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Tuesday, February 28, 2012

SEC ISSUES ALERT TO HELP STOP UNAUTHORIZED TRADING IN BROKERAGE & ADVISORY ACCOUNTS

FOR IMMEDIATE RELEASE
2012-33


"Washington, D.C., Feb. 27, 2012 – The Securities and Exchange Commission today released an alert to help firms prevent and detect unauthorized trading in brokerage and advisory accounts.

The following excerpt is from and SEC e-mail:

"The Risk Alert issued by the agency’s Office of Compliance Inspections and Examinations (OCIE) notes that although broker-dealers and investment advisers are subject to different regulatory requirements, both face similar risks of financial and reputational losses arising from unauthorized trading.
Unauthorized trading can include rogue trades in customer, client, or proprietary accounts or trades that exceed firm limits on position exposures, risk tolerances, and losses. Unauthorized trading can be done by traders, assistants on trading desks, portfolio managers, brokers, risk managers, or other personnel, including those in administrative positions in a firm’s back office.

“Unauthorized trading is not a new problem, and the risks it poses should be a perennial concern to financial firms as well as to regulators,” said Carlo di Florio, Director of OCIE. “We hope that the observations shared in the Risk Alert will be helpful for firms as they review their compliance and supervisory controls to detect and deter unauthorized trading.”

The alert notes that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny. The alert suggests compliance measures that firms might want to use to protect themselves and their clients from unauthorized trading, such as stress testing and independent trading reviews. The alert also discusses policies that require traders to take vacations without remote access to trading accounts. These policies could be enhanced, for instance, by using the trader’s vacation to conduct a special review of the trader’s portfolio for signs of unusual activity.

The alert is the second this year and the fourth in a continuing series of Risk Alerts that the SEC’s examination staff expects to issue."

The following staff contributed substantially to preparing this Risk Alert: Marita Bartolini, Andrew Bowman, Julius Leiman-Carbia, Olin Filyaw, Dan Gregus, George Kramer, Lesley Ward, and Margaret Willenbucher.

Monday, February 27, 2012

MAN PLEADS GUILTY IN $72 MILLION PONZI SCHEME

The following excerpt is from the SEC website:

February 24, 2012
“SEC v. Gregory N. McKnight, et al.: 08-cv-11887 (E.D. Mich.)
Court Accepts Guilty Plea from Gregory McKnight in $72 Million Ponzi Scheme
The Securities and Exchange Commission announced that on February 16, 2012, the Honorable Mark A. Goldsmith of the United States District Court for the Eastern District of Michigan accepted a guilty plea by Flint-area resident Gregory N. McKnight to one count of wire fraud for his role in orchestrating a $72 million Ponzi scheme involving at least 3,000 investors. For his crimes, McKnight faces a potential maximum penalty of 20 years in federal prison. His sentence will be determined at a future date. The U.S. Attorney’s Office for the Eastern District of Michigan filed criminal charges against McKnight on February 14, 2012.

The criminal charges arose out of the same facts that were the subject of an emergency action that the Commission filed against McKnight and others on May 5, 2008. On that same day, the Court issued orders freezing McKnight’s assets and those of several companies he controlled, and appointed a Receiver. The Commission’s complaint alleged that, from December 2005 through November 2007, McKnight, through his company Legisi Holdings, conducted a fraudulent, unregistered offering of securities in which he raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries. According to the Commission's complaint, McKnight represented that he would invest the offering proceeds in various investment vehicles and pay interest of as much as 15 percent per month from the resulting profits. The complaint charged that McKnight invested less than half of the offering proceeds and that these investments resulted in millions of dollars in losses. The Commission's complaint further charged that McKnight used investor funds to make Ponzi payments to investors and for his own use. The Commission’s complaint charged McKnight with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

On July 6, 2011, the Court entered a final judgment against McKnight in the Commission’s action, and ordered McKnight to pay disgorgement of ill-gotten gains, prejudgment interest, and civil penalties totaling approximately $6.5 million. The court also issued orders permanently enjoining McKnight from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 hereunder.”

