ATTORNEY SUSPENDED FROM PRACTICING LAW FOR THREE YEARS OVER INSIDER TRADING ROLE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

New York State Suspends Attorney Mitchell S. Drucker from Practicing Law for Three Years Based On Insider Trading Violation

The Commission announces that on July 17, 2013, the Appellate Division, Second Department, of the New York State Supreme Court (the "Appellate Division"), issued a decision suspending attorney Mitchell S. Drucker from the practicing law for three years, commencing August 16, 2013. The decision provides that Drucker cannot apply for reinstatement earlier than February 16, 2016. The Court imposed this sanction based on the judgment the Commission obtained in its insider trading case against Drucker. SEC v. Mitchell S. Drucker, et al, 06 Civ. 1644 (S.D.N.Y.) In December 2007, a jury in the United States District Court for the Southern District of New York found that Drucker, who was in the legal department of public company NBTY, Inc., violated the antifraud provisions of the securities laws by insider trading the common stock of NBTY, tipping his father, who traded, and trading his friend's NBTY shares. In its decision, the Appellate Division upheld the determination of a Special Referee that Drucker had (1) "engaged in conduct involving dishonesty, deceit, fraud, or misrepresentation, in violation of former Code of Professional Responsibility DR1-102(a)(4) (22 NYCRR 1200.3[a][4])," and (2) "engaged in conduct adversely reflecting on his fitness as an attorney, in violation of former Code of Professional Responsibility DR 1-102(a)(7) (22 NYCRR 1200.3[a][7])." In imposing its sanction, the Appellate Division found:

. . . [W]e note the absence of cooperation by the respondent with the SEC, as well as the absence of any admission by the respondent that he engaged in insider trading. As the District Court noted, the respondent "failed to cooperate … until … he could no longer conceal his transgression, thereby misleading his employer," and he failed to take responsibility for what he did. We find the absence of remorse to be an aggravating factor, consistent with the District Court's finding that the respondent was entitled to "no mercy" as a result of the "brazenness" of his conduct and his "cocky refusal to own up to it." Moreover, we note the District Court's description of the respondent as having "demonstrated utter indifference to the law and to his client," and of his conduct as "egregious."

Previously, on December 26, 2007, Judge Colleen McMahon, whose decision and findings were cited by the Appellate Division, enjoined Drucker from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and barred him from serving as an officer and director of any public company. The judgment also ordered defendant Drucker to pay disgorgement and prejudgment interest totaling $201,146, to pay, and be jointly and severally liable with his father, defendant Ronald Drucker for, disgorgement and prejudgment interest totaling $74,411, and to pay, and be jointly and severally liable with his friend, relief defendant William Minerva for, disgorgement and prejudgment interest totaling $11,577. Finally, the judgment ordered Mitchell Drucker to pay a civil penalty of $394,486, representing two times the combined ill-gotten gains obtained by defendants Mitchell Drucker and Ronald Drucker, and relief defendant Minerva. Drucker subsequently completed those payments to the U.S. Treasury.

In February 2008, the Commission issued an Order temporarily and then permanently suspending Drucker from practicing before the Commission based on his insider trading judgment.

CFTC ANNOUNCEMENT REGARDING MANDATORY CLEARING OF iTRAXX CDS INDICES FOR CATEGORY 2 ENTITIES

FROM:  COMMODITY FUTURES TRADING COMMISSION

July 25, 2013
CFTC Announces that Mandatory Clearing of iTraxx CDS Indices for Category 2 Entities Begins Today

Washington, DC — The Division of Clearing and Risk (Division) of the Commodity Futures Trading Commission (Commission) announces that the second phase of required clearing for certain iTraxx credit default swap (CDS) indices begins today for Category 2 Entities. Category 2 Entities include commodity pools, private funds, and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature, except for third-party subaccounts. These entities are required to begin clearing iTraxx CDS indices that are subject to the clearing requirement under section 2(h) of the Commodity Exchange Act (CEA) and Regulations 50.2 and 50.4(b) executed on or after July 25, 2013.

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the CEA to require that the Commission determine whether a swap is required to be cleared by a derivatives clearing organization (DCO). The Commission adopted its first clearing requirement determination for four classes of interest rate swaps and two classes of CDS on November 28, 2012.

At the time of the Commission’s initial clearing determination no DCO was offering client clearing for the iTraxx CDS indices. The Commission specified that if no DCO offered client clearing for the indices by February 11, 2013, compliance with the required clearing of iTraxx would begin 60 days after the date on which iTraxx was first offered for client clearing by an eligible DCO.

