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This is a photo of the National Register of Historic Places listing with reference number 7000063

Monday, February 25, 2013

SEC COMMISSIONER GALLAGHER'S REMARKS AT "SEC SPEAKS IN 2013" CONFERENCE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Remarks at "The SEC Speaks in 2013"
byCommissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
Washington, D.C.
February 22, 2013

Thank you, Craig [Lewis], for your kind introduction. This is my second year addressing this conference as a Commissioner. Last year, I spoke as one of five Commissioners, while this year, as you well know, we’re temporarily down one member. And so, I understand that the organizers are offering a 20% discount which you can collect after my remarks. Just kidding. The truth is that they asked all of us to give longer speeches, and since I am still the junior Commissioner, the others dumped their extra time on me. So, I hope you are ready for an hour long adventure.

Before I begin, let me remind you that as usual, my remarks today are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

On a number of occasions since returning to the SEC as a Commissioner, I’ve spoken about the Commission’s priorities, both in terms of what the Commission is doing and what it should be doing in order effectively to carry out its mandate to protect investors, ensure fair and efficient markets, and facilitate capital formation. Needless to say, the Commission does not operate in a vacuum, and for various reasons, it’s not always easy to execute those priorities as we see fit. The constant stream of external influences on the Commission’s work serves as a significant impediment to its ability to focus on the core mission, including the vital, basic "blocking and tackling" of securities regulation. Today, therefore, I’d like to talk about the Commission’s origin and role as an expert, independent agency — as well as the challenges to that independence — in what has become in recent years a difficult environment for independent agencies.

As I’m sure all of you know, Congress created the SEC in the Securities Exchange Act of 1934. What some of you may not know, however, is that the Securities Act of 1933 originally tasked the Federal Trade Commission with administering the new federal securities laws. Indeed, the FTC was the initial choice of many, including President Franklin Roosevelt, to administer the Exchange Act as well.
1 Ultimately, however, a consensus emerged that the difficult task of administering the federal securities laws required the creation of a new independent, bipartisan agency with a high level of technical expertise in securities matters that could focus exclusively on the nation’s capital markets. For example, during consideration of the House version of the legislation that would ultimately become the Exchange Act, Representative Charles Wolverton cited the "high degree of technical skill and knowledge," that would be necessary to administer the new federal securities laws in his support for the creation of a five-member, expert Commission to take over the administration of those new laws.2 Similarly, during consideration of the corresponding Senate bill, Senator Duncan Fletcher explained the belief among "[m]any people, Members of Congress and others . . . that a special commission ought to be provided to administer the measure because the provisions are largely technical, and we ought to have men experienced in business of the kind involved."3

The final version of the Exchange Act that emerged from Congress in the summer of 1934 provided the newly-established Commission with a broad mix of regulatory and quasi-judicial authority to carry out the legislative policies set forth in the Securities Act and the Exchange Act. The movement toward the establishment of expert, independent agencies represented a major shift in the regulatory paradigm, and it wasn’t long before this model was challenged. A year after Congress created the SEC, the Supreme Court took up the issue of independent agencies in the case of Humphrey’s Executor v. United States, which arose from President Roosevelt’s attempt to remove William Humphrey from his position as an FTC Commissioner. Much to the chagrin of the President, the Court ruled that as "an administrative body created by Congress to carry into effect legislative policies," an independent agency such as the FTC "cannot in any proper sense be characterized as an arm or an eye of the executive. Its duties are performed without executive leave and, in the contemplation of the statute, must be free from executive control."
4 Most recently, in its 2010 decision in Free Enterprise Fund v. PCAOB, the Supreme Court implicitly referenced the Commission’s independence, proceeding on the understanding that SEC Commissioners "cannot themselves be removed by the President except under the Humphrey’s Executor standard of inefficiency, neglect of duty, or malfeasance in office."5 This stands in contrast to, for example, Cabinet secretaries, who, while subject to Senate confirmation, serve at the pleasure of the President.