SEC SAYS THREE OIL SERVICES EXECUTIVES VIOLATED FOREIGN CORRUPT PRACTICES ACT

The following excerpt is from the SEC website:

"Washington, D.C., Feb. 24, 2012 — The Securities and Exchange Commission today charged three oil services executives with violating the Foreign Corrupt Practices Act (FCPA) by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.
The SEC alleges that former Noble Corporation CEO Mark A. Jackson along with James J. Ruehlen, who is the current Director and Division Manager of Noble’s subsidiary in Nigeria, bribed customs officials to process false paperwork purporting to show the export and re-import of oil rigs, when in fact the rigs never moved. The scheme was designed to save Noble Corporation from losing business and incurring significant costs associated with exporting rigs from Nigeria and then re-importing them under new permits. B
ribes were paid through a customs agent for Noble’s Nigerian subsidiary with Jackson and Ruehlen’s approval.
The SEC separately charged Thomas F. O’Rourke, who was a former controller and head of internal audit at Noble. The SEC alleges that O’Rourke helped approve the bribe payments and allowed the bribes to be booked improperly as legitimate operating expenses for the company. O’Rourke agreed to settle the SEC’s charges and pay a penalty.

“These executives knowingly authorized and paid foreign officials to process false documents, and they consciously concealed the scheme from Noble’s audit committee,” said Gerald Hodgkins, Associate Director in the SEC’s Division of Enforcement. “When executives bribe government officials overseas, their misconduct puts their companies in legal peril and damages the integrity of foreign markets and the reputation of U.S. companies abroad.”

Noble Corporation was charged with FCPA violations as part of a sweep of the oil services industry in late 2010. The company cooperated with investigators and agreed to pay more than $8 million to settle civil and criminal cases.
According to the SEC’s complaint against Jackson and Ruehlen filed in U.S. District Court for the Southern District of Texas, the executives who perpetrated the scheme worked at Noble Corporation and its Nigerian subsidiary Noble Drilling (Nigeria) Ltd, whose rigs operated in Nigeria on the basis of temporary import permits granted by the Nigeria Customs Service (NCS). These temporary permits allowed the rigs to be in the country for a one-year period. NCS had the discretion to grant up to three extensions lasting six months each, after which the rigs were required to be exported and re-imported under a new temporary permit or be permanently imported with the payment of sizeable duties.
The SEC alleges that Jackson and Ruehlen had a role in arranging, facilitating, approving, making, or concealing the bribe payments to induce Nigerian customs officials to grant new temporary permits illegally and favorably exercise or abuse their discretion to grant permit extensions. Together, Jackson and Ruehlen participated in paying hundreds of thousands of dollars in bribes to obtain about 11 illicit permits and 29 permit extensions. Jackson approved the bribe payments and concealed the payments from Noble’s audit committee and auditors. Ruehlen prepared false documents, sought approval for the bribes, and processed and paid the bribes.
The SEC’s complaint against Jackson and Ruehlen alleges they directly violated the anti-bribery provisions of Section 30A of the Securities Exchange Act and the internal controls and false records provisions at Section 13(b)(5) and Rule 13b2-1 of the Exchange Act. The complaint alleges that they aided and abetted Noble’s violations of Section 30A and the books and records and internal controls provisions at Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The complaint further alleges that Jackson directly violated Exchange Act Rule 13b2-2 by misleading auditors and Exchange Act Rule 13a-14 by signing false certifications of Noble’s financial statements. He also is liable as a control person under Section 20(a) of the Exchange Act for violations of the anti-bribery, books and records, and internal controls provisions by Noble, Ruehlen, and O’Rourke.
The SEC’s complaint against O’Rourke alleges that he aided and abetted Noble’s violations of the anti-bribery, books and records, and internal controls provisions of the Exchange Act, and that he directly violated the internal controls and false records provisions of the Exchange Act. Without admitting or denying the SEC’s allegations, O’Rourke consented to entry of a court order requiring him to pay a $35,000 penalty and permanently enjoining him from further violations of Sections 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and 30A of the Exchange Act and Rule 13b2-1.

The SEC’s investigation was conducted by Moira T. Roberts, Sharan K.S. Custer, and Colin Rand, and the litigation effort will be led by Kenneth W. Donnelly. The SEC acknowledges the assistance of the U.S. Department of Justice, Fraud Section, and the Federal Bureau of Investigation."