On February 25, 2013, ICE Clear Credit LLC notified the Commission that it had begun offering customer clearing of the iTraxx CDS indices that are subject to the clearing requirement. The following are the compliance dates previously announced for required clearing of these iTraxx swaps:

Category 1 Entities: Friday, April 26, 2013
Category 2 Entities: Thursday, July 25, 2013
All other entities: Wednesday, October 23, 2013
The compliance dates set forth above do not apply to the clearing schedule for the interest rate swaps and other CDS indices subject to the clearing requirement established in the Commission’s first determination, which are as follows:

Category 1 Entities: Monday, March 11, 2013
Category 2 Entities: Monday, June 10, 2013
All other entities: Monday, September 9, 2013

FORMER INVESTMENT BANKER AND COLLEGE FRIEND SENTENCED FOR ROLES IN INSIDER TRADING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Former Investment Banker and His College Friend Sentenced to 16 Months in Prison for Insider Trading Scheme

The Securities and Exchange Commission announced that on July 23, 2013, investment bank analyst Jauyo "Jason" Lee, 29, of Palo Alto, Calif., and his college friend Victor Chen, 29, of Sunnyvale, Calif., were sentenced to 16 months in prison for their roles in an insider trading scheme. The Honorable Richard Seeborg, of the U.S. District Court for the Northern District of California, also sentenced Lee and Chen to two years of supervised release following their incarceration and ordered that restitution and forfeiture be considered at a subsequent hearing. Chen paid $610,099 in forfeiture prior to sentencing. Lee and Chen both pleaded guilty on April 16, 2013, to one count of conspiracy to commit securities fraud and one count of securities fraud.

The criminal charges filed by the U.S. Attorney for the Northern District of California arose out of the same facts that were the subject of a civil action that the SEC filed against Lee and Chen on September 27, 2012. The SEC's complaint alleged that Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive, nonpublic information about two upcoming deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped Chen, his longtime college friend with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.

According to the SEC's complaint, Lee was first privy to information about Leerink's client Syneron Medical Ltd., which was negotiating an acquisition of Candela Corporation in 2009. He later learned that Leerink's client Somanetics Corporation was in the process of being acquired by Covidien plc. in 2010. As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly and exchanged dozens of phone calls and text messages. Some of the calls took place from Lee's office telephone at Leerink. Lee had a duty to preserve the confidentiality of the information that he received in the course of his employment at Leerink.

The SEC alleged that in the days leading up to the public announcements of each of these deals, Chen made sizeable purchases of stock and call options in Candela and Somanetics and made unusual trades in the securities of each of these acquisition targets. Chen had never previously bought securities in these companies, yet he suddenly spent a significant portion of his available cash to buy the Candela and Somanetics securities. Chen proceeded to sell most of his Candela and Somanetics holdings once public announcements were made about the transactions. Because Chen made some of his trades in his sister Jennifer Chen's account, the SEC's complaint also names her as a relief defendant for the purposes of recovering the illegal profits in her account.

As a result of their conduct, the SEC's complaint charged Lee and Chen with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The complaint sought disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and permanent injunctions against Lee and Chen. The SEC's case remains pending.

FORMER EXECUTIVE PLEADS GUILTY TO PART IN $400 MILLION SECURITIES FRAUD SCHEME

FROM:  U.S. DEPARTMENT OF JUSTICE 
Tuesday, July 23, 2013
Former Senior Executive of ArthroCare Corp. Pleads Guilty in $400 Million Securities Fraud Scheme

A former senior executive of ArthroCare Corp., a publicly traded medical device company based in Austin, Texas, pleaded guilty for his role in a scheme to defraud the company’s shareholders and members of the investing public by falsely inflating ArthroCare’s earnings, announced Acting Assistant Attorney Mythili Raman of the Department of Justice’s Criminal Division and U.S. Attorney Robert Pitman of the Western District of Texas. The plea was taken under seal on June 24, 2013, and unsealed late yesterday.

John Raffle, 45, of Austin, pleaded guilty before U.S. Magistrate Judge Mark Lane in Austin to conspiracy to commit securities, mail and wire fraud and two false statements violations.  Raffle was the senior vice president of Strategic Business Units at ArthroCare, overseeing all sales and marketing staff at the company.  Raffle admitted that he and other co-conspirators falsely inflated ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors and that he and other co-conspirators caused ArthroCare to file a Form 10-K for 2007 and Form 10-Q for the first quarter of 2008 with the U.S. Securities and Exchange Commission that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings.  As part of his plea, Raffle agreed that his conduct and the conduct of his co-conspirators caused more than $400 million in losses to shareholders.

According to court documents, Raffle and others determined the type and amount of product to be shipped to distributors – notably ArthroCare’s largest distributor, DiscoCare Inc. –  based on ArthroCare’s need to meet sales forecasts, rather than the distributors’ actual orders. Raffle and others then caused ArthroCare to “park” millions of dollars worth of ArthroCare’s medical devices at its distributors at the end of each relevant quarter. ArthroCare would then report these shipments as sales in its quarterly and annual filings at the time of the shipment, enabling the company to meet or exceed internal and external earnings forecasts.

