CFTC CHAIRMAN MASSAD SPEAKS AT MONETARY AUTHORITY OF SINGAPORE ON REGULATION

Keynote Address by Chairman Timothy G. Massad before the Monetary Authority of Singapore

The Future of Financial Market Regulation

January 23, 2015

As Prepared For Delivery

Introduction

Good morning. I want to thank Lucien for that kind introduction. I also want to thank Ravi Menon and the MAS and the Singapore Academy of Law for inviting me and for organizing this excellent conference. It is a privilege and a pleasure to be here. I am also very pleased to be here with Masa Kono, with whom I spent some time in Tokyo earlier this week, and I look forward to our panel shortly with Ong Chong Tee.

While this is my first trip here as Chairman of the CFTC, I am no stranger to Singapore. I spent five years living in Hong Kong and working in the region as a lawyer in private practice.

It’s great to have the opportunity to visit Asia again. I began my trip in Beijing and was also in Hong Kong earlier this week.

My five years in Asia were some of the best years in my life. The work was interesting, and getting to know the various countries and cultures in Asia was fascinating. I met my wife here—though she happens to be from St. Paul, Minnesota. She is a fluent Mandarin speaker who spent many years in Beijing and Taipei. She fell in love with the language and wanted to have a legal career that revolved around Asia. I, on the other hand, was a complete novice to the region. I fell in love both with her and with Asia.

I have many fond memories of my time in Asia, including many fond memories of Singapore. During those years, I came here many times, and made many good friends. As I learned more about your history, my respect and admiration grew. In 200 days you will celebrate the 50^th anniversary of your independence. What you have built and accomplished over the last fifty years is simply staggering. Lee Kuan Yue said, “Some countries are born independent. Some achieve independence. Singapore had independence thrust upon it.” You certainly seized the mantle once it was thrust upon you. The relationship between our countries has also become very important over those years, another reason why I am pleased to be here today.

I want to talk today about where we are in the process of global financial regulatory reform. I want to talk about Singapore’s role in that effort and why that effort is important to the prospects for growth here and throughout Asia. But I want to first say a few more words about my path to standing in front of you today, and how it shapes my perspective on these issues.

My Experience in Asia

During my time in Asia, I had the privilege to work with the MAS, Temasek, and many fine corporate leaders, bankers, and lawyers here on a variety of transactions. I had the honor of being the United States counsel for the initial public offering of SGX, and the merger of the cash equities and derivatives exchanges. I had done a lot of public offering and securities work throughout my career. And my derivatives work began as a young lawyer, when I represented the International Swaps and Derivatives Association (or ISDA), and helped lay the groundwork for the modern financial derivatives industry. I was one of a handful of lawyers who worked for over a year to draft the first master agreements for swaps; before that, swaps were documented on 50 page agreements.

The SGX offering was a landmark transaction for Singapore. It was a pleasure to work with Joe Pillay, who was then chairman, the MAS, Lucien Wong, and many others on this important transaction.

But my stay in Asia began at a difficult time. It was in June of 1997 that I agreed with my firm that I would move to Hong Kong. It was right before the handover by the British. Things were booming in Hong Kong, China, and throughout Southeast Asia at the time. There was lots of work for bankers and lawyers.

But a few weeks after I agreed to move, the Thai baht collapsed. By the time I arrived in January 1998, the baht had lost over 50% of its value, and the crisis had spread throughout Southeast Asia. Singapore suffered, though not nearly as badly as others. I know you all remember this period well.

I spent much of the first year or so I was in Asia on transactions involving sales of distressed debt by Thailand and Korea.

I recount all this because, while it’s hard to predict or plan out your career or your life, when you look back, you can often see how one experience led to another, and how those experiences shape your views.

When I was working on distressed debt sales by the governments of Thailand and Korea during the Asian financial crisis, I never would have guessed that ten years later I would oversee the Troubled Asset Relief Program, the key U.S. response to the 2008 global financial crisis.

When I was helping to standardize the swaps market through the writing of the first master agreements in the late 1980s, I never would have guessed that twenty five years later I would have the responsibility to lead the efforts of the United States to bring much greater transparency and cross-border harmonization to the swaps market.

And similarly, when I was meeting just down the road at the offices of SGX to prepare them for an initial public offering, I never would have guessed that, fifteen years later, I would be back here to meet with SGX as chairman of the CFTC.

But I have drawn on these experiences in this job and at Treasury, when I was helping the United States recover from the worst financial crisis we have experienced since the Great Depression.

Learning from the Past Crises

Looking back not only reminds us of how we got here; the perspective can inform our way forward. That is true for nations as well as individuals. It is particularly relevant when we think about the next steps in financial regulatory reform.

Looking back teaches us more than a little humility. When the Asian financial crisis occurred, many in the West were quick to point out why the West would not catch what was sometimes referred to as the “Asian flu.” Some people said our markets and financial regulatory system were more mature, more transparent, and better supervised. They said that all of those things made us more resilient to shocks. Well, not resilient enough. Those things didn’t mean we wouldn’t have our own crisis. They didn’t inoculate us from the dangers that can occur when risks are not properly understood, when authorities believe markets are fully self-policing.

By the same token, recall some of the things that were said after Asia had recovered from its crisis, and in the years before the financial crisis, about “decoupling”. People began to suggest that the Asian economies had “decoupled” from the economies of the West. No longer were they dependent on what happened in the West. Slow growth or even more serious problems in the West would not affect the dynamic growth in Asia.

Well, that didn’t prove true either. The Asian economies did not escape the collateral damage of the 2008 financial crisis. And that should not surprise us, given the severity of the shocks. In the United States, we lost eight million jobs and millions lost their homes in foreclosure. Our economy was in free-fall. And with markets so interconnected, the shock waves reverberated worldwide.

Looking back on these crises is helpful as we think about the way forward when it comes to financial regulatory reform today.

