SEC CAUTIONS EXCHANGES TO MONITOR FOR COMPLIANCE COMPOSITION OF INDICES USED IN OFFERING FINANCIAL INSTRUMENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
FOR IMMEDIATE RELEASE
2013-150
Washington D.C., Aug. 8, 2013 —

The Securities and Exchange Commission today issued a report cautioning exchanges and investment professionals to monitor the composition of indices used in offering financial instruments to determine if they are security futures products and ensure they are complying with the federal securities laws.

The SEC’s report of investigation stems from an inquiry into a foreign derivatives exchange that was offering and selling futures to U.S. customers on what was initially a broad-based index not subject to the registration requirements of the federal securities laws.  The index later transitioned to a narrow-based security index, leaving it without a valid exemption from the securities laws.  The SEC’s report reminds exchanges and investment professionals to establish policies and procedures to consistently monitor the composition of indices on which futures are based to establish whether or not they are offering security futures products.

“As the compositions of exchange indices fluctuate, it is critically important for exchanges to have policies and procedures in place to effectively monitor the composition of their indices and  ensure that they are appropriately offering securities based on those indices to U.S. investors,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “It is equally important for investment professionals to be mindful of the highly analogous situation involving security-based swaps, and the failure to appropriately monitor the characteristics of such financial instruments risks violating the federal securities laws.”

The SEC’s investigation into Eurex Deutschland revealed that the exchange began offering and selling futures on its Euro STOXX Banks Index to U.S. customers more than 10 years ago pursuant to a Commodity Futures Trading Commission (CFTC) no-action letter obtained in part through Eurex’s representation that it was a broad-based index subject to the CFTC’s exclusive jurisdiction.  In October 2011, Eurex reviewed the index for the first time in response to a request by the CFTC to confirm it was still broad-based.  During the review, Eurex discovered and self-reported to the SEC and CFTC that the index had transitioned in April 2010 from a broad-based to a narrow-based security index as defined by Section 3(a)(55)(B) of the Securites Exchange Act of 1934.   From April 2010 to October 2011, Eurex sold 6 million contracts on the index through approximately 79 foreign-based broker-dealers, some of which offered direct market access to the index through trading terminals in the U.S.  Other orders were facilitated through omnibus customer accounts carried by foreign-based intermediaries on behalf U.S. investors.

According to the SEC’s report, Eurex did not comply with Section 6(h)(1) of the Exchange Act by effecting transactions in security futures that were not listed on a national securities exchange or national securities association for U.S. investors.  Eurex also failed to comply with Section 5 of the Exchange Act by not registering as a national securities exchange, and by offering and selling security futures in the U.S without registering the transactions or having a valid exemption from registration.  The Commission has decided to issue this report and forego an enforcement action against Eurex in part because of its substantial and timely cooperation with the investigation and its prompt remediation efforts.  After self-reporting the findings of its review, Eurex extensively cooperated with the SEC staff and voluntarily provided updates and documents.  Eurex has since implemented comprehensive policies and procedures that now require monthly, and in some instances daily, compliance monitoring of indices on which it offers futures contracts in the U.S.

The SEC’s report notes that in analogous situations involving security-based swaps, investment professionals who engage in swap transactions are responsible for ascertaining the swap’s characteristics.  When the swaps are securities-based, they must ensure that they are following the registration requirements of the federal securities laws and appropriately offering these financial instruments to U.S. investors.

The SEC’s investigation was conducted by Kay B. Lee of the Enforcement Division’s Market Abuse Unit in Philadelphia, and was supervised by Mr. Hawke.

SEC ANNOUNCES FINAL JUDGEMENT AGAINST DEFENDANT IN "U TURN" PRICING INFORMATION SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Edward O'connor

The Securities and Exchange Commission announced today that on July 30, 2013, the Honorable George B. Daniels of the United States District Court for the Southern District of New York entered a final judgment against defendant Edward O'Connor. The final judgment permanently bars O'Connor from service as an officer or director of a public company, orders him to pay disgorgement of $550,000 and a civil penalty of $150,000, and imposes permanent injunctions against future violations of the antifraud, corporate reporting, books and records, and internal accounting controls provisions of the federal securities laws cited in the Commission's complaint.

