FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 15, 2013 — The Securities and Exchange Commission charged a former employee at a Connecticut-based brokerage firm with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.
David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC's charges. He also pleaded guilty today in a parallel criminal case.
The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.
"Miller's scheme was deliberate, brazen, and ultimately ill-conceived," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit. "This is a wake-up call to the brokerage industry that the unchecked conduct of even a single individual in a position of trust can pose grave risks to a firm and potentially to the markets and investors."
According to the SEC's complaint filed in federal court in Connecticut, Miller entered purchase orders for 1.625 million shares of Apple stock on Oct. 25, 2012, with the company's earnings announcement expected later that day. His plan was to share in the customer's profit from selling the shares if Apple's stock price increased. Alternatively, if Apple's stock price decreased, Miller planned to claim that he inadvertently misinterpreted the size of the customer's order, and Rochdale would then take responsibility for the unauthorized purchase and suffer the losses.
According to the SEC's complaint, Apple's stock price decreased after Apple's earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm's available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.
The SEC's complaint charges Miller with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.
In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.
The SEC's investigation, which is continuing, has been conducted by Eric A. Forni, David H. London, and Michele T. Perillo of the Market Abuse Unit in the Boston Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut, Federal Bureau of Investigation, and Financial Industry Regulatory Authority (FINRA).
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged an investment banker in Toronto with insider trading by using information that he obtained through his job of pitching investment ideas to the Canada Pension Plan Investment Board (CPPIB).
The SEC alleges that Richard Bruce Moore, who worked at the Canadian Imperial Bank of Commerce (CIBC), was attempting to obtain a role in a pending acquisition when he learned facts that allowed him to conclude that U.K.-based engineering and manufacturing company Tomkins plc was the CPPIB’s target. Moore misappropriated the information by purchasing Tomkins American Depositary Receipts (ADRs), which trade on the New York Stock Exchange, during the weeks leading up to the acquisition. After the acquisition offer was announced, the closing price of Tomkins ADRs rose 27 percent, and Moore made more than $163,000 in illicit profits.
Moore has agreed to settle the SEC’s charges by paying more than $340,000. The Ontario Securities Commission today announced a related action against Moore for insider trading in Tomkins common stock.
"Moore spent approximately one-third of his total net worth on purchases of Tomkins securities based on information he learned in the course of his employment," said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. "In today’s interconnected markets, the cooperative relationships among securities regulators mean that those who choose to engage in international insider trading should expect to face consequences across the globe."
According to the SEC’s complaint filed in federal court in Manhattan, the CPPIB was one of Moore’s top clients at CIBC in 2010. His primary contact was a CPPIB managing director who was responsible for taking public companies private. Through Moore’s interactions with the CPPIB, he learned that the Board was working on a large transaction in the United Kingdom. He pieced together nonpublic information to conclude that the Board was going to make an offer to acquire Tomkins.
The SEC alleges that Moore used an account in the Channel Islands to purchase 51,350 Tomkins ADRs on the New York Stock Exchange on June 28, 2010. He also purchased a large number of Tomkins common shares on the London Stock Exchange. The CPPIB and a Canadian private equity firm announced the acquisition offer for Tomkins on July 19, 2010.
The SEC’s complaint charges Moore with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In the settlement, which is subject to court approval, Moore agreed to pay $163,293 in disgorgement, $14,905 in prejudgment interest, and a $163,293 penalty. Moore also agreed to an SEC order that will bar him from the securities industry or participating in a penny stock offering.
The SEC’s investigation was conducted by David Frohlich and Matthew L. Skidmore. The SEC appreciates the cooperation and assistance of the Ontario Securities Commission, Jersey Financial Services Commission, and Financial Industry Regulatory Authority.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
"Kaleidoscopes"
Speech of Commissioner Bart Chilton at Washington University in St. Louis, St. Louis, MO
April 15, 2013
Introduction
How do you do Wash U? Thanks to President (James) Bullard and Professor (Christopher) Waller for the invitation to be with you today. I’m sure each of you knows this, but what lucky folks you are to have the benefit of spending some time with these "smartest of the smart" economists. I’m envious.