The Asian financial crisis and the global financial crisis illustrate the speed with which capital can move, and the speed with which markets can fall, when problems hit. And these crises remind us that the economies of the United States and Asia are strongly intertwined. What we do affects you. What happens here affects us. We are all in this together.

The Importance of Asia’s Role in Financial Regulatory Reform

Simply put, that is why I am here. I am here because Singapore and other countries in Asia are critically important in building a new global regulatory framework for derivatives. Our effort to build that framework can only fully succeed if we act together.

Building this new regulatory framework is important for Asia because well-developed derivatives markets can propel growth in the real economy.

The Asian derivatives markets are growing rapidly. Today the Asian derivatives markets represent nearly a third of global futures and options volume measured by number of contracts, and continued growth is to be expected. China is liberalizing its markets, which will bring further opportunity. The commencement of the HK – Shanghai Stock Connect is very important, as are their plans to introduce an oil futures contract that would be open to foreign participation. And I know you have had success in growing the Singapore market, a subject to which I will return in a moment.

Let me turn then to discuss where we are in the process of building the global regulatory framework with respect to derivatives, and the importance of your role in that process.

In 2008, we learned how over-the-counter swaps could accelerate and intensify the financial crisis. Of course, in normal times, the derivatives markets provide significant benefits to our economies. They enable airlines to hedge the costs of fuel, manufacturers to hedge the price of industrial metals, exporters to manage fluctuations in foreign currencies, and businesses of all types to lock in borrowing costs.

But in 2008, swaps worsened the crisis. The swaps market had grown to be a massive, global market that was unregulated. Participants had taken on risk that they didn’t always fully understand, and that was opaque to regulators. The interconnectedness of large institutions meant that trouble at one firm could easily cascade through the system.

In response, the leaders of the G-20 nations agreed to bring the swaps market out of the shadows and achieve greater transparency. They agreed to implement four fundamental reforms: require central clearing of standardized swaps through regulated clearinghouses; require regular reporting so that regulators and the public can have a view of what is happening in the market; require oversight of the largest market participants; and require transparent trading of swaps on regulated platforms.

Let’s pause just to reflect on the fact that the nations comprising the G-20 agreed on how to reform the swap market. That illustrates how far we have come. At the time of the Asian financial crisis, there was no G-20, nor was there a Financial Stability Board. There was no simple way to agree to global reforms.

A G-20 communique only goes so far, however. The task of actually writing laws and developing rules remains with individual nation states.

What makes this reform effort unique and especially challenging is that we must regulate what is already a global market, but we can only do so through the actions of individual countries, each of which has its own legal traditions, regulatory philosophies, political processes, and market concerns. That can lead to differences.

Now in most areas of financial regulation, the fact that there are differences between national laws wouldn’t be news. Consider the laws that govern how corporations sell securities, which vary significantly among jurisdictions. When we did the SGX offering, for example, it was structured legally as a public offering in Singapore, but that did not entitle us to sell securities publicly in other countries. Whether we could sell, and how, depended on the laws in those jurisdictions. The fact is the U.S. and many other countries established their securities laws long before there was a global securities market, and we are not trying to make all those laws the same.

But the swaps industry grew to be a global market before there was any regulation. So today, many participants expect harmonization. They expect it in timing of implementation as well as in the substance of the reforms. Indeed, they are critical that we haven’t achieved it yet.

I would say that those who are critical are looking at the glass as half empty; I see it as half full.

The fact is the G-20 nations have agreed on necessary reforms and are moving in the same direction. We have made great progress, and we will continue to do so, but it will take time.

Another challenge in regulating this global swaps market is the fact that a country’s financial stability can be threatened by offshore swaps activity. In the U.S., we experienced this first-hand with AIG, which nearly failed because it took on excessive swap risk through operations located in London. The failure of AIG, at that time, in those circumstances, could have triggered another Great Depression. As a result, U.S. taxpayers were required to commit $182 billion to prevent this one company’s collapse. I spent a significant part of my time at Treasury working to recover those monies on behalf of American taxpayers, and so I am very aware of the need to address cross-border risk.

But we also know that there are limits to the reach of any one country’s laws. We recognize the importance of harmonizing our rules with those of other nations where possible. And, at the CFTC, I have made it a priority to work with my international counterparts on these issues.

I am pleased that Singapore and other countries in Asia have taken many steps to implement these reforms. I think that’s good for you, and for us.

I talked earlier about the growth generally of the Asian derivatives markets and the prospects for future growth. Let me say a few more words about growth here in Singapore. What you have done to date is quite impressive. You have developed a wide range of products since the time I was here for the IPO. Your success with equity derivatives is particularly notable, including those based on China’s and Japan’s markets. The Wall Street Journal ran a feature story on derivatives innovation at SGX last month. And more generally, you have built a very successful financial services industry, and no doubt you are looking at the best ways to continue to grow your financial markets and the industry generally in the future.

Part of the answer is surely a sound regulatory framework. History demonstrates that markets are strongest when they are built on a firm foundation of transparency and sensible oversight. Consider how successful was the framework for securities regulation that the U.S. implemented in response to securities scandals in the Great Depression. And you have focused on creating a strong regulatory structure to date.

The goal of the reforms we are adopting today should be to create a framework in which the derivatives markets can continue to thrive and develop, here, and throughout Asia, and throughout the world.

The framework must bring transparency, integrity, and oversight, but, at the same time, provide predictability to market participants, and encourage innovation and competition.

So let me turn to discuss where we are on the four key areas of reform—clearing and clearinghouse regulation, market data, oversight of market participants and trading.

Clearing and Clearinghouse Oversight

Clearing is perhaps the most important reform in terms of reducing systemic risk. But we must remember that central clearing does not eliminate risk.

We are making substantial progress in requiring clearing of standardized swaps. The percentage of transactions that are centrally cleared in the markets we oversee has gone from 15% in December 2007 to about 75% today. Globally, the FSB reports that the percentage is close to half, again up substantially over the last few years. Some countries in Asia have implemented mandates, such as Japan, which did so in 2013, thanks in part to Masa’s leadership. Other countries are still working on theirs.

