Investor Bulletin: How Harmed Investors May Recover Money

Investor Bulletin: How Harmed Investors May Recover Money

CFTC ORDERS DEUTSCHE BANK TO PAY $3 MILION TO SETTLE VIOLATION CHARGES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

December 22, 2014

CFTC Orders Deutsche Bank Securities Inc. to Pay $3 Million to Settle Charges of Improper Investment of Customer Segregated Funds, Reporting and Recordkeeping Violations, and Supervision Failures

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and simultaneously settling charges against Deutsche Bank Securities Inc. (DBSI), a registered Futures Commission Merchant (FCM) based in New York, N.Y., for failing to properly invest customer segregated funds, failing to prepare and file accurate financial reports, failing to maintain required books and records, and for related supervisory failures. None of the violations resulted in any customer losses, according to the CFTC’s Order. The Order requires DBSI to pay a $3 million civil monetary penalty and to cease and desist from violating the CFTC Regulations, as charged. DBSI is an indirect, wholly-owned subsidiary of the parent company, Deutsche Bank AG.

Specifically, the CFTC’s Order finds that, for the period June 18, 2012 through August 15, 2012, DBSI failed to accurately compute the amount of customer funds on deposit. As a result of these miscalculations, DBSI’s investment of customer funds in certain money market mutual funds during that period exceeded the 50% asset-based concentration limit for such investments in violation of CFTC Regulation 1.25(b)(3)(i)(F).

The Order also finds that on at least six occasions between June 2011 and March 2013, DBSI failed to file accurate financial statements with the CFTC in a timely manner in violation of CFTC Regulation 1.10. According to the Order, DBSI did not have automated processes in place designed to ensure the accuracy of the firm’s financial reporting. Consequently, DBSI filed six amended FOCUS Reports as a result of the errors, the Order finds. The CFTC Order further finds that DBSI failed to create and maintain complete and systematic records, such as order tickets, for a number of block trades it executed at various times throughout October 1, 2009 and March 16, 2012 in violation of CFTC Regulation 1.35.

The CFTC Order finds that each of these violations was a result of DBSI’s failure to maintain adequate controls and systems, reflecting a lack of supervision over its business as a CFTC registrant in violation of CFTC Regulation 166.3.

CFTC Director of the Division of Enforcement, Aitan Goelman, said, “This case demonstrates that the Commission takes the sufficiency of its registrants’ internal controls very seriously, and expects that these internal controls will both address known issues and identify regulatory risks to minimize the possibility of violations like this.”

The Order recognizes DBSI’s cooperation and corrective action it undertook after its deficiencies were discovered.

The CFTC’s Enforcement Division thanks Jerry Nudge, Kevin Piccoli, Mortimer Rollins and Robert Laverty of the CFTC’s Division of Swap Dealer and Intermediary Oversight for their assistance in this matter.

CFTC Division of Enforcement staff members responsible for this matter are Susan Gradman, Brigitte Weyls, Lindsay Evans, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

SEC CHARGES EQUITY RESEARCH FIRM OWNER WITH MANIPULATING MARKET FOR PUBLICLY TRADED STOCK

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against a Phoenix-based equity research firm owner who allegedly manipulated the market for a publicly traded stock he was soliciting investors to purchase.

 The SEC Enforcement Division alleges that after a company hired his firm to assist in two private placement offerings, Paul Pollack repeatedly engaged in wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership of the stock.  According to the order instituting an administrative proceeding, Pollack conducted approximately 100 wash trades where the buy or sell orders came within 90 seconds of each other at prices and quantities that were virtually identical.  The wash trades are alleged to have occurred during a nearly one-year period and created the false and misleading appearance of consistent active trading in the otherwise thinly traded stock.

 The SEC Enforcement Division further alleges that Pollack and his firm Montgomery Street Research LLC violated federal securities laws by acting as brokers on behalf of the company without first registering with the SEC.

 Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock,” said Thomas J. Krysa, Associate Director of Enforcement in the SEC’s Denver Regional Office.  “In this case, we allege that Pollack engaged in this type of trading, and he and his firm acted as unregistered brokers outside the boundaries of the law by effecting transactions in securities and avoiding SEC oversight and examinations that protect the interests of investors.”

