SEEKING GUIDANCE ON DODD-FRANK STRESS TEST GUIDANCE FOR MEDIUM-SIZED FIRMS

FROM:  FEDERAL DEPOSIT INSURANCE CORPORATION

Agencies Seek Comment on Dodd-Frank Act Stress Test Guidance for Medium-sized Firms

Three federal bank regulatory agencies are seeking comment on proposed guidance describing supervisory expectations for stress tests conducted by financial companies with total consolidated assets between $10 billion and $50 billion.

These medium-sized companies are required to conduct annual company-run stress tests beginning this fall under rules the agencies issued in October 2012 to implement a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

To help these companies conduct stress tests appropriately scaled to their size, complexity, risk profile, business mix, and market footprint, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency are proposing guidance to provide additional details tailored to these companies.

The stress test rules allow flexibility to accommodate different approaches by different companies in the $10 billion to $50 billion asset range. Consistent with this flexibility, the proposed guidance describes general supervisory expectations for Dodd-Frank Act stress tests, and, where appropriate, provides examples of practices that would be consistent with those expectations.

The public comment period on the proposed supervisory guidance will be open until September 25, 2013.

MAN ORDERED TO PAY OVER $480,000 TO SETTLE CHARGES OF VIOLATING A PERMANENT TRADING BAN

FROM:  COMMODITY FUTURES TRADING COMMISSION

Federal Court in Illinois Orders Michael Peskin to Pay More Than $480,000 and Imposes Other Sanctions to Settle Charges that Peskin Violated A Permanent Trading Ban

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge John F. Grady of the U.S. District Court for the Northern District of Illinois entered a Consent Order permanently enjoining Michael Peskin from trading in violation of a CFTC trading ban. The Order was entered on July 24, 2013 and arises out of an enforcement action filed against Peskin in CFTC v. Michael Peskin, No. 13 cv 5211 (N. D. Illinois July 22, 2013), a case stemming from charges that Peskin had violated a permanent trading ban. The Court also ordered Peskin to pay disgorgement of $239,339.78 and a civil monetary penalty of $250,000.

The Commission imposed a trading ban against Peskin in 1993 as a sanction after finding that Peskin had fraudulently allocated trades to benefit himself at the expense of his customers in an administrative proceeding entitled In the Matter of Peskin, CFTC Docket No. 89-1 [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,660 (CFTC Feb. 9, 1993).

The CFTC complaint alleges that Peskin violated a permanent trading ban entered against him in 1993 by trading for himself through the individual trading accounts of others from at least February 2006 through December 2012. The complaint also alleged that Peskin profited by $239,339.78 by trading in violation of the ban.

The Order finds that, beginning in at least February 2006, Peskin arranged with other persons to assume the identity of these other persons in order to trade for himself, both telephonically and electronically, through the accounts of those other persons.

CFTC Division of Enforcement staff responsible for this case are Susan Padove, Judy McCorkle, Elizabeth M. Streit, Scott Williamson, Rosemary Hollinger, and Richard Wagner.

FLORIDA RESIDENT CHARGED BY SEC WITH SELLING UNREGISTERED SECURITIES

FROM:   SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Florida Resident with Unregistered Sales of Securities

On July 23, 2013, the Securities and Exchange Commission filed settled charges against Florida resident Jorge Bravo, Jr., for unlawful sales of millions of shares of a microcap company to the public without complying with the registration requirements of the Securities Act of 1933.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, from April 2009 until May 2010, Bravo unlawfully sold approximately 93 million shares of stock of AVVAA World Health Care Products, Inc. in unregistered transactions for proceeds of approximately $523,000. The complaint alleges that Bravo obtained the shares through three "wrap around agreements." The wrap around agreements involved debts that AVVAA supposedly owed to its officers, affiliates, or other persons closely associated with the company ("Affiliates") for unpaid compensation for services rendered. Under the wrap around agreements, the Affiliates assigned to Bravo the debts that AVVAA purportedly owed to them, and AVVAA consented to the assignment and agreed to modify the terms of the original debt obligation so that the debts now owed to Bravo were immediately convertible into shares of AVVAA common stock. According to the complaint, within weeks of entering into the first two agreements, and approximately four months after the execution of the third, Bravo began selling the shares he obtained under the agreements to the public. He then used some of the proceeds of the stock sales to pay the amounts owed to the Affiliates under the wrap around agreements. The complaint further alleges that Bravo had previously been involved in wrap around agreements, in his capacity as of president and chief executive of Cross Atlantic Commodities, Inc., a public company located in Weston, Florida, and that those wrap around agreements were subjects of a prior Commission enforcement action, SEC v. K&L International Enterprises, Inc., 6:09-cv-1638-GAP-KRS (M.D. Fla. Sept. 24, 2009). Bravo was not charged in that matter.

