FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The United States Securities and Exchange Commission announced today that the Honorable James V. Selna of the United States District Court for the Central District of California entered final judgments against defendants Thomas Rubin, Christopher Scott, BGLR Enterprises, LLC and E-Info Solutions, LLC on May 22, 2013. The final judgments imposed on Rubin and Scott permanent injunctions against future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The judgments also imposed on BGLR Enterprises, LLC and E-Info Solutions, LLC permanent injunctions against future violations of Sections 5(a) and (c) of the Securities Act. The court also entered ten-year penny stock bars against Rubin and BGLR Enterprises, along with five-year penny stock bars against Scott and E-Info Solutions as well as a five-year officer and director bar against Scott. Also, Scott was ordered to pay full disgorgement of approximately $112,000, prejudgment interest of approximately $12,000, and a civil penalty of $75,000, while the court will determine if and to what amount monetary relief will be ordered against Rubin.
The SEC's complaint, filed on September 22, 2011, charged Rubin, who was the Chief Executive Officer of a now-defunct broker-dealer named Westcap Securities, Inc., and Scott, Westcap's former Chief Compliance Officer, with engaging in a continuing series of schemes with others to conduct unlawful unregistered offerings and/or fraudulently manipulate the market for the common stock of four microcap companies. The complaint alleged that Rubin and Scott personally engaged in various manipulative activities including coordinated and matched trading activity and that the two took advantage of the manipulated markets for certain of the above-described issuers by selling shares they had received in these issuers for substantial profits. The complaint also alleged that Rubin and Scott, through their respective related entities, BGLR Enterprises, LLC and E-Info Solutions, LLC, violated the registration provisions of Section 5(a) and (c) of the Securities Act by selling stock in unlawful unregistered offerings.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 30, 2013 — The Securities and Exchange Commission today announced that the subject of an enforcement inquiry in Florida has pled guilty to criminal charges for obstructing justice and lying to SEC investigators looking into his real estate securities offerings to investors.
The U.S. Attorney’s Office for the Southern District of Florida has filed criminal charges against former broker and securities fraud recidivist Robert J. Vitale, who lives in Lauderdale-by-the Sea. According to the criminal information filed in U.S. District Court for the Southern District of Florida, the SEC issued subpoenas to Vitale and his investment company Realty Acquisitions & Trust in order to identify investor funds and assets related to the securities offerings. The SEC investigators subpoenaed Vitale for all related bank records and took his sworn testimony.
The criminal information alleges that Vitale lied about the existence of two separate bank accounts that he did not disclose to the SEC. Specifically, Vitale deposited $100,000 into a bank account in Fort Lauderdale under the name of "B.L. Inc." in the days preceding his testimony to SEC investigators in June 2012. Vitale then did not disclose the existence of the account to the SEC when asked under oath.
Vitale was previously charged by the SEC several years ago for participating in a pump-and-dump market manipulation scheme. Vitale later settled the charges in federal district court and was barred from the brokerage industry.
"Lying to SEC investigators is a violation of the public trust placed in us by America’s investors as well as a violation of criminal law," said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. "Those who obstruct SEC investigations should realize they will ultimately be held accountable by criminal authorities who work so closely with us to rid the markets of securities law violators, particularly repeat offenders like Vitale. The SEC greatly appreciates the persistence of the U.S. Attorney’s Office and the FBI in pursuing this case."
Vitale pled guilty to a two-count information charging him with obstructing the SEC investigation in violation of 18 U.S.C. § 1505 and perjury in violation of 18 U.S.C. § 1621. The Honorable Joan A. Lenard will schedule a sentencing hearing in the coming weeks.
The SEC appreciates the assistance of the Federal Bureau of Investigation along with the U.S. Attorney’s Office for the Southern District of Florida in this matter.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 3, 2013 —The Securities and Exchange Commission today announced the second-largest trading suspension in agency history as it continues its "Operation Shell Expel" crackdown against the manipulation of microcap shell companies that are ripe for fraud as they lay dormant in the over-the-counter market.
