SEC ADOPTS NEW RULES REGARDING SWAP DATA REPOSITORIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today adopted two new sets of rules that will require security-based swap data repositories (SDRs) to register with the SEC and prescribe reporting and public dissemination requirements for security-based swap transaction data.  The SEC also proposed certain additional rules, rule amendments and guidance related to the reporting and public dissemination of security-based swap transaction data.  The new rules are designed to increase transparency in the security-based swap market and to ensure that SDRs maintain complete records of security-based swap transactions that can be accessed by regulators.

The rules implement mandates under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“These rules go to the core of derivatives reform by establishing a strong foundation for transparency and efficiency in the market,” said SEC Chair Mary Jo White.  “They provide a powerful framework for trade reporting and the public dissemination of information that addresses blind spots exposed by the financial crisis.”

The rules require an SDR to register with the SEC and set forth other requirements with which SDRs must comply.  The rules also provide an exemption from registration for certain non-U.S. SDRs when specific conditions are met.

The rules addressing security-based swap data reporting and public dissemination, known as Regulation SBSR, outline the information that must be reported and publicly disseminated for each security-based swap transaction.  In addition, the rules assign reporting duties for many security-based swap transactions and require SDRs registered with the SEC to establish and maintain policies and procedures for carrying out their duties under Regulation SBSR.  Under the rules, the Commission is recognizing the Global Legal Entity Identifier System as the system from which security-based swap counterparties must obtain codes to identify themselves when reporting security-based swap data.  The rules also address the application of Regulation SBSR to cross-border security-based swap activity and include provisions to permit market participants to satisfy their obligations under Regulation SBSR through compliance with the comparable regulation of a foreign jurisdiction.

The proposed rule amendments would assign reporting duties for certain security-based swaps not addressed by the adopted rules, prohibit registered SDRs from charging fees to or imposing usage restrictions on the users of publicly disseminated security-based swap transaction data, and provide a compliance schedule for certain provisions of Regulation SBSR.

“We carefully considered comments received and the workability of the rules and rule proposal in the context of the existing CFTC regimes for swap data repositories, swap data reporting and public dissemination,” said Steve Luparello, Director of the SEC’s Division of Trading and Markets.  “Today’s measures are robust and appropriately tailored to the security-based swap market.”

The new rules will become effective 60 days after they are published in the Federal Register.  Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register.  The compliance date for certain provisions of Regulation SBSR is the effective date, and the Commission is proposing compliance dates for the remaining provisions of Regulation SBSR in the proposed amendments release.

SEC CHARGES CANADIAN RESIDENT FOR ROLE IN MARKET MANIPULATION SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
01/13/2015 01:15 PM EST

The Securities and Exchange Commission today charged a man living in Ontario, Canada, with orchestrating a lucrative market manipulation scheme that relied on “layering” in which a trader places orders solely to trick others into buying or selling U.S. publicly traded stocks at artificially inflated or depressed prices.

In a complaint filed in federal court in Newark, N.J., the SEC alleges that since at least January 2013, Aleksandr Milrud recruited online traders chiefly based in China and Korea and shared in the profits the traders made from manipulative trading in U.S. securities markets.  Milrud provided the traders with access to trading accounts and technology and instructed them on how to avoid regulatory scrutiny while engaging in layering strategies.  The SEC’s complaint also alleges that to distance himself from certain transactions, Milrud wired funds to an offshore bank account and had the money delivered to him in a suitcase filled with cash.

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

“Layering is a deceptive practice to trick others into buying or selling a stock at artificially inflated or depressed prices,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “No matter where they are located, we continue to identify and investigate those whose trading practices threaten to undermine the fair operation of the U.S. securities markets.”

According to the SEC’s complaint, Milrud inserted numerous middlemen into his scheme in an effort to evade detection.  He had his traders use multiple computers, Internet protocol (IP) addresses, and user names.  Traders were provided at least two accounts, one to do what Milrud called “the dirty work” of layering and one to execute what he termed “clean” trades at prices affected by the dirty work of the first account.  Milrud instructed the traders to conduct layering on a wide variety of stocks while limiting the number of trades and the price changes, hoping to minimize attention to the manipulative trading.

“Milrud’s elaborate efforts to disguise this manipulative trading scheme were ultimately unsuccessful,” said Joseph G. Sansone, Co-Deputy Chief of the SEC’s Market Abuse Unit.  “His scheme was uncovered and he must now face the consequences of his actions.”