Sunday, February 26, 2012

COMMISSIONER DANIEL M. GALLAGHER SPEAKS AT CREDIT SUISSE GLOBAL EQUITY TRADING FORUM

The following excerpt is from the SEC website:

“Remarks at the Credit Suisse Global Equity Trading Forum
Commissioner Daniel M. Gallagher
Miami Beach, FL
February 17, 2012
Thank you, John [Anderson], for that very kind introduction. I am pleased to be here today.
Before I continue, I need to provide the standard disclaimer that my comments today are my own, and do not necessarily represent the positions of the Commission or my fellow Commissioners.

The broad topic of this conference is “Seeing Beyond,” and this theme is particularly relevant given the focus of my discussion this morning--Dodd-Frank, with a special emphasis on the Volcker Rule. Indeed, for the financial services industry, not just in the U.S. but worldwide, it is very difficult to “see beyond” Dodd-Frank. The largest financial reform law in 70 years has and will continue to impose massive costs on market participants, and will reconfigure the financial services industry worldwide, but the amount of these costs and the scope of this reconfiguration are still highly uncertain.

18 months on, regulators are still working to implement Dodd-Frank, and most, if not all, of the new regulatory undertakings are very much works in progress. Regulators are therefore in a difficult position, because the markets and the public need regulatory guidance and certainty, but that certainty can and should not come at the cost of hasty and ill-considered regulatory initiatives that will damage the real economy that Dodd-Frank ostensibly is designed to protect.

At the SEC, we face this tension every day. Dodd-Frank requires more than 100 rulemakings and studies from the agency. Among these rulemakings, Dodd-Frank mandates that the agency build regulatory infrastructures from scratch in several areas, including the OTC derivatives market, in conjunction with the CFTC; the registration and oversight of municipal advisors; and the registration and oversight of hedge funds and private equity funds. The sheer breadth of rulemaking for the agency argues for a general approach that is systematic yet incremental: particularly in areas where we are creating new regulatory paradigms, we should strive to build a solid foundation, and develop the regulatory regime over time as the markets and our expertise in those markets develop.

It is also important to remember, as we implement Dodd-Frank, what the law did and didn’t do, particularly as it relates to the SEC. Critically, it did notchange the fundamental mission of the agency. Our mission was and still is to protect investors, maintain fair and efficient markets, and promote capital formation. Dodd-Frank did not make us a banking or safety and soundness regulator. We still regulate markets that are risky, and where the taking of risk is critical to capital allocation and the healthy functioning of these markets and the broader economy. Moreover, in terms of the additional responsibilities given to the SEC, both in those areas we traditionally oversee and those that we don’t, Dodd-Frank reinforced Congress’s nearly 80-year commitment to a strong, vibrant, expert and independent equity markets regulator.

Which brings me to the Volcker Rule. I can think of no better topic to address today. It is not only timely--the comment period to the proposal closed this week, to great fanfare in the press--but it may, perhaps more than any other rule regulators are promulgating under Dodd-Frank, have a dramatic impact on world markets and U.S. competitiveness. Moreover, the heart of the Volcker Rule deals with a topic about which the SEC traditionally has--among all the regulators writing rules in this space--the most experience and expertise in regulating. For those reasons--because it is potentially so significant and because it implicates areas of the SEC’s core competence, it is a perfect case study for how to think about approaching Dodd-Frank rulemaking and the SEC’s role in that rulemaking. Indeed, Volcker is especially important to the major U.S. investment banks which until the financial crisis were subject primarily to SEC oversight. Now, as a result of the financial crisis, the survivors are all within bank holding companies.

I want to begin by talking a bit about the statute and the proposed rules. Section 619 of the Dodd-Frank Act,1 commonly known as the “Volcker Rule” even though it is a statutory provision, imposes two significant prohibitions on banking entities and their affiliates. First, the Rule generally prohibits banking entities that benefit from federal insurance on customer deposits or access to the discount window, as well as their affiliates, from engaging in proprietary trading. Second, the Rule prohibits those entities from sponsoring or investing in hedge funds or private equity funds. The Rule identifies certain specified “permitted activities,” including underwriting, market making, and trading in certain government obligations, that are excepted from these prohibitions but also establishes limitations on those excepted activities. The Volcker Rule defines--in expansive terms--key terms such as “proprietary trading” and “trading account” and grants the Federal Reserve Board, the FDIC, the OCC, the SEC, and the CFTC the rulemaking authority to further add to those definitions.