The SEC suspended trading in the securities of 61 empty shell companies that are delinquent in their public filings and seemingly no longer in business based on an analysis by the SEC's Microcap Fraud Working Group. Since microcap companies are thinly-traded, once they become dormant they have great potential to be hijacked by fraudsters who falsely hype the stock to portray it as a thriving company and coerce investors into "pump-and-dump" schemes.
In this latest review of microcap stocks nationwide using enhanced intelligence technology in the Enforcement Division's Office of Market Intelligence, the SEC identified these clearly dormant shell companies in at least 17 states and one foreign country. By suspending trading in these companies, they're obligated to provide updated financial information to prove they're still operational, essentially rendering them useless to scam artists now that they are no longer flying under the radar.
"Stock manipulators crave empty shell companies that they can use to conduct pump-and-dump schemes and line their pockets with illicit trading profits by taking advantage of unsuspecting investors," said Andrew J. Ceresney, Co-Director of the SEC's Division of Enforcement. "We will aggressively suspend trading in such empty shells to take away a tool of their trade and help rid our markets of fraud."
Pump-and-dump schemes are among the most common types of fraud involving empty shell companies. Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. They purchase the stock at a low price before pumping the stock price higher by creating the appearance of market activity and drawing investor interest. They dump the stock for significant profit by selling it into the market at the higher price once investors have bought in.
"Once a company ceases its filings and investors no longer have current information about it, there is no good reason for that empty shell to remain exposed in our public markets," said Christopher Ehrman, Co-National Coordinator of the SEC's Microcap Fraud Working Group. "In this initiative, we are committed to identifying unacceptable risks in the marketplace and removing them to safeguard investors."
The SEC's Operation Shell Expel initiative has been led by Mr. Ehrman, Margaret Cain, Robert Bernstein, Jessica P. Regan, Leigh Barrett, and Megan Alcorn in the Office of Market Intelligence. The SEC appreciates the assistance of the Federal Bureau of Investigation's Economic Crimes Unit.
FROM: COMMODITY FUTURES TRADING COMMISSION
Federal Court in New York Imposes a $1 Million Fine and other Sanctions against Kevin Cassidy, Former CEO of Optionable Inc.
Cassidy settles CFTC charges of defrauding the Bank of Montreal
Washington, DC — The Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring Defendant Kevin Cassidy, formerly of Bedford Hills, New York, former CEO of Optionable Inc., to pay a $1 million civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC Regulations. The order was entered on May 28, 2013, by the Honorable George B. Daniels of the U.S. District Court for the Southern District of New York.
The Order stems from a CFTC Complaint filed on November 18, 2008 (see CFTC Press Release 5571-08). The Complaint charged David P. Lee, a former trader for the Bank of Montreal (BMO), for mis-marking and mis-valuing BMO’s natural gas options book and deceiving BMO and charged Lee and Cassidy for deceiving BMO, from 2003 through April 2007, by fabricating purportedly independent broker quotes delivered to BMO’s back office for price and skew verification.
Previously, on April 30, 2012, Judge Daniels entered an Amended Partial Consent Order for Permanent Injunction and Other Equitable Relief finding that Cassidy violated Section 4c(b) of the Act, 7 U.S.C. § 6c(b) (2002), and CFTC Regulations 33.10 (a)-(c), 17 C.F.R. § 33.10 (a)-(c) (2008). The Amended Partial Consent Order also imposed permanent trading and registration bans on Cassidy and prohibited him from violating the CEA, as charged.
In relation to the same underlying conduct, in August 2011 Cassidy entered a plea of guilty in the Southern District of New York to one criminal count of conspiracy. In April 2012, Cassidy was sentenced to 30 months imprisonment followed by three years of supervised release.
Defendant Lee settled the CFTC action against him in November 2009 (see CFTC Press Release 5745-09, November 6, 2009). In November 2008, in the Southern District of New York, Lee entered a plea of guilty to four criminal counts: Conspiracy to Commit Wire Fraud and to Make False Bank Entries, Wire Fraud, False Statements to a Bank, and Obstruction of Justice. Lee has not yet been sentenced.