Without admitting or denying the SEC's allegations, Bravo agreed to settle the case against him by consenting to the entry of a final judgment permanently enjoining him from future violations of Sections 5(a) and 5(c) of the Securities Act; permanently enjoining him from participating in any offering of penny stock; and requiring him to pay disgorgement of $ 392,000, the amount of his ill-gotten gains, plus prejudgment interest of $ 53,866 and a civil penalty in the amount of $150,000. The settlement must be approved by the court.

The SEC's investigation was conducted by New York Regional Office Enforcement staff Karen Lee, Christopher Ferrante, and Leslie Kazon. The Commission acknowledges the assistance of FINRA, the British Columbia Securities Commission, and the Ontario Securities Commission in this matter.

ATTORNEY SUSPENDED FROM PRACTICING LAW FOR THREE YEARS OVER INSIDER TRADING ROLE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

New York State Suspends Attorney Mitchell S. Drucker from Practicing Law for Three Years Based On Insider Trading Violation

The Commission announces that on July 17, 2013, the Appellate Division, Second Department, of the New York State Supreme Court (the "Appellate Division"), issued a decision suspending attorney Mitchell S. Drucker from the practicing law for three years, commencing August 16, 2013. The decision provides that Drucker cannot apply for reinstatement earlier than February 16, 2016. The Court imposed this sanction based on the judgment the Commission obtained in its insider trading case against Drucker. SEC v. Mitchell S. Drucker, et al, 06 Civ. 1644 (S.D.N.Y.) In December 2007, a jury in the United States District Court for the Southern District of New York found that Drucker, who was in the legal department of public company NBTY, Inc., violated the antifraud provisions of the securities laws by insider trading the common stock of NBTY, tipping his father, who traded, and trading his friend's NBTY shares. In its decision, the Appellate Division upheld the determination of a Special Referee that Drucker had (1) "engaged in conduct involving dishonesty, deceit, fraud, or misrepresentation, in violation of former Code of Professional Responsibility DR1-102(a)(4) (22 NYCRR 1200.3[a][4])," and (2) "engaged in conduct adversely reflecting on his fitness as an attorney, in violation of former Code of Professional Responsibility DR 1-102(a)(7) (22 NYCRR 1200.3[a][7])." In imposing its sanction, the Appellate Division found:

. . . [W]e note the absence of cooperation by the respondent with the SEC, as well as the absence of any admission by the respondent that he engaged in insider trading. As the District Court noted, the respondent "failed to cooperate … until … he could no longer conceal his transgression, thereby misleading his employer," and he failed to take responsibility for what he did. We find the absence of remorse to be an aggravating factor, consistent with the District Court's finding that the respondent was entitled to "no mercy" as a result of the "brazenness" of his conduct and his "cocky refusal to own up to it." Moreover, we note the District Court's description of the respondent as having "demonstrated utter indifference to the law and to his client," and of his conduct as "egregious."

Previously, on December 26, 2007, Judge Colleen McMahon, whose decision and findings were cited by the Appellate Division, enjoined Drucker from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and barred him from serving as an officer and director of any public company. The judgment also ordered defendant Drucker to pay disgorgement and prejudgment interest totaling $201,146, to pay, and be jointly and severally liable with his father, defendant Ronald Drucker for, disgorgement and prejudgment interest totaling $74,411, and to pay, and be jointly and severally liable with his friend, relief defendant William Minerva for, disgorgement and prejudgment interest totaling $11,577. Finally, the judgment ordered Mitchell Drucker to pay a civil penalty of $394,486, representing two times the combined ill-gotten gains obtained by defendants Mitchell Drucker and Ronald Drucker, and relief defendant Minerva. Drucker subsequently completed those payments to the U.S. Treasury.

In February 2008, the Commission issued an Order temporarily and then permanently suspending Drucker from practicing before the Commission based on his insider trading judgment.