In its Complaint, as amended, the Commission alleged that O'Connor, a former director and executive officer of publicly traded commodities brokerage firm Optionable, Inc., took part in a scheme to "u turn" pricing information from defendant David Lee, a natural gas options trader at Bank of Montreal ("BMO"), back to reviewers at BMO as if the information had been independently verified. As a result of this scheme, the Commission alleged, BMO's financial results for the fiscal year ended October 31, 2006 and for the first quarter of fiscal year 2007 were materially overstated. The Commission also alleged that O'Connor and another defendant made misrepresentations in Optionable's periodic reports about the firm's valuation services, among other things, and deceived the operator of the New York Mercantile Exchange (NYMEX) through misrepresentations, in a stock purchase agreement, about the truthfulness of Optionable's SEC filings and its compliance with law. O'Connor consented to the entry of the final judgment without admitting or denying the Commission's allegations.

The litigation was handled by Joe Boryshansky, Jess Velona, and Daniel Walfish.

TWO FORMER OFFICERS OF DEFUNCT COMPANY CHARGED FOR PARTICIPATING IN FRAUDULENT PENNY STOCK SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Former Officers and Investor in Houston Company in Fraudulent Penny Stock Scheme

The Securities and Exchange Commission today charged two former officers of now-defunct PGI Energy, Inc., as well as an investor in the company, for their roles in a fraudulent penny stock scheme to issue purportedly unrestricted PGI Energy shares in the public markets.

The SEC's complaint, filed in U.S. District Court for the Southern District of Texas, alleges that starting in 2011, PGI Energy's former Chief Investment Officer Robert Gandy and former CEO and Chairman Marcellous McZeal engaged in a scheme that included creating false promissory notes, signing misleading certifications, and altering the company's balance sheet to cause its transfer agent to issue millions of PGI Energy common stock shares without restrictive legends. The SEC also charged investor Alvin Ausbon for his role in the scheme, which included signing false promissory notes and diverting proceeds from the sale of PGI Energy stock back to the company and Gandy.

Gandy is also the CEO of Houston-based Pythagoras Group, which purports to be an "investment banking firm." McZeal is an attorney licensed in Texas. The complaint alleges that Gandy and McZeal made material misstatements and provided false documents to attorneys and a transfer agent who relied on them to conclude that PGI Energy shares could be issued without restrictive legends. The SEC alleges that Gandy and McZeal backdated promissory notes that purported to memorialize debt supposedly owed by PGI Energy and a prior business venture. They also are alleged to have added false debt to PGI Energy's balance sheet, and signed bogus "gift" letters and certifications of non-shell status, all in an effort to get unrestricted, free-trading PGI Energy shares unlawfully released into the market. Ausbon is charged with furthering the scheme by signing bogus promissory notes and remitting proceeds from the sale of PGI Energy shares back to the company and Gandy.

According to the complaint, the scheme collapsed in February 2012 when the SEC ordered a temporary suspension of trading in PGI Energy's securities, due to questions regarding the accuracy and adequacy of the company's representations in press releases and other public statements.

The SEC's complaint charges all defendants with violating Sections 5 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 complaint seeks permanent injunctions, disgorgement plus prejudgment interest, a financial penalty, and penny stock bars against all three defendants and officer and director bars against Gandy and McZeal.

Without admitting or denying the allegations in the SEC's complaint, McZeal has consented to the entry of a final judgment enjoining him from future violations of Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. He has also agreed to pay disgorgement plus prejudgment interest thereon of $19,919.37 and a civil penalty of $70,000. In addition, McZeal has agreed to permanent officer and director and penny stock bars. This settlement is subject to court approval. Subject to final settlement of the district court proceeding, McZeal has also agreed to the institution of a settled administrative proceeding pursuant to Rule 102(e) of the SEC's Rules of Practice, pursuant to which he would be barred from appearing before the SEC as an attorney.

LABOR, SEC RENEW MEMORANDUM OF UNDERSTANDING REGARDING SHARED INFORMATION ON RETIREMENT AND INVESTMENTS

FROM:   U.S. DEPARTMENT OF LABOR

US Labor Department renews its memorandum of understanding with Securities and Exchange Commission

WASHINGTON — The U.S. Department of Labor announced that it has renewed a memorandum of understanding with the U.S. Securities and Exchange Commission on sharing information on retirement and investment matters. The memorandum was signed by Secretary of Labor Tom Perez and SEC Chair Mary Jo White.

"The department views our work with the SEC on shared interests in recent years as a tremendous success. By renewing this memorandum of understanding, we will continue to better serve all of America's workers who depend on private-sector retirement plans," said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. "Our experience with the SEC helps to boost the department's enforcement program and ensure that our regulatory and other programs work in tandem with the SEC's initiatives to provide meaningful protections for workers' retirement savings."

The memorandum sets forth a process for the department's Employee Benefits Security Administration and SEC staffs to share information and meet regularly to discuss topics of mutual interest. The memorandum also will facilitate the sharing of non-public information regarding subjects of mutual interest between the two agencies. Additionally, both agencies will cross-train staff with the goal of enhancing each agency's understanding of the other's mission and investigative jurisdiction.

