SEC ANNOUNCES $20.3 MILLION SETTLEMENT RELATED TO MISUSE OF DARK POOL TRADING SUBSCRIBER INFO AND OPERATING SECRET TRADING DESK

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/12/2015 09:00 AM EDT

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.  While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.

“ITG created a secret trading desk and misused highly confidential customer order and trading information for its own benefit,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “In doing so, ITG abused the trust of its customers and engaged in conduct justifying the significant sanctions imposed in this case.”

According to the SEC’s order instituting a settled administrative proceeding:

Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling.

Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams.  As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG.  Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders.  By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).

Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.

To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega.  Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT.
Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools.  Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions.  The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.

The SEC’s order finds that ITG violated Sections 17(a)(2) and (3) of the Securities Act of 1933 in connection with Project Omega by engaging in a course of business that operated as a fraud and by failing to make disclosures about Project Omega and its proprietary trading activities.  ITG also violated Rules 301(b)(2) and 301(b)(10) of Regulation ATS by failing to amend its Form ATS filings in light of Project Omega’s trading activities in POSIT, failing to establish adequate safeguards, and failing to implement adequate oversight procedures to protect the confidential trading information of POSIT subscribers.

The SEC’s continuing investigation is being conducted by Paul T. Chryssikos, Scott A. Thompson, Matthew Koop, and Mandy B. Sturmfelz of the SEC Enforcement Division’s Market Abuse Unit with assistance from G. Jeffrey Boujoukos of the Philadelphia Regional Office.  The case is being supervised by Joseph G. Sansone, acting co-chief of the unit.  Substantial assistance was provided by Michael J. Gaw and Tyler Raimo of the Division of Trading and Markets.

Remarks at a Press Conference Announcing Major Enforcement Charges Involving a Massive Hacking Trading Scheme

Remarks at a Press Conference Announcing Major Enforcement Charges Involving a Massive Hacking Trading Scheme

NY RESIDENT AND COMPANY CHARGED BY CFTC WITH MAKING FALSE STATEMENTS TO NFA

FROM:  U.S. COMMODITIES FUTURES TRADING COMMISSION 

CFTC Charges New York Resident Gary Creagh and his Company, Wall Street Pirate Management, LLC, with Making False Statements to the National Futures Association

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an enforcement action charging Defendants Gary Creagh and Wall Street Pirate Management, LLC (Wall Street Pirate), both of New York, New York, with making false, fictitious, or fraudulent statements or omissions to the National Futures Association (NFA) in statutorily required reports and during an NFA audit, in violation of the Commodity Exchange Act (CEA). Both Wall Street Pirate and Creagh, the managing member and sole employee of Wall Street Pirate, were registered with the CFTC at the time of the conduct.

The CFTC Complaint, filed on August 5, 2015, in the U.S. District Court for the Southern District of New York, charges that, from at least December 2011 through September 2013, Creagh willfully made false statements or representations to the NFA and concealed material information from the NFA. Specifically, Creagh falsely represented to the NFA on multiple occasions that the commodity pool he operated on behalf of Wall Street Pirate was not active, despite the fact that he had accepted funds from prospective pool participants and actively traded commodity futures on behalf of the commodity pool, according to the Complaint. The CFTC Complaint also charges that Wall Street Pirate, by and through Creagh, failed to maintain required books and records and provide account statements and privacy notices to pool participants.

The NFA is a Chicago-based futures association, which is registered with the CFTC and serves as an industry self-regulatory organization. Pursuant to the CEA, the NFA is responsible, under CFTC oversight, for certain aspects of the regulation of futures entities and their associated persons.

In its continuing litigation against the Defendants, the CFTC seeks disgorgement of ill-gotten gains, restitution to defrauded customers, a civil monetary penalty, permanent trading and registration bans, and a permanent injunction against further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Jonah E. McCarthy, Timothy J. Mulreany, Patricia Gomersall, and Paul G. Hayeck.

The CFTC would like to thank the NFA for its cooperation in this matter.

MORGAN STANLEY TO PAY $300,000 FINE FOR VIOLATING CUSTOMER PROTECTION RULE AND RELATED SUPERVISION FAILURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

August 6, 2015

CFTC Orders Morgan Stanley & Co. LLC to Pay a $300,000 Civil Monetary Penalty for Violations of Customer Protection Rule for Cleared Swaps and Related Supervision Failures

Order Finds that the Firm Failed to Maintain Sufficient U.S. Dollars in Segregated Accounts in the United States, Holding Required Funds Instead in Other Currencies

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order requiring Morgan Stanley & Co. LLC (Morgan Stanley), a registered Futures Commission Merchant and provisionally registered swap dealer, to pay a $300,000 civil monetary penalty for failing to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all of its U.S. Dollar obligations to cleared swaps customers. The Order also finds that the firm failed to implement adequate procedures and requires Morgan Stanley to cease and desist from violating CFTC Regulations, as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Since passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has implemented rules to protect swaps customers and market participants, including rules for protection of cleared swaps customer collateral. This action demonstrates that the Division of Enforcement will investigate and pursue violations of these important rules of the road in the swaps market.”