The statute also charges the three Federal banking agencies, the SEC, and the CFTC with adopting rules to carry out the provisions of the Volcker Rule. It requires the Federal banking agencies to issue their rules with respect to insured depositary institutions jointly and mandates that all of the affected agencies, including the Commission, “consult and coordinate” with each other in the rulemaking process. In doing so, the agencies are required to ensure that the regulations are “comparable,” that they “provide for consistent application and implementation” in order to avoid providing advantages or imposing disadvantages to affected companies, and that they protect the “safety and soundness” of banking entities and nonbank financial companies supervised by the Fed.

In October of last year, the Commission jointly proposed with the Federal banking agencies a set of implementing regulations for the Volcker Rule,2with the CFTC issuing a substantively identical set of proposals last month. The proposed rules, which were issued prior to the beginning of my tenure as a Commissioner, are designed to clarify the scope of the Volcker Rule’s prohibitions as well as certain exceptions and limitations to those exceptions as provided for in the statutory text. The proposing release includes extensive commentary designed to assist entities in distinguishing permitted trading activities from prohibited proprietary trading activities as well as in identifying permitted activities with respect to hedge funds and private equity funds. In addition, the release includes over 1,300 questions on nearly 400 topics--you can see why I and my colleague Commissioner Troy Paredes thought that commenters needed 30 extra days when the comment period extension was granted in December.

The proposed implementing rules are designed to clarify the scope of the Volcker Rule’s prohibitions on proprietary trading and hedge fund or private equity fund ownership and identify transactions and activities excepted from those prohibitions, as well as the limitations on those exceptions. For example, the proposed rules would except from the prohibition on proprietary trading transactions in certain instruments--such as U.S. government obligations--as well as certain activities, such as market making, underwriting, risk-mitigating hedging, or acting as an agent, broker, or custodian for an unaffiliated third party. The proposed rules would also establish a three-pronged definition of “trading accounts” which would include exceptions from that definition such as repurchase and reverse repurchase agreements and securities lending transactions, liquidity management positions, and certain positions of derivatives clearing organizations and clearing agencies.

The proposed rules would require a banking entity to establish an internal compliance program designed to ensure and monitor compliance with the prohibitions and restrictions of the Volcker Rule. The rules would require firms with significant trading operations to report certain quantitative measurements designed to aid regulators and the firms themselves in determining whether an activity constitutes prohibited proprietary trading or falls under an exception to that prohibition, such as the exception for market-making transactions. Finally, the proposed rules would set forth activities exempt from the general prohibition on investments in hedge funds and private equity funds: for example, organizing and offering a hedge fund or private equity fund with investments in such funds limited to a de minimis amount, making risk-mitigating hedging investments, and making investments in certain non-U.S. funds.

As I mentioned earlier, the Volcker Rule comment period ended earlier this week.
Although it would of course be premature to share my thoughts on the proposed rules today, based on just a quick review of many substantial comment letters--more than 100 of which were filed just this week--it appears that many of my fears about the effect of the proposed rules on the proper functioning of global markets and the competitiveness of the U.S. financial industry might be well-founded.
Here are a few lines from comment letters:

From a major investment bank: “The list of undesirable consequences is long and troublesome. We share the view, already noted by others, that the Proposal would reduce market liquidity, increase market volatility, impede capital formation, harm U.S. individual investors, pension funds, endowments, asset managers, corporations, governments, and other market participants, impinge on the safety and soundness of the U.S. banking system, and constrain U.S. economic growth and job creation.”3

From a major coalition of financial services trade groups: “Many commenters, including customers, buy-side market participants, industrial and manufacturing businesses, treasurers of public companies and foreign regulators--constituencies with different goals and interests--have agreed that the Proposal would significantly harm financial markets. They point to the negative impacts of decreased liquidity, higher costs for issuers, reduced returns on investments and increased risk to corporations wishing to hedge their commercial activities.”4

From a Fortune 50 corporation: “Although we appreciate the Agencies' efforts to strike the correct balance in the Proposed Rule, we are concerned that the sweeping effects of the Proposed Rule and the narrowness of the exceptions to it would have a substantial and negative impact not only on banks and the broader financial services industry, but also on industrial and other non-financial businesses, and ultimately the real economy.”5

From a large foreign bank: ”We are concerned that certain key aspects of the Proposed Rule are deficient and will lead to a significant negative impact on the efficient functioning of the U.S. and international financial systems, with a particularly disruptive effect on the capital markets.”6

