FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders FCStone LLC to Pay a $1.5 Million Civil Monetary Penalty for Failing to Have Risk Controls, in Violation of Supervision Obligations
Washington, DC - The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against FCStone LLC, a Futures Commission Merchant (FCM) headquartered in New York, New York, for failing to diligently supervise its officers and employees relating to its business as an FCM in violation of Commission Regulation 166.3, 17 C.F.R. § 166.3 (2008). FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 and part of 2009, allowing one account (Account) to acquire a massive options position that it could not afford to maintain. Ultimately, FCStone was forced to take over the Account, and lost approximately $127 million. The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.
The Order finds that from January 1, 2008 through March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the Account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two Account owners accumulated a massive position -- more than 2.5 million relatively illiquid commodity option contracts, which the Account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the Account owners were unable to meet their financial obligations with respect to the Account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions, FCStone ended up suffering $127 million in losses. The Commission found that FCStone violated Regulation 166.3 by failing to diligently supervise in a manner designed to mitigate risks associated with customer accounts, such as the risks arising from unsatisfied margin obligations, negative account balances, and the handling of large relatively illiquid positions.
David Meister, the CFTC’s Director of Enforcement stated, "The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order."
The CFTC thanks and acknowledges the Securities and Exchange Commission for its assistance in this matter and the CME Group for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Joan Manley, Allison Baker Shealy, Traci Rodriguez, George Malas and Paul Hayeck. CFTC staff from the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, including Thomas Bloom, Ryan Goodman, Kevin Piccoli and Jan Ripplinger, also provided assistance in this matter.
FROM: SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2013 — The Securities and Exchange Commission today charged NASDAQ with securities laws violations resulting from its poor systems and decision-making during the initial public offering (IPO) and secondary market trading of Facebook shares. NASDAQ has agreed to settle the SEC’s charges by paying a $10 million penalty – the largest ever against an exchange.
Exchanges have an obligation to ensure that their systems, processes, and contingency planning are robust and adequate to manage an IPO without disruption to the market. According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO. NASDAQ then made a series of ill-fated decisions that led to the rules violations.
According to the SEC’s order, several members of NASDAQ’s senior leadership team convened a "Code Blue" conference call and decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.
"This action against NASDAQ tells the tale of how poorly designed systems and hasty decision-making not only disrupted one of the largest IPOs in history, but produced serious and pervasive violations of fundamental rules governing our markets," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit, added, "Our focus in this investigation was on the design limitation in NASDAQ’s system and the exchange’s decision-making after that limitation came to light. Too often in today’s markets, systems disruptions are written off as mere technical ‘glitches’ when it’s the design of the systems and the response of exchange officials that cause us the most concern."
The matching of buy and sell orders in an IPO is referred to as "the cross." According to the SEC's order, the systems problems encountered during the Facebook IPO on May 18, 2012, caused the cross to fall 19 minutes behind the orders received by NASDAQ, whose IPO cross application calculated the price and volume of the cross based on the orders and cancellations received up until 11:11 a.m. This time discrepancy caused more than 38,000 marketable Facebook orders placed between 11:11 a.m. and 11:30:09 a.m. to not be included in the cross. Approximately 8,000 of those orders were entered into the market at 11:30 a.m. when continuous trading commenced, and the remaining 30,000 were "stuck" orders. Immediately prior to the cross, NASDAQ officials noticed a discrepancy between the final indicative pricing and volume totals and the actual totals on NASDAQ’s internal systems. This discrepancy indicated that there was still a problem with the cross and that some cross-eligible orders may not have been handled properly. But NASDAQ failed to address this issue during the minutes and hours following the cross. NASDAQ’s Facebook issues also caused problems in the trading of Zynga shares, and NASDAQ failed to execute 365 orders for Zynga shares in accordance with the price/time priority requirements.
According to the SEC’s order, NASDAQ further violated its rules when it assumed a short position in Facebook of more than three million shares in an unauthorized error account. NASDAQ’s rules do not permit it to use an error account for any purpose. NASDAQ subsequently covered that short position for a profit of approximately $10.8 million, also in violation of its rules. NASDAQ further violated its rules in three other ways during the opening of trading after the end of the display-only period for Facebook and following a halt in Zynga trading.