The SEC’s complaint charges Milrud with violating and aiding and abetting violations of anti-fraud provisions of federal securities laws and the SEC’s antifraud rule, and with liability for the conduct of the traders under his management.  The SEC is seeking a final judgment ordering Milrud to return his allegedly ill-gotten gains with interest plus penalties and permanently barring him from future violations.

The SEC’s investigation, which is continuing, is being conducted by Simona Suh, Barry P. O’Connell, A. Kristina Littman, and Lynn H. O’Connor of the Market Abuse Unit and by Elzbieta Wraga of the New York Regional Office.  The case is being supervised by Mr. Hawke, Mr. Sansone, and Steven D. Buchholz of the Market Abuse Unit.  The SEC’s litigation will be led by Nancy A. Brown, Ms. Suh, and Mr. O’Connell.  The SEC appreciates the assistance of the Newark Field Office of the Federal Bureau of Investigation, U.S. Attorney’s Office for the District of New Jersey, and Financial Industry Regulatory Authority.

CFTC ANNOUNCES DEFAULT ORDER ENTERED IN CASE INVOLVING THE VASQUEZ POOL

FROM:  COMMODITY FUTURES TRADING COMMISSION 

Federal Court Orders North Carolina Resident Edwin A. Vasquez and His Company, Vasquez Global Investments, LLC, to Pay over $1.3 Million for Commodity Pool Fraud

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that Judge Martin Reidinger of the U.S. District Court for the Western District of North Carolina entered an Order of Default Judgment against Defendants Edwin A. Vasquez of Arden, North Carolina, and his company, Vasquez Global Investments, LLC (VGI), for defrauding participants in a commodity pool commonly known as the Vasquez pool.

The Order, entered on December 30, 2014, requires Vasquez and VGI, joint and severally, to pay $331,556 in restitution; requires Vasquez and VGI, joint and severally, to pay a civil monetary penalty of $994,668, and imposes permanent trading, solicitation, and registration bans against all Defendants.

The Court’s Order stems from a CFTC Complaint filed on July 30, 2014, that charged Vasquez and VGI with misappropriation, solicitation fraud, and issuing false statements in connection with the operation of an unregistered commodity trading pool (see CFTC Press Release 6974-14). The Complaint also charged Vasquez and VGI with commingling pool participant funds and registration violations.

The Order finds that, beginning in August 2011, Vasquez, acting individually and through VGI, defrauded and deceived at least 19 participants who invested at least $583,491 in the Vasquez pool. The Order further finds that Vasquez told prospective pool participants that he was a successful trader and that the VGI pool was a “no risk” investment. In fact, the Order finds that of the $583,491 solicited and accepted from pool participants, Vasquez and VGI lost $65,374 trading commodity futures and misappropriated $331,556 by using those funds to pay for VGI’s operating costs and for Vasquez’s personal expenses, including travel, restaurants, and retail purchases. During that time, according to the Order, Vasquez did not disclose his trading losses and misappropriation and, instead, issued false statements to the pool participants regarding the profitability and value of their shares of the pool.

The CFTC appreciates the efforts of the North Carolina Department of the Secretary of State, Securities Division.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC Division of Enforcement staff members responsible for this case are Elizabeth N. Pendleton, Joseph Patrick, Susan Gradman, Nancy Hooper, Scott Williamson, and Rosemary Hollinger.

SEC CHARGES STOCK PROMOTER WITH FRAUD IN PURPORTED PURCHASE OF FACEBOOK, TWITTER SHARES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a stock promoter based in Santa Barbara, Calif., with fraudulently raising nearly $3.5 million from investors purportedly to purchase Facebook and Twitter shares prior to their initial public offerings (IPOs).

The SEC alleges that instead of purchasing the shares in the secondary market as promised, Efstratios “Elias” Argyropoulos and his firm Prima Capital Group misappropriated investor funds.  They used the money primarily for day trading of stocks and options as well as to pay off certain investors who complained when they didn’t receive the promised Facebook or Twitter shares.

Argyropoulos agreed to settle the SEC’s charges and be barred from working for an investment adviser or broker-dealer, and financial penalties will be determined at a later date.

“Argyropoulos capitalized on the high demand for pre-IPO Facebook and Twitter shares to steal investor money and secretly fund his own day trading,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint charges Argyropoulos and Prima Capital with violating the antifraud provisions and broker-dealer registration provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Argyropoulos and Prima Capital agreed to settle the charges without admitting or denying the allegations, and the settlement is subject to court approval.