Defendant Robert Moore settled the CFTC’s litigation on March 8, 2010 (see CFTC Press Release 5788-10).
The CFTC thanks the Manhattan District Attorney’s Office, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the Southern District of New York for their assistance.
CFTC staff members are responsible for this case are Christine Ryall, Eugene Smith, Patricia Gomersall, Joan Manley, and Paul Hayeck.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Remarks at Joint News Conference on National Financial Capability Study
by
Chairman Mary Jo White
U.S. Securities and Exchange Commission
Washington, D.C.
May 29, 2013
The FINRA Investor Education Foundation’s 2012 National Financial Capability Study provides a wealth of data regarding the financial knowledge, attitudes, and behaviors of Americans. It gives us a great sense of what Americans know, what they feel, and how they act when making investments and other financial decisions.
As Chair of the agency whose core mission is protecting investors and promoting capital formation, the results of this study remind us that we can do more to increase the financial capability of all Americans.
People who have limited knowledge of the financial system are less likely to enter the financial markets, and are unlikely to benefit from America’s economic growth. This reality makes it more difficult for entrepreneurs and dynamic companies to access the capital they need to thrive and create jobs.
Many Americans may needlessly struggle in retirement or miss the chance to purchase a home or graduate from college debt-free, simply because they were never exposed to the basics of finance. Others may suffer disproportionate losses when markets tumble because they failed to diversify their holdings, or see their net worth decline sharply because they engaged in high-risk investing strategies.
At the SEC, we passionately believe in the importance of improving Americans’ financial capability so that they can optimize the chance of reaching their personal savings and investing goals. For this to happen, more Americans should learn about the "magic" of compound interest, the virtue of diversification, and the value of planning for retirement.
Unfortunately, not all investors do what they should to be as informed as possible. For instance, few investors pick up the phone or go online to do a simple background check. It seems that we are almost more likely to go on Angie’s List to check out our plumber than we are to go onto the SEC’s website to investigate the background of an individual to whom we’re about to entrust our life savings. There is obviously something wrong with this picture.
There is some good news in the study: individuals owning stocks, bonds, mutual funds, or other securities (outside of retirement accounts) scored better than non-investors on the study’s financial literacy quiz.
On the other hand, the study found that even though they did better than non-investors, most investors still are not aware of the fundamental that market interest rates and bond prices move in opposite directions. In fact, only 43 percent of investors and 22 percent of non-investors knew that bond prices typically fall when interest rates rise. This kind of clear gap in investor knowledge is why the SEC’s Office of Investor Education and Advocacy recently created a series of investor bulletins on investing in bonds.
The study also indicates that despite a troubling lack of basic knowledge, Americans are now willing to take on more risk than they were in 2009. Higher risk investments can be an important part of an investor’s portfolio, but willingness to take on risk without a clear understanding of the potential consequences can lead to disastrous results.
Empowering Americans with the knowledge and the tools that they need to make sound financial decisions can also produce significant economic and social benefits. Individuals with both the opportunity and the ability to invest infuse the markets with vital capital resources that help both businesses and the economy grow stronger. These investments ensure that new and creative technologies have a chance to develop and flourish.
That is why our investor education and outreach efforts are so important.
At the SEC, our Office of Investor Education and Advocacy is creating a nationwide program focused on teaching individuals how to make better decisions about investing in our capital markets.
And, importantly, it also teaches them how to spot the securities frauds that we work so hard to uncover, investigate and punish.
In addition to educating investors at in-person events, our investor education office staff assists tens of thousands of investors every year with questions and complaints, produces a wide variety of print publications, issues investor alerts and bulletins on topical subjects, and even tweets.
We also created a website — Investor.gov — that is focused exclusively on investor education.
On Investor.gov, you can research public companies and other filers using our EDGAR database — you can find, for example, annual corporate filings, mutual fund prospectuses, and information on variable insurance products.