Kaleidoscopes
My last time here was October 17th, 2000 for the presidential debate between Vice President Gore and Governor Bush. I was with my boss, and am honored to say my friend, Dan Glickman, who was the U.S. Secretary of Agriculture. After the debate, Secretary Glickman and a few dozen surrogates for each campaign went into the "spin room" and gave their perspective on the debate. We all watched the same debate, but as you might know, the views on what took place were dramatically different.
When I was a kid, I adored looking through those kaleidoscope tubes. The small bits of glass with myriad reflections gave you such different perspectives. Spin the end of the tube and it would change; even though you were focused on the same object—kinda similar to that Wash U spin room. So today, like kaleidoscopes, let’s look at the futures markets from a few different perspectives. After my comments, I'd like your MBA-based subjective, introspective, perspectives...umm...respectively. Cool? Cool.
Futures—The Baseline
Okay. Okay. First, I know you all are MBA-bound prodigies, but let’s get a baseline from which to work. These futures markets are steeped in a hell of a history. Hell of a history, I say. They were started for producers and processors—farmers and ranchers, millers and feedlots—and most importantly from my perspective, for consumers.
People were hungry for ways to hedge their risk and get a fair price at harvest time and in lean times. At harvest, the markets would flood with produce; grain would rot with over-supply; and producers would suffer the consequences. Then, in the winter, grain was scarce, and millers couldn’t afford it. That wasn’t working for anyone—not so much. Markets needed a fair price at harvest and the rest of the year. Consumers were gouged at certain times when supplies were scarce. The costs incurred were passed to the ultimate purchasers—households and families. Producers, processors, and consumers were weary of the volatility. So, in 1848—just five years before Wash U started—25 guys got together above a feed store on Water Street in Chicago and started what would become the Chicago Board of Trade. In addition to grain merchants and a banker, that assembly included some unexpected folks: a bookseller, a druggist, a hardware dealer and a tanner, among others. Guess what? It worked by helping even out prices. What this commodity consortium created still impacts us today—even if we’ve never been near a farm or a mill. All right, that’s the baseline.
Futures Today—You Better You Bet
Fast forward to today. We still have commercials who hedge their risk (farmers and processors, etc.) and speculators who continue to bet they can make money from a futures contract by selling it later if prices change. One thing that is different, however, is that the markets have expanded well beyond the ag commodities to energy, metals and financial products.
What they started back in Chicago was not only good, it was fantastico. Then, markets got even better. Today, 165 years later, we want these markets to be even better. "You better, you better, you bet." (It's "The Who" and President Bullard, Professor Waller and I know it. If you're too young to know it, Google or Bing it...whatever. "You Better You Bet," or the Alaska version: You better, you better, you betcha.
The question is: Are these derivative markets better? Wanna bet they’re better? You bet? In truth, the answer is definitely debatable. That’s because it depends upon your…perspective, my new-found kaleidoscope comrades.
There’s a lot of fresh liquidity—more liquidity, more volume, bigger markets. Bigger should be better? Bigger, more liquid markets should equal closer bid-ask spreads and better pricing. You guys are smart. You learned that years ago…you! One might bet that consumers should benefit, too, right? That should be better.
Betcha can hold that thought—bigger is better.
Bigger is Better?
Has anyone seen that series of AT&T commercials with Beck Bennett and the kids? He’s that super funny comic, sort of our present-day Art Linkletter or Bill Cosby when it comes to interviewing children. (Again, Google, Bing and Yahoo are your friends). Anywho, Beck is the interviewer in a focus-group-like setting with kids. He asks them, "What’s better: bigger or smaller?" The kids yell out, "bigger" before the next question, which is, "Which would you rather have, a big tree house or a small tree house?" They, of course, all want a bigger tree house…you betcha they do. One explains, "If it’s big enough you can have a disco," while another comments that a small tree house wouldn’t have room for a flat screen TV. "Bigger is better," is the tag line on the commercial.