But now that we are requiring more clearing, we must make clearinghouse supervision a top priority. We must make sure that clearinghouses themselves do not pose risk to the stability of the financial system.

Doing so requires regulators from different countries to work together effectively. The fact is that a small number of clearinghouses are becoming increasingly important single points of risk in the global financial system. Their importance transcends national borders. Their importance transcends swaps—they handle clearing for many products.

And here, I want to congratulate the MAS and SGX for implementing and adhering to high standards. In December 2013, SGX became the first Asian clearinghouse registered with the U.S., which means it can clear swaps for U.S. participants. And just last week, I understand Mizuho Securities became the first clearing member on SGX registered with us.

Our dual registration system came about originally because we took a very non-territorial view as to where clearing must occur. The U.S. did not mandate that clearing of futures traded on U.S. exchanges must take place in the U.S.; we simply required that it take place through clearinghouses that are registered with us and that meet certain standards.

This dual registration system has been the foundation on which the swaps market grew to be a global market. The clearinghouse LCH, which now handles 85% of swaps clearing, is based in Europe, and has been registered with us since 2001.

Today, we are also continuing to work with Europe on harmonizing our rules with theirs as much as possible with respect to clearinghouse supervision. And we are working out cooperative supervision arrangements with them.

We do not take the view that every clearinghouse in the world must register with us. The CFTC previously granted temporary relief from registration to several clearinghouses where the clearing for U.S. persons is limited to clearing members and their affiliates. We did this for clearinghouses in Hong Kong, South Korea, India, and Australia. We are currently working with those four clearinghouses on permanent exemptions, and we hope to have those in place later this year. They can also apply to register with us should they wish at a later date to engage in clearing for U.S. customers.

I believe cooperation among regulators with respect to clearinghouse supervision will be increasingly critical given the increasing importance that major clearinghouses play in the global financial system. I expect that there will be significant dialogue among regulators about clearinghouse standards and strength. Margining standards will be a critical piece of this discussion. So will stress testing. We will need to make sure that the financial, managerial, and operational resources of major clearinghouses are adequate, and in particular that liquidity is adequate. We will need to focus on clearinghouse recovery and resolution. And we will also be very focused on cybersecurity, which is perhaps the most important single risk to global financial stability today.

Market Data

The second area of reform is the collection and analysis of data. The establishment of swap data repositories in the U.S., and trade repositories abroad, is bringing unprecedented transparency to the swaps market.

Data enables regulatory authorities to engage in meaningful oversight. Robust surveillance and enforcement, so critical to maintaining market integrity, depends on the availability of accurate market data. And increased transparency helps market participants by increasing competition, facilitating the price discovery process, and enhancing confidence in the integrity of the market. It also enables participants and regulatory authorities to understand systemic risk exposures.

We have come a long way from 2008, when we knew very little about the exposures in this market. Today we have real-time information on prices and volumes of traded swaps, and we are in a much better position to monitor risk. But we have a considerable amount of work still to do to collect and use derivatives market data effectively. We must harmonize data reporting standards and make sure that market participants fulfill their obligations to provide accurate and timely reports. There are four data repositories in the U.S. and more than 20 others internationally, plus thousands of participants who must report data. This is a challenging task that will take time.

Important work is going on today. We and the European Central Bank currently co-chair a global task force that is seeking to standardize data standards internationally. While much of this work is highly technical, it is vitally important to international cooperation and transparency. Japan, Singapore, and Hong Kong are all participating in that process, but I encourage you to become even more active in helping to lead this effort. We need your involvement.

Oversight of Market Participants

Let me turn to a third reform area agreed to by the G-20, which is oversight of major market players. I want to focus on two aspects in particular. The first is margin requirements for uncleared swaps. And I want to focus on this for two reasons—one is its importance, and the second is what it says about international harmonization. This rule is important because uncleared, bilateral swap transactions will continue to be a large part of the derivatives market. And setting margin requirements for the largest players in this market will be a significant tool to mitigate risk to the financial system as a whole.

This is also an opportunity to make the rules in the U.S., Asia, and Europe substantially similar from the outset. The CFTC recently proposed margin rules for uncleared swaps, which are similar to those being developed in Japan and Europe. Collectively, the rules reflect a set of standards agreed to by a broader international consensus. There are some differences, and I hope that we can minimize those in the months ahead. I also hope similar reforms will be adopted by Singapore.

Another important area is risk mitigation standards, such as confirmation, documentation, portfolio reconciliation, compression, and valuation. These risk mitigation techniques are essential for addressing operational and other risks faced by market participants, and are based on industry best practices that were developed over many years. I congratulate Singapore for having co-chaired an international committee in this area. That committee is producing international standards, and the U.S. has implemented rules consistent with those standards.

Trading

Finally, let me say a word about swaps trading as well as futures trading. The CFTC has implemented a trading mandate for swaps as well as rules for swap execution facilities. Today we are looking at ways to fine tune those rules, so that we enhance transparency and market integrity, but also allow market participants the freedom to innovate and compete as much as possible. It is challenging to be the first mover with swaps trading in a market that has been global, unregulated and highly mobile. So we look forward to other jurisdictions implementing their trading mandates. My impression is there is still some work to be done in most Asian countries on this issue. As you consider this, we are open to your ideas and happy to work with you.

I also want to talk about trading of futures. We generally do not regulate the trading of futures on offshore exchanges. U.S. citizens are free to trade futures on exchanges located in other countries. However, we have in the past required foreign exchanges to apply for relief from our registration requirements if they wish to provide direct electronic access to U.S. citizens. We have now formalized that process so that foreign exchanges, which we refer to as foreign boards of trade or FBOTs, can be officially registered with us.

Today I am pleased to announce that we have approved the foreign board of trade registration application for the SGX derivatives exchange. I congratulate you and look forward to working with you.

