CFTC CHARGES COUPLE AND COMPANY WITH MAKING ILLEGAL OFF-EXCHANGE COMMODITY TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

CFTC Charges Florida Residents Cindy and Paul Vandivier and Their Company, Mintline, Inc., with Fraud in Connection with Illegal, Off-Exchange Commodity Transactions

Federal Court Issues Order Freezing Defendants’ Assets and Prohibiting Destruction of Books and Records

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained an emergency court Order on May 13, 2014, freezing and preserving the assets under the control of Cindy Vandivier, Paul Vandivier, and their company, Mintline, Inc. (collectively, the Defendants), all of Coconut Creek, Florida. The court’s Order, entered by Judge William J. Zloch of the U.S. District Court for the Southern District of Florida, also prohibits the Vandiviers and Mintline from destroying books and records and grants the CFTC immediate access to such documents. Neither Mintline nor Cindy Vandivier has ever been registered with the CFTC, and Paul Vandivier has no current registration status with the CFTC.

The Order stems from a CFTC enforcement action filed on May 12, 2014, charging the Vandiviers and Mintline with fraudulently soliciting customers and misappropriating customer funds in connection with illegal, off-exchange transactions in precious metals from July 2011 to at least April 2013.

Defendants Allegedly Misappropriated Virtually All of the Customers’ Funds

According to the CFTC Complaint, the Defendants purported to sell physical metals, on a leveraged, margined, or financed basis to retail customers located throughout the United States. The Complaint alleges that the Defendants, in fact, did not purchase, sell, transfer ownership of, deliver, or arrange for storage of any physical metals in connection with the financed metals transactions, but instead misappropriated virtually all of the customers’ funds, using a portion of those funds to pay for office and personal expenses.

The CFTC Complaint further alleges that the Defendants falsely represented to customers that their metals were being held in secured depositories, and fraudulently charged customers interest on purported loans to finance the purchase of the metals. In reality, the Complaint alleges that no physical metal was stored for Defendants’ customers and no loans were made to customers to purchase physical metal.

Sometime between January and April 2013, the Defendants ceased operations, leaving customers without their metals or a return of their funds, according to the Complaint.

In its continuing litigation against the Defendants, the CFTC seeks full restitution to defrauded customers, a return of ill-gotten gains, permanent trading and registration bans, civil monetary penalties, and a permanent injunction from future violations of federal commodities laws, as charged.

CFTC Division of Enforcement staff members responsible for this case are Alan Edelman, Michelle Bougas, James H. Holl, III, and Rick Glaser.

SEC CHARGES FLORIDA FUND MANAGER WITH DEFRAUDING INVESTORS IN A PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a Sarasota, Fla.-based private fund manager with defrauding investors in a Ponzi scheme that ensued after he squandered their money on bad investments and personal expenses.

The SEC alleges that Gaeton “Guy” S. Della Penna raised $3.8 million from investors in three private investment funds that he operated.  Investors were told their funds would be used to trade securities or invest in small companies.  Despite depicting himself as a distinguished trader and profit-maker, Della Penna lost nearly all of their money by making unsuccessful investments and diverting more than a million dollars to himself for mortgage payments and money for his girlfriend.  In an effort to cover up his fraud as it unraveled, Della Penna began operating a Ponzi scheme by using money from newer investors to pay fake returns to prior investors.  He provided some investors with false account statements to mislead them into believing they were profiting by investing their money with him.

In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida today announced criminal charges against Della Penna.

“Della Penna lied to investors about his trading track record in order to gain their trust and pocket their investments,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “He fostered a false sense of security by creating bogus account statements showing positive returns when, in reality, he was operating a Ponzi scheme and stealing investor money.”

According to the SEC’s complaint filed in the U.S. District Court for the Middle District of Florida, many of the investors in Della Penna’s scheme were acquaintances who he met through his church.  He solicited investors to purchase notes in his private investment funds from 2008 to 2013, often promising 5 percent annual returns along with 80 percent of the trading profits generated with their investments.  He later promised some investors 10 percent returns on their money to be used for investing in small companies. All the while, Della Penna was siphoning away investor funds to the tune of about $1.1 million to make mortgage payments on his 10,000-square-foot home and make payments to his girlfriend who lived with him there.  Della Penna also transferred some investor funds into accounts at Gaeton Capital Advisors LLC, an entity that is named as a relief defendant in the SEC’s complaint for the purpose of recovering any investor funds in its possession.

 The SEC’s complaint alleges that Della Penna violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and a permanent injunction against Della Penna.

The SEC’s investigation was conducted by Raynette R. Nicoleau and supervised by Chedly C. Dumornay in the Miami Regional Office.  The SEC’s litigation will be led by Andrew Schiff.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Middle District of Florida and the Tampa division of the U.S. Secret Service.