According to the superseding information, DiscoCare agreed to accept shipment of approximately $37 million of product in exchange for substantial, upfront cash commissions, extended payment terms and the ability to return product, as well as other special conditions, allowing ArthroCare to falsely inflate its revenue by tens of millions of dollars.  To conceal the fact that DiscoCare owed ArthroCare a substantial amount of money on the unused inventory, Raffle and others caused ArthroCare to acquire DiscoCare on Dec. 31, 2007.

According to court documents, between December 2005 and December 2008, ArthroCare’s shareholders held more than 25 million shares of ArthroCare stock.  On July 21, 2008, after ArthroCare announced publicly that it would be restating its previously reported financial results from the third quarter 2006 through the first quarter 2008 to reflect the results of an internal investigation, the price of ArthroCare shares dropped from $40.03 to $23.21 per share.  The drop in ArthroCare’s share price caused an immediate loss in shareholder value of more than $400 million.

Raffle faces a maximum prison sentence of five years in prison for each charge.  A sentencing date has yet to be scheduled.  Raffle’s co-defendant David Applegate pleaded guilty on May 9, 2013.  ArthroCare’s Chief Executive Officer, Michael Baker, and Chief Financial Officer, Michael Gluk, were indicted as part of the same alleged securities fraud scheme on July 16, 2013.  An indictment is merely a charge, and the defendants are presumed innocent until proven guilty.

This case was investigated by the FBI’s Austin office.  The case is being prosecuted by Deputy Chief Benjamin D. Singer and Trial Attorneys Henry P. Van Dyck and William Chang of the Criminal Division’s Fraud Section.  The Department recognizes the substantial assistance of the U.S. Securities and Exchange Commission.

CFTC COMMISSIONER MARK WETJEN GIVES TESTIMONY BEFORE CONGRESS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Testimony of Commissioner Mark Wetjen Before the U.S. House Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management, Washington, DC

July 23, 2013

Good morning Chairman Conaway, Ranking Member Scott, and members of the subcommittee. Thank you for inviting me to testify this morning and share some of my perspectives on the future of the Commodity Futures Trading Commission. It is a pleasure to be here.

I want to personally thank Chairman Conaway for his open dialogue with me since I joined the commission. I have found our discussions to be useful and hopefully mutually beneficial.

I also want to acknowledge my friend, Commissioner O’Malia, who is beside me today. I have admired his skills in analyzing and bringing attention to important issues raised by our rules or other market developments. I hope he would agree that we have developed a good working partnership at the agency.

For a host of reasons, now is a very good time for not only this subcommittee, but all stakeholders in the CFTC, to reflect on what the future might bring for this agency. Allow me to mention a few.

First, and most obviously, Congress must address the expiring authorization for the agency, which is the primary reason for the hearing today and of course will require a congressional response. I appreciate this subcommittee’s efforts to work toward making that response an informed one that seeks to solve any inadequacies or other problems related to the Commodity Exchange Act or the work of the commission.

It is my hope and belief that many of the issues raised by CFTC rulemakings in the past three years that eventually became the subject of congressional legislation have been resolved or adequately addressed in our final rules or through other relief granted by the agency. With or without additional direction from Congress through CFTC re-authorization, it is important that the agency and its staff continue to find ways to address problems that are still in need of a solution.

Second, the commission’s implementation of Title VII of Dodd-Frank is for the most part finished. We have almost 80 swap dealers now registered with the CFTC, clearing mandates in place for a broad swath of the swap market, and new reporting obligations for market participants. The commission also just completed its cross-border guidance, informing market participants and other regulators how the commission’s rules will be applied to activities and entities overseas.

Looking ahead through the lens of what already has been done, the commission and all stakeholders will need to closely monitor and, if appropriate, address the inevitable challenges that that will come with implementing the new regulatory framework under Dodd-Frank.

Third, while most of the commission’s work to implement Dodd-Frank is complete, there remain important rulemakings and administrative matters in the months ahead. Perhaps most importantly, the commission, along with the Federal Reserve, the OCC, the FDIC, and the SEC, must finalize its rulemaking on the so-called “Volcker Rule.”

The agency also must undertake “substituted compliance” determinations under the recently finalized cross-border guidance. This will involve a review of swap-regulatory regimes in other nations to determine whether they are “comparable and comprehensive” or “essentially identical” to U.S. law.

The commission also must finalize its rulemaking on capital-and-margin requirements for un-cleared swaps. And there are two very important rulemakings related to the international harmonization of risk-management requirements on clearing houses, which dovetails with the substituted-compliance determinations.