Having established the SEC as an expert, independent agency with the authority to administer the federal securities laws, Congress has traditionally provided the Commission with considerable flexibility to exercise that expertise and authority. Historically, Congress has avoided imposing minutely detailed mandates on the Commission. Instead, Congress has, in conjunction with past grants of authority to the SEC, largely left it to the Commission to study issues and formulate rules which the Commission deemed in its discretion to be "in the public interest or for the protection of investors," a phrase that appears time and again in our securities laws.
6 As President Roosevelt himself remarked upon signing the Investment Company Act and Investment Advisers Act into law in 1940, "[E]fficient regulation in technical fields such as this requires an administering agency which has been given flexible powers[.]"7

For nearly eighty years, the Commission, like other independent agencies, has brought its expertise and judgment to bear in fulfilling the legislative mandates established by Congress in the federal securities laws. Yet, in today’s post-financial crisis, post-Dodd-Frank regulatory environment, the Commission is faced with a variety of challenges that carry with them the potential to erode its independence. The Commission must remain alert to these challenges and must respond when appropriate in order to preserve its ability to act independently in fulfilling its core mission. My concerns here do not derive from ideology or a desire to perpetuate seemingly age old agency turf wars. Instead, this is about the need to preserve a long-standing regulatory model that eschews a one-size-fits-all approach in favor of allowing expert, independent agencies to craft rules that, when necessary, are appropriately tailored to the specific entities and products they regulate.

And then came Dodd-Frank. I worry about the limits placed on the Commission’s ability independently to apply its expertise and judgment under the paradigm established by the Dodd-Frank Act. The Act contains approximately 400 specific mandates to be implemented through agency rulemaking, around 100 of which apply directly to the SEC. Many of these mandates are highly prescriptive, and instead of directing the Commission to regulate in an area after studying the relevant issues, compiling data, and determining what, if any, regulatory action may be appropriate, they require the Commission to issue strictly prescribed and often highly technical rules under short deadlines. Unfortunately, although the Commission always has some degree of discretion when implementing a Congressional mandate, these more prescriptive rules limit the Commission’s flexibility in the rulemaking process while occupying time and resources that could be better spent fulfilling the Commission’s other important responsibilities. If one of the duties of an independent agency is to work proactively with Congress to ensure that statutes do not impose unnecessary or inappropriate mandates, then on that front the Commission unfortunately came up short with respect to many Dodd-Frank mandates.

Ideally, when Congress provides the SEC with statutory authority to draft and implement rules in a new area, it will allow the Commission the time and flexibility necessary to study the issues involved and formulate smart regulation that reflects a complete understanding of the underlying data, including the costs and benefits associated with regulatory action. This is, after all, how the Commission was intended to operate when it was established nearly eighty years ago. In fact, I believe it is the Commission’s duty as an expert, independent agency to continue to employ this data-driven approach as best it can even in the face of prescriptive mandates from Congress.

Although the Commission continues to stare down an overflowing plate of Dodd-Frank mandates in addition to its other responsibilities, as an expert, independent agency, the Commission must not allow itself to assume a secondary role in the regulation of matters squarely within its jurisdiction and core competencies. This, I’m afraid, is exactly the role that the Commission has taken thus far with respect to critical initiatives, including the Volcker Rule.

Pursuant to Section 619 of Dodd-Frank, the three Federal banking agencies, the SEC, and the CFTC must together adopt regulations to implement the Volcker Rule’s two prohibitions on banking entities and their affiliates: its prohibition on engaging in proprietary trading and its prohibition on sponsoring or investing in "covered funds" such as hedge funds or private equity funds. Unfortunately, there is little doubt that notwithstanding the valiant efforts of the SEC staff, the Commission for too long has taken a back seat to the banking regulators in this rulemaking process. As I have said in the past, despite the Rule’s ostensible application to banking entities, the Rule is actually focused on the conduct to be regulated, not the entities that engage in this activity. There is no question that the specific trading, hedging, and investing activities to be regulated under the Rule fall firmly within the Commission’s core competencies, as they deal directly with SEC registrants and registration requirements. It makes little sense, therefore, for the Commission to defer to the banking regulators in this area when for decades it has regulated securities market-making in order to facilitate liquidity and promote the efficient allocation of capital.