I would also like to announce that we have approved the application for Bursa Malaysia, and two days ago, while in Tokyo, I announced we approved the application for the Tokyo Commodities Exchange (or TOCOM). These approvals recognize the increasing interconnectedness of the global derivatives markets and the importance of Asia in that development. The approvals also demonstrate our commitment to a coordinated regulatory approach that relies on foreign supervisory authorities and ongoing cooperation. I am delighted that these exchanges have this status, and we look forward to continuing to work with them as well as any other Asian exchanges that intend to register.

Conclusion

Let me conclude with this: markets thrive where there is confidence and integrity. You saw how quickly markets lost confidence when the Asian financial crisis hit. And we all saw how quickly that happened in 2008.

Market confidence requires transparency, which in turn requires good regulation. Since 2008, the global community has made significant progress implementing reform. We are all stronger and more resilient as a result.

But there is much more to do, and it requires action by all of us—the U.S., Asia, and Europe.

We in the U.S. stand ready to work with you to implement the G-20 commitments. We look forward to creating a foundation that will enable all of our markets to thrive, and economies to grow into the future.

Thank you again for inviting me today.

Last Updated: January 22, 2015

SEC OBTAINS FREEZE AGAINST ASSETS OF INVESTMENT ADVISERS CHARGED WITH MISAPPROPRIATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23178 / January 22, 2015

Securities and Exchange Commission v. Daniel Thibeault, et al., Civil Action No. 1:15-cv-10050 (D. MA)

SEC Obtains Asset Freeze Against Massachusetts-Based Investment Advisers Charged with Misappropriation of Money from an Investment Fund'

The Securities and Exchange Commission yesterday announced that a federal court has imposed an asset freeze against a group of Massachusetts-based investment advisory companies and their President/CEO, based on the alleged misappropriation of at least $16 million from an investment fund.

Judge Nathaniel Gorton of the United States District Court for the District of Massachusetts granted the SEC's request for an emergency court order to freeze the assets of the following defendants, who are charged in a complaint filed by the SEC on January 9, 2015:

Daniel Thibeault of Framingham, Massachusetts;
Graduate Leverage, LLC, an asset management and financial advisory firm based in Waltham, Massachusetts, of which Thibeault is the principal owner, president and Chief Executive Officer;
GL Capital Partners, LLC, an investment adviser based in Waltham, Massachusetts that is controlled by Thibeault;
GL Investment Services, LLC, an investment adviser based in Waltham, Massachusetts that is indirectly owned by Thibeault;
Taft Financial Services, LLC, which is based in Texas and is believed to be controlled by Thibeault; and
two other parties as relief defendants based on their receipt of investor funds: GL Advisor Solutions, Inc., a corporation based in the Philippines that is controlled by Graduate Leverage, LLC and Thibeault; and Shawnet Thibeault, who is Daniel Thibeault's wife.
In addition to the asset freeze, the court also ordered certain preliminary relief against the defendants, including, variously, preliminary injunctions, an accounting of investor funds and all assets in their possession, a repatriation of all foreign assets that were obtained directly or indirectly from investors, and a prohibition from soliciting or accepting additional investments.

The SEC's complaint alleges that GL Capital Partners, LLC and its principal, Daniel Thibeault, were the investment advisers to a fund called the GL Beyond Income Fund, and that they misappropriated at least $16 million of the money that belonged to this fund. The GL Beyond Income Fund's assets consisted primarily of individual variable rate consumer loans. According to the complaint, Thibeault and other defendants solicited investments in the GL Beyond Income Fund by representing that investors' money would be pooled and used to make or purchase consumer loans. These consumer loans would then constitute assets of the GL Beyond Income Fund, and would provide a return to the investors when interest and principal payments were made on the loans. The SEC alleges that beginning in 2013 or earlier, Thibeault and the other defendants engaged in a scheme to create fictitious loans to divert investor money from the GL Beyond Income Fund, and to report these fake loans as assets of the GL Beyond Income Fund. This scheme was designed to conceal the fact that Thibeault and the other defendants had misappropriated millions of dollars from the GL Beyond Income Fund. According to the SEC's complaint, the scheme involved the fabrication of paperwork purporting to reflect numerous six-figure consumer loans using the names and personal information of individuals who were unaware that loans were being originated in their names. The complaint further alleges that money from the GL Beyond Income Fund was disbursed to fund these fictitious loans, but the borrowed money did not go to the purported borrowers whose names appeared on the documentation. Instead, it went to Thibeault and other defendants. The SEC alleges that Thibeault and other defendants misappropriated the money from the fake loans and used it for personal expenses and to run businesses other than the GL Beyond Income Fund, as well as to perpetuate the scheme by making "interest payments" on fake loans.

The SEC charges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933 and that Thibeault, GL Capital Partners, LLC, and GL Investment Services, LLC, also violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against each of these defendants. The SEC also seeks disgorgement plus prejudgment interest from relief defendants GL Advisor Solutions, Inc. and Shawnet Thibeault.

S&P TO PAY OVER $77 MILLION TO SETTLE CASE INVOLVING CMBS RATINGS

 FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C., Jan. 21, 2015 — The Securities and Exchange Commission today announced a series of federal securities law violations by Standard & Poor’s Ratings Services involving fraudulent misconduct in its ratings of certain commercial mortgage-backed securities (CMBS).

S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional $19 million to settle parallel cases announced today by the New York Attorney General’s office ($12 million) and the Massachusetts Attorney General’s office ($7 million).

“Investors rely on credit rating agencies like Standard & Poor’s to play it straight when rating complex securities like CMBS,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “But Standard & Poor’s elevated its own financial interests above investors by loosening its rating criteria to obtain business and then obscuring these changes from investors.  These enforcement actions, our first-ever against a major ratings firm, reflect our commitment to aggressively policing the integrity and transparency of the credit ratings process.”

