SEC OBTAINS $13.9 MILLION PENALTY AGAINST FORMER GOLDMAN SACHS BOARD MEMBER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C., July 17, 2013 — The Securities and Exchange Commission today obtained a $13.9 million penalty against former Goldman Sachs board member Rajat K. Gupta for illegally tipping corporate secrets to former hedge fund manager Raj Rajaratnam. Gupta also is permanently barred from serving as an officer or director of a public company.

The SEC previously obtained a record $92.8 million penalty against Rajaratnam for prior insider trading charges.

“The sanctions imposed today send a clear message to board members who are entrusted with protecting the confidences of the companies they serve,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “If you abuse your position by sharing confidential company information with friends and business associates in exchange for private gain, you will be prosecuted to the fullest extent by the SEC.”

In its complaint filed in late 2011, the SEC alleged that Gupta disclosed confidential information to Rajaratnam about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs as well as nonpublic details about Goldman Sachs’s financial results for the second and fourth quarters of 2008.

In addition to imposing the civil penalty, the order issued today by the Honorable Jed S. Rakoff of the U.S. District Court for the Southern District of New York enjoins Gupta from future violations of the securities laws, and permanently bars him from acting as an officer or director of a public company, and from associating with any broker, dealer, or investment adviser.

In a parallel criminal case arising out of the same facts, the SEC provided significant assistance to the U.S. Attorney’s Office for the Southern District of New York in its successful criminal prosecution of Gupta, who was found guilty on June 15, 2012 of one count of conspiracy to commit securities fraud and three counts of securities fraud. Following the jury verdict, Gupta was sentenced on Oct. 24, 2012, to a term of imprisonment of two years followed by one year of supervised release, and ordered to pay a $5 million criminal fine.

On Dec. 26, 2012, the SEC obtained a final judgment ordering Rajaratnam to disgorge his share of the profits gained and losses avoided as a result of the insider trading based on Gupta’s tips, plus prejudgment interest.

CFTC SEEKS TO REVOKE REGISTRATIONS AFTER MAN CONVICTED OF COMMODITIES FRAUD

FROM:  COMMODITY FUTURES TRADING COMMISSION

CFTC Seeks to Revoke the Registrations of Joshua Wallace and his Company System Capital, LLC Based on Court’s Permanent Injunction Order Prohibiting Them from Committing Further Fraud and on Wallace’s Conviction for Criminal Commodities Fraud

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today filed a Notice of Intent (Notice) to revoke the registrations of Joshua Wallace and System Capital, LLC (System Capital). System Capital, based in Oregon, is a registered Commodity Trading Advisor. Wallace is an Oregon resident registered as an Associated Person of System Capital and is System Capital’s founder, sole owner, principal, and president.

The CFTC Notice alleges that Wallace and System Capital are subject to statutory disqualification from CFTC registration based on an Order for entry of default judgment, permanent injunction and ancillary equitable relief entered by the U.S. District Court for the Southern District of New York on March 14, 2013 (see CFTC Release 6539-13, March 20, 2013). The Order prohibits Wallace and System Capital from committing further fraud, among other violations as charged, and includes findings that Wallace and System Capital misrepresented to prospective and actual clients that Wallace and System Capital had a successful history of trading futures contracts and that System Capital had assets under management of at least $29 million; and that as a result of these fraudulent solicitations, they successfully solicited at least 17 clients and managed approximately $3.5 million of client funds. The Order also found that Wallace, on behalf of System Capital and himself, knowingly provided false information and documents to the National Futures Association. Among other sanctions, the Order permanently enjoined Wallace and System Capital from further violations of the anti-fraud provisions of the Commodity Exchange Act, as charged, and ordered each of them to pay a $420,000 civil monetary penalty.

In addition, the Notice alleges that Wallace and System Capital are subject to disqualification from CFTC registration based on Wallace’s conviction for criminal commodities fraud in connection with these same activities, as entered by the U.S. District Court for the Southern District of New York on November 27, 2012. On May 15, 2013, the District Court sentenced Wallace to 27 months in prison.

CFTC Division of Enforcement staff members responsible for this action are Mark A. Picard, Elizabeth C. Brennan, Philip Rix, Steven Ringer, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.