Perhaps the AT&T marketing gurus are too young to remember what the Department of Justice said about that bigger is better stuff, although AT&T is something like the second largest company in the States and 14th largest in the world. I guess they know what they are doing. Anyway, Ma Bell remembers. Bing it baby, or Bing Baby Bells, whatever. The point: Kids think bigger is better.
We Want More
There’s another one of those commercials where Beck asks "Who thinks more is better than less?" A little girl explains, if we like it, "…we want more, we want more." "It’s not complicated," goes the tag line.
Well, if your perspective is that of a six or eight-year-old, all of that may make a lot of sense. Bigger is better. More is better. When it comes to futures markets and you wonder if bigger markets with lots of liquidity and more traders are better, your gut reaction maybe to say, "No duh Sherlock."
However, it actually is more complicated than that. Admittedly, if one looks at it from the exchange kaleidoscope perspective, exchanges make money from bigger volume, more traders. You might not even care about the price of anything. Bigger is better. More is more. You like it. You like it. You la la like it. You want more.
But, what about those Chi-town thought leaders back in the day—in 1848? What about consumers? Is more always better? Is bigger always better? Sometimes, is more, less?
Massive Passives and 2008
Let me give you one scenario, which happens to be based upon, well…fact. At least it is based upon fact from my and many other peoples’ kaleidoscope perspectives. In three short years, between 2005 and 2008, we saw over $200 billion come into U.S. futures markets. That’s a whole lotta liquidity—200B. That’s more volume. Gotta be better, right? Well, there was something different about these playas, that is: the speculators that gave the green. These speculators were new to the markets—the likes of pension funds. There’s nothing wrong with pension funds. (In fact, a lot of people like pension funds so much, they are still pretty peeved that theirs was cut in half due to the economic collapse). But that’s another tale too tough to tell—too tender to the touch tonight, perhaps another time.
In addition to pension funds, this $200 billion that came into our futures markets included exchange traded funds (ETFs). There’s nothing wrong with ETFs. The problem is: they, all these new speculators—the pension funds, ETFs, index funds and some others—had a different trading strategy. They had a different perspective than previous speculators. And, they deserved their own moniker—their own name.
I call these new speculators Massive Passives: voila! Here’s why. They are ginormous—so they are massive. And, they have a fairly price-insensitive trading strategy—so they are passive—Massive Passives. They don’t get in or out of markets based upon the crop year or the harvest. They don’t, by and large, make decisions about a drought, a cold winter or the summer driving season. Their bet is many years out. They invest like people who invest in the stock markets. People who invest there often park their money and leave it for years. A lot of our parents did, or do, just that. Many stock market investors do it today.
Sonny Boy, Girly Sue, let me explain investing to you.
As a stock holder, when we get older,
you’ll remember this chat about stock this and stock that.
You’ll recall I said with a grin that these shares of…AT&T or something akin, will be worth something then.
We’re gonna hang onto these bad boys.
Someday, when then arrives, we’ll be rich.
It will change our lives. That’s how wealth derives.
High fives!
I’m pretty sure that’s exactly how the conversations went down. And, that’s sort of how the Massive Passives have operated. You see, they wanted to diversify their portfolios beyond stocks and bonds and get into futures. And the futures industry said, "Sure, come one come all. Bigger is better. We want more. We want more." So, the Massive Passives brought the buckaroos and parked them—like a stock—in a bunch of futures—ags, metals, financials, and energy. They call this bigger is better moolah movement the "financialization of futures."
Here’s the troublesome part. Too much one-way wagering—like Massive Passive long speculation—can influence prices. Let me give you an example: crude oil. We know crude and related energy commodities impact so much of our economy because they are used to produce and transport so many things. At the beginning of 2008, a barrel of crude was in the $90s. By the time summer rolled around, it had vaulted to over $140, creating the highest ever gasoline prices in our nation’s history—$4.10 a gallon. The thing is: Even though prices change radically, not much changed in the way of supply and demand. Folks searched for some volatility causation. But, what we found was the big influx of Massive Passive dough. Then by December, as the entire economy was collapsing, even the Massive Passives weren’t so price insensitive. They got out of the market. Prices plunged to the $30s. Again, this took place without much in the way of any supply demand relationship.