The implementing rulemaking for the Volcker Rule was proposed in October 2011. Almost a year and a half — and over 18,000 comment letters — later, the Volcker Rule remains at the proposal stage. Indeed, it appears that the proposal’s broad definitions of statutory terms have taken a bad situation and made it worse. Commission staff continue to engage in discussions with the bank regulators and the CFTC regarding the many concerns raised in those 18,000-plus comment letters. For this rule to get done and get done properly, the SEC must take a leadership role. In fact, I believe it is our duty as the independent financial regulator with primary authority over, and expertise in, the activities to be regulated to ensure that the final Rule meets the aims of Congress without destroying critically important market activity that the Rule explicitly intends not to eliminate. Moreover, in accordance with its core mission, it is the Commission’s responsibility to balance the bank regulators’ focus on safety and soundness and Dodd-Frank’s overarching focus on managing systemic risk with legitimate considerations of investor protection and the maintenance of vibrant markets.

This brings me to the elephant in the room: FSOC. FSOC was created, in part, to respond to the realization during the financial crisis that regulatory balkanization had resulted in a lack of communication and information-sharing among financial services regulators, which undoubtedly led to poor policy decisions during the crisis. None of us who lived through the crisis on the ground floor would argue against improvements to the regulatory structure that would facilitate coordination and information-sharing among regulators. However, with FSOC the threats to the Commission’s independence move from the theoretical to the immediate, for already in its short existence, this new body has directly challenged the Commission’s regulatory independence. It is also where just one member of the Commission, the Chairman, can defend that independence. Pursuant to the provisions of Dodd-Frank establishing FSOC, the group is composed not of agencies, but the individual heads of agencies, acting ex officio.

As I have said in the past, the structure of FSOC is particularly troubling for an independent agency like the SEC. While the Secretary of the Treasury and the heads of the FHFA and the CFPB may speak on behalf of their agencies — not to mention the President that appointed them — the same cannot be said of the Chairman of the SEC. To preserve its independence, Congress created the SEC as a bipartisan, five-member Commission and gave each Commissioner — including the Chairman — only one vote. This means that the Chairman has no statutory authority to represent or bind the Commission through his or her participation on FSOC. Yet as a voting member of FSOC, the Chairman of the SEC does have a say in authorizing FSOC to take certain actions that may affect — and indeed have already affected — markets or entities that the Commission regulates. While one might expect that the Chairman of the SEC would always represent the views of the Commission as a whole, there is no formal oversight mechanism available to the Commission to check the Chairman’s participation on FSOC. Moreover, although the Commission’s bipartisan structure insulates it from undue political influence, FSOC’s structure does not. On the contrary, FSOC is composed of individuals who are heads of their agencies — typically making them members of the President’s political party — and led by a Cabinet official who is removable by the President at will. These factors, among others, make FSOC particularly susceptible to political influence which, in turn, can be — and has been — exerted on the agencies led by FSOC’s members.

To further complicate matters, FSOC operates under a different mandate than the SEC, having been established by Congress with a broad mandate to identify systemic risks and emerging threats to the country’s financial stability. Putting aside the fact that FSOC’s designation of certain firms as "systemically important" likely institutionalizes the idea of "too big to fail," FSOC’s core mission is to ensure the safety and soundness of the U.S. financial system — not surprising given that a significant plurality of FSOC is composed of the heads of bank regulators. While this mission is of unquestionable importance, so, too is the distinct mission of the SEC. To be sure, proper oversight of our capital markets should positively impact the safety and soundness of our financial system. Nevertheless, the SEC is not by statute a safety and soundness regulator. In fact, the markets we regulate are inherently risky, and with good reason. By putting money at risk, investors allocate capital in a manner that spurs economic growth in the hopes of a much higher return on their investments than they could obtain from lower-risk, lower-return investments, such as bank accounts. The SEC seeks to protect these investors from fraud and to ensure that the markets in which they put their capital to work are fair and efficient. Our mission is not, and should not be, to make these markets risk-free, nor is it to preserve the existence of any particular firm or firms. Capital markets regulators and bank regulators have drastically different missions and oversee fundamentally different markets and market participants. And, importantly for me and all of those who appreciate and advocate for free markets, we must keep a healthy distance between capital markets regulation, which rightfully assumes no taxpayer safety nets, and bank regulation.

It is not difficult to see the potential tension between the SEC and FSOC missions and the resulting threat to the Commission’s ability to function independently. As the old adage goes: "No one can serve two masters." When the Chairman of the SEC faces this tension, which of these two potentially competing mandates does he or she honor?