The SEC Enforcement Division alleges that Pollack and Montgomery Street Research raised more than $2.5 million from 11 investors after being hired by the company to raise money and make introductions to potential investors in its stock.  Among other things, they identified and solicited potential investors, provided financial information regarding the issuer, fielded investor inquiries, and in some instances received transaction-based compensation.

The SEC Enforcement Division alleges that Pollack and Montgomery Street willfully violated Section 15(a)(1) of the Securities and Exchange Act of 1934 and that Pollack willfully violated Section 9(a)(1) and Section 10(b) of the Exchange Act of 1934, and Rules 10b-5(a) and 10b-5(c).  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC Enforcement Division’s investigation was conducted by Kurt L. Gottschall and Marc D. Ricchiute in the Denver Regional Office with assistance from staff in the Enforcement Division’s Center for Risk and Quantitative Analytics.  The Enforcement Division’s litigation will be led by Mr. Ricchiute and Gregory A. Kasper.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

MF GLOBAL ORDERED TO PAY OVER $1.2 BILLION RESULTING FROM UNLAWFUL USE OF CUSTOMER FUNDS

FROM:  U.S. JUSTICE DEPARTMENT 
December 24, 2014
Federal Court in New York Orders MF Global Holdings Ltd. to Pay $1.212 Billion in Restitution for Unlawful Use of Customer Funds and Imposes a $100 Million Penalty

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) has obtained a federal court consent Order against Defendant MF Global Holdings Ltd. (MFGH) requiring it to pay $1.212 billion in restitution or such amount as necessary to ensure that claims of customers of its subsidiary, MF Global Inc. (MFGI), are paid in full. The CFTC previously filed and settled charges against MFGI for misuse of customer funds and related supervisory failures in violation of the Commodity Exchange Act and CFTC Regulations (see CFTC Press Release 6776-13). MFGI was required to pay $1.212 billion in restitution to its customers, as well as a $100 million penalty. MFGH’s restitution obligation is joint and several with MFGI’s restitution obligation, pursuant to which a substantial portion of the restitution obligation has already been paid (see CFTC Press Prelease 6904-14). The consent Order, entered on December 23, 2014, by Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MFGH, to be paid after claims of customers and certain other creditors entitled to priority under bankruptcy law have been fully paid.

The consent Order arises out of the CFTC’s amended Complaint, filed on December 6, 2013, charging MFGH and the other Defendants with unlawful use of customer funds. In the consent Order, MFGH admits to the allegations pertaining to its liability based on the acts and omissions of its agents as set forth in the consent Order and the amended Complaint.

The CFTC’s amended Complaint charged that MFGH controlled MFGI’s operations and was responsible for MFGI’s unlawful use of customer segregated funds during the last week of October 2011. In addition to the misuse of customer funds, the amended Complaint alleged that MFGH is responsible for MFGI’s (i) failure to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) filing of false statements in reports with the CFTC that failed to show the deficits in the customer accounts, and (iii) use of customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid, in violation of CFTC regulations.

The CFTC’s litigation continues against the remaining Defendants, Jon S. Corzine and Edith O’Brien.

The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.

The consent Order recognizes the cooperation of MFGH and requires MFGH’s continued cooperation with the CFTC.

Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology assisted in this matter. CFTC Division of Enforcement staff members responsible for this matter are David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, and Manal Sultan.

CFTC REPORTS COURT HAS ORDERED RBC TO PAY $35 MILLION FOR ILLEGAL TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

December 18, 2014

Federal Court Orders Royal Bank of Canada to Pay $35 Million Penalty for Illegal Wash Sales, Fictitious Sales, and Noncompetitive Transactions

Canadian Bank Traded Single Stock Futures and Narrow-Based Stock Index Futures on OneChicago Futures Exchange

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on December18, 2014, Judge Alvin K. Hellerstein of the U.S. District Court for the Southern District of New York entered a Consent Order for Permanent Injunction and Civil Monetary Penalty against Royal Bank of Canada (RBC) for engaging in more than 1,000 illegal wash sales, fictitious sales, and noncompetitive transactions over a three-year period.  The Order enjoins RBC from committing future violations of the wash sale, fictitious sale, and noncompetitive transaction prohibitions of the Commodity Exchange Act and the CFTC’s Regulations, and requires RBC to pay a civil monetary penalty of $35 million.