Less experienced investors can find out how to read these filings, using materials that explain the disclosures in more detail. Investors also can conduct those background checks on financial professionals with whom they’re considering working. We provide information aimed at investors with particular investment needs such as members of the military, students, teachers, and retirees.
While we don’t — and can’t — provide investment advice, we do offer analyses of different types of investments — the benefits and the risks of investment vehicles including stocks, bonds, mutual funds and REITs — all on Investor.gov.
Informed investors are a critical pillar of our financial system and the economy as a whole. They are more likely to create wealth for themselves and their families — providing for themselves and for the next generation. And informed investors help make available the capital that fuels growth and contributes to a healthy and dynamic economy.
So I thank the FINRA Investor Education Foundation for its excellent and very important work.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Remarks at the 32nd Annual SEC and Financial Reporting Institute Conference
by
Paul Beswick
Chief Accountant, Office of the Chief Accountant
U.S. Securities and Exchange Commission
Pasadena, California
May 30, 2013
As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.
I would like to thank Randy (Beatty) for the kind invitation to speak at this conference. I think this conference provides an excellent chance for members of the SEC staff to leave the East Coast and interact with registrants from this part of the country. I do need to take a moment to provide the staff disclaimer for not only myself, but for all of the SEC staff who are speaking at this program today.
With my time this morning, I thought I would focus on the following topics:
Why the U.S. needs a strong IASB and what are we doing about it
Definition of a successful implementation of an accounting standard
PCAOB accomplishments
Internal Controls and the new COSO Framework
This does not mean I am limited to these topics. In fact, there is the Q&A session later in the day if you have specific questions you would like me to address. Although if the question starts with a FASB codification reference, you might want to consider taking advantage of our pre-filing consultation process to have your question answered.
Why the U.S. needs a strong IASB and what are we doing about it
I thought I would spend several minutes talking about why the United States has a vested interest in making sure that the International Accounting Standards Board (IASB) continues to function as a strong and independent accounting standard setter. However, it is important to highlight that these remarks are not intended to forecast what the Office of the Chief Accountant (OCA) might recommend to the Commission or what the Commission might be thinking in terms of next steps for IFRS for domestic issuers. The consideration of IFRS for domestic issuers is a complex issue. There also are several recent and future anticipated changes at the Commission level. So despite that "double disclaimer," the focus of my remarks is why IFRS matters in today’s U.S. capital markets and not trying to predict or give an indication of what might happen next.
Put simply, the reason that IFRS matters to the U.S. is that the U.S. is heavily invested in companies that prepare their financial statements using IFRS. Let me illustrate through an example. Recently, I was reviewing my financial holdings, and I was once again struck by the fact that in one of my mutual fund holdings I pay foreign taxes every time I receive a dividend from the fund. This time, I decided to look at the underlying holdings of the fund. When I reviewed the holdings of the fund, I found that the holdings were dominated by companies that prepare their financial statements using IFRS. I imagine your personal experience is very similar.
But let me start with a quick history lesson on the use of IFRS in the U.S. In 2007, the Commission removed the requirement for foreign private issuers to reconcile financial statements prepared using IFRS to U.S. GAAP. Outside the U.S., the removal of the reconciliation requirement was hailed as a significant event in the context of the development of IFRS. In the adopting release, the Commission noted,
"IFRS as issued by the IASB and U.S. GAAP are both sets of high-quality accounting standards that are similar to one another in many respects, and the convergence efforts to date have progressed in eliminating many differences."
The fact that the Commission required IFRS as issued by the IASB without any sort of ongoing endorsement mechanism or suitability test is notable. Most other large jurisdictions utilize some sort of endorsement mechanism to ensure suitability. To me, this represents a significant amount of confidence placed in the IASB as an institution, and its governance, to produce high-quality accounting standards.
So what do we know about the current use of IFRS in the United States? In the context of foreign private issuers, there are over 450 filers who use IFRS without reconciliation to U.S. GAAP. The market capitalization of these filers is in the multiple of trillions of U.S. dollars. The Division of Corporation Finance has an Assistant Director (AD) group dedicated to large financial institutions. Of the banks included in this AD group, approximately forty percent of them file financial statements prepared using IFRS. Finally, there are undeterminable amounts of capital invested through mutual funds and direct financial investments in jurisdictions that require or permit use of IFRS.