And we have also received very interesting comment from our foreign regulatory counterparts from around the world. In a comment letter filed in December, the Japanese FSA and the Bank of Japan discuss “the importance of taking due account of the cross-border effect of financial regulations and the need to collaborate with the affected countries” and express their concerns over “the potentially serious negative impact on the Japanese markets and associated significant rise in the cost of related transactions for Japanese banks” that they believe would arise from the extraterritorial application of the Volcker Rule. They specifically cite the adverse impact they believe the Rule would have on Japanese Government Bonds, adding, “We could also see the same picture in sovereign bond markets worldwide at this critical juncture.” 7

Last month, British Chancellor of the Exchequer George Osborne wrote to Fed Chairman Bernanke to express his belief that the proposed rules would result in the withdrawal of market making services for non-U.S. debt, making it “more difficult and costlier” for banks to trade non-U.S. sovereign bonds on behalf of clients. Citing the harm that would arise from the potential reduction of liquidity in sovereign markets, he proposed that the U.S. and the U.K. “launch a more active dialogue” on the Rule and its potential impact on markets outside the U.S. 8

Bank of Canada Governor Mark Carney--who was recently named Chairman of the G-20’s Financial Stability Board--has stated that he and other Canadian officials have “obvious concerns” about the proposed rules. He cited the lack of clarity in the proposed rules’ definitions of “market making” versus “proprietary trade,” and the effect the rules would have on non-U.S. government bond markets. In addition, he criticized what he viewed as the Rule’s “presumption” that trades are proprietary, stating that any such presumption “should go in reverse.”9

Lastly, Michel Barnier, the European Commissioner for Internal Markets and Services, has written to Fed Chairman Bernanke and Treasury Secretary Geithner that “[t]here is a real risk that banks impacted by the rule would also significantly reduce their market-making activities, reducing liquidity in many markets both within and outside the United States.”10
To be fair, these are just a few select quotes from commenters who have provided significant and detailed comments on a variety of issues, and there is broad comment generally on the range of issues presented by the rule proposal. However, these comments are very different from the garden variety comments we usually see in our rulemaking. Those usually go something like: “We applaud the Commission’s efforts to do X. . .” I am not hearing any clapping in these quotes. And that’s because the consequences to world markets of getting it wrong are so significant.

This brings me back to thinking about the role of the SEC in this rulemaking, our role generally as a markets regulator, and how, if we at the SEC play our role properly, we can and should ensure that the Volcker Rule meets the aims of Congress without destroying critically important market activity explicitly contemplated by the statute.

In particular, although commenters have raised many concerns about the proposal, including significant issues surrounding extraterritoriality, I want to focus on the skills that the SEC can bring to bear in sorting through the difficult questions posed by distinguishing between permitted trading activities and prohibited proprietary trading activities.

In her Opening Statement introducing the joint rule proposals at an SEC Open Meeting last October, Chairman Schapiro praised the collaborative effort among the five agencies involved in the drafting process, noting that it involved “more than a year of weekly, if not more frequent, interagency staff conference calls, interagency meetings, and shared drafting.”11 It is telling, however, that in his recent testimony before a House Financial Services Subcommittee, CFTC Chairman Gensler, noting his agency’s role as a “supporting member” in the rulemaking process, stated, “The bank regulators have the lead role.”12

I think, however, that both the statute and our expertise compel the SEC to play a strong and vigorous role in the rulemaking. The Volcker Rule applies to “banking entities” and their affiliates, affecting a wide range of financial institutions regulated by the five different agencies. Regardless of the nature of the regulated activities, however, the Rule addresses a set of activities--the trading and investment practices of those entities--that fall within the core competencies of the SEC. Indeed, the Rule expressly envisions that quintessential market-making activity continue within these firms.

By taking a leadership role, the SEC can also ensure that the final rule is consistent with our core mission of protecting investors, maintaining fair and efficient markets and promoting capital formation. These considerations, coupled with the expertise that the SEC brings to the table, should ensure that the bank regulators’ focus on safety and soundness and Dodd-Frank’s overarching focus on managing systemic risk (although many have argued whether the statute will in the end reduce such risk), are balanced by legitimate considerations of investor protection and the maintenance of robust markets.