The SEC issued three orders instituting settled administrative proceedings against S&P.  One order, in which S&P made certain admissions, addressed S&P’s practices in its conduit fusion CMBS ratings methodology.  S&P’s public disclosures affirmatively misrepresented that it was using one approach when it actually used a different methodology in 2011 to rate six conduit fusion CMBS transactions and issue preliminary ratings on two more transactions.  As part of this settlement, S&P agreed to take a one-year timeout from rating conduit fusion CMBS.

Another SEC order found that after being frozen out of the market for rating conduit fusion CMBS in late 2011, S&P sought to re-enter that market in mid-2012 by overhauling its ratings criteria.  To illustrate the relative conservatism of its new criteria, S&P published a false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress.  S&P’s research relied on flawed and inappropriate assumptions and was based on data that was decades removed from the severe losses of the Great Depression.  According to the SEC’s order, S&P’s original author of the study expressed concerns that the firm’s CMBS group had turned the article into a “sales pitch” for the new criteria, and that the removal of certain information from the article could lead to him “sit[ting] in front of [the] Department of Justice or the SEC.”  The SEC’s order further finds that S&P failed to accurately describe certain aspects of its new criteria in the formal publication setting forth their operation.  Without admitting or denying the findings in the order, S&P agreed to publicly retract the false and misleading Great Depression-related study and correct the inaccurate descriptions in the publication about its criteria.

“These CMBS-related enforcement actions against S&P demonstrate that ‘race to the bottom’ behavior by ratings firms will not be tolerated by the SEC and other regulators.  When ratings standards are compromised in pursuit of market share, a firm’s disclosures cannot tell a different story,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.

A third SEC order issued in this case involved internal controls failures in S&P’s surveillance of residential mortgage-backed securities (RMBS) ratings.  The order finds that S&P allowed breakdowns in the way it conducted ratings surveillance of previously-rated RMBS from October 2012 to June 2014.  S&P changed an important assumption in a way that made S&P’s ratings less conservative, and was inconsistent with the specific assumptions set forth in S&P’s published criteria describing its ratings methodology.  S&P did not follow its internal policies for making changes to its surveillance criteria and instead applied ad hoc workarounds that were not fully disclosed to investors.  Without admitting or denying the findings in the order, S&P agreed to extensive undertakings to enhance and improve its internal controls environment.  S&P self-reported this particular misconduct to the SEC and cooperated with the investigation, enabling the Enforcement Division to resolve the case more quickly and efficiently and resulting in a reduced penalty for the firm.

The SEC’s orders find that S&P violated Section 17(a)(1) of the Securities Act (fraud), Section 15E(c)(3) of the Securities Exchange Act  (internal controls violations), Securities Exchange Rules 17g-2(a)(2)(iii) (books and records violations), Rule 17g-2(a)(6) (books and records violations), and 17g-2(a)(2)(iii) (failure to maintain records explaining differences between numerical model output and ratings).

In a separate order instituting a litigated administrative proceeding, the SEC Enforcement Division alleges that the former head of S&P’s CMBS Group fraudulently misrepresented the manner in which the firm calculated a critical aspect of certain CMBS ratings in 2011.  Barbara Duka allegedly instituted the shift to more issuer-friendly ratings criteria, and the firm failed to properly disclose the less rigorous methodology.  The matter against Duka 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 the Enforcement Division’s Complex Financial Instruments Unit and led by John Smith in the Denver office, Robert Leidenheimer and Lawrence Renbaum in the Washington D.C. office, and Joshua Brodsky in the New York office with assistance from Daniel Nigro and Judy Bizu.  The litigation against Duka will be led by Stephen McKenna of the Denver office.  The cases were supervised by Laura Metcalfe, Reid Muoio, and Mr. Osnato.  The Enforcement Division worked closely with the SEC’s Office of Credit Ratings in these matters, particularly Thomas Butler, Michele Wilham, Natasha Kaden, Julia Kiel, Kenneth Godwin, and David Nicolardi.

The SEC appreciates the assistance of the New York Attorney General’s office and the Massachusetts Attorney General’s office.

CFTC ORDERS COMPANY TO PAY FINE, CEASE AND DESIST FROM ACTING AS UNREGISTERED COMMODITY TRADING ADVISER

FROM:  COMMODITY FUTURES TRADING COMMISSION 

January 16, 2015

CFTC Orders Summit Energy Services, Inc. to Pay $140,000 Civil Monetary Penalty and Cease and Desist from Acting as an Unregistered Commodity Trading Advisor

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today entered an Order requiring Summit Energy Services, Inc. (Summit Energy), a Delaware corporation with its principal place of business in Louisville, Kentucky, to pay a $140,000 civil monetary penalty for acting as an unregistered Commodity Trading Advisor (CTA).

The Order finds that, from at least October 2012 to September 25, 2014, Summit Energy, for compensation or profit, engaged in the business of advising more than 15 clients as to the value of or the advisability of trading in futures contracts and over-the-counter (OTC) natural gas swaps and held itself out generally to the public as a CTA, without being registered as such with the CFTC.

Furthermore, according to the Order, Summit Energy, through its website and public brochures, offered prospective clients “risk management” services, which included advising its clients as to the value of or the advisability of trading in natural gas swaps and futures. Most of Summit Energy’s clients were commercial entities that purchased physical natural gas and electricity as part of their energy needs. The Order also finds that Summit Energy acted as a broker in OTC natural gas swaps transactions with respect to some of its clients and that Summit Energy’s commodity trading advice was not solely incidental to its business, but rather was an integral part of the services it provided to its clients.

In addition to the civil monetary penalty, the CFTC ordered Summit Energy and its parents, affiliates, subsidiaries, successors, and assigns to cease and desist from further violations of the CTA registration provision of the Commodity Exchange Act.

The CFTC appreciates the assistance of the National Futures Association in this matter.

