CFTC REPORTS COURT HAS ORDERED RBC TO PAY $35 MILLION FOR ILLEGAL TRANSACTIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

December 18, 2014

Federal Court Orders Royal Bank of Canada to Pay $35 Million Penalty for Illegal Wash Sales, Fictitious Sales, and Noncompetitive Transactions

Canadian Bank Traded Single Stock Futures and Narrow-Based Stock Index Futures on OneChicago Futures Exchange

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that on December18, 2014, Judge Alvin K. Hellerstein of the U.S. District Court for the Southern District of New York entered a Consent Order for Permanent Injunction and Civil Monetary Penalty against Royal Bank of Canada (RBC) for engaging in more than 1,000 illegal wash sales, fictitious sales, and noncompetitive transactions over a three-year period.  The Order enjoins RBC from committing future violations of the wash sale, fictitious sale, and noncompetitive transaction prohibitions of the Commodity Exchange Act and the CFTC’s Regulations, and requires RBC to pay a civil monetary penalty of $35 million.

CFTC Director of Enforcement Aitan Goelman stated: “Illegal wash trades may seem innocuous. They are not.  They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason.  This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets.”

The court’s Order arises from a Complaint filed by the CFTC on October 17, 2012, that charged RBC with engaging in illegal wash sales, fictitious sales, and noncompetitive transactions involving stock futures contracts, among other illegal conduct (see CFTC Press Release 6223-12, April 2, 2012).  In its Order, the court found that between June 1, 2007 and May 31, 2010, RBC knowingly executed 1,026 illegal wash sales and fictitious sales of narrow-based stock index futures (NBI) and single stock futures (SSF) contracts.  RBC conducted the transactions as block trades through its branches and internal trading accounts trading opposite two of RBC’s off-shore subsidiaries, and executed the trades on the OneChicago, LLC futures exchange in Chicago, Illinois.  The court also found that RBC’s NBI and SSF transactions were noncompetitive transactions prohibited by CFTC Regulations.

According to the Order, senior RBC personnel designed the trading strategy, which was motivated in part by tax benefits it generated for the RBC corporate group.  The Order states that, as designed, RBC and its subsidiaries entered into the NBI and SSF trades so that RBC entities would be both buyer and seller in the transactions, initiated with the express or implied understanding that they would later unwind the positions opposite each other through offset or delivery, and that the trades were equal and offsetting in all material respects:  They involved the trading of the same quantity of the same futures contracts at the same price and time, and therefore achieved a wash result for RBC.  Further, the Order states that the employees who oversaw RBC’s NBI and SSF trading knew that the trades negated the market risk inherent in normal futures transactions because the profits and losses that accrued to the RBC entities participating in the trades were ultimately consolidated in the RBC corporate group’s overall profits and losses, where they netted to zero, and were therefore economic and futures market nullities for the bank.

Finally, the Order finds that RBC’s trades were noncompetitive because RBC failed to timely report part of each trade to the OneChicago futures exchange, in violation of the exchange’s written rules.  Because the trades did not comply with the written rules of the exchange, they violated a CFTC Regulation requiring futures transactions to be executed openly and competitively on designated contract markets in accordance with the exchange’s written rules.

CFTC Division of Enforcement staff members responsible for this action are David Slovick, Lindsey Evans, Susan Gradman, Amanda Harding, Joseph Patrick, Scott Williamson, Rosemary Hollinger, and Richard Wagner. The Division of Enforcement also recognizes the contributions of CFTC Division of Market Oversight staff.

OWNER HOME RESTORATION BUSINESS CHARGED WITH SECURITIES FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

12/12/2014 11:50 AM EST

The Securities and Exchange Commission today announced securities fraud charges against the owner of a home restoration business in upstate New York who sold unsecured notes to investors to finance his real estate operations.

The SEC alleges that David Fleet misrepresented or failed to disclose a number of key facts to investors in Cornerstone Homes Inc., which was in the business of buying and restoring distressed single family homes to sell or rent to low-income customers.  For example, investors were told that the company did not use bank financing during time periods when Fleet was heavily reliant on mortgaging to banks virtually all of the homes that Cornerstone was purchasing with investor money.