Senator Jeff Merkley, cosponsor of the Volcker Rule, wrote this week: “Put simply, the Volcker rule takes deposit-taking, loan-making banks out of the business of high-risk, conflict-ridden trading.” 13 In essence, a main goal of the Volcker Rule is a return to the Glass-Steagall division between commercial and investment banking. But, it bears mentioning that the major investment banks that became part of bank holding companies during the 2008 crisis don’t meet this profile: they are not buying lottery tickets with their depositors’ money, because their business models are not premised on taking deposits. They provide services to clients and the objective should be for them to provide the services that they have traditionally provided, that market participants count on, while fulfilling the statutory imperative to ban proprietary trading.

I want to turn to another point I made at the beginning of my remarks, but which I think is an appropriate guiding principle as we undertake not only our consideration of the Volcker Rule but also other significant rulemaking mandated under Dodd-Frank. The aggregate impact of the rulemakings we and our fellow regulators are promulgating is massive, the costs are enormous, and we are doing so at a time when our economy is still hopefully limping towards recovery. These factors all argue for an approach that is careful, systematic, but most importantly regulatorily incremental. It is important to remember that regulators’ authority and oversight responsibilities do not end when final rules are promulgated, and that continued oversight will ensure that regulators can refine and improve the rules as markets organize and develop in response to the rules we write. Importantly, we can and should recalibrate the rules as markets develop and regulators learn more and gather and analyze relevant data. We must avoid regulatory hubris and should not regulate--particularly where the changes are so novel or comprehensive--with the belief that we completely understand the consequences of the regulations we may impose. In many of these areas, including Volcker, missing the mark could have dire and perhaps irreversibly negative consequences.

Before I end, I also wanted to touch on one last regulatory issue, which is surprisingly not a Dodd-Frank rulemaking but which has received quite a bit of attention recently, and that is the possibility of a new proposal to regulate money market funds.

I say “surprisingly not in Dodd-Frank” because, in a 2350-page lawostensibly devoted to solving for systemic risk, Congress did not address money market funds and they are, according to various speeches and news articles, considered a continuing systemic risk notwithstanding significant money market reforms approved by the SEC in 2010.

Any effort to reconsider the SEC’s oversight of money market funds should be guided by the same principles outlined above. First, we should ensure that any prospective reforms in this are consistent with the core missions of the agency to protect investors, maintain fair and efficient markets and promote capital formation. Second, we should consider such proposals carefully, but ultimately we need to let empiricism and not guesswork guide our decision-making.

Last year I posed two questions: “First, for what specific problems or risks are we trying to solve? And second, do we have the necessary data that will allow us to regulate in a meaningful and effective way?” Indeed, I have further refined these simple queries to be even more straightforward: What data do we have that clearly demonstrates the need for reform above and beyond that imposed in 2010? This question has yet to be answered for me, although I understand the Staff is working on it. I anticipate working closely with the economists in the Division of Risk, Strategy and Financial Innovation as they analyze the available data. Only by continuing such a data-driven analysis can we determine if money market fund investors are exposed to unnecessary risk. We also, of course, need to fully understand the impact of any action we could take on the capital formation process and the fair and the efficient functioning of the markets.
Thank you for your patience and for having me here today. I would be happy to answer any questions you may have.”

COURT FINES INVESTMENT ADVISER $2.5 MILLION FOR MISREPRESENTATIONS

The following excerpt is from the SEC website:

February 23, 2012

FEDERAL COURT ENTERS ORDER IMPOSING $2.5 MILLION CIVIL PENALTY AGAINST INVESTMENT ADVISER ROBERT GLENN BARD AND VISION SPECIALIST GROUP, LLC

The Securities and Exchange Commission announced that on February 2, 2012, United States District Judge William C. Caldwell of the United States District Court for the Middle District of Pennsylvania entered an order imposing a $2,500,000 civil penalty jointly and severally against defendants Robert Glenn Bard and Vision Specialist Group, LLC. In an earlier order on November 10, 2011, the Court found that defendants made false statements to thirty-three of their investment advisory clients on 146 separate occasions about what type of securities and holdings they had, where the assets were, and the value of the assets, and that they charged at least one client excessive fees. In assessing the penalty, the Court found that the egregiousness of defendants’ behavior, the recurrent nature of the conduct, the lack of cooperation with authorities, defendants’ degree of scienter, and the risk of loss created by defendants’ actions all weighed in favor of imposing a substantial penalty.