The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.
In separate incidents unrelated to the Facebook IPO, the SEC’s order additionally charges NASDAQ with violations of Regulation NMS and Regulation SHO based on its failure to appropriately monitor and enforce compliance with price-test restrictions in October 2011 and August 2012.
The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. Additionally, NASDAQ violated Rule 201(b) of Regulation SHO during two separate incidents in October 2011 and August 2012 and also violated Rule 611 of Regulation NMS during the October 2011 incident. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.
The SEC’s investigation was conducted by Michael Holland, Daniel Marcus, and Amelia A. Cottrell, who are members of the Market Abuse Unit in New York. They were assisted by Brendan Hamill, George Makris, Mark Donohue, Jon Hertzke, and Kristen Lever in the National Exam Program’s Office of Market Oversight under the supervision of John Polise. The case was supervised by Daniel M. Hawke, who is the Market Abuse Unit's Chief, and Sanjay Wadhwa, who is Senior Associate Director of the SEC’s New York Regional Office.
FROM: U.S. JUSTICE DEPARTMENT
Thursday, May 23, 2013
Owner of Investment Company Pleads Guilty to Engaging in a Fradulent Investment Scheme
The owner of an investment company pleaded guilty today for his role in an investment scheme involving false promises, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, U.S. Attorney for the Eastern District of Virginia Neil H. MacBride, and Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office.
David Eugene Howard II, 34, of Queens Village, N.Y., pleaded guilty before U.S. District Judge T. S. Ellis III in the Eastern District of Virginia to one count of mail fraud.
According to the plea documents, from in or about March 2008 through in or about April 2009, Howard falsely represented to investors that his company, Flatiron Systems LLC, traded pooled equity accounts using a proprietary trading system called "Pathfinder." Through distributing false and misleading letters, operating agreements, account statements and other materials, he caused investors to send investments of at least $5,000, which were deposited into an account that he exclusively controlled and which he later misappropriated for his own benefit and the benefit of others.
Over the course of his scheme, Howard directly misappropriated approximately $373,000 of $1.8 million in investor funds. Howard’s misappropriation included approximately $86,000 in transfers to his personal bank account, cash withdrawals and personal expenditures made with his company debit card, to include approximately $34,500 in charges at a night club and approximately $3,600 in charges towards the purchase of a Tiffany necklace for Howard’s girlfriend at the time.
According to court documents, in December 2008, Howard falsely informed investors that trading had been voluntarily halted so that an independent audit could be performed. Nonetheless, Howard continued to transfer approximately $26,500 in investor funds to his personal bank account, along with additional cash withdrawals and personal expenditures over the course of the following four months. Howard followed up with another letter which falsely advised investors of prolonged audit and tax procedures, which his nonexistent attorneys and accountants were purportedly diligently working on.
At sentencing, Howard faces a maximum penalty of 20 years in prison, a fine of $250,000 or twice the gross gain or loss, and full restitution. Sentencing is scheduled for Sept. 20, 2013.
In a related action, the U.S. Securities and Exchange Commission (SEC) filed a civil enforcement action against Howard on March 21, 2011.
This prosecution is the result of an investigation by the FBI’s Washington Field Office, along with a parallel investigation by the SEC. The case is being prosecuted by Trial Attorneys Mark Grider, N. Nathan Dimock, and Luke B. Marsh of the Justice Department Criminal Division’s Fraud Section, and by Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia.
FROM: U.S. SECURITY AND EXCHANGE COMMISSION
SEC Charges Atlanta-Area Registered Representative and Registered Investment Adviser Representative with Securities Fraud
On May 23, the Securities and Exchange Commission filed an emergency action seeking a temporary restraining order and other emergency relief in federal court in the Northern District of Georgia, charging Blake Richards (Richards), a Buford, Georgia resident with violations of the federal securities laws for misappropriating investor funds.
The Honorable Julie E. Carnes, the Chief Judge of the Northern District of Georgia, granted the Commission’s request for emergency relief, issuing an order that temporarily restrained Richards from further securities laws violations, froze Richards’s assets, prevented the destruction of documents and expedited discovery. The Court also set a hearing date of June 6 for the Commission’s request for a preliminary injunction. The Commission’s complaint also seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. Those claims will be adjudicated at a later date.