CFTC Director of Enforcement Aitan Goelman stated: “Illegal wash trades may seem innocuous. They are not.  They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason.  This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets.”

The court’s Order arises from a Complaint filed by the CFTC on October 17, 2012, that charged RBC with engaging in illegal wash sales, fictitious sales, and noncompetitive transactions involving stock futures contracts, among other illegal conduct (see CFTC Press Release 6223-12, April 2, 2012).  In its Order, the court found that between June 1, 2007 and May 31, 2010, RBC knowingly executed 1,026 illegal wash sales and fictitious sales of narrow-based stock index futures (NBI) and single stock futures (SSF) contracts.  RBC conducted the transactions as block trades through its branches and internal trading accounts trading opposite two of RBC’s off-shore subsidiaries, and executed the trades on the OneChicago, LLC futures exchange in Chicago, Illinois.  The court also found that RBC’s NBI and SSF transactions were noncompetitive transactions prohibited by CFTC Regulations.

According to the Order, senior RBC personnel designed the trading strategy, which was motivated in part by tax benefits it generated for the RBC corporate group.  The Order states that, as designed, RBC and its subsidiaries entered into the NBI and SSF trades so that RBC entities would be both buyer and seller in the transactions, initiated with the express or implied understanding that they would later unwind the positions opposite each other through offset or delivery, and that the trades were equal and offsetting in all material respects:  They involved the trading of the same quantity of the same futures contracts at the same price and time, and therefore achieved a wash result for RBC.  Further, the Order states that the employees who oversaw RBC’s NBI and SSF trading knew that the trades negated the market risk inherent in normal futures transactions because the profits and losses that accrued to the RBC entities participating in the trades were ultimately consolidated in the RBC corporate group’s overall profits and losses, where they netted to zero, and were therefore economic and futures market nullities for the bank.

Finally, the Order finds that RBC’s trades were noncompetitive because RBC failed to timely report part of each trade to the OneChicago futures exchange, in violation of the exchange’s written rules.  Because the trades did not comply with the written rules of the exchange, they violated a CFTC Regulation requiring futures transactions to be executed openly and competitively on designated contract markets in accordance with the exchange’s written rules.

CFTC Division of Enforcement staff members responsible for this action are David Slovick, Lindsey Evans, Susan Gradman, Amanda Harding, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard Wagner. The Division of Enforcement also recognizes the contributions of CFTC Division of Market Oversight staff.

OWNER HOME RESTORATION BUSINESS CHARGED WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

12/12/2014 11:50 AM EST

The Securities and Exchange Commission today announced securities fraud charges against the owner of a home restoration business in upstate New York who sold unsecured notes to investors to finance his real estate operations.

The SEC alleges that David Fleet misrepresented or failed to disclose a number of key facts to investors in Cornerstone Homes Inc., which was in the business of buying and restoring distressed single family homes to sell or rent to low-income customers.  For example, investors were told that the company did not use bank financing during time periods when Fleet was heavily reliant on mortgaging to banks virtually all of the homes that Cornerstone was purchasing with investor money.

The SEC further alleges that as the business began to deteriorate during a downturn in the real estate market, Fleet failed to inform his investors as he decided to secretly invest Cornerstone’s funds in the stock options market in an effort to keep the company’s finances afloat.  Fleet lost between $3 million and $4 million of the approximately $6 million that he invested.  Ironically, this allegedly occurred soon after Fleet sent newsletters to investors, many of them senior citizens, warning that investing in the stock market was risky and they would be better off investing their money in Cornerstone.  Fleet continued to raise money from investors without telling them that he was using their investments in his company to unsuccessfully invest in the stock market.  Cornerstone eventually filed for bankruptcy.

“Fleet concealed the true state of finances at Cornerstone Homes and essentially tricked investors into funding his efforts to save his company by investing in the stock market that he had otherwise told them was too risky,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, which was filed in U.S. District Court for the Western District of New York, alleges that Fleet violated the registration and antifraud provisions of the federal securities laws.  The complaint seeks financial remedies and a permanent injunction against Fleet, who resides in Beaver Dams, N.Y.

The SEC’s investigation was conducted by Neal Jacobson and Patricia Schrage of the New York Regional Office, and they will lead the litigation.  The case is supervised by Alistaire Bambach.  The SEC appreciates the assistance of the Office of the United States Trustee for Region 2.