This case arises out of allegations by the Commission in a complaint filed on July 30, 2009, that defendant Bard, an investment adviser, and his solely-owned company Vision Specialist Group, LLC, had violated the federal securities laws through fraudulent misrepresentations regarding client investments, account performance and advisory fees, the creation of false client account statements, and forgery of client documents. On November 10, 2011, the Court granted the Commission’s motion for summary judgment. The Court found Bard and Vision Specialist liable for violations of § 17(a) of the Securities Act of 1933, § 10(b) of the Exchange Act of 1934, and Rule 10b-5 thereunder, and §§ 206(1) and 206(2) of the Investment Advisers Act of 1940. In that order, the Court also entered permanent injunctions against the defendants for violations of those provisions, and held the defendants jointly and severally liable for disgorgement of $450,000, plus prejudgment interest in an amount to be determined."

Saturday, February 25, 2012

FOUNDERS OF CANOPY FINANCIAL, INC., SENTENCED TO 13 AND 15 YEARS IN PRISON FOR FRAUD

The following excerpt is from the SEC website:

February 23, 2012
United States v. Jeremy Blackburn and Anthony Banas, Criminal Action No. 09 CR 976 (N.D. Ill. March 1, 2010)
“The U.S. Securities and Exchange Commission (Commission) announced that on February 15, 2012, co-founders of the bankrupt Canopy Financial, Inc., a health care transaction-software company based in Chicago, were sentenced to 15 and 13 years in prison for defrauding investors and clients of more than $93 million. Anthony Banas, Canopy’s chief technology officer, was sentenced to 160 months in prison, while Jeremy Blackburn, Canopy’s former president and chief operating officer, was sentenced to 180 months in prison. Both men pleaded guilty in late 2010 to one count of wire fraud, admitting they engaged in a fraud scheme that cheated investors of approximately $75 million and also misappropriated more than $18 million from customer accounts intended for health care savings and expenses. In imposing sentence, United States District Judge Ruben Castillo of the Northern District of Illinois noted that this case was the most aggravated financial fraud he had seen in his 18 years on the federal bench. The judge ordered both men to pay mandatory restitution and forfeiture totaling $93,125,918.

According to their plea agreements, Blackburn and Banas used false information about Canopy’s financial condition, including a bogus auditor’s report and falsified bank statements, to fraudulently obtain approximately $75 million from several private equity investors in 2009. Approximately $39 million of that money was used to redeem shares of other Canopy investors, including approximately $1.6 million that went to Blackburn and $975,000 that went to Banas, while another $29 million obtained from investors was deposited into Canopy operating accounts.

Also according to their plea agreements, Blackburn and Banas misappropriated Canopy operating funds for their own benefit. Blackburn took approximately $6 million in unauthorized withdrawals and transfers from Canopy bank accounts during 2009. Blackburn typically directed a Canopy employee, or occasionally Banas, to transfer Canopy funds to his bank accounts or to pay for his personal expenses, including credit card balances, luxury car purchases, and travel on a private jet. Blackburn also paid for personal home renovations, bought sports tickets and purchased jewelry and watches using misappropriated Canopy funds. Banas used misappropriated Canopy money to invest $300,000 in a nightclub. Banas also spent $400,000 between 2007 and 2009 on other personal expenses.

Blackburn admitted that he created phony bank statements during 2009 to conceal the transfer of more than $18 million from special health care accounts in which Canopy held funds as custodian for the benefit of more than 1,600 clients and customers to make payments to medical providers. The funds were transferred to Canopy’s own operating accounts, as well as to benefit Blackburn and Banas personally.
The Commission’s cases against Blackburn (SEC v. Canopy Financial, Inc., et al., Case No. 09-CV-7429, USDC, N.D.IL (LR-21324) and Banas (SEC v. Anthony T. Banas, Case No. 10- CV 3877 USDC N.D. IL) (LR-21566) resulted in permanent injunctions against both individuals for violating the antifraud provisions of the Securities Act of 1933 [Section 17(a)] and the Securities Exchange Act of 1934 [Section 10(b) and Rule 10b-5 thereunder], ordered disgorgement of $1,779,759.83 and prejudgment interest of $71,182.03 against Blackburn in April 2011 and disgorgement of $975,548.25 and prejudgment interest of $32,910.45 against Banas in June 2010.”