U.S. CFTC AND AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY SIGN MEMORANDUM OF UNDERSTANDING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

April 13, 2015

U.S. Commodity Futures Trading Commission and Australian Prudential Regulation Authority Sign Memorandum of Understanding to Enhance Supervision of Cross-Border Regulated Firms

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that CFTC Chairman Tim Massad and Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres have signed a Memorandum of Understanding (MOU) regarding cooperation and the exchange of information in the supervision and oversight of regulated firms that operate on a cross-border basis in the United States and in Australia.

Through the MOU, the CFTC and APRA express their willingness to cooperate in the interest of fulfilling their respective regulatory mandates. The scope of the MOU includes swap dealers and major swap participants.

SEC BRINGS FRAUD CHARGES AGAINST COMPANY CONTROLLER IN RECORDS MANIPULATION CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced fraud charges against the former controller of a suburban Chicago company’s Japanese subsidiary who cost his company millions of dollars in trading losses and manipulated accounting records to avoid detection.

The SEC alleges that Katsuichi Fusamae, who was a senior accounting officer at Molex Japan Co. Ltd., engaged in unauthorized equity trading in the company’s brokerage accounts that resulted in losses of more than $110 million.  He concealed the massive trading losses by taking out unauthorized and undisclosed company loans with Japanese banks and brokerage firms, and he used loan proceeds to replenish account balances and engage in additional trading.  When Fusamae’s long-running scheme came to light and the parent company Molex Incorporated restated its financial statements in 2010, it recognized $201.9 million in cumulative net losses, which included both trading losses and borrowing costs from the unauthorized loans.

Fusamae agreed to settle the SEC’s charges by admitting wrongdoing and accepting a permanent bar from serving as an officer or director of a publicly traded company.  Possible monetary sanctions will be determined by the court at a later date.

Molex Incorporated, which is based in Lisle, Ill., and designs, manufactures, and sells electronic components, agreed to a cease-and-desist order finding that the company filed inaccurate financial statements as a result of Fusamae’s fraud.  Molex also failed to maintain accurate books and records and sufficient internal accounting controls.

“Fusamae took advantage of internal control weaknesses at Molex to falsify records, monopolize the flow of information from banks and broker-dealers, and circumvent external and internal audit processes.  His actions left Molex shareholders in the dark about the company’s true financial condition,” said Timothy L. Warren, Associate Director of the SEC’s Chicago Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Illinois, Fusamae’s scheme began in the late 1980s when he began investing Molex Japan’s excess cash in riskier securities, including substantial trading of equities on margin. No one at Molex or Molex Japan authorized Fusamae to engage in the riskier trading, nor were they aware of his trading activities.  Shortly after Fusamae started his unauthorized trading, Molex Japan began suffering substantial losses on Fusamae’s investments.  Fusamae falsified Molex accounting records and general ledger entries and intentionally utilized dormant general ledger accounts to conceal the unauthorized and undisclosed trading as well as the concealed borrowing.  At the peak of his scheme, Molex Japan had accumulated approximately $222 million in unauthorized loan obligations as a result of Fusamae’s misconduct.  Molex consequently filed financial statements that failed to account for the trading losses and unauthorized loans.

The SEC’s complaint charges Fusamae with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1.  Fusamae also is charged with aiding and abetting Molex’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13.  In addition to the officer-or-director bar, the settlement permanently enjoins Fusamae from future violations and provides the court with the authority to determine whether he obtained any ill-gotten gains and whether disgorgement is appropriate.  The settlement is subject to court approval.

The SEC’s order against Molex finds that the company violated 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.  Molex neither admits nor denies the findings.

The SEC’s investigation was conducted by Jeffrey A. Shank and Kevin A. Wisniewski in the Chicago Regional Office.  The SEC’s litigation related to disgorgement will be led by Daniel J. Hayes.

SEC.gov | Remarks at University of South Carolina and UNC-Charlotte 4th Annual Fixed Income Conference

SEC.gov | Remarks at University of South Carolina and UNC-Charlotte 4th Annual Fixed Income Conference

SEC CHARGES BLACKROCK ADVISORS LLC WITH BREACHING FIDUCIARY DUTY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

04/20/2015 01:15 PM EDT

The Securities and Exchange Commission today charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.

BlackRock agreed to settle the charges and pay a $12 million penalty.  The firm also must engage an independent compliance consultant to conduct an internal review.

According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company.  Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company.  Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10 percent) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.  The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.

“BlackRock violated its fiduciary obligation to eliminate the conflict of interest created by Rice’s outside business activity or otherwise disclose it to BlackRock’s fund boards and advisory clients,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “By failing to make such a disclosure, BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions.”

The SEC’s order also finds that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the funds’ failure to report a “material compliance matter” – namely Rice’s violations of BlackRock’s private investment policy – to their boards of directors.  BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure.  Battista agreed to pay a $60,000 penalty to settle the charges against him.

“This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “BlackRock and Battista caused the funds’ failure to report Rice’s violations of BlackRock’s private investment policy and denied the funds’ boards critical compliance information alerting them to Rice’s outside business interests.”