The CFTC staff members responsible for this matter are Amanda L. Olear and Kevin Piccoli of the Division of Swap Dealer and Intermediary Oversight and W. Derek Shakabpa, Judith M. Slowly, Trevor Kokal, David Acevedo, Lenel Hickson, Jr., and Manal M. Sultan of the Division of Enforcement.

CFTC CHAIRMAN MASSAD MAKES REMARKS TO ASIAN FINANCIAL FORUM, HONG KONG

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Remarks of Chairman Timothy G. Massad before the Asian Financial Forum, Hong Kong

January 19, 2015

As Prepared For Delivery

Introduction

Good morning. I want to thank the Asian Financial Forum for inviting me. It is a pleasure to be here. I am especially pleased to be here on a panel with Chairman Xiao, Chairman Maijoor, and Secretary Purisima. Since I took office in June of last year, working with my international counterparts has been a priority. I look forward to our discussion shortly with Professor Chan.

It is great to be back in Hong Kong. I spent five years living here when I was a lawyer in private practice – some of the best years in my life. I made many good friends, and met my wife here – though she happens to be from St. Paul, Minnesota.

It was a pleasure to begin my trip in Beijing last week, where I met with Chairman Xiao and others. And I will be going on from here to Tokyo and Singapore.

You have asked us to discuss the prospects for sustainable growth in Asia in a world of change, particularly a world of changing financial sector regulations. I am very involved in changing financial sector regulations. I chair the Commodity Futures Trading Commission, which is the United States agency responsible for overseeing the futures, options, and swaps markets. And in that capacity, it is my responsibility to lead the U.S. effort to implement the commitments of the G-20 nations to reform the over-the-counter swaps market.

Let me first say a word about the relationship of the derivatives markets to growth. Many people probably hadn’t heard the word derivatives until the financial crisis, and today they may associate that word with bad behavior by big banks. But these markets, when working properly, are very beneficial to the real economy. When designed to help commercial users, they create substantial, if largely unseen, benefits for all of us. They enable utility companies or airlines to hedge the costs of fuel. They help manufacturers control the costs of industrial metals like copper. They enable farmers to lock in a price for their crops. They enable exporters to manage fluctuations in foreign currencies. And businesses of all types can lock in their borrowing costs. In the simplest terms, derivatives enable businesses to manage risk.

The Asian economies have grown to the point where well-developed derivatives markets can provide great value. To achieve that, there must be a regulatory foundation that enables markets to thrive and that attracts participants. That is, a framework that provides transparency and sensible oversight while also promoting competition and innovation. And because the economies of Asia, the United States, and Europe are increasingly interconnected, we must work together to build a global regulatory framework that achieves those ends.

Our lives shape our views, so let me tell you a little about how mine has.

I agreed to move to Hong Kong in 1997 right before the handover. Things were booming here and throughout Asia at the time. But by the time I arrived in January 1998, the Thai baht had collapsed, and the financial crisis had spread throughout Southeast Asia. I spent much of the first year or so I was in Asia on transactions involving sales of distressed debt by Thailand and Korea.

Now, at that time, I never would have guessed that many years later I would work on distressed debt sales, or troubled assets as we called them, for my own country. But a decade later, I joined the U.S. Treasury Department to help the United States recover from the worst financial crisis we have experienced since the Great Depression. I oversaw the Troubled Asset Relief Program, the key U.S. response to the 2008 global financial crisis.

Today, I look back on both the Asian financial crisis and the 2008 global financial crisis as I think about the challenges we face and the relationship of sustainable growth to regulatory change.

Looking back teaches us more than a little humility. When the Asian financial crisis occurred, many in the West were quick to point out why the West would not catch what was sometimes referred to as the “Asian flu.” Some people said our markets and financial regulatory system were more mature, more transparent, and better supervised. They said that all of those things made us more resilient to shocks. Well, not resilient enough. Those things didn’t mean we wouldn’t have our own crisis. They didn’t inoculate us from the dangers that can occur when risks are not properly understood, or when authorities believe markets are fully self-policing

By the same token, after Asia had rebounded from its crisis, some began to suggest that the Asian economies had “decoupled” from the economies of the West. No longer were they dependent on what happened in the West. Slow growth or even more serious problems in the West would not affect the dynamic growth in Asia.

Well, that didn’t prove true either. The Asian economies did not escape the collateral damage of the 2008 financial crisis. And that should not surprise us, given the severity of the shocks. In the United States, we lost eight million jobs, and millions lost their homes in foreclosure. With markets so interconnected, the shock waves reverberated worldwide.

Both crises illustrate the speed with which capital can move, and markets can fall, when problems hit. And these crises remind us that the economies of the United States and Asia are strongly and increasingly intertwined. What we do affects you. What happens here affects us. We are all in this together.

And that is why I am in Asia this week. I believe that we must continue to work together to build a global regulatory framework that helps our financial markets thrive. And that is especially true when it comes to the derivatives markets.

The Asian derivatives markets are growing. They represent nearly a third of global futures and options volume.

There are exciting developments taking place that may portend further growth and, in particular, greater sophistication and innovation in your markets. One is the launch of a crude oil contract on the Shanghai Exchange that is open to foreign participation. Another is what is happening in the equities market with Stock Connect.

I know many here are focused on making sure the derivatives markets serve the real economy. I share that objective, and I had a good discussion about this with Chairman Xiao last week. And I believe a good regulatory foundation is critical for that.

One way a good regulatory foundation can do so is by creating transparency. This can encourage innovation, which can lead to the development of a wide range of contracts that enable businesses to hedge different types of risk. For example, in the U.S., there are futures contracts traded on over 40 physical commodities, but there are more than 2000 different listed futures and options contracts on those commodities, though not all are actively traded. These contracts reflect differences in grade or quality of the product, length of term, delivery location, or other factors. This variety is a response to the diverse hedging needs of market participants. And in the over-the-counter market, parties can design contracts that allow for further customization.