OPEN MEETING STATEMENT BY SEC COMMISSIONER AGUILAR

Statement at Open Meeting
by
Commissioner Luis A. Aguilar

FROM:  U.S. SECURITIES AND EXCHANG COMMISSION  
U.S. Securities and Exchange Commission
Open Meeting
Washington, D.C.
July 10, 2013

Today the Commission votes on a proposal (the “Proposing Release”) that contains a number of changes which would help protect investors and provide the Commission with information it needs to advance its regulatory, oversight, and enforcement functions.

More specifically, the Proposing Release would amend Regulation D to improve the content and timeliness of the Form D notice filing and to require legends and other disclosures in written materials disseminated in offerings utilizing general solicitation. The proposal would also amend Rule 156 to extend certain antifraud guidance to the sales literature of private funds, and would add new Rule 510T to require, on a temporary basis, the submission of written general solicitation materials to the Commission no later than the date of first use of such materials.

The Proposing Release follows the Commission’s adoption of rule amendments to implement Section 201 of the JOBS Act by removing the prohibition on general solicitation in certain exempt offerings (the “General Solicitation Rule”).1

The Proposing Release is intended to address some of the concerns that many commenters have raised regarding general solicitation, including concerns regarding an increase in fraudulent activity, as well as to improve the Commission’s ability to evaluate the development of market practices in Rule 506 offerings.

Although I support the Proposing Release, I would like to emphasize that this proposal is not a “quick fix” to the problems associated with the way the majority of the Commission has decided to implement general solicitation. Nor does this proposal rectify the Commission’s failure to consider commenters’ recommendations in connection with the original proposal of the General Solicitation Rule, or its failure to repropose that rule, so that such recommendations could be taken into account concurrently with the rule’s adoption. As I have said before, I’m afraid that any protections resulting from today’s proposal will come too late, if they come at all, for many investors.

It is ironic that the Proposing Release describes a work plan developed by the Commission staff to monitor, review, and analyze the use of Rule 506(c), including monitoring the Rule 506(c) market for indications of fraud. While I appreciate any effort by the staff to better inform our rulemaking and enforcement efforts, I am struck by the fact that the need for such a work plan is simply further confirmation that the General Solicitation Rule adopted today fails to address the risks to investors arising from the faulty process followed in implementing Section 201 of the JOBS Act.

I hope that the Regulation D enhancements we propose today — as well as needed improvements to the definition of accredited investor — will be adopted promptly. Investors should not be at risk any longer than is necessary.

Before I conclude, I would like to thank the staff who worked on the Proposing Release. I appreciate your efforts.

1 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Facilitating General Solicitation at the Expense of Investors,” Statement at SEC Open Meeting (July 10, 2013). I also recognize the Commission action today to adopt rule amendments to implement Section 926 of the Dodd-Frank Act by disqualifying certain felons and “bad actors” from offerings under Rule 506, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Limiting — But Not Eliminating — Bad Actors from Certain Offerings,” Statement at SEC Open Meeting (July 10, 2013).

CFTC COMMISSIONER CHILTON'S STATEMENT ON CROSS-BORDER GUIDANCE AND EXEMPTIVE ORDER

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
“Just Say’n”

Statement of Commissioner Bart Chilton on Cross-Border Guidance and Exemptive Order, Washington, DC

July 12, 2013

We’ve done a lot of rules and we’ve done way more than other financial regulators. We have final clearing and transparency rules, recordkeeping, reporting, and registration rules, and we’re working hard to finalize other important areas (like, just gotta say, position limits and I hope we more actively engage on Volcker). We’ve done a heckuva job on a lot of issues. All of these are super important. Nothing we’ve done, however, will fully succeed without the critical action that I hope we will take today. Just say’n.

That’s because we don’t live in a void all to ourselves. We live in a world with intricate, inter-connected, interdependent international markets. There is a commonality of connections like never before in history. What happens in one nation impacts another. Risk travels around the globe with a click of the mouse.

We’ve learned that hurting lesson and come to this point where we can move forward. Here are the two key takeaways for me on what we can do today:

1. We can provide certainty to markets and market participants to give needed structure in our rapidly changing financial world;

2. We can do so in a fashion—through phased-in effective dates for rules—that is cognizant of other global regulators, particularly those in the European Union.