You don’t have to take my word for it. A perspective from a top notch researcher at Goldman Sachs—one of the largest speculators on earth—said long speculation in markets does impact price. He even quantified it. Even expert researcher Luciana Juvenal at the Federal Reserve Bank of St. Louis came to similar conclusions. Researchers at Rice, MIT (Massachusetts Institute of Technology) and a plethora of other places say comparable things. There’s good and plenty of evidence—reputable and reliable substantiation—documenting what many of us simply know: Excessive speculation can help push prices around, and businesses and consumers can suffer.
Position Limits
How do we ensure that these 165-year-old markets keep working properly under these circumstances? Well, Congress and President Obama told us to put in place what are called speculative position limits as part of the financial reform law in 2010. They would limit the size that traders may control in a given market. So far, however, they’re not in place. That is due to the biggest speculators on the planet and their litigation efforts. My bet and I’d betcha, is this: The efforts to stop position limits will eventually fail. Congress told us, in no uncertain terms, to get it done. I intend to see that we do that—you betcha.
A Cheetah Taped to Grandma
There’s one more AT&T commercial you may recollect. This is the one where Beck asks the kids if faster or slower is better. They all like fast, of course. Then he asks, what’s fast? One kid says, "My mom’s car and a cheetah." Then the kids are asked, "What’s slow?" to which a young boy says, "My Grandmother is slow; I bet she would like it if she was fast." Beck proposes, "Maybe give her some turbo boosters?" But, the boy suggests, "Tape a cheetah to her back." Beck says, "Hmm, seems like you’ve thought about this before." The tag line for the spot is: "It’s not complicated. Faster is better."
Well, just like my perspective that bigger and more isn’t always better, and that more can be less, I’m not so sure that faster is always better in trading. If we look at another key change to markets from back in the day, there’s also a lot of gee whiz, crazy cool, lightning-fa fa fast technology. There are algorithms that mine newsfeeds. They quantify, analyze, calculate and compute things most people would never ever dream. And, they do it quicker than a blink of an eye.
These speed demons are called high-frequency traders (HFTs), although a few years ago I thought they, too, needed a more descriptive name. I came up with Cheetahs. The fastest land animals, not like a Boston card cheater.
The problem with fast in this regard is this: I speak with commercial market participants regularly who suggest the cheetahs are taking advantage of markets. They know the cheetahs are sort of like the new middlemen. And, they are out there 24-7-365 trying to scoop up micro-dollars in milliseconds.
Lots of commercial hedgers try to trade fast, but they have explained their circumstances. Say you are merging onto a freeway. You are ready to get on, ready to trade. Just before merging, five or six cheetahs zoom zoom past like they are in the fast lane and jump in the market ahead of you at a certain price. If you’re a little slow, you can still get on the highway but not at the price you intended.
A study late last year, which was conducted in conjunction with the CFTC, said in essence that cheetah trading imposes quantifiable costs on small investors. Aggressive cheetahs make a lot of money, and they make their biggest paydays when they trade with small, traditional traders. This could end up pushing smaller, non-cheetah traders out of markets. From most perspectives I can think of, that sort of fast isn’t better.
To be clear, I’m not proposing we get rid of neato, gee whiz technology in markets or we make the cheetahs an endangered species. They have some real attributes—you bet—like speed, smarts and portability. But, we need only to go back to May 6th 2010, when the Flash Crash occurred. The Dow Jones lost almost a thousand points in a matter of minutes. Cheetahs played a part in the entire damaging debacle, and as some of us recall: life in the fast lane can surely make you lose your mind, and a mind is a terrible thing to waste.
Today, we have no rules or regulation to deal with the cheetahs. I’m not suggesting slow is better than fast, I’m just saying we need to look at these things from a few perspectives. We shouldn’t just accept that all is good with speed.