Nor is FSOC merely an advisory body without teeth. To carry out its mandate, Congress provided FSOC with extraordinary powers for an inter-agency council. For example, FSOC has the authority to designate a nonbank financial company as "systemically important," and to subject these companies to prudential supervision by the Fed. FSOC may also designate a financial market utility or a payment, clearing, or settlement activity as "systemically important," and direct the Fed, in consultation with the relevant supervisory agencies and FSOC itself, to prescribe risk management standards. To the extent that these "systemically important" utilities or activities are conducted by firms for which the SEC or CFTC is the primary regulator, Dodd-Frank provides "special procedures" pursuant to which the Fed may, if it determines that the risk management standards set by the SEC or the CFTC are "insufficient," impose its own standards. That authority is not simply a threat to the Commission’s independence — if exercised, it would be an outright annexation.

FSOC also has the authority to recommend that a primary financial regulator, such as the SEC, apply new or heightened standards and safeguards for systemically significant financial activities or practices. In this regard, FSOC has been busy in recent months prodding the Commission on money market fund reforms, including through the release of proposed reform recommendations last November.

I won’t recount the history that led to FSOC’s involvement in the regulation of money market funds, an area which unquestionably falls within the core expertise and regulatory jurisdiction of the SEC. But I will emphasize that my colleagues and I have made it clear that, having now been provided with the rigorous study and economic analysis on money market funds that a bipartisan majority of the Commission asked for from the start, we fully expect the Commission to move forward with a rule proposal shortly. Why, then, is FSOC still involved in the process? FSOC was established in part to promote coordination, collaboration, and information-sharing among its member agencies. It is immensely troubling then to think of the FSOC as an institutionalized mechanism for one set of regulators to pressure another in the latter agency’s field of expertise — yet that is exactly what is happening.

Moving on from the threats posed to the Commission’s independence by Congressional mandates and FSOC intervention, there are other, more mainstream, jurisdictional incursions the Commission must monitor and manage. For example, in December 2012, the Fed, acting pursuant to Dodd-Frank authority, issued proposed regulations to apply U.S. capital, liquidity, and other prudential standards to the U.S. operations of foreign bank organizations with total global consolidated assets of at least $50 billion.

8 These rules, if adopted in their current form, would require such organizations to create an intermediate holding company that would house all of their U.S. bank and nonbank subsidiaries.

The Fed proposal would affect SEC registrants as the new holding company capital rules would treat assets held by broker-dealer subsidiaries differently than they are treated in the SEC capital rules because of the proposed leverage standard that would apply to foreign bank organizations. Specifically, a U.S. broker-dealer subsidiary of a foreign bank organization could be required indirectly to hold more capital than would be necessary to satisfy the SEC’s net capital rule to maintain the same positions.

The regulation of broker-dealers is at the heart of the Exchange Act and, as such, has been under the Commission’s regulatory purview for nearly eight decades. Using the expertise it has developed over this period, the Commission has designed capital requirements under Rule 15c3-1 that are tailored to the operations of broker-dealers and the industry in which they operate. Here, it is crucial to understand the differing theories that underlie broker-dealer and bank capital requirements. The Commission’s capital rules are meant to deal with failure, in that they are designed to ensure that when a broker-dealer fails, it has net liquid assets in excess of all non-subordinated liabilities so that the firm can be self-liquidated in an orderly manner and satisfy all creditors, particularly its customers. On the other hand, bank capital standards are not designed to require a bank to maintain sufficient net liquid assets to satisfy all creditors. Instead, banks have access to federal liquidity facilities that can be used as a funding source in the event that the bank cannot find private funding. These facilities allow the bank to be liquidated in a more orderly manner in the case of a failure. And, if the bank is "too big to fail," the facilities can operate as a tax payer-funded life support system. Accordingly, it will be very important for the Fed and the Commission to coordinate carefully as this rule proposal is considered to ensure that legitimate goals can be advanced without undermining SEC oversight.

This Fed rulemaking comes on the heels of the misguided repeal in Dodd-Frank of the Commission’s Supervised Investment Bank Holding Company, or SIBHC, program. This little-known program, which the Commission implemented under the authority of Exchange Act Section 17(i), should have been expanded in Dodd-Frank to allow the SEC to better oversee non-systemically important broker-dealer holding companies. Instead, Dodd-Frank eliminated Exchange Act Section 17(i), and replaced it with a new Fed program.