There are a number of things the Commission, the Commission’s staff, and others are doing to protect investors who are investing in entities with financial statements utilizing IFRS within our markets, but there are also network benefits to the global financial reporting community at large. These efforts take many forms: from working to help ensure that the IASB’s standards are the highest quality standards possible, to helping ensure that IFRS is consistently applied. In fact the staff’s involvement in the process has increased over the past several years. Let me explain several of these, and these are all steps beyond the important convergence work between the Financial Accounting Standards Board (FASB) and the IASB, which I will speak about later.
First, from a governance perspective, the Chair of the SEC is a member of the IFRS Monitoring Board. In this role, the Chair endeavors to fulfill the mission of the Monitoring Board, which in part includes,
"To monitor and reinforce the public interest oversight function of the IFRS Foundation, while preserving the independence of the IASB."
Second, the staff works to monitor the development of IFRS through observing the IASB standard setting process. This observation manifests itself in many different ways, including following all of the IASB’s standard setting projects and providing feedback on the projects where appropriate. The staff also participates in working groups of the IASB; for example, an SEC staff member is a member of the IASB’s Consultative Group - Methodology for Fieldwork & Effect Analyses.
Third, the staff works to promote consistent application of IFRS on a global basis. As will be discussed later in the conference, the Division of Corporation Finance reviews the filings of foreign private issuers and issues comment letters on the filings. The comment letters and responses are made public following the same process the Division uses for domestic registrants. Global accounting firms and other regulators look to these comments to see areas where the staff is focusing their efforts.
In OCA, we consider pre-filing accounting consultation requests on IFRS matters from registrants and their auditors. This is an opportunity for us to interact not only with the registrants and their auditors, but also with our regulatory counterparts. The staff is increasing its interactions with our regulatory counterparts in a number of different ways—both formal and informal—including outreach to our counterparts on specific registrant issues and discussions on broad policy matters.
Fourth, it is not just the SEC staff that is working to improve the quality of IFRS. As Russ (Golden) will discuss in a couple minutes, the FASB is a member of the IASB’s new Accounting Standards Advisory Forum, or ASAF. The objective of ASAF is to provide an advisory forum where members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards.
Successful implementation of an accounting standard
Turning to the FASB and its work with the IASB, over the next 18 months the two Boards will complete some of the most fundamental projects on their respective agendas, and by that I mean the high priority convergence projects. As I mentioned in a speech last December, successful implementation of these standards is of paramount importance. From my perspective, it is never too early to start focusing on making sure we take the steps necessary to make implementation of these standards as successful as possible.
Some may ask, however, how do I define a successful implementation of a standard? I think a successful implementation is when the standards are applied consistently among registrants and their auditors to the benefit of investors. To the extent there are judgments applied, the standards should result in those judgments being clearly disclosed to investors so they can factor that into their analysis.
At the SEC, the staff already is beginning to think about how we are going to manage implementation of these standards. This includes some critical fundamentals, such as training for SEC staff across the Commission. It also includes thinking about what sort of outreach we plan to have with preparers and auditors to identify any issues during the implementation period. I am encouraged that for the revenue standard, the FASB will be using an implementation group to address issues as they arise. I am sure we will talk about this group in the convergence panel in a later session. The creation of an implementation group can greatly reduce the likelihood that we will need to consider supplemental guidance during the implementation period.
One final quick thought on this subject. One thing that I believe will be helpful is for the FASB and the IASB to provide long implementation periods on these projects given the amount of effort that will be required to implement them successfully.
PCAOB Accomplishments
One of OCA’s roles is to assist the Commission in discharging its oversight responsibilities over the Public Company Accounting Oversight Board (PCAOB). Over the last decade, the PCAOB has had many accomplishments, and I believe there is no question that investors have benefited overall. While it is good to reflect on past accomplishments, it is equally, if not more, important to reflect on what we have learned from the last decade and think about what we can improve for the future.