Conclusion
The questions that folks should ask are these: Are markets performing as they should? Are they, in particular, benefiting consumers? What, if anything needs to be done?
We all have our own cool-colored, multi-faceted Kaleidoscope opinions based upon our proficiencies and experiences. That’s an enormous value we have individually, but it also benefits our schools, businesses, our communities and government institutions. Learning about these diverse perspectives makes us better. That’s why I want to hear what you think.
I appreciate your attention and really value the opportunity to be with you at Wash U. You betcha, I do.
Thanks.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Chairman Gary Gensler before the U.S. House Appropriations Subcommittee, Washington, DC
April 12, 2013
Good morning Chairman Aderholt, Ranking Member Farr and members of the Subcommittee. Thank you for inviting me to today’s hearing on the President’s request for the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2014 budget. I’m pleased to testify along with my fellow Commissioner Scott O’Malia.
This hearing is occurring at an historic time in the markets because under Congress’ direction, the CFTC now oversees the derivatives marketplace: not only futures that we have overseen for decades, but also the swaps market. The agency has completed 80 percent of the swap market reform rules required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The public is benefiting from seeing the price and volume of each swap transaction. This information is available free of charge on a website, like a modern-day tickertape. For the first time, the public will benefit from the risk reduction and greater access to the market that comes from centralized clearing. And for the first time, the public is benefiting from the oversight of swap dealers. So far, 75 have registered and must adhere to sales practice and business conduct standards to help lower risk to the overall economy.
The marketplace is increasingly shifting to implementation of these common-sense rules of the road. Now it is all the more clear: the CFTC is not the right size for its new and expanded mission Congress has directed it to perform.
The CFTC’s current funding is $207 million prior to sequestration. We recognize that the federal government is operating under a sequester and that budgets for agencies across government require additional scrutiny. Our mission, however, has expanded dramatically. We have a duty to help protect the economy and taxpayers from risks in the financial system. Thus, the President’ FY 2014 budget requests an appropriation of $315 million and 1,015 FTEs. The overall funding levels requested approximate the plan set forth in the President’s 2013 Budget ($308 million and 1,015 FTE), but also take into account industry progress in implementing financial reform. Although 1,015 FTE resources requested in this budget are at the same level as for FY 2013, adjustments were made across our mission activities to reflect the transition from Dodd-Frank rulemaking to swaps market oversight in 2014. Primarily, the Commission shifted its requested resource allocation to support and maintain direct examinations – a critical component of customer protection. Market events have highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.
The President’s budget request for the Commission strikes a balance between important investments in technology and human capital, both of which are essential to carrying out the agency’s mandate. This approximately 52 percent increase in funding includes a 62 percent increase in IT services, but only a 44 percent increase in staff.
The CFTC is dedicated to using taxpayer dollars efficiently – nearly a fourth of the overall budget request, $73 million, is for outside IT services. When the CFTC’s dedicated IT staff is included, the request is $94.8 million for IT, or nearly a third of the overall budget. But it still takes human beings to watch for market manipulation and abuses that affect hedgers, farmers, ranchers, producers and commercial companies, as well as the public buying gas at the pump.
The CFTC is operating under a strategic plan for FY 2011-2015. This plan raises the bar on the agency’s performance measures to more accurately evaluate our progress. But the agency’s performance is affected by the challenges of limited resources. For the second year in a row, there are many goals that were not met, as are detailed in the agency’s Annual Performance Report (APR). The CFTC is reviewing the results of the APR and will include the findings in this year’s revision of the strategic plan and consider the results as the agency reevaluates the allocation of resources.
In my remaining testimony, I will review the five areas that make up over 90 percent of our requested budgeted staff increase: registrations, examinations, surveillance and data, enforcement, and economics and legal analysis.
Registration and Product Reviews
A significant task before us in FY 2014 will be the continuation of registration of effected entities, as well as reviews of new products for both the clearing mandate and the trading mandate.