The Commission’s complaint alleges that, since at least 2008, Richards, a registered representative of a broker dealer, misappropriated at least $2 million from at least seven investors. The majority of the misappropriated funds constituted retirement savings and/or life insurance proceeds from deceased spouses.
In its complaint, the Commission alleges that Richards instructed investors to write out checks to entities under his control with the understanding that Richards would invest their funds in fixed income assets, variable annuities and/or common stock. The complaint alleges that none of these investments were ever made. None of the investments appeared on the client’s brokerage account statements, and Richards received no commission income from these investments. The complaint further alleges that Richards siphoned off the funds entrusted to him for personal use.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 24, 2013 — The Securities and Exchange Commission today announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.
The SEC alleges that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.
"Bergin betrayed the trust of his clients by secretly using information about their trades to gain an unfair trading advantage and reap massive profits for himself," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit.
According to the SEC's complaint filed yesterday in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin is the trader primarily responsible for managing price exposures related to client orders for equity trades.
"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.
According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.
According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.
The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.
In order to halt Bergin's ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and Zaun.
The SEC's complaint alleges that Bergin violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(j) of the Investment Company Act of 1940 and Rule 17j-1. The complaint seeks disgorgement, prejudgment interest, and a penalty as well as a permanent injunction against Bergin.
The SEC's investigation was conducted in the Fort Worth Regional Office by Frank Goodrich and Barbara Gunn of the Asset Management Unit. The litigation will be led by Jennifer Brandt and Mr. Goodrich. The examination that led to the investigation was conducted by Mary Walters, Anthony McNeal, Charles Amsler, Brandon Whitaker, Carol Hahn, Dennis Rogers, and Kim Shaw of the Fort Worth office.
The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Texas and the Federal Bureau of Investigation.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court Orders Spencer Montgomery, Brian Reynolds, Arjent Capital Markets LLC, and Chicago Trading Managers LLC to Pay More than $1.8 Million for Commodity Pool Fraud
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Defendants Spencer Montgomery and Brian Reynolds, and a default judgment and permanent injunction Order against Defendants Arjent Capital Markets LLC (Arjent) and Chicago Trading Managers LLC (CT Managers), for defrauding pool participants by knowingly issuing or causing to be issued false account statements for commodity pools. The Orders require Montgomery and Reynolds each to pay a $140,000 civil monetary penalty, Arjent and CT Managers jointly to pay a $1.4 million civil monetary penalty, and Arjent to pay an additional $140,000 civil monetary penalty. The Orders further impose permanent trading and registration bans on all the Defendants and prohibit them from violating the Commodity Exchange Act (CEA), as charged.
The court’s Orders, entered March 19, 2013 and May 15, 2013, respectively, stem from a CFTC Complaint filed on March 13, 2012, that charged the Defendants with violating the CEA’s anti-fraud provisions.
The Orders find that from at least June 2008 through at least November 2009, Arjent, CT Managers, Montgomery, and Reynolds defrauded commodity pool investors, who had invested approximately $10.5 million. CT Managers, Montgomery, and Reynolds knowingly issued and/or causing to be issued false account statements for two commodity pools, which Arjent aided and abetted, while Arjent, Montgomery, and Reynolds knowingly issued or caused to be issued a false account statement for a third commodity pool, the Orders find. Additionally, the Orders find that the Defendants knew that certain debits were being held in the same account as the commodity pools’ assets and that those debits depleted the commodity pools’ assets. Nonetheless, the Orders find that Arjent, CT Managers, Montgomery, and Reynolds issued or caused to be issued account statements that did not reflect the dilution of the commodity pools’ assets by these debits.
The CFTC thanks the National Futures Association, the Chicago Board Options Exchange, the U.S. Securities and Exchange Commission, and the Financial Services Authority (UK) for their assistance.
CFTC staff members responsible for this case are Laura Martin, Janine Gargiulo, Candice Aloisi, Michael Geiser, Judith Slowly, David Acevedo, Manal Sultan, Lenel Hickson, Lisa Hazel, Annette Vitale, Ronald Carletta, Stephen Obie, and Vincent McGonagle.
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