before he speaks.

Much of what we do here at the CFTC can seem removed from everyday life. Most Americans do not participate directly in the markets we oversee. But as you know, the agency’s origins are in agriculture, an industry that is basic and important to the lives of all American families. Futures on agricultural commodities have been traded in the US since the 19th century and have been regulated at the federal level since the 1920s. Today, agricultural derivatives are now only one piece of the markets we oversee, but they are fundamentally important. The ability of the Ag sector to hedge commercial exposures is critical to having a successful agricultural industry, and to putting food on the table for all of us. The CFTC’s job in overseeing these markets should not only help participants be able to hedge effectively. It should help these markets thrive, and in turn help the agricultural economy thrive. And I know strengthening the ag economy, and fostering investment and new opportunities in the ag economy are important to all of you and to Secretary Vilsack.

Our ability to successfully oversee these markets requires listening to market participants. It is helpful to hear your thoughts on what we are, or should be, doing. And that is why this Advisory Committee is so important. I know travelling to Washington two weeks before the holidays—which is a very busy time—is not always easy. But I know I speak for all the Commissioners in saying that your presence and your participation on this Committee are much appreciated.

I joined the Commission about six months ago, as did Commissioners Bowen and Giancarlo. The three of us have benefitted from Commissioner Wetjen’s experience as we got up to speed. I am pleased that all three of my fellow commissioners are here today.

We have all been listening and learning from market participants like you. In the last six months, we have focused on moving forward important reforms, to promote greater transparency and market integrity. But we’ve also made it a priority to address areas where our rules may not be working as well as they should. Our goal is not to create unnecessary burdens on commercial end users but to build a reliable, orderly framework for oversight in which vibrant markets can thrive.

In the last few months, we have taken a number of steps to that end.

I know some of our recent actions have been especially important to the agricultural industry, such as our proposal on “residual interest,” and our changes to certain recordkeeping requirements. We’ve addressed contracts with volumetric optionality, making sure publicly-owned utilities can access the energy swaps markets, and making sure end users can use their treasury affiliates for swap transactions and still benefit from the Congressional end user exemptions.

Today, we will discuss a few topics important to the agricultural markets that we have decided upon in consultation with you. We’ll first discuss how the current agricultural economy is impacting CFTC-regulated markets and then discuss how to best calculate deliverable supply for commodities, a topic that is critically important to establishing position limits. We also will spend a little time discussing what the agency has been doing lately, and what we should consider having this Agriculture Advisory Committee discuss in the future.

Thank you again for being here and contributing your ideas. I look forward to a productive discussion.

VICE CHAIR FDIC MAKES COMMENTS ON CONGRESS ALLOWING TAXPAYER SUPPORTED DERIVATIVES TRADING BY BANKS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION
Speeches & Testimony
Statement from FDIC Vice Chairman Hoenig on Congressional moves to repeal swaps push-out requirements

In 2008 we learned the economic consequences of conducting derivatives trading in taxpayer-insured banks. Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks. It is illogical to repeal the 716 push out requirement. In fact, under 716, most derivatives -- almost 95% -- would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.

Derivatives that are pushed out by 716 are only removed from the taxpayer support and the accompanying subsidy of insured deposit funding -- they will continue to exist and to serve end users. In fact, most of these firms have broker-dealer affiliates where they can place these activities, but these affiliates are not as richly subsidized, which helps explain these firms' resistance to 716 push out.

CFTC CHARGES MAN WITH FRAUD AND ACTING AS AN UNREGISTERED FUTURES COMMISSION MERCHANT

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

November 25, 2014

CFTC Charges California Resident Thomas Gillons with Fraud and Acting as an Unregistered Futures Commission Merchant

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

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced the filing of a civil enforcement action in the U.S. District Court for the Northern District of Illinois, charging Defendant Thomas Gillons of Napa County, California, with fraud and acting as a Futures Commission Merchant (FCM) without being registered as such with the CFTC.

On the same day the Complaint was filed, November 19, 2014, U.S. District Judge Ronald A. Guzman issued an emergency Order freezing and preserving assets under the control of Gillons and prohibiting him from destroying documents or denying CFTC staff access to his books and records. The court scheduled a hearing for December 1, 2014, on the CFTC’s motion for a preliminary injunction.

Gillons Allegedly Misappropriated Nearly $130,000 in Customer Funds

The CFTC’s Complaint alleges that, since at least August 31, 2013, Gillons fraudulently solicited and accepted at least $194,000 from at least three customers by claiming that he was a licensed broker and would trade their funds in a sub-account in customers’ names, earning them a 12 to 14 percent return. However, in reality, Gillons’ broker license had been suspended, and he was not currently registered with any securities firm, according to the Complaint. Moreover, Gillons traded only a portion of customer funds, losing approximately $55,234 and misappropriating at least $129,766 in customer funds, the Complaint alleges.

Furthermore, the Complaint alleges that Gillons accepted money to margin, guarantee, or secure commodity futures trades without being registered with the CFTC as an FCM.

In its continuing litigation, the CFTC seeks restitution, disgorgement of ill-gotten gains, civil monetary penalties, trading and registration bans, and injunctions against further violations of the Commodity Exchange Act.

CFTC Division of Enforcement staff members responsible for this action are Stephanie Reinhart, Melissa Glasbrenner, David Terrell, Scott Williamson, and Rosemary Hollinger.