Like in the movie Field of Dreams, when the voice from the corn field says, “If you build it, he will come.” I’ve said repeatedly that if we and the E.U. build balanced and fairly harmonized financial regulatory regimes, the rest of the world will come. The rest of the world will build similar regulatory structures. And that’s the ticket to protecting consumers: a network of fairly comparable and comprehensive rules that guard against systemic risks for us, but for other nations as well.

Now, before I finish, there’s a key concept I want to highlight for all the naysayers out there. The economy crashed in 2008. Dodd-Frank was passed in 2010 and required—required—us to implement it in 2011. The G-20 even agreed that swaps reform should be done in 2012. We’ve had a guidance document floating around here for half-a-year. My point, and I do have one, is this: it isn’t like this regulatory reform or this guidance snuck up on us. And, there isn’t any reason for folks to come down with acute Reguphobia at this state of play—paranoia will destroya.

At the same time, we’re always going for balance, so let me highlight the important comment period here: 75 days. We want them, we need them, gotta have ‘em! I hope and expect to hear from the public on any and all issues relating to our implementation of Dodd-Frank—on all fronts. We all are down in the weeds implementing these things, and if we need to tweak or adjust, work on a few kinks, on any issue, from implementation of cross-border trading requirements to indemnification guidance—let us know. And to that end, let me reiterate something I said in October and repeated in December: during this interim period of phased in compliance, I cannot envision nor would I support the agency taking any action against an entity engaging in good faith compliance, nor can I envision an action in the future taken retroactively for non-compliance in this interim period. We’ve all gotta use a common sense, reasonable man standard here.

(Oh, and by the way, while your commenting, please feel free to tell us if we got something right, as well!)

We all know that once in a while regulators can leave a thread hanging loose, ‘cause ooh, we aren’t always perfect. In this regard, I plan to engage the Global Markets Advisory Committee (GMAC) during this comment period to ensure we have a live-action forum to hear from folks (not that people have been shy about airing their concerns to date).

Finally, I express my sincere gratitude to the Chairman for his tireless work on all of these issues. I also thank my colleagues, Commissioner Sommers (whom we will miss), Commissioners O’Malia and Wetjen and their staffs. Finally, special heartfelt thanks to the professional agency staff who have worked exceedingly hard on this key component of financial reform. We need to honor your tireless work by passing this thing—the guidance and phased-in compliance—today. Not to do so would allow consumers and our economy to be unprotected. That just wouldn’t be right. Just say’n.

Thank you.

SEC FREEZES TRADER ASSETS FOR ALLEGED INSIDER TRADING IN ONYX PHARMA STOCK

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Freezes Assets of Insider Traders in Onyx Pharmaceuticals

On July 3, 2013, the Securities and Exchange Commission obtained an emergency court order to freeze the assets of traders using foreign accounts to reap approximately $4.6 million in potentially illegal profits by trading in advance of the Sunday, June 30, 2013 announcement that Onyx Pharmaceuticals, Inc. had received, but rejected an acquisition offer from Amgen, Inc.

The SEC alleges that unknown traders took risky bets that Onyx’s stock price would increase by purchasing call options on June 26, 27 and 28, the three trading days before the announcement. Through quick, cross country coordination between the agency’s Los Angeles and New York offices, the SEC took emergency action to freeze the traders’ assets before courts closed for the holiday.

According to the SEC’s complaint filed in federal court in Manhattan, on June 30, 2013 Onyx announced that it had received, but rejected, an unsolicited proposal from Amgen to acquire all of Onyx’s outstanding shares and share equivalents for $120 per share in cash. The Announcement also stated that Onyx’s board of directors rejected Amgen’s proposal and that Onyx had authorized its financial advisors to contact potential acquirers who may have an interest in a transaction with Onyx. Amgen’s $120 per share price offer represented a 38% premium to Onyx’s closing share price on Friday June 28, 2013. The complaint further alleges that as a result of the announcement, Onyx’s share price increased from a close of $86.82 on over 51% on Monday July 1 compared with the prior trading day’s closing price, and that the trading volume of its stock increased by over 900% that day. The complaint alleges that the traders, as a result of these well-timed trades, collectively earned a profit of approximately $4.6 million in just three days.