CFTC ANNOUNCEMENT REGARDING MANDATORY CLEARING OF iTRAXX CDS INDICES FOR CATEGORY 2 ENTITIES

FROM:  COMMODITY FUTURES TRADING COMMISSION

July 25, 2013
CFTC Announces that Mandatory Clearing of iTraxx CDS Indices for Category 2 Entities Begins Today

Washington, DC — The Division of Clearing and Risk (Division) of the Commodity Futures Trading Commission (Commission) announces that the second phase of required clearing for certain iTraxx credit default swap (CDS) indices begins today for Category 2 Entities. Category 2 Entities include commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, except for third-party subaccounts. These entities are required to begin clearing iTraxx CDS indices that are subject to the clearing requirement under section 2(h) of the Commodity Exchange Act (CEA) and Regulations 50.2 and 50.4(b) executed on or after July 25, 2013.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the CEA to require that the Commission determine whether a swap is required to be cleared by a derivatives clearing organization (DCO). The Commission adopted its first clearing requirement determination for four classes of interest rate swaps and two classes of CDS on November 28, 2012.

At the time of the Commission’s initial clearing determination no DCO was offering client clearing for the iTraxx CDS indices. The Commission specified that if no DCO offered client clearing for the indices by February 11, 2013, compliance with the required clearing of iTraxx would begin 60 days after the date on which iTraxx was first offered for client clearing by an eligible DCO.

On February 25, 2013, ICE Clear Credit LLC notified the Commission that it had begun offering customer clearing of the iTraxx CDS indices that are subject to the clearing requirement. The following are the compliance dates previously announced for required clearing of these iTraxx swaps:

Category 1 Entities: Friday, April 26, 2013
Category 2 Entities: Thursday, July 25, 2013
All other entities: Wednesday, October 23, 2013
The compliance dates set forth above do not apply to the clearing schedule for the interest rate swaps and other CDS indices subject to the clearing requirement established in the Commission’s first determination, which are as follows:

Category 1 Entities: Monday, March 11, 2013
Category 2 Entities: Monday, June 10, 2013
All other entities: Monday, September 9, 2013

FORMER INVESTMENT BANKER AND COLLEGE FRIEND SENTENCED FOR ROLES IN INSIDER TRADING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Former Investment Banker and His College Friend Sentenced to 16 Months in Prison for Insider Trading Scheme

The Securities and Exchange Commission announced that on July 23, 2013, investment bank analyst Jauyo "Jason" Lee, 29, of Palo Alto, Calif., and his college friend Victor Chen, 29, of Sunnyvale, Calif., were sentenced to 16 months in prison for their roles in an insider trading scheme. The Honorable Richard Seeborg, of the U.S. District Court for the Northern District of California, also sentenced Lee and Chen to two years of supervised release following their incarceration and ordered that restitution and forfeiture be considered at a subsequent hearing. Chen paid $610,099 in forfeiture prior to sentencing. Lee and Chen both pleaded guilty on April 16, 2013, to one count of conspiracy to commit securities fraud and one count of securities fraud.

The criminal charges filed by the U.S. Attorney for the Northern District of California arose out of the same facts that were the subject of a civil action that the SEC filed against Lee and Chen on September 27, 2012. The SEC's complaint alleged that Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive, nonpublic information about two upcoming deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped Chen, his longtime college friend with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.

According to the SEC's complaint, Lee was first privy to information about Leerink's client Syneron Medical Ltd., which was negotiating an acquisition of Candela Corporation in 2009. He later learned that Leerink's client Somanetics Corporation was in the process of being acquired by Covidien plc. in 2010. As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly and exchanged dozens of phone calls and text messages. Some of the calls took place from Lee's office telephone at Leerink. Lee had a duty to preserve the confidentiality of the information that he received in the course of his employment at Leerink.

The SEC alleged that in the days leading up to the public announcements of each of these deals, Chen made sizeable purchases of stock and call options in Candela and Somanetics and made unusual trades in the securities of each of these acquisition targets. Chen had never previously bought securities in these companies, yet he suddenly spent a significant portion of his available cash to buy the Candela and Somanetics securities. Chen proceeded to sell most of his Candela and Somanetics holdings once public announcements were made about the transactions. Because Chen made some of his trades in his sister Jennifer Chen's account, the SEC's complaint also names her as a relief defendant for the purposes of recovering the illegal profits in her account.

As a result of their conduct, the SEC's complaint charged Lee and Chen with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The complaint sought disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctions against Lee and Chen. The SEC's case remains pending.