The SEC separately announced an administrative proceeding against Khaled A. Eldaher, a registered representative living in Austin, Texas.  The SEC Enforcement Division alleges that while working for a registered broker-dealer, Eldaher reached a side agreement with Argyropoulos to solicit investors and receive 50 percent of the mark-up on Facebook shares he sold.  Eldaher sold $362,887.50 worth of Facebook shares and was paid $15,478 by Prima Capital.  He was later terminated by the broker-dealer for selling securities other than through the firm.  The Enforcement Division alleges that Eldaher’s sales of unregistered securities violated Section 15(a)(1) of the Exchange Act.  The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted by Tony Regenstreif and supervised by Victoria A. Levin of the Los Angeles Regional Office.  The Enforcement Division’s litigation against Eldaher will be led by Karen Matteson.

SEC HAS CHARGED F-SQUARED WITH MAKING FALSE STATEMENTS TO INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Litigation Release No. 23166 / December 22, 2014

Securities and Exchange Commission v. Howard B. Present, Civil Action No. 14-CV-14692 (District of Massachusetts, filed December 22, 2014)

SEC Charges Investment Manager F-Squared and Former CEO with Making False Performance Claims

The Securities and Exchange Commission ("SEC") announced that investment management firm F-Squared Investments has agreed to pay $35 million and admit wrongdoing to settle charges that it defrauded investors through false performance advertising about its flagship product.

The SEC separately charged the firm's co-founder and former CEO Howard Present with making false and misleading statements to investors as the public face of F-Squared.

According to the SEC's order instituting a settled administrative proceeding against Massachusetts-based F-Squared, which is the largest marketer of index products using exchange-traded funds (ETFs), the firm began receiving signals from a third-party data provider in September 2008 indicating when to buy or sell an investment. The signals were based on an algorithm, and F-Squared and Present used the signals to create a model portfolio of sector ETFs that could be rebalanced periodically as the signals changed. They named the new product "AlphaSector" and launched the first index a month later. AlphaSector's indexes quickly became the firm's largest revenue source, and F-Squared went from losing money to becoming a highly profitable investment manager.

The SEC alleges that while marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients. In reality, the algorithm was not even in existence during the seven years of purported performance success. The data used in F-Squared's advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and Present specifically advertised the investment strategy as "not backtested." Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.

According to the SEC's complaint against Present filed in federal court in Boston, he was responsible for F-Squared's advertising materials that were often posted on the company website and sent to clients and prospective clients. Present also was responsible for the descriptions of AlphaSector in its filings with the SEC, and he certified the accuracy of those filings. F-Squared and Present made the false and misleading statements about AlphaSector from September 2008 to September 2013. The SEC alleges that they claimed AlphaSector was based on an investment strategy that had been used to invest client assets since April 2001. Yet Present knew that the algorithm was not finalized until late summer 2008 when he devised rules for turning the signals into a model ETF portfolio and directed an assistant to calculate hypothetical returns for the portfolio going back to April 2001.

The SEC further alleges that the F-Squared analyst who calculated the backtested AlphaSector performance inadvertently applied the buy/sell signals to the week preceding any ETF price change that the signals were based on. The mistake carried the model portfolio's backtested buy and sell decisions back in time one week, enabling the model to buy an ETF just before the price rose and sell an ETF just before the price fell. The SEC alleges that the analyst tried to explain this possible calculation error to Present in late September 2008, yet F-Squared went on to advertise the inflated data for the next five years and overstated that AlphaSector significantly outperformed the S&P 500 from April 2001 to September 2008.

F-Squared consented to the entry of the order finding that it violated Sections 204, 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 204-2(a)(16), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8. The order also finds that F-Squared aided and abetted and caused certain mutual funds sub-advised by F-Squared to violation Section 34(b) of the Investment Company Act of 1940. F-Squared acknowledged that its conduct violated federal securities laws, and agreed to cease and desist from committing or causing violations of these provisions. F-Squared agreed to retain an independent compliance consultant and pay disgorgement of $30 million and a penalty of $5 million.

The SEC's complaint against Present alleges that he violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8.

The SEC's investigation, which is continuing, is being conducted by Bill Donahue, Robert Baker, Jose Santillan, and John Farinacci of the Asset Management Unit as well as Rachel Hershfang, Frank Huntington, Mayeti Gametchu, Jennifer Cardello, and Rory Alex of the Boston Regional Office. The case has been supervised by Kevin Kelcourse. The SEC's litigation against Present will be led by Mr. Huntington and Ms. Hershfang.

Investor Bulletin: 15 Investment Tips for 2015

Investor Bulletin: 15 Investment Tips for 2015