The SEC alleges that certain unknown traders were in possession of material nonpublic information about the offer to acquire Onyx at a substantial premium over the stock price at the time they purchased Onyx call options, many of which were out-of-the-money, in the three trading days before the announcement. According to the complaint, the timing and size of the trades were highly suspicious because they constituted large increases over the historical volume for those call options purchased.

The emergency court order obtained by the SEC freezes the traders’ assets related to the Onyx call options transactions and prohibits the traders 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 Exchange Act Rule 10b-5. In addition to the emergency relief, the Commission is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and permanently bar them from future violations.

CRIMINAL CHARGES FILED AGAINST MASSACHUSETTS INVESTMENT ADVISER

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Criminal Charges Filed Against Massachusetts Investment Adviser For Defrauding Investors


The Securities and Exchange Commission announced that, on July 1, 2013, the United States Attorney’s Office for the District of Massachusetts filed a criminal Information against Jeffrey A. Liskov (Liskov) of Plymouth, Massachusetts. The one-count criminal Information charged Liskov with willfully violating Section 206 of the Investment Advisers Act of 1940 (Advisers Act). The Commission previously filed a civil action against Liskov and his advisory firm, EagleEye Asset Management, LLC (EagleEye), for defrauding advisory clients in connection with foreign currency exchange (forex) investments. The factual allegations in the criminal Information are substantially similar to those in the Commission’s complaint in the civil case.


The Commission’s complaint in the civil case, filed on September 8, 2011, alleged that, between at least November 2008 and August 2010, Liskov made material misrepresentations to several advisory clients to induce them to liquidate investments in securities and instead invest in forex. The forex investments resulted in client losses totaling nearly $4 million, while EagleEye and Liskov came away with over $300,000 in performance fees, in addition to other management fees they collected from clients. The Commission alleged that Liskov’s strategy was to generate temporary profits on client forex investments to enable him to collect performance fees, after which client forex investments invariably quickly declined in value.

According to the Commission’s complaint, Liskov made material misrepresentations or failed to disclose material information to clients concerning the nature of forex investments, the risks involved in forex, and Liskov’s poor track record in forex trading for himself and other clients. The Commission’s complaint further alleged that, as to two clients, without their knowledge or consent, Liskov liquidated securities in their brokerage accounts and transferred the proceeds to their forex trading accounts where he lost nearly all their funds, but not before first collecting performance fees on temporary profits in these clients’ forex accounts. The complaint alleged that Liskov accomplished the unauthorized transfers by using "white out" correction fluid to change dates, amounts, and other data on asset transfer documentation. Liskov also opened multiple forex trading accounts in the name of one client, without obtaining the client’s consent, thereby maximizing his ability to earn performance fees on the client’s forex investments.

As result of the foregoing conduct, the Commission alleged that EagleEye and Liskov violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder and Sections 206(1) and 206(2) of the Advisers Act. The Commission also alleged that EagleEye failed to maintain certain books and records required of investment advisers in violation of Section 204 of the Advisers Act and Rule 204-2 thereunder, and that Liskov aided and abetted EagleEye’s violations of these recordkeeping provisions.

On November 26, 2012, after an eight-day trial in the Commission’s civil action, a jury found that EagleEye and Liskov violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 206(1) of the Advisers Act. After a further hearing, U.S. District Court Judge William G. Young found violations by EagleEye and Liskov of Section 204 of the Advisers Act and Rule 204-2 thereunder, concerning their recordkeeping obligations relating to EagleEye’s advisory business. On December 12, 2012, the court entered a final judgment against EagleEye and Liskov in the Commission’s civil action, ordering that they be permanently enjoined from future violations of the foregoing provisions of the securities laws. The court further ordered EagleEye and Liskov, jointly and severally, to pay disgorgement of their ill-gotten gains in the amount of $301,502.26, plus pre-judgment interest on that amount of $29,603.59, and the court also ordered EagleEye and Liskov each to pay a civil penalty of $725,000.

On December 27, 2012, the Commission instituted public administrative proceedings against each of EagleEye and Liskov to determine what sanctions against them, if any, may be appropriate and in the public interest.