But a good regulatory framework is needed so that this innovation does not create excessive risk or other problems. In the U.S., we have had a strong framework for futures for many years. We learned in the 2008 financial crisis that we needed regulation for over-the-counter swaps. We saw how over-the-counter swaps accelerated and intensified the crisis. The swaps market had grown to be a massive, global market that was unregulated. Participants had taken on risk that they didn’t always fully understand, and that was opaque to regulators. The interconnectedness of large institutions meant that trouble at one firm could easily cascade through the system. And we learned how a country’s financial stability could be threatened by excessive risk that starts outside its borders.

In response, the leaders of the G-20 nations agreed to bring the swaps market out of the shadows and achieve greater transparency. They agreed to implement some fundamental reforms such as requiring central clearing of standardized swaps.

The fact that the nations comprising the G-20 agreed on how to reform the swap market is, in and of itself, an achievement.

A G-20 communique only goes so far, however. The task of actually implementing those reforms remains with individual nation states, each with its own markets, legal traditions, regulatory philosophies and political processes. That can lead to differences.

Now, the fact is that, in most areas of financial regulation, national laws differ. Consider how securities are sold, for example. When I was working here, and we received approval for listings and initial public offerings on the Hong Kong Stock Exchange, that did not mean we could sell the same stock in a public offering in the United States.

But because the swap market was already global, many participants expect harmonization in regulation from the start. That is a good goal, though it may take time. To me, however, the glass is half full, not half empty. We are making good progress.

I can assure you that we in the United States want to continue to work with Asia to build that framework. We are aware that there are limits to the reach of any one country’s laws. We recognize the importance of harmonizing our rules with those of other nations where possible.

I believe Asia has much to gain from building this new global regulatory framework. It can create strong and innovative derivatives markets that can help propel growth in the real economy. And that can contribute to sustainable growth.I look forward to working with you to build that framework, and to enhancing sustainable growth for all of us.

Last Updated: January 18, 2015

CFTC ANNOUNCES JUDGEMENT AGAINST COMMODITY POOL OPERATORS

FROM:  U.S. COMMODITY FUTURES 
January 14, 2015

CFTC Obtains Judgment against Commodity Pool Operators TOTE Fund LLC and MJS Capital Management LLC, and their Principal, Michael J. Siegel, for Commodity Pool Fraud and Other Violations

Federal Court Orders Defendants to Pay More than $871,000 in Restitution, Disgorgement, and Civil Monetary Penalties

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Noel L. Hillman of the U.S. District Court for the District of New Jersey entered an Order of default judgment and permanent injunction against Defendants TOTE Fund LLC (TOTE) and MJS Capital Management LLC (MJS), two Commodity Pool Operators, and their sole principal Michael J. Siegel of Northfield, New Jersey.

The court’s Order requires Siegel and MJS, jointly and severally, to pay restitution of $104,684.47, disgorgement of $86,503.36, and a civil monetary of $259,510.08. Siegel and TOTE are also jointly and severally required to pay disgorgement of $105,185.89 and a civil monetary penalty of $315,557.67. The Order further imposes permanent trading and registration bans against all Defendants. The Order, entered on December 30, 2014, stems from a CFTC Complaint filed on September 27, 2013 (see CFTC Press Release 6723-13).

The Order finds that Defendants violated the Commodity Exchange Act by misappropriating funds totaling approximately $191,689 from Monarch Futures Fund LLC (Monarch) and QEP Futures Fund LLC (QEP), two commodity pools operated by TOTE and MJS, respectively, by withdrawing money from the pools for non-pool expenses and taking fees to which they were not entitled. According to the Order, despite earning incentive, management, and administrative fees of $319,909 based on his trading, Siegel transferred approximately $511,598 from bank accounts in the names of Monarch, QEP, and TOTE to his personal bank accounts, to a credit card account, and to at least one individual and used some of these funds to pay personal expenses.

The Order further finds that MJS and Siegel misappropriated funds by failing to return funds to at least two pool participants who sought to withdraw their funds from QEP. Also, TOTE, acting through Siegel, failed to provide Monarch pool participants with copies of monthly statements received by TOTE from Futures Commission Merchants, as required by a CFTC Regulation, the Order finds.

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 Kara L. Mucha, James A. Garcia, Michael W. Solinsky, Charles D. Marvine, and Gretchen L. Lowe.

SEC ANNOUNCES CHARGES AGAINST ATTORNEYS AND AUDITORS IN SHAM STOCK OFFERINGS CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against attorneys, auditors, and others allegedly involved in a microcap scheme the agency stifled last year when it suspended the registration statements of 20 purported mining companies being used for sham offerings of stock to investors.

The SEC Enforcement Division alleges that a Canada-based attorney and stock promoter named John Briner orchestrated the scheme, which entailed creating shell companies supposedly exploring mining activities.  Briner had been suspended from practicing on behalf of entities regulated by the SEC, so he recruited clients and associates to become figurehead executive officers while he secretly controlled the companies from behind the scenes.  The registration statements falsely stated that each CEO was solely running the company when in fact Briner was making all material decisions.

The SEC Enforcement Division further alleges that none of the companies had any intention of pursuing mining, and mineral claims purportedly owned by each company were never actually transferred to them.  The registration statements falsely claimed that each company was capitalized by the CEO’s $30,000 purchase of issuer stock when in fact it was Briner who was funding the companies. 

The SEC’s stop order proceedings last year enabled the subsequent suspension of the registration statements for the 20 microcap companies before any investors purchased the stocks, which were ripe for pump-and-dump schemes.

“Briner allegedly orchestrated a massive scheme to create public shell companies through false registration statements,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our action in this case proactively prevented Briner and his cohorts from carrying out the fraud to an extent that directly harmed investors.”