Another critical rulemaking, albeit not directly related to Dodd-Frank, is the commission’s customer-protection rule that seeks to improve risk-management practices at futures commission merchants.

Finally, given that the U.S. has nearly delivered on its G20 commitments to derivatives reform, and the European Union is close behind, all of us can spend more time focusing on the developing market structure for swaps on a more global scale. The commission already has authorized new trading platforms for swaps, and Europe is about to do the same. We anticipate that with these developments many swaps will be executed on regulated and transparent marketplaces located both here and abroad, facilitating global liquidity formation and risk management. Consistent with this result, I believe the commission’s cross-border guidance reversed a developing trend toward market and risk-management fragmentation that would have been counterproductive to the goals of Dodd-Frank as well as the G20 commitments.

But we all must wait and see to a greater degree what developments will take shape outside of the U.S. and Europe. Other jurisdictions that host a substantial market for swap activity are still working on their reforms, and certainly will be informed by our work. All of us will need to monitor those developments closely, with an eye toward how they could separate those jurisdictions from the fabric we – along with our European partners – stitched together in last week’s accord.

In other words, the commission must remain vigilant in monitoring, identifying, and addressing risk, and continually prioritize so we are focused on the greatest threats. Indeed, another threat identified by the Treasury Secretary last week must be part of this global monitoring: the cyber-security threat. As marketplaces and systems continue to rely more and more on technology, the need to better understand and protect against cyber-security threats to the markets the commission regulates increases. There are multiple task forces and coalitions formed of domestic and international partners that the commission will need to work with to ensure success on this front.

Thank you again for inviting me today. I would be happy to answer any questions from the panel.

FORMER BMY EXECUTIVE SETTLES CHARGES OF INSIDER TRADING WITH SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Former Bristol-Myers Executive Agrees to Settle Insider Trading Charges

The Securities and Exchange Commission announced today that the Honorable Susan D. Wigenton of the United States District Court for the District of New Jersey entered a judgment approving a $324,777 settlement between the Commission and Robert D. Ramnarine, a former executive at Bristol-Myers Squibb Co., in a case that arose from allegations of insider trading in the securities of three companies that Bristol had targeted for acquisitions between 2010 and 2012.

In its action against Ramnarine, SEC v. Robert D. Ramnarine, 2:12-cv-04837 (D.N.J.), filed on August 2, 2012, the Commission alleged that Ramnarine, a former executive in Bristol's treasury department, misappropriated material nonpublic information relating to Bristol's involvement in evaluating possible acquisitions of ZymoGenetics, Inc., Pharmasset, Inc. and Amylin Pharmaceuticals, Inc. and then traded in stock options of these potential target companies' securities in personal brokerage accounts. Prior to buying Pharmasset call options, the Commission alleged that Ramnarine sought to conceal his unlawful conduct by conducting internet research, using his Bristol computer, to determine whether his option trading would be detected by regulators. In particular, the Commission alleged that Ramnarine ran internet searches using Bristol's computer network for phrases including "can stock option be traced to purchaser," "how to detect can stock option be traced to purchase inside trading," and "illegal insider trading options trace." According to the Commission's complaint, Ramnarine realized ill-gotten gains of at least $311,361 by trading stock options of ZymoGenetics, Pharmasset and Amylin in advance of announcements that those companies would be acquired.

The judgment entered in the Commission's action permanently enjoins Ramnarine from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and (14)(e) of the Securities Exchange Act of 1934, and Rules 10b-5 and 14e-3 thereunder, and permanently enjoins Ramnarine from acting as an officer or director of any issuer that has any class of securities registered pursuant to Section 12 of the Exchange Act. The judgment also requires Ramnarine to disgorge $311,361, plus prejudgment interest of $13,061, and requires that funds in a brokerage account controlled by Ramnarine that were frozen by previous order of the Court be transferred to the Commission. Pursuant to the judgment, the Commission may later move the Court to impose a civil penalty against Ramnarine.

The U.S. Attorney's Office for the District of New Jersey filed a parallel criminal action against Ramnarine on August 1, 2012 based on the same facts, U.S. v. Ramnarine, 3:13-cr-00387 (D.N.J.), and on June 10, 2013, Ramnarine pleaded guilty to securities fraud before the Honorable Anne E. Thompson of the United States District Court for the District of New Jersey. Sentencing is scheduled for September 26, 2013.

The Commission acknowledges the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the Options Regulatory Surveillance Authority.

The Commission's investigation was conducted by Market Abuse Unit staff Paul T. Chryssikos, Senior Counsel, and John S. Rymas, Investigator, in the Philadelphia Regional Office. Daniel M. Hawke, Chief of the Market Abuse Unit, supervised the investigation. Regional Trial Counsel, G. Jeffrey Boujoukos and Senior Trial Counsel, John V. Donnelly, handled the litigation.