SEC SANCTIONS 9 AUDIT FIRMS FOR VIOLATING AUDITOR INDEPENDENCE RULES

FROM:   U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today sanctioned eight firms for violating auditor independence rules when they prepared the financial statements of brokerage firms that were their audit clients.

SEC investigations found that the audit firms, which agreed to settle the cases, generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements.  Under auditor independence rules, firms cannot jeopardize their objectivity and impartiality in the auditing process by providing such non-audit services to audit clients.  By preparing the financial statements, these particular firms essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.

“To ensure the integrity of our financial reporting system, firms cannot play the roles of auditor and preparer at the same time,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement.  “Auditors must vigilantly safeguard their independence and stay current on the applicable requirements under the rules.”

The SEC’s orders censure each firm and require them to cease and desist from committing or causing any violations of Exchange Act Section 17(a) and Rule 17a-5.  The firms, which consented to the orders without admitting or denying the findings, will collectively pay $140,000 in penalties and must comply with a series of remedial undertakings designed to prevent future violations of these independence requirements.

According to the SEC’s orders, these firms were not independent of their broker-dealer audit clients under independence criteria established by Rule 2-01(c)(4)(i) of Regulation S-X, which Rule 17a-5 of the Securities Exchange Act of 1934 makes applicable to the audits of broker-dealer financial statements.  The orders find that the firms (1) violated Rule 17a-5(i) of the Exchange Act, (2) caused their broker-dealer audit clients to violate Section 17(a) of the Exchange Act and Rule 17a-5, and (3) engaged in improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

The SEC’s investigations were conducted by Sarah Allgeier, Carolyn Kurr, Keith O’Donnell, Paul Pashkoff, and Jeffrey Anderson.  The cases were supervised by C. Joshua Felker and Jennifer Leete.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board, which today announced its own enforcement actions related to auditor independence rules violations.

SEC, CITY OF HARVEY AGREE TO SETTLE FRAUDULENT BOND OFFERING CHARGES

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23149 / December 5, 2014

Securities and Exchange Commission v. City of Harvey, Illinois, et al., Civil Action No. 1:14-cv-4744

City of Harvey Agrees to Settle Charges Stemming from Fraudulent Bond Offering Scheme

The Securities and Exchange Commission announced today that on December 4, 2014, the City of Harvey, Illinois agreed to settle charges stemming from an enforcement action filed in June 2014. The city has consented to the entry of a final judgment which includes undertakings designed to provide significant protections for bond investors.

On June 25, 2014, the SEC obtained an emergency court order in the U.S. District Court for the Northern District of Illinois against the Chicago suburb and its comptroller, Joseph T. Letke, to stop a fraudulent bond offering that the city had been marketing to potential investors. The complaint alleged that the city and Letke had been engaged in a scheme for the past several years to divert bond proceeds from prior bond offerings for improper, undisclosed uses. While investigating Harvey's past bond offerings, the SEC learned that the city intended to issue new limited obligation bonds. The SEC also learned that the city had drafted offering documents that made materially misleading statements about the purpose and risks of those bonds, while omitting that past bond proceeds had been misused.

The city has agreed to the entry of a final judgment which will enjoin it from committing future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Harvey has agreed to retain an independent consultant and an independent audit firm, and will be prohibited from engaging in the offer or sale of any municipal securities for three years unless it retains independent disclosure counsel. These measures are designed to prevent future securities fraud by Harvey and to enhance transparency into Harvey's financial condition for future bond investors. The litigation against Letke is pending.

SEC CHARGES FORMER COO WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23142 / November 25, 2014

Securities and Exchange Commission v. D. Michael Donnelly, Civil Action No. 4:14-cv-01970 (E.D. Mo., November 25, 2014)

SEC Charges Former Solutia Executive with Insider Trading

The Securities and Exchange Commission today charged D. Michael Donnelly, the former Chief Operating Officer of Solutia, Inc., with insider trading in the stock of Solutia based on material non-public information regarding Eastman Chemical Company’s offer to acquire Solutia.  On the morning of January 27, 2012, Solutia and Eastman announced that Eastman would acquire Solutia at an implied value of $27.65 per share for Solutia investors.  At the end of trading on January 27, 2012, Solutia’s stock price closed at $27.51 per share, approximately 41 percent higher than the previous day’s close.

According to the SEC’s complaint filed in the U.S. District Court for the Eastern District of Missouri, Donnelly knew of Eastman’s interest in acquiring Solutia and learned on November 18, 2011, that Eastman would be submitting an improved offer.  The complaint alleges that between November 18, 2011, and November 22, 2011, Donnelly made multiple purchases of Solutia stock totaling 8,130 shares in brokerage accounts in the names of his children.  The complaint also alleges that between February 2, 2012, and February 8, 2012, Donnelly sold all 8,130 shares of Solutia stock for a profit of $104,391.  The complaint alleges that Donnelly misappropriated this information for his own personal benefit and breached the duty of trust and confidence that he owed to Solutia and its shareholders.

Without admitting or denying the SEC’s allegations, Donnelly agreed to settle the case against him.  The settlement is pending final approval by the court.  Specifically, Donnelly consented to the entry of a final judgment permanently enjoining him from violations of Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; requiring him to pay disgorgement of $104,391, the amount of his ill-gotten gains, plus prejudgment interest of $8,371.71, and a civil penalty of $104,391; and prohibiting him from serving as an officer and director of a public company.