The SEC further alleges that as the business began to deteriorate during a downturn in the real estate market, Fleet failed to inform his investors as he decided to secretly invest Cornerstone’s funds in the stock options market in an effort to keep the company’s finances afloat.  Fleet lost between $3 million and $4 million of the approximately $6 million that he invested.  Ironically, this allegedly occurred soon after Fleet sent newsletters to investors, many of them senior citizens, warning that investing in the stock market was risky and they would be better off investing their money in Cornerstone.  Fleet continued to raise money from investors without telling them that he was using their investments in his company to unsuccessfully invest in the stock market.  Cornerstone eventually filed for bankruptcy.

“Fleet concealed the true state of finances at Cornerstone Homes and essentially tricked investors into funding his efforts to save his company by investing in the stock market that he had otherwise told them was too risky,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint, which was filed in U.S. District Court for the Western District of New York, alleges that Fleet violated the registration and antifraud provisions of the federal securities laws.  The complaint seeks financial remedies and a permanent injunction against Fleet, who resides in Beaver Dams, N.Y.

The SEC’s investigation was conducted by Neal Jacobson and Patricia Schrage of the New York Regional Office, and they will lead the litigation.  The case is supervised by Alistaire Bambach.  The SEC appreciates the assistance of the Office of the United States Trustee for Region 2.

SEC CHARGED OIL-AND-GAS COMPANY, 5 EXECS IN ALLEGED STOCK TRADING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23158 / December 15, 2014

Securities and Exchange Commission v. Treaty Energy Corporation, et al., Civil Action No. 4:14-cv-00812 (E.D. Tex., filed December 15, 2014)

SEC Charges New Orleans Oil-And-Gas Company with Fraudulent Stock Manipulation

The Securities and Exchange Commission charged a New Orleans-based oil-and-gas company and five executives with running a stock trading scheme in which they claimed to have struck oil in Belize in order to manipulate the price of the company's stock as they illegally sold restricted shares to the public.

The SEC also charged a Houston-based attorney with facilitating the scheme by issuing false legal opinion letters that allowed free trading of the restricted company stock.

According to the SEC's complaint filed in U.S. District Court for the Eastern District of Texas, Treaty Energy Corporation issued deceptive press releases touting drilling successes in Belize and Texas to induce investor demand for its unregistered stock, which was then illegally distributed to the public. The SEC alleges that Treaty Energy's founder Ronald Blackburn and four company officers — Andrew V. Reid, Bruce A. Gwyn, Lee C. Schlesinger, and Michael A. Mulshine — obtained at least $3.5 million in illicit profits from the scheme.

The SEC's complaint further alleges that Treaty Energy's outside counsel Samuel Whitley abused his gatekeeper role and enabled the scheme by authoring improper legal opinion letters that allowed the company and its officers to illegally distribute unregistered stock to the public. Whitley was aware that Blackburn was running the company and Treaty Energy was abusing registration rules under the federal securities laws. Yet these facts did not deter him from issuing the opinion letters that allowed the scheme to proceed.

According to the SEC's complaint, the scheme had three basic components. The first part began in January 2012 when Blackburn directed Treaty Energy to issue a press release claiming that its purported oil strike in Belize contained an estimated five to six million barrels of recoverable oil. Treaty's stock price shot up nearly 80 percent that day. However, the Belize government publicly refuted Treaty Energy's purported oil strike the very next day, calling the company's statement "false and misleading" and "irresponsible." The SEC alleges that despite Belize's denial, Blackburn and the company's officers continued to mislead investors by claiming that Belize was merely downplaying an actual oil strike for strategic reasons.

The SEC alleges that the second part of the scheme entailed Treaty Energy's failure to disclose in public filings from 2009 to 2013 that Blackburn — previously convicted of federal income tax evasion — actually controlled the company and was a de facto officer. The SEC alleges that Reid, Gwyn, Schlesinger, and Mulshine all knew Blackburn's true role at the company, but intentionally kept this fact out of its disclosures to conceal from the public that a convicted felon was in charge.

According to the SEC's complaint, the final part of the scheme got underway in November 2013 when Treaty Energy began offering investors working interests in a well in West Texas. Investors were enticed with claims that the working interests were low-risk and expected to yield a return of 111.42 percent over a 10-year period. The SEC alleges that Treaty Energy and its officers knew these claims were baseless because the well was producing only marginal amounts of oil. In fact, the well produced 235 total barrels from October 2013 to October 2014.