So I’ll start by acknowledging the significant progress the PCAOB has made in reaching new cooperative agreements and developing stronger relationships with a growing number of non-U.S. regulators. This progress has enabled the PCAOB to conduct inspections of audits in increasing numbers of jurisdictions around the world. The PCAOB, under the SEC’s oversight, has achieved significant successes in the past couple of years in advancing international coordination in its inspections program. The PCAOB has now conducted inspections in 40 foreign jurisdictions. New arrangements are now in place with a number of countries, including France, Germany, Finland and Spain, to perform on-site inspections of auditors located in those countries.
I believe a strong, global inspection program is a critical component to the Board’s overall evaluation of auditor performance. It also provides important information to inform the PCAOB about the current level of audit quality and where improvement is needed. Inspection results should also inform the PCAOB’s standard setting activities. My Professional Practice Group Deputy, Brian Croteau, often refers to this as "the audit performance feedback loop."
Global coordination in audit oversight continues to be important. Audit regulators around the world are advancing a new paradigm for working together. The U.S. plays an important role through the PCAOB’s leadership roles in the International Forum of Independent Audit Regulators (IFIAR). In April, PCAOB Board Member Lewis H. Ferguson took office as Chair of IFIAR. Through IFIAR, individual regulators can get a better window on the global landscape of audit practice and financial reporting.
But let’s not forget about the important role of auditors themselves. As Commissioner Walter [who is speaking later today] has mentioned many times, auditors have the important role as gatekeepers to the public securities markets. With far-reaching audit policy considerations taking place around the world, auditors need to stay focused on investor needs for reliable financial reporting. I strongly believe that auditors should stay focused on their important role in auditing historical financial statements, rather than trying to predict the future, as I have heard some suggest from time to time.
Internal Controls and the New COSO Framework
Increased attention on internal control over financial reporting was an important element of the Sarbanes-Oxley Act of 2002, and I believe it continues to be important now and will remain so in the future. In December, the Board issued a report on its observations from 2010 inspections of annually-inspected firms regarding deficiencies in audits of internal control over financial reporting (ICFR). This report includes information about the nature and frequency of deficiencies in firms’ audits of ICFR detected during the PCAOB’s 2010 inspections of eight large annually-inspected firms. It would not surprise me if some of the audit deficiencies around ICFR may also be indicative of deficiencies in management’s own internal controls.
It is important to remember that management and auditors both have responsibilities with respect to ICFR, regardless of whether the company is exempt from the requirement to have an auditor’s attestation on ICFR under Section 404(b) of the Sarbanes-Oxley Act. It also is important to recognize that the benefits to reliable financial reporting are dependent upon the ongoing commitment by management to maintaining effective ICFR.
There is new guidance that management may find helpful in implementing and evaluating its internal control. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently released its updated internal control framework, which is intended to provide more comprehensive and relevant conceptual and practical guidance by focusing on 17 principles to help management focus on important aspects of the components of internal control.
I understand that COSO intends to supersede their 1992 Framework as of December 15, 2014, and we expect there will be questions about whether the SEC will provide management with any transition or implementation guidance to change from the existing framework to the new framework. COSO has publicly stated its belief that "users should transition their applications and related documentation to the updated Framework as soon as is feasible under their particular circumstances" and that "the key concepts and principles embedded in the original framework are fundamentally sound and broadly accepted in the marketplace, and accordingly, continued use of the 1992 framework during the transition period (May 14, 2013 to December 15, 2014) is acceptable." COSO further explained "the COSO Board’s goal in updating the original Framework has been to reflect changes in the business and operating environments, to formalize more explicitly the principles embedded in the original framework that facilitate development of effective internal control and assessment of its effectiveness, and to increase the ease of use when applied to an entity objective."
SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate at some point in the future. However, at this time, I’ll simply refer users of the COSO framework to the statements COSO has made about their new framework and their thoughts about transition.
Conclusion
Once again, I would like to thank you for the invitation to speak to you today at this conference. Enoy the rest of the conference.
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