CFTC ACTING CHAIRMAN WETJEN ANNOUNCES 3 ACTIONS TO IMPROVE MARKETS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

May 22, 2014

Acting Chairman Mark Wetjen Announces Three Actions to Protect Liquidity for Certain End-Users, Further Consider Certain Hedging Practices, and Promote Trading on SEFs and DCMs

Washington, DC — The Commodity Futures Trading Commission (Commission) Acting Chairman Mark Wetjen and Commissioner Scott O’Malia announced three actions to benefit utility special entities, further consider certain hedging practices for commercial market participants, and promote end-user trading on swap execution facilities (SEFs) and designated contract markets (DCMs).

Acting Chairman Mark Wetjen said, “I am pleased the Commission is acting to address the impact the special entity de minimis threshold is having on utility special entities and the markets in which they operate and to further consider the appropriate treatment of hedging practices in the marketplace today.”

“I am equally pleased,” continued Acting Chairman Wetjen, “that the Divisions are acting to promote trading on SEFs and DCMs and give certain members of these important exchanges and platforms additional time to come into compliance with Regulation 1.35(a).”

“These proposals collectively reflect our continuing efforts to ensure that market regulations accomplish their intended function without creating negative, unintended consequences, in particular for commercial end-users,” said Acting Chairman Wetjen.

”Today marks a significant victory for the end-user community and for the Commission’s rulemaking process. End-users will win today, with the proposal fixing the Special Entity rule and further relief from rule 1.35, which applied unworkable and costly recording requirements. The relief will remain effective until the Commission revisits the rule to appropriately tailor the rule’s requirements to the relevant entities and more carefully consider the costs and technological feasibility of compliance with the rule. I am pleased that the Commission has chosen to confront the shortcomings in its rules by using the proper process that is consistent with the Administrative Procedure Act,” said Commissioner O’Malia.

CFTC Issues Proposal to Amend its Regulations for Entities Entering into Swaps with Utility Special Entities

The Commission issued today a proposed rule amendment to adjust the de minimis threshold for determining if an entity that enters into swaps with utility special entities must register as a swap dealer.

The proposal would amend the Commission’s swap dealer definition to permit a person dealing in “utility operations-related swaps” with “utility special entities” to exclude those swaps in determining whether that person has exceeded the de minimis threshold specific to dealing with special entities. Under the proposal, however, such swaps would be counted for determining whether the general dealing de minimis threshold applies.

The Commission is seeking comments from the public on the proposal. The comment period will close 30 days after the proposal is published in the Federal Register.

CFTC Publishes Notice to Open Comment Period to Further Consider Certain Issues Related to Hedging of Physical Commodities

Acting Chairman Wetjen, with the support of Commissioner O’Malia, previously directed the staff to hold a public roundtable on June 19, 2014 to consider certain hedging issues relating to market practices in physical commodity derivatives.

In order to provide interested parties with an opportunity to comment on the issues to be discussed at that roundtable, the Commission is opening comment periods for two previous proposals, the Position Limits Proposal and the Aggregation Proposal, for a three-week period starting June 12, 2014 (one week before the roundtable) and ending July 3, 2014 (two weeks following the roundtable).

The Commission specifically asked market participants to comment on the following issues: hedges of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption; the setting of spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption; the setting of non-spot limits for wheat contracts; the aggregation exemption for certain ownership interests of greater than 50 percent in an owned entity; and aggregation based on substantially identical trading strategies.

CFTC Staff Issues No-Action Relief from Compliance with Certain Requirements under Regulation 1.35(a) for Certain Members of Designated Contract Markets or Swap Execution Facilities

To incentivize trading on SEFs and DCMs, the Commission’s Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight also today issued a no-action letter that provides relief with respect to compliance with certain recordkeeping provisions of Regulation 1.35(a) to members of designated contract markets or swap execution facilities that are not registered or required to be registered with the Commission (Covered Members).

The letter provides relief, pending further Commission action, to Covered Members with respect to complying with the requirements under Regulation 1.35(a) to keep electronic text messages and to keep records in a form and manner identifiable and searchable by transaction.

CFTC ORDERS REGISTERED FUTURES COMMISSION MERCHANT TO PAY $200,000 PENALTY

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Global Futures & Forex, Ltd. Ordered to Pay $200,000 Penalty to Settle CFTC Charges of Violating Minimum Financial Requirement Rules

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges that, between December 2010 and November 2012 (the Relevant Period), Global Futures & Forex, Ltd. (GFF), a CFTC-registered Futures Commission Merchant (FCM) and former Retail Foreign Exchange Dealer (RFED) headquartered in Grand Rapids, Michigan, failed to comply with minimum financial requirements for FCMs and RFEDs. The CFTC Order imposes a $200,000 civil monetary penalty and a cease and desist order against GFF for its violations.

Under CFTC Regulations in effect during the Relevant Period, an FCM was required to maintain adjusted net capital (ANC) equal to, or in excess of, the greatest of $1 million or various other measures, including the “amount of [ANC] required by a registered futures association of which it is a member.” The same Regulations also required that an RFED maintains ANC of $20 million plus five percent of its total retail forex obligation in excess of $10 million at all times. GFF’s ANC requirement as an RFED was approximately $24 million.