The SEC's complaint charges Treaty Energy, Blackburn, Reid, Gwyn, Mulshine, and Schlesinger with securities fraud as well as violations of the registration and reporting violations of the federal securities laws. The SEC seeks disgorgement of ill-gotten gains with prejudgment interest plus financial penalties as well as penny stock bars, officer-and-director bars, and permanent injunctions against them. Reid and Gwyn are additionally charged with signing false certifications in Treaty Energy's SEC filings, and Whitley is accused of securities registration violations.

The SEC's investigation was conducted by Samantha Martin, Keith Hunter, and Joann Harris of the Fort Worth Regional Office. The SEC's litigation will be led by Jessica Magee.

SEC CHARGED ATTORNEY WITH CONDUCTING A PONZI SCHEME WORTH ABOUT $5 MILLION

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission  charged a Manhattan-based attorney with conducting a Ponzi scheme that defrauded some of his legal clients as well as close family members and friends.

The SEC alleges that Charles A. Bennett raised approximately $5 million by selling purported investments in what he described as a pool of funds that invested in joint ventures with a Wyoming-based investment fund to which he claimed to have a close connection.  Bennett told investors their money would largely be used to fund investments in European real estate mortgage-backed securities yielding lucrative rates of return ranging anywhere from 6 to 25 percent over short periods of time.  He stated that prominent individuals including a former governor of New York were participating in these investment ventures.
However, the SEC alleges that Bennett’s story was a sham.  While the fund does exist and Bennett is an acquaintance of the fund’s principal, he had no connection to the fund nor did he invest in any joint ventures associated with the fund or prominent individuals.  In fact, he made no investments at all, instead secretly misappropriating all of the money he raised from investors.  Bennett used funds from newer investors to pay redemptions and make phony “interest” payments to earlier investors, and he siphoned away investor money to support his own lifestyle that included vacations, expensive hotels, and substantial cash withdrawals.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Bennett.

“Bennett falsely portrayed that he was closely associated with a Wyoming-based fund and would provide substantial rates of return to investors, but he was simply keeping the cash for himself and using it to perpetuate his Ponzi scheme,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in federal court in Manhattan, Bennett sent phony documents to investors in order to make the investments appear legitimate.  He falsely claimed them to be account statements issued by the Wyoming-based fund.  By mid-2014, Bennett’s scheme began to collapse as investors’ demands for the return of their principal outpaced his ability to obtain new funds.  Last month, Bennett composed a lengthy handwritten note admitting to his fraudulent conduct and left it in a Manhattan hotel room.  He then jumped into the Hudson River and was later rescued.

The SEC’s complaint charges Bennett with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and with selling securities for which no registration statement is active or on file with the SEC.  The complaint seeks among other things permanent injunctive relief, disgorgement of ill-gotten gains, and financial penalties.  

The SEC’s investigation, which is continuing, is being conducted by Jorge G. Tenreiro and Lara S. Mehraban of the New York Regional Office.  The case is being supervised by Amelia A. Cottrell, and Richard G. Primoff and Mr. Tenreiro are leading the SEC’s litigation.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC FILES FRAUD CHARGES AGAINST INVESTMENT ADVISER TO PRO ATHLETES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23155 / December 11, 2014

Securities and Exchange Commission v. Bill C. (Billy) Crafton, Civil Action No. 3:14-cv-02916-DMS-JLB

Yesterday the Securities and Exchange Commission filed fraud charges against a former investment advisor who provided services primarily to professional athletes, alleging that he failed to disclose compensation and kickbacks he received for steering clients to certain investments and financial products. The SEC further alleges that he misappropriated substantial sums from two clients for the benefit of a third.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of California, San Diego resident Bill C. (Billy) Crafton was the sole owner of Martin Kelly Capital Management, through which he provided investment advice and wealth administration services to current and former professional athletes in Major League Baseball, the National Football League, the National Hockey League, and the National Basketball Association. From at least 2006 to 2010, Crafton received more than $1.5 million in undisclosed compensation and brokerage commissions from the principals of certain funds and businesses in exchange for recommending that his clients invest in those enterprises or do business with them. In some instances, Crafton falsely disavowed to his clients that he was receiving such compensation in connection with client transactions.

The SEC further alleges that Crafton knowingly orchestrated a fraudulent scheme in June 2010 when he arranged through forged wire transfer authorizations and other means for two of his clients to purchase a third client's $700,000 position in a fund. Crafton was well aware that the fund had been the subject of an asset freeze obtained by the SEC four days earlier for allegedly operating as a Ponzi-like scheme.