As more and more investors turn to the markets to help secure their futures, pay for homes and send children to college, the shared investor protection mission of the SEC and the Department of Labor is more vital for America's workers than ever before. The renewed memorandum reinforces the agencies' historical commitment to share information and work together on a variety of regulatory, enforcement, public outreach, research and information technology matters.
EBSA's mission is to assure the retirement, health and other workplace-related benefits of America's workers, retirees and their families. In the retirement area, EBSA has authority over private-sector retirement plans including 401(k) plans and IRAs, plan fiduciaries, and service providers.

SETTLED FRAUD AND SECURITIES CHARGES FILED AGAINST OWNER OF CONESTOGA LOG CABIN LEASING, INC.

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Settled Charges Against John M. Sensenig, Founder and Owner of Conestoga Log Cabin Leasing, Inc. for Fraud and Unregistered Sales of Securities Violations

On July 29, 2013, the Securities and Exchange Commission ("Commission") filed a complaint against John M. Sensenig ("Sensenig"), in the United States District Court for the Eastern District of Pennsylvania alleging that Sensenig, a member of the Mennonite community and the founder and owner of Conestoga Log Cabin Leasing, Inc. and other affiliated companies, violated the antifraud and securities registration provisions of the federal securities laws.

The Commission's complaint alleges that from at least 1997 until 2009, Sensenig raised millions of dollars from more than 1,500 fellow members of the Amish and Mennonite communities through the offer and sale of Promissory Notes. Sensenig used the proceeds to finance a collection of start-up companies he founded and controlled, the largest of which was Conestoga Log Cabin Leasing, Inc. More than half of the funds raised by Sensenig were returned to investors. The complaint further alleges that Sensenig made material misrepresentations and omissions to investors including failing to disclose the use of proceeds, the risks associated with the investment, and remedial sanctions placed on him by a state securities regulator. The Commission further alleges that Sensenig failed to register the offering of the Promissory Notes although no exemption from registration applies. The complaint alleges that this conduct violated Sections 5(a), 5(c), 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act").

Without admitting or denying the allegations in the complaint, Sensenig consented to the entry of a final judgment, subject to the court's approval, in which he is: (i) permanently enjoined from further violations of Sections 5 and 17(a) of the Securities Act, (ii) permanently enjoined from direct or indirect participation in any unregistered offerings of securities; (iii) ordered to pay a civil penalty in the amount of $131,500; and (iv) ordered to surrender for cancellation all shares of stock he owns in two privately held companies formerly affiliated with Conestoga Log Cabin Leasing, Inc. The Commission is not seeking the imposition of a higher penalty in light of Sensenig's financial condition.

ALLEGED TIPPER CHARGED IN S.A.C. CAPITAL PORTFOLIO MANAGER INSIDER TRADING CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Tipper of Confidential Information to S.A.C. Capital Portfolio Manager

On July 30, 2013, the Securities and Exchange Commission charged the tipper of confidential information to a S.A.C. Capital portfolio manager who has been charged with insider trading.

The SEC amended its complaint against Richard Lee, who was charged last week, to additionally charge Sandeep Aggarwal, a sell-side analyst who tipped Lee in advance of a July 2009 public announcement about an Internet search engine partnership between Microsoft and Yahoo. Lee purchased large amounts of Yahoo stock in the S.A.C. Capital hedge fund that he managed as well as in his personal trading account on the basis of the inside information.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Aggarwal, who lives in India but recently returned to the U.S.

The SEC alleges that Aggarwal learned confidential details about the significant progress of the Microsoft-Yahoo negotiations from his close friend at Microsoft on July 9, 2009, and he tipped Lee with the information during a telephone call the following day. When the information was reported in the media almost a week later, Yahoo's stock price rose approximately 4 percent. S.A.C. Capital and Lee reaped substantial profits from the Yahoo shares that he purchased after speaking to Aggarwal.

According to the SEC's amended complaint filed in federal court in Manhattan, Aggarwal covered both Microsoft and Yahoo for his research firm and regularly received periodic updates from his inside source at Microsoft. Upon learning that Microsoft and Yahoo were potentially within two weeks of finalizing a deal, Aggarwal shared very specific details with Lee. Aggarwal assured him that the information came from a close friend at Microsoft who was reliable and accurate.

The SEC's amended complaint charges Aggarwal and Lee with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The amended complaint seeks a final judgment ordering Aggarwal and Lee to pay disgorgement of ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.