According to the Order, GFF did not maintain its required ANC during various separate months between December 2010 and November 2012, with month-end ANC computations showing that GFF was undercapitalized by as much as $30 million at one point.

GFF has been registered with the CFTC as an FCM since November 2000 and as an RFED from December 2010 to August 2013.

CFTC Division of Enforcement staff members responsible for this case are Andrew Ridenour, Daniel Jordan, and Richard Wagner. Lisa Marlow of the CFTC’s Division of Swap Dealer and Intermediary Oversight also assisted in this matter.

FOUR CHARGED BY SEC WITH INTENTIONAL AND SYSTEMIC VIOLATION OF RULE 204 UNDER REG. SHO.

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against four former officials at clearing firm Penson Financial Services for their roles in Regulation SHO violations.

An SEC investigation found that Penson’s securities lending practices intentionally and systematically violated Rule 204 under Reg. SHO.  The SEC’s Enforcement Division alleges that Penson’s chief compliance officer Thomas R. Delaney II had direct knowledge that the firm’s procedures for sales of customer margin securities were resulting in rule violations, yet he didn’t take steps to bring Penson into compliance and instead affirmatively assisted the violations.  Penson’s president and CEO Charles W. Yancey ignored significant red flags about Delaney’s involvement in the violations and the fact that he was concealing them from FINRA and the SEC.  Penson has since filed for bankruptcy.

Two former Penson securities lending officials – Michael H. Johnson and Lindsey A. Wetzig – were charged in administrative proceedings and agreed to settle the charges.  The SEC Enforcement Division will litigate the charges against Delaney and Yancey in a separate proceeding.

“This enforcement action seeks to hold Penson executives responsible for choosing profits over compliance with Reg. SHO,” said Andrew J. Ceresney, director of the SEC’s Enforcement Division.  “We will aggressively pursue those who disregard this important rule, especially when they take affirmative steps to mislead regulators.”

Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit, added, “Compliance officers are a critical line of defense against violations of the securities laws, and we rely on them to help prevent infractions from happening in the first place.  Delaney, however, crossed the line when he participated in the firm’s Reg. SHO violations and affirmatively acted to perpetuate or conceal them.”

The SEC adopted Rule 204 in response to the 2008 financial crisis in order to address the negative effects that fails to deliver have on the markets.  The SEC’s Enforcement Division alleges that when Penson loaned securities held in customer margin accounts to third parties and the margin customers sold those securities, Penson waited until settlement date (T+3) to recall the stock loans.  This practice resulted in serial failures to deliver at the firm level.  Rule 204 required Penson to purchase or borrow sufficient shares to close out those failures to deliver no later than the beginning of regular market hours on the sixth business day after the sale (T+6).

According to the SEC’s orders instituting administrative proceedings, Penson’s securities lending personnel including Johnson and Wetzig knew about Reg. SHO’s close-out requirements, but determined not to comply with them.  Instead, they allowed the firm-level failures to deliver to persist until the borrowers returned the recalled shares, which often did not happen until the close of business on T+6.  In some circumstances, Penson’s securities lending personnel allowed the failures to deliver to persist beyond the close of business on T+6.

The SEC Enforcement Division alleges that Delaney discussed Penson’s non-compliant procedures with Johnson and learned that the firm’s non-compliance with the regulation was intentional.  He then agreed with Johnson not to change the procedures to bring Penson into compliance with Rule 204 because they did not want the firm to incur the costs of doing so.  Delaney also approved written supervisory policies and procedures (WSPs) that he knew concealed the non-compliant procedures at the firm, and then he further concealed the violations in numerous communications with the SEC and FINRA.  Meanwhile, Yancey failed reasonably to supervise Delaney and Johnson.  He ignored Delaney’s efforts to conceal the violations from regulators.  And despite being designated as Johnson’s direct supervisor, Yancey exercised no supervision over Johnson whatsoever.

Johnson consented to an SEC order finding that he willfully aided-and-abetted and caused Penson’s violations.  He agreed to pay a $125,000 penalty and be barred from the securities industry for at least five years.  He must cease and desist from committing or causing violations of Rule 204.  Wetzig consented to an order finding that he caused Penson’s violations.  He agreed to be censured and must cease and desist from committing or causing violations of Rule 204(a).  Johnson and Wetzig neither admitted nor denied the findings.

The SEC’s investigation was conducted by Jonathan Warner and Jay Scoggins of the Market Abuse Unit and Denver Regional Office.  The case was supervised by Mr. Hawke.  The SEC’s litigation will be led by Polly Atkinson and Nicholas Heinke of the Denver office.

Remarks at the Financial Accounting Foundation Trustees Dinner

Remarks at the Financial Accounting Foundation Trustees Dinner