The SEC's complaint alleges that Crafton violated Section 17(a) of the Securities Act of 1933; Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5; and Sections 206(1), 206(2), and 206(3) of the Investment Advisers Act of 1940.

Crafton has agreed to a settlement that is subject to court approval. In settlement papers that Crafton signed in April 2014 which were filed with the court simultaneously with the complaint, Crafton consented to the entry of a final judgment permanently enjoining him against future violations of the Section 17(a) of the Securities Act of 1933; Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5; and Sections 206(1), 206(2), and 206(3) of the Investment Advisers Act of 1940. The final judgment to which Crafton consented would order that he is liable for $1,505,952 in disgorgement plus prejudgment interest of $192,959, for a total of $1,698,911 that he is anticipated to pay as part of his obligations in a parallel criminal case by the U.S. Attorney's Office for the Southern District of California in which he pled guilty to charges of conspiracy to commit wire fraud on October 17, 2014.

Additionally, Crafton consented to the future entry of a Commission order that would bar him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and also bar him from participating in any penny stock offering.

The SEC’s investigation, which is continuing, is being led by Alfred C. Tierney and John P. Lucas and supervised by J. Lee Buck, II. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of California and the Federal Bureau of Investigation.

FOREX TRADING CO. TO PAY $600,000 PENALTY FOR MINIMUM NET CAPITAL DEFICITS, UNTIMELY NOTICE, FAILURE TO SUPERVISE

FROM:  COMMODITY FUTURES TRADING COMMISSION

December 10, 2014

CFTC Orders IBFX, Inc. f/k/a Tradestation Forex, Inc. to Pay a $600,000 Penalty for Series of Minimum Net Capital Deficits, Untimely Notice, and a Failure to Supervise

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against IBFX, Inc. f/k/a Tradestation Forex, Inc. (IBFX), a Florida-based Retail Foreign Exchange Dealer (RFED), for violating CFTC Regulations by failing to meet the minimum net capital requirements on three separate occasions, failing to timely report one of the minimum net capital deficits, and failing to supervise its employees and agents diligently by establishing, implementing, and executing an adequate supervisory structure and compliance programs.

The CFTC Order finds that from December 2011 through June 9, 2014 (the Relevant Period), IBFX violated CFTC Regulations by failing to meet the minimum net capital requirements on three separate occasions. First, during the period December 2011 to June 2012, IBFX had uncovered foreign currency positions. Based on the corrected charges to capital for these uncovered positions, as calculated on a month-end basis, IBFX failed to meet the minimum net capital requirements for January 31, 2012. Second, IBFX failed to meet the minimum net capital requirements for a brief period of time on January 9, 2013, due to a typographical error. IBFX immediately discovered this failure, but failed to report the failure to the CFTC until January 11, 2013. Finally, IBFX failed to meet the minimum net capital requirements on June 9, 2014, when software that IBFX installed, but did not fully test prior to installation, resulted in uncovered positions requiring charges to capital. IBFX’s failure to adequately test the new software, lack of a system to timely detect erroneous trades generated by the new software, and inability to accurately assess and reverse the errors evidence IBFX’s lack of diligent supervision in violation of a CFTC Regulation.

The CFTC Order requires IBFX to pay a $600,000 civil monetary penalty and requires IBFX to develop an automated forex exposure monitoring system that will enable the comprehensive real-time monitoring of its actual forex exposure, and adopt and implement risk management procedures regarding 24-hour forex exposure monitoring. The Order also requires IBFX to retain a nationally recognized independent third-party consultant to review and evaluate IBFX’s information technology development and implementation policies and procedures and prepare a written report with recommendations for improvement, as applicable, which IBFX will implement absent extenuating circumstances.

IBFX has cooperated with Division of Enforcement and Division of Swap Dealer and Intermediary Oversight staff.

The CFTC acknowledges the valuable assistance of the National Futures Association in connection with this matter.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Baker Shealy, Timothy J. Mulreany, and Paul Hayeck, with assistance from CFTC Division of Swap Dealer and Intermediary Oversight (DSIO) staff Kevin Piccoli, Robert Laverty, Gerald J. Nudge, Timothy J. Wigand, Ronald Carletta, and Linda Santiago.