We want to consider registration applications in a thoughtful and timely manner, be efficient in reviewing submissions, and be responsive to market participant inquiries –but this will require sufficient funding. For FY 2014, the President’s request supports $38.9 million and 147 FTEs for these two mission areas, an increase of $22.6 million and 92 FTEs.
The estimated 200 clearinghouses, trading platforms, swap data repositories, swap dealers and major swap participants that are recently registered or may seek CFTC registration within the next year is a dramatic increase over any registration effort the agency has overseen in the past. The Commission needs staff to facilitate the registration of the following:
• Clearinghouses – Entities that lower risk to the public by guaranteeing the obligations of both parties in a transaction. We are working with five entities seeking to register as DCOs and have inquiries from others. These entities would join the 14 we currently oversee.
• Designated contract markets (DCMs) – U.S. trading platforms that list futures and options and likely will start listing swaps. The CFTC currently oversees 16 DCMs, and by 2014, staff expects another two to three to seek registration.
• Foreign boards of trade (FBOTs) – Regulated trading platforms in other countries that are generally equivalent to DCMs. Since the FBOT rule became effective, 19 FBOTs have filed applications with the CFTC. By 2014, staff expects an additional couple of FBOTs to seek registration with the CFTC.
• Swap data repositories (SDRs) – Recordkeeping facilities created by Dodd-Frank to bring transparency to the swaps market. Three are provisionally registered with the CFTC, and by 2014, an additional SDR may seek registration.
• Swap dealers and major swap participants – Under the Dodd-Frank Act, the CFTC is working to comprehensively regulate swap dealers and major swap participants to lower their risk to the economy. As the result of completed CFTC rules, 75 swap dealers and two major swap participants are now provisionally registered. This initial group includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. Commission staff currently estimates that over time, 25-50 additional swap dealers may request registration with the National Futures Association (NFA). We’ll be overseeing their registration and related questions.
• Swap execution facilities (SEFs) – The new trading platform for swaps. Commission staff estimates that 15 entities may request to become SEFs.
While we will have a system for provisional registration in place, market participants will want the certainty of final registration.
The Commission approved the first clearing requirement last November. A key milestone was reached last week with the requirement that swap dealers and the largest hedge funds clear as of March 11. The vast majority of interest rate and credit default index swaps are being brought into central clearing. Compliance will continue to be phased in throughout this year. Other financial entities begin clearing June 10. Accounts managed by third party investment managers and ERISA pension plans have until September 9. The Commission continues in the resource intensive review for determinations of other swaps that will be subject to the clearing mandate.
Full funding for the agency means that we will be best prepared to review the dramatic increase in requested registrations and to review swaps for the clearing mandate. A partial increase in funding means market participants will see a backlog in registrations, responses to their inquiries, and product review because we won’t have personnel sufficient to review their submissions in a timely and complete manner. Flat funding will mean market participants will wait even longer. There will be significant backlogs for participants seeking to register with the CFTC, as well as for review of swaps for mandatory clearing.
Examinations
Another critical mission for FY 2014 will be more regular and more in-depth examinations of the major market participants the CFTC oversees. Examinations are the CFTC’s tool to check for compliance with laws that protect the public and to ensure the protection of customer funds. The President’s request would provide $44.3 million and 185 FTEs for examinations, an increase of $25.6 million and 104 FTEs. The CFTC would more than double our current allocation for this mission because the number of entities we examine is expected to more than double.
This is an area where the agency has fallen short of our goals in performance reviews. The CFTC directly reviews clearinghouses and trading platforms and will review SDRs. But while the agency reviews them directly, we don’t have the resources to have full-time staff on site, unlike other regulatory agencies that do have on-the-ground staff at the significant firms they oversee. The CFTC also doesn’t do annual reviews. Clearinghouses, for instance, currently are examined on a three-year cycle. For intermediaries such as futures commission merchants (FCMs) and swap dealers, the CFTC relies on what are known as self-regulatory organizations (SROs) to be the primary examiners. Given our lack of resources, we’re only able to double check the SROs’ work on a limited number of FCMs each year, and the agency can spend little time onsite at the firms.