On a final note, the Commission must also be mindful of the effect that international regulatory bodies, even those like IOSCO and the FSB in which the Commission is a participant, can have on the Commission’s prerogatives as an expert, independent agency. Many of these organizations were formed in large part to foster cooperation, information-sharing, and coordination among financial regulators in different jurisdictions. However, we now often see from these groups one-size-fits-all "recommendations," some of which run contrary to the Commission’s existing regulations or address the substance of specific issues pending before the Commission. I believe that the Commission must remain an active, productive member of these groups, but we must ensure that policymaking remains in the hands of domestic regulators acting with the requisite independence.

Thank you all for coming to this year’s SEC Speaks, and I look forward to seeing you again next February.


ALLEGED INVESTMENT FRAUD BY ISLAND INVETMENT ADVISER

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Feb. 21, 2013 — The Securities and Exchange Commission today charged an investment adviser located in the U.S. Virgin Islands with defrauding clients from whom he withheld the fact that he was receiving kickbacks for investing their money in thinly-traded companies. When he faced pressure to pay clients their returns on those investments, he allegedly used money from other clients in a Ponzi-like fashion to make payments.

The SEC’s Enforcement Division alleges that James S. Tagliaferri, through his St. Thomas-based firm TAG Virgin Islands, routinely used his discretionary authority over the accounts of his clients to purchase promissory notes issued by particular private companies. In exchange for financing those companies, TAG received millions of dollars in cash and other compensation — a conflict of interest that was never disclosed to investors. The Enforcement Division further alleges that when the promissory notes neared or passed maturity and his clients demanded payment, Tagliaferri misused assets of other clients to meet those demands.

"Tagliaferri was anything but forthcoming with his clients and he repeatedly failed to act in their best interests," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "He didn’t tell them about the compensation he received from the companies they were financing, and then compounded his fraud by using client assets to pay other clients when the conflicted investments came due."

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Tagliaferri.

According to the SEC’s order instituting administrative proceedings, Tagliaferri invested TAG clients primarily in conservative and liquid investments such as municipal bonds and blue-chip stocks until around 2007, when he began investing clients in highly illiquid securities. These investments included promissory notes issued by various closely-held private companies that were nothing more than holding companies through which an individual and his family effected personal and business transactions. He also invested at least $40 million of clients’ money in notes of a private horse-racing company, International Equine Acquisitions Holdings, Inc.

According to the SEC’s order, TAG received more than $3.35 million and approximately 500,000 shares of stock of a microcap company in return for placing various investments with these companies. The compensation that TAG received from the companies for the investments that Tagliaferri made on behalf of his clients created a conflict of interest that he was required to disclose to investors.

The SEC’s Enforcement Division alleges that Tagliaferri then further defrauded clients by investing their funds in microcap and other thinly-traded public companies in order to raise at least $80 million to pay the interest or principal due to other clients on certain of the promissory notes. Tagliaferri explained in e-mails he sent in April 2010 to the individual behind the companies that the real motivation for investing TAG clients in one of his microcap companies was to use the proceeds to pay off other clients invested in the initial series of promissory notes. "Where is the $125MM. As you are aware, this money was earmarked to clear all of the notes and other issues facing us both," Tagliaferri wrote. He later added, the "shares you transferred are being sold to clients. With those proceeds, you’re buying back your own notes." TAG clients were unaware, however, that Tagliaferri’s true motivation for having them buy these stocks was to repay other TAG clients on other conflicted investments he had made for them.

According to the SEC’s order, Tagliaferri willfully violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rules 10b-5 thereunder, and Sections 206(1), 206(2) and 206(3) of the Investment Advisers Act of 1940.

The SEC’s investigation, which is continuing.

Sunday, February 24, 2013

FUND MANAGER CHARGED FOR ALLEGED RISKY MORTGAGE-RELATED INVESTMENT

FROM: SECURITIES AND EXCHANGE COMMISSION
SEC Charges Fund Manager in Scheme Involving Risky Mortgage-Related Investment

The Securities and Exchange Commission today announced charges against an investment fund manager with offices in California and Arizona who is allegedly deceiving investors about the safety and performance of their investments, which involve risky collateralized mortgage obligations (CMOs).

The SEC alleges that George Charles Cody Price of La Jolla, Calif., raised $18 million for three investment funds through his firm ABS Manager LLC, and he promised investors that their money was secured by government-backed bonds yielding extraordinary double-digit returns as high as 18 percent per year. Price used the tagline "Your Flight to Safety" in marketing one of those funds. However, Price was actually investing in one the riskiest tranches of CMOs on the market, and the investments failed to achieve the returns that Price promised and sometimes even lost money. Price concealed the actual performance of these risky bonds by providing fake monthly statements to investors that inflated the value of the investments.