BlackRock agreed to be censured and consented to the entry of the SEC’s order finding that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  The order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940.  Battista also consented to the entry of the order finding that he caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1.  BlackRock and Battista are required to cease and desist from committing or causing any further violations.  BlackRock and Battista neither admitted nor denied the findings.

The SEC’s investigation was conducted by Janene M. Smith, David A. Becker, and Brian E. Fitzpatrick and supervised by Jeffrey B. Finnell of the SEC Enforcement Division’s Asset Management Unit.

SEC CHARGES 23 COMPANIES, 6 INDIVIDUALS FOR ROLES IN CELLULAR LICENSING FRAUD SCHEME

U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23236 / April 9, 2015

Securities and Exchange Commission v. Janus Spectrum LLC et al., Civil Action No. 2:15-cv-00609-DGC

SEC Charges Firms and Individuals for Defrauding Investors in Cellular Licensing Scheme

On April 6, 2015, the Securities and Exchange Commission charged 12 companies and six individuals with defrauding investors in a scheme involving applications to the Federal Communications Commission (FCC) for cellular spectrum licenses.

According to the SEC's complaint filed in federal district court in Arizona, David Alcorn and Kent Maerki orchestrated the offering fraud through Janus Spectrum LLC, a Glendale, Ariz.-based company they founded and managed. Janus Spectrum held itself out as a service provider that prepares cellular spectrum license applications on behalf of third parties. The complaint alleges that although Alcorn and Maerki had third parties offer and sell securities based on the licenses to investors, they were personally involved in presentations to investors and Maerki appeared in misleading videos, including one called "Money from Thin Air."

The SEC alleges that investors in the scheme were promised potentially lucrative returns based on Janus Spectrum obtaining FCC licenses in the Expansion Band and Guard Band portions of the 800 megahertz (MHz) band. Janus Spectrum and the fundraising entities claimed that investors could profit because Sprint and other major wireless carriers needed licenses in this spectrum. In fact, the value of the licenses was small because this spectrum cannot support cellular systems and is generally used for "push-to-talk" services for local law enforcement or businesses like pizza delivery companies that require less bandwidth.

The SEC's complaint alleges that the scheme raised more than $12.4 million from investors from May 2012 to October 2014. The fundraising entities funneled a significant percentage of the investors' funds to Janus Spectrum, which used only a small portion to prepare applications for FCC licenses. The complaint alleges that instead, all of the individuals in the scheme kept a significant portion of investor funds for personal use.
he SEC's complaint alleges that all of the defendants violated Sections 5(a), 5(c), and 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, the SEC's complaint alleges that Janus Spectrum, Alcorn, Maerki, Bank, Jones, Johnson, and Chadwick violated Section 15(a) of the Exchange Act. The SEC also seeks permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against all defendants.

The SEC's investigation was conducted by Sana Muttalib and Lorraine Pearson and supervised by Victoria A. Levin of the Los Angeles office. The litigation will be handled by Sam Puathasnanon. The SEC appreciates the assistance of the Texas State Securities Board and the Federal Communications Commission.

SEC CHARGES COMPANY WITH CONDUCTING FRAUDULENT OIL AND GAS SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23230 / April 6, 2015

Securities and Exchange Commission v. Team Resources, Inc., et al., Civil Action No. 3:15-CV-1045 (NDTX, April 6, 2015)

SEC Charges California Companies with Running a $33 Million Oil and Gas Scheme

The Securities and Exchange Commission today filed suit in the U.S. District Court for the Northern District of Texas against two California oil-and-gas companies, their principal, and four sales associates, for conducting a long-term fraudulent oil and gas scheme.

The SEC alleges that, from 2007 through 2012, Team Resources, Inc. and Fossil Energy Corp. raised over $33 million from approximately 475 investors nationwide through eight unregistered offerings of oil-and-gas partnership interests. Kevin Albert Boyles controlled both companies, and used his sales staff of Philip Adam Dressner, Michael James Eppy, Andrew Stitt, and John M. Olivia to cold-call potential investors and mislead them into buying the partnership interests. The complaint alleges that the defendants misled investors about such material information as potential returns, the success of past offerings, and how offering proceeds would be used. In addition, Boyles paid large and undisclosed commissions to the salesmen — ranging from 25% to 35% — even though none of them was registered as a broker or associated with a registered broker-dealer. After raising sufficient funds from investors, Team Resources and Fossil Energy contracted with third parties to drill the wells, all of which failed to produce oil and gas in the amounts projected by the defendants.

The SEC charges Team, Fossil, Boyles, Dressner, Eppy and Stitt with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 15(a) of the Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Olivia is charged with violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The SEC seeks civil penalties and disgorgement plus prejudgment interest from each defendant, as well as other relief.

To settle the SEC's charges, Team, Fossil, and Boyles have consented to judgments permanently enjoining them from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder. Olivia has consented to a permanent injunction against violations of Sections 5(a) and 5(c) of the Securities Act, and Section 15(a) of the Exchange Act. Team, Fossil, Boyles, and Olivia have consented to disgorge their ill-gotten gains and to pay civil penalties in amounts to be determined by the court. Boyles and Olivia have also agreed to consent to an administrative order barring each from associating with any broker, dealer, investment adviser, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating in an offering of penny stock.