On top of the current lack of staff for examinations, our responsibilities in 2014 will expand to include reviews of many new market participants. For instance, there are currently 117 FCMs, 75 swap dealers and two major swap participants have provisionally registered, and more are expected to do so as the year progresses. More frequent and in-depth examinations are necessary to assure the public that firms have adequate capital, as well as systems and procedures in place to protect customer money. Reviews are critical to ensuring the financial soundness of clearinghouses, and ensuring transparency and competition in the trading markets.
Fully funding the increase for examinations means the Commission can move toward annual reviews of all significant clearinghouses and trading platforms and adequate reviews of other market participants. A partial increase for examinations means cutting back our monitoring plans for new market participants and more in-depth risk reviews. Flat funding means we will continue lacking the ability to assure the public that the CFTC’s registrants are financially sound and in compliance with regulatory protections.
Surveillance and Data
Effective market surveillance is dependent on the CFTC’s ability to acquire and analyze extremely large volumes of data to identify trends and events that warrant further investigation. For FY 2014, the President’s request would support $61.7 million and 174 FTEs for surveillance, data acquisition, and analytics, an increase of $18.3 million and 53 FTEs. Of the $61.7 million request, 55 percent would be directed toward IT.
The Dodd-Frank swaps market transparency rules mean a major increase in the amount of incoming data for the CFTC to aggregate and analyze. The agency is taking on the challenge of establishing connections with SDRs and aggregating the newly available swaps data with futures market data. This requires high performance hardware and software and the development of analytical alerts. But it also requires the corresponding personnel to manage this technology effectively for surveillance and enforcement.
As the CFTC also receives ownership and control information for trading accounts, it will have data to better detect intraday position limit violations and analyze high frequency trading.
A full increase for surveillance means the CFTC will have the ability to analyze futures and swaps data to protect market participants and the public. A partial increase would limit the agency’s investments in analysis-based surveillance tools. And flat funding will limit our capacity to effectively utilize and aggregate the new data we now are receiving.
Enforcement
The CFTC’s enforcement arm protects market participants and other members of the public from fraud, manipulation and other abusive practices in the futures and swaps markets. Our efforts range from pursuing Ponzi schemers who defraud individuals across the country out of life savings; to abuses that threaten customer funds; to false reporting of prices; to schemes to manipulate prices, including of goods, such as oil, gas and agricultural products. The Commission has opened more than 800 investigations in the past two fiscal years. The President’s FY 2014 request would provide $57.7 million and 213 FTEs for enforcement, an increase of $18.1 million and 51 FTEs.
In 2002, we had 154 people devoted to enforcement, and that number is nearly flat with our current staff of 158. This staff has been called upon to enforce laws and rules that are new to our arsenal. The Dodd-Frank mandate closed a significant gap in the agency’s enforcement authorities by extending the enforcement reach to swaps and prohibiting the reckless use of manipulative or deceptive schemes. In addition, the CFTC will be overseeing a host of new market participants.
A full increase for enforcement means more investigations and cases that the agency can pursue to protect the public. A less than full increase means that the CFTC will be faced with difficult choices. We could maintain the current volume and types of cases, but we would have to shift resources from futures cases to swaps cases or not cover all of the swaps market. Flat funding means not only that the Commission’s enforcement volume likely would shrink, but parts of the markets would be left with little enforcement oversight.
The Commission’s engagement in targeted enforcement efforts in the public interest include its historic actions regarding the rigging of benchmark rates, such as the London Interbank Offered Rate (LIBOR), a reference rate for much of the U.S. futures and swaps markets. Barclays, UBS and RBS were fined approximately $2.5 billion for manipulative conduct by the CFTC, the UK Financial Services Authority (FSA) and the Justice Department. At each bank, the misconduct spanned many years, took place in offices in several cities around the globe, included numerous people, and involved multiple benchmark rates and currencies. In each case, there was evidence of collusion. In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputation. While the cases led to $2 billion in fines flowing to the U.S. Treasury, what this is about is ensuring for financial market integrity.