The SEC further alleges that Price, who regularly co-hosted a radio show in the San Diego area called "The Wealth Weekend Hour" and recommended that listeners invest in one of his funds, also stole a half-million dollars of fund assets in the form of purported fees, and grossly inflated the assets under his management to misrepresent his prominence as an investment manager as he solicited investors.

The SEC's complaint charges Price and ABS Manager with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-8(a) thereunder. Price's three investment funds (ABS Fund, LLC [Arizona], ABS Fund, LLC [California], and Capital Access, LLC) are named as relief defendants along with his company Cavan Private Equity Holdings LLC and his wife's company Lucky Star Events LLC because they hold cash or other assets acquired from the fund assets.

Concurrent with filing the complaint, the SEC also sought a temporary restraining order, asset freeze, receiver, order prohibiting the destruction of documents, and an accounting. The SEC sought to file the action under seal. In an Order dated February 11, 2013, United States District Court Judge Gonzalo Curiel denied the requests at this time.

The SEC's investigation was conducted by Morgan B. Ward Doran, Janet Weissman, and Carol Shau of the Los Angeles Regional Office. Sam Puathasnanon and Lynn Dean will lead the litigation
.

Saturday, February 23, 2013

SEC SETTLES WITH EXECUTIVES IN COMPENSATION CASE

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION  
Executives to be Permanently Enjoined, to Pay Civil Penalties and Disgorgement, and to Reimburse Company Pursuant to Section 304 of Sarbanes-Oxley; Former CEO/Chairman also to be Barred for Five Years from Serving as an Officer and Director of any Public Company


The Securities and Exchange Commission today settled civil fraud charges against Amnon Landan, the former Chairman and Chief Executive Officer of Mercury Interactive, LLC (Mercury), and Douglas Smith, a former Chief Financial Officer of Mercury, arising from an alleged scheme to backdate stock option grants and from other alleged misconduct.

On May 31, 2007, the Commission charged Landan, Smith, and two other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint also alleges that during this period Landan and certain other executives backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

Without admitting or denying the allegations in the Commission's complaint, Landan consented to the entry of a final judgment permanently enjoining him from violating and/or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as the financial reporting, record-keeping, internal controls, false statements to auditors, and proxy provisions of the federal securities laws. Landan also agreed to be barred from serving as an officer or director of any public company for five years. Landan will pay $1,252,822 in disgorgement and prejudgment interest, representing the "in-the-money" benefit from his exercise of backdated option grants, and a $1,000,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Landan will also reimburse Mercury, or the parent company that acquired it after the alleged misconduct (Hewlett-Packard Company), $5,064,678 for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, Landan's Section 304 reimbursement would be deemed partially satisfied by his prior return to Mercury of $2,817,500 in vested options.

Without admitting or denying the allegations in the Commission's complaint, Smith consented to the entry of a final judgment permanently enjoining him from violating Section 17(a)(2) and (a)(3) of the Securities Act of 1933. He will disgorge $451,200, representing the "in-the-money" benefit from his exercise of backdated option grants, and pay a $100,000 civil penalty. Pursuant to Section 304 of the Sarbanes-Oxley Act, Smith will also reimburse Mercury or its parent company $2,814,687 for cash bonuses and profits from the sale of Mercury stock that he received in 2003. Under the terms of the settlement, all of Smith's disgorgement and all but $250,000 of his Section 304 reimbursement would be deemed satisfied by his prior repayment to Mercury of $451,200 and his foregoing of his right to exercise vested options with a value of $2,113,487.

The settlements are subject to the approval of the United States District Court for the Northern District of California.