As set forth in the Order, on numerous days from March 12, 2013 to March 7, 2014, Morgan Stanley failed to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all U.S. Dollar obligations to the firm’s cleared swaps customers, in violation of CFTC Regulation 22.9. On those days, Morgan Stanley held the amount of the U.S. Dollar deficits in Euros and other currencies, rather than in U.S. Dollars, according to the Order. Because Morgan Stanley held the amount of the U.S. Dollar deficits in other currencies, it did not have a shortfall in overall cleared swaps customer collateral. As the Order finds, however, the size of Morgan Stanley’s U.S. Dollar deficits ranged from approximately $5 million to approximately $265 million, at times representing more than 10 percent of the amount that the firm was obligated to maintain in U.S. Dollars for cleared swaps customers.

Additionally, the Order finds that from November 8, 2012 to on or about April 8, 2014, Morgan Stanley did not have in place adequate procedures to comply with the currency denomination requirements for cleared swaps customer collateral and did not train and supervise its personnel to ensure compliance with CFTC Regulation 22.9. Morgan Stanley thereby failed to supervise diligently its officers, employees, and agents and did not have sufficient procedures in place to detect and deter the violations found herein, in violation of Regulation 166.3, the Order finds.

The Order recognizes that Morgan Stanley promptly reported the deficiencies to the CFTC, implemented corrective procedures, and cooperated with the CFTC’s Division of Enforcement in its investigation.

The CFTC appreciates the assistance of the Division of Swap Dealer and Intermediary Oversight.

The CFTC Division of Enforcement staff members responsible for this case are Elizabeth C. Brennan, Douglas K. Yatter, Lenel Hickson, Jr., and Manal M. Sultan.

Additional Dissenting Comments on Pay Ratio Disclosure

Additional Dissenting Comments on Pay Ratio Disclosure

TWO CORPORATE OFFICERS CHARGED WITH INFLATING VALUES OF ENERGY PROPERTIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

08/06/2015 10:00 AM EDT

The Securities and Exchange Commission today announced charges alleging that Miller Energy Resources Inc., its former chief financial officer, and its current chief operating officer inflated values of oil and gas properties, resulting in fraudulent financial reports for the Tennessee-based company.  The audit team leader at the company’s former independent auditor also was charged in the matter.

In an order instituting administrative proceedings, the SEC’s Division of Enforcement alleges that after acquiring oil and gas properties in Alaska in late 2009, Miller Energy overstated their value by more than $400 million, boosting the company’s net income and total assets.  The allegedly inflated valuation had a significant impact, turning a penny-stock company into one that eventually listed on the New York Stock Exchange, where its stock reached a 2013 high of nearly $9 per share.

“Financial statement information is the cornerstone of investment decisions.  We’ve charged that Miller Energy falsified financial statement information and grossly overstated the value of its Alaska assets and that the company’s independent auditor failed to conduct an audit that complied with professional standards,” said William P. Hicks, Associate Regional Director of the SEC’s Atlanta office.  “The SEC will aggressively prosecute such conduct.”    

Knoxville-based Miller Energy paid $2.25 million and assumed certain liabilities to purchase the Alaska properties.  It later reported them at a value of $480 million, according to the SEC’s Division of Enforcement.  While accounting standards required the company to record the properties at “fair value,” then-CFO Paul W. Boyd allegedly relied on a reserve report that did not reflect fair value for the assets, and he also is alleged to have double-counted $110 million of fixed assets already included in the reserve report.  The report by a petroleum engineering firm allegedly contained expense numbers that were knowingly understated by David M. Hall, the CEO of Miller Energy’s Alaska subsidiary and Miller Energy’s chief operating officer since July 2013.  Hall, of Anchorage, Alaska, also is alleged to have altered a second report to make it appear as though it reflected an outside party’s estimate of value.

The Division of Enforcement alleges that the fiscal 2010 audit of Miller Energy’s financial statements was deficient due to the failure of Carlton W. Vogt III, the partner in charge of the audit.  Vogt, of Warwick, New York, was then at Sherb & Co LLP, a now defunct firm that was suspended by the SEC in 2013 for conduct unrelated to its work for Miller Energy.  Vogt issued an unqualified opinion of Miller Energy’s 2010 annual report and is alleged to have falsely stated that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board and that Miller Energy’s financial statements were presented fairly and conformed with U.S. generally accepted accounting principles.

As a result of their conduct, Miller Energy, Boyd, and Hall are alleged to have violated anti-fraud provisions of U.S. securities laws and a related SEC anti-fraud rule.  The company also is alleged to have violated books and recordkeeping and internal controls requirements, with Boyd and Hall in some cases causing or aiding and abetting those alleged violations.  The SEC’s Division of Enforcement is seeking to obtain cease-and-desist orders, civil monetary penalties, and return of allegedly ill-gotten gains from the company, Boyd, and Hall.  It also is seeking to bar Boyd and Hall from serving as public company officers or directors and to bar Boyd and Vogt from public company accounting.  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’s investigation was conducted in its Atlanta Regional Office by William Uptegrove and John Nemeth under the supervision of Assistant Regional Director Peter Diskin.  The Enforcement Division’s litigation will be led by Robert Schroeder, Edward Sullivan, William Uptegrove, and M. Graham Loomis of the Atlanta Regional Office.