Economics and Legal Analysis
For FY 2014, the President’s budget would support $24.6 million and 97 FTEs to invest in robust economic analysis teams and Commission-wide legal analysis, a decrease of $3.6 million and 20 FTEs from our estimate under the pre-sequester continuing resolution. The CFTC’s economists support all of the Commission’s divisions, including surveillance and complex enforcement cases. They have served on Dodd-Frank rule teams to carefully consider the costs and benefits of each rule.
The decision to make downward adjustments in the resources requested for this critical mission activity was not an easy one. However, given the increasing number of intermediaries the CFTC now oversees, examination teams needed to be bolstered.
In 2014, the CFTC’s economists will be integral in developing tools to analyze automated surveillance data and continue to evaluate new products for clearing.
Flat funding means a strained ability to analyze the market and detect problems that could be negative for the economy. Flat funding also means the Commission’s legal analysis team will be cut back even further to support front-line examinations, adding to the delays in responding to market participants and processing applications and straining the team’s ability to support of enforcement efforts.
Conclusion
The CFTC’s hardworking team is just 8 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown five-fold, driven by rapid advances in technology. The swaps market is eight times larger than the futures market. Effective market implementation of swaps reforms by the CFTC requires additional resources. We are not asking for eight times the funding or staff. Investments in both technology and people, however, are needed for effective oversight of these markets by regulators.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. With 77 entities having registered as new swap dealers and major swap participants, we need people to answer their questions and work with the NFA on the necessary oversight to ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs.
This is an incredibly strained budget environment. But without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy.
Thank you again for inviting me today, and I look forward to your questions.
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., April 11, 2013 — The Securities and Exchange Commission charged the former partner in charge of KPMG's Pacific Southwest audit practice and his friend with insider trading on nonpublic information about firm clients.
The SEC alleges that Scott London tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements. The two men had met at a country club several years earlier and became close friends and golfing partners. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn. In exchange for the illegal trading tips, Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.
London, who lives in Agoura Hills, Calif., and worked at KPMG for nearly 30 years, recently informed the firm that he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients. The firm immediately terminated him.
"London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex," said George S. Canellos, Acting Director of the Division of Enforcement.
Michele Wein Layne, Director of the SEC's Los Angeles Regional Office, added, "As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties."
In a parallel action, the U.S. Attorney's Office for the Central District of California today announced criminal charges against London.
According to the SEC's complaint filed in federal court in Los Angeles, London began providing Shaw with nonpublic information in October 2010 and the misconduct continued for the next 18 months. Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.
According to the SEC's complaint, London was the lead partner on several KPMG audits including Herbalife and Skechers USA, and he was the firm's account executive for Deckers Outdoor Corp. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results. Shaw, who lives in Lake Sherwood, Calif., routinely traded at least a dozen times on the inside information he received from London. He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers.
The SEC alleges that London also gained access to inside information about impending mergers involving two former KPMG clients - RSC Holdings and Pacific Capital. London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.
According to the SEC's complaint, in addition to the bags of cash and the Rolex watch valued at $12,000, Shaw gave London several pieces of expensive jewelry for his wife and routinely covered the costs of dinners and concerts the two men shared along with their families.
The SEC's complaint charges London and Shaw with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently ordering them to disgorge ill-gotten gains plus pay prejudgment interest and financial penalties, and enjoining them from future violations of these provisions of the federal securities laws.
The SEC's investigation, which began in mid-2012 and is continuing, has been conducted by William Fiske and Marc Blau of the Los Angeles Regional Office. The SEC's litigation will be led by Lynn Dean. The SEC appreciates the assistance of the U.S. Attorney's Office for the Central District of California and the Federal Bureau of Investigation. The SEC also appreciates assistance from the Financial Industry Regulatory Authority (FINRA), Options Regulatory Surveillance Authority (ORSA), and Chicago Board Options Exchange (CBOE).
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