The Commission previously filed settled charges in this matter against Mercury and three former outside directors of Mercury. On May 31, 2007, the Commission filed civil fraud charges against Mercury based on the stock option backdating scheme and other fraudulent conduct noted above. Mercury, which was acquired by Hewlett-Packard Company on Nov. 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million penalty and to be permanently enjoined. See Litigation Release No.
20136 (May 31, 2007). On September 17, 2008, the Commission filed settled charges against three former outside directors of Mercury alleging that they recklessly approved backdated stock option grants and reviewed and signed public filings that contained materially false and misleading disclosures about the company's stock option grants and company expenses. The outside directors settled the matter by consenting to permanent injunctions and the payment by each director of a $100,000 penalty. See Litigation Release No. 20724 (Sept. 17, 2008). Mercury and the outside directors settled the charges without admitting or denying the allegations in the Commission's complaint. The Commission also previously settled with one of the four senior officers its contested action. On March 20, 2009, the Commission settled with former Mercury CFO Sharlene Abrams by which she agreed to entry of a permanent injunction against the antifraud and certain other securities law provisions, to pay $2,287,914 in disgorgement which was deemed partially satisfied by payment to Mercury, to pay a $425,000 civil penalty, to be permanently barred from serving as an officer and director of any public company, and to a Commission order barring her from appearing or practicing before the Commission as an accountant. See Litigation Release No. 20964 (March 20, 2009). Abrams settled without admitting or denying the allegations in the Commission's complaint.

The Commission's litigation against one remaining Mercury officer, former general counsel Susan Skaer, is continuing.

Friday, February 22, 2013

ASSET FREEZE ANNOUNCED BECAUSE OF SUSPICIOUS TRADING AHEAD OF H.J. HEINZ ACQUISITION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.

The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.

In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

"Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information," said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, "Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen."

The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.

The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.

The SEC’s expedited investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles Regional Office with substantial assistance from Charles Riely, Market Abuse Unit member in the New York Regional Office who will handle the SEC’s litigation. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority (ORSA).

Thursday, February 21, 2013

COMPANY SETTLES WITH CFTC OVER FAILURE TO MAITAIN MINIMUM CAPITAL REQUIREMENTS

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Enskilda Futures Limited to Pay a $125,000 Civil Monetary Penalty for Failing to Meet Minimum Capital Requirements Due to Margin Errors

Washington, DC
- The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Enskilda Futures Limited (EFL), a London-based Futures Commission Merchant (FCM), for failing to meet the minimum capital requirements as set forth in Section 4f(b) of the Commodity Exchange Act (CEA) and CFTC Regulation 1.17. The failure to meet the minimum capital requirements was a result of EFL’s failure to call for sufficient margin collateral on an intra-month basis from its ultimate parent, Skandinaviska Enskilda Banken, AB (SEB), which holds an omnibus account at EFL, the Order finds. The CFTC Order requires EFL to pay a $125,000 civil monetary penalty and to maintain the remedial measures adopted following discovery of the error.

The CFTC Order finds that during the period of July 14 to August 2, 2011 (the Relevant Period), EFL collected only net margin collateral from SEB on an intra-month basis and not gross margin collateral as required. At month end, EFL and SEB settled up and EFL called for gross margin; thus, there was no effect on EFL’s monthly capital. However, because EFL failed to collect adequate margin collateral on an intra-month basis from SEB, EFL incurred charges to its adjusted net capital. As a result of these charges, EFL failed to meet the minimum capital requirements on 11 days in violation of Section 4f(b) of the CEA, 7 U.S.C. § 6f(b) (2006), and CFTC regulation 1.17, 17 C.F.R. § 1.17 (2011), according to the Order.

The error was discovered during a routine risk-based audit conducted by CME Group, Inc. (CME) on or about November 8, 2011, the Order finds. On November 9, 2011, EFL filed notice with the CFTC, the National Futures Association, and the CME, pursuant to CFTC regulation 1.12(a) and (f)(3), 17 C.F.R. §1.12(a) and (f)(3) (2011), advising of its failure to meet the net capital requirements during the relevant period. EFL immediately undertook measures to revise its policies and procedures and collect adequate margin collateral from its customer, the Order further finds.

EFL has cooperated fully with CFTC staff, according to the Order. Further, it appears that at all times during the Relevant Period, SEB possessed ample funds to satisfy any intra-month collateral call from EFL. EFL need only have collected such funds to have remained in compliance with CFTC regulations, the Order finds.

The CFTC thanks the CME for its cooperation.

The CFTC Division of Enforcement staff responsible for this matter are Allison Baker Shealy, Timothy J. Mulreany and Joan Manley, with assistance from CFTC Division of Swap Dealer and Intermediary Oversight staff Kevin Piccoli, Robert Laverty, Ronald Carletta, and Linda Santiago.