The SEC Enforcement Division alleges that several gatekeepers helped Briner perpetrate his scheme.  They along with Briner are named in the order instituting a litigated administrative proceeding:

• Colorado-based attorney Diane Dalmy allegedly provided opinion letters for 18 of the mining companies in which she falsely stated that she conducted an investigation of the companies’ stock issuance.
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• Nevada-based audit firm De Joya Griffith LLC and partners Arthur De Joya, Jason Griffith, Philip Zhang, and Chris Whetman were engaged by Briner for the purpose of auditing the financial statements of some of the mining companies.  The audits they conducted were allegedly so deficient that they amounted to no audits at all, and they ignored red flags that Briner was engaging in fraud.
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• Texas-based audit firm M&K CPAS PLLC and partners Matt Manis, Jon Ridenour, and Ben Ortego were similarly engaged by Briner for the purpose of auditing the financial statements of some of the mining companies.  The audits they conducted also were allegedly so deficient that they amounted to no audits at all, and they ignored red flags that Briner was engaging in fraud.

“Attorneys and auditors have a serious obligation as gatekeepers to protect the integrity of our markets, and the individuals we’ve charged in this case failed the investing public in their roles,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office. 

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 Enforcement Division alleges that Briner, Dalmy, and the auditors violated the antifraud provisions of the Securities Act of 1933 and that the auditors violated Rule 2-02(b)(1) of Regulation S-X and engaged in improper professional conduct under Rule 102(e) of the Commission’s Rules of Practice.

In separate orders instituting settled administrative proceedings, three of the figurehead CEOs installed by Briner agreed to settlements for their involvement in the scheme.  Without admitting or denying the SEC’s findings, they each agreed to be barred from serving as an officer or director of a public company or from participating in penny stock offerings.  They also agreed to give up money paid to them by Briner as “consulting” fees and pay additional penalties:

• Stuart Carnie of Ocala, Fla., was installed as the purported sole CEO of three of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Carnie must pay disgorgement of $6,000 plus prejudgment interest of $337.85 and a penalty of $12,000 for a total of $18,337.85.
• Charles Irizarry of Peoria, Ariz., was installed as the purported sole CEO of three of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Irizarry must pay disgorgement of $6,000 plus prejudgment interest of $337.85 and a penalty of $12,000 for a total of $18,337.85.
• Wayne Middleton of Salt Lake City, Utah, was installed as the purported sole CEO of two of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Middleton must pay disgorgement of $4,000 plus prejudgment interest of $225.24 and a penalty of $8,000 for a total of $12,225.24.

The SEC’s investigation was conducted by Jason W. Sunshine, James Addison, and Lara Shalov Mehraban in the New York Regional Office, and the case was supervised by Sanjay Wadhwa.  The litigation will be led by David Stoelting, Mr. Sunshine, and Jorge Tenreiro.

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

SEC ALLEGES FUND MANAGERS & FIRM DIVERTED INVESTOR MONEY TO HELP SIDE BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced charges against three fund managers and their New York-based firm accused of secretly diverting investor money for their own benefit to prop up a fledgling side business.

The SEC Enforcement Division alleges that VERO Capital Management’s president Robert Geiger, general counsel George Barbaresi, and chief financial officer Steven Downey managed a pair of funds whose offering documents indicated they would aim to achieve attractive returns by investing primarily in mortgage-backed securities.  After deciding to wind down the funds, instead of returning all of the cash to investors as the funds liquidated their investments, the three officers diverted $4.4 million by causing the funds to make undocumented “bridge loans” to an affiliated company purportedly in the risk management business.  The Enforcement Division alleges that VERO Capital and the officers never disclosed to investors or the funds’ director that they were making unauthorized loans to their other company out of investor funds.  In fact, in one instance they even lied to the funds’ custodial bank to withdraw $800,000 from the funds’ bank account to divert to the other company.

“VERO Capital and its officers allegedly misled their investors about the funds’ investment activities and funneled money to their side project while winding down the funds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the order instituting an administrative proceeding against VERO Capital, Geiger, Barbaresi, and Downey, the SEC Enforcement Division additionally alleges that although VERO Capital had custody of client assets, the firm failed to have the funds audited by independent auditors for 2012 or 2013.  The firm also failed to arrange for a surprise examination to be performed as required.

The SEC Enforcement Division further alleges that VERO Capital and the three officers caused the funds to purchase three notes worth a total of $7 million from an affiliate of the firm, which constituted principal transactions that require written notice to a client as well as the client’s consent before completing the transaction.  However, they allegedly made no efforts to provide the required notice to the funds or obtain the required consents for these three transactions.

The SEC Enforcement Division alleges that VERO Capital, Geiger, Barbaresi, and Downey willfully violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8.  The Enforcement Division further alleges that VERO Capital willfully violated Advisers Act Sections 206(3) and 206(4) as well as Rule 206(4)-2, and Geiger, Barbaresi, and Downey aided and abetted and caused these violations.  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 Enforcement Division’s investigation was conducted by Matthew Watkins, John Lehmann, Jacqueline Fine, Nancy Brown, and Thomas P. Smith Jr. of the New York Regional Office.  The case was supervised by Amelia A. Cottrell, and the Enforcement Division’s litigation will be led by Kevin McGrath.

COMMODITY POOL OPERATOR TO PAY $5.6 MILLION IN RESTITUTION AND PENALTIES

FROM:  U.S. COMMODITY FUTURES TRADING C

Federal Court Orders Commodity Pool Operator and Commodity Trading Advisor AlphaMetrix, LLC to Pay $5.6 Million in Restitution and Penalties

Court Also Orders AlphaMetrix’s Parent Company, AlphaMetrix Group, LLC, to Pay $2.8 Million in Disgorgement

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) announced that on December 16, 2014, Judge Joan H. Lefkow of the U.S. District Court for the Northern District of Illinois entered a Consent Order for permanent injunction against AlphaMetrix, LLC (AlphaMetrix), a Chicago-based Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA), and its parent company AlphaMetrix Group, LLC (AlphaMetrix Group). The Order requires AlphaMetrix to pay restitution of $2.8 million and a civil monetary penalty of $2.8 million and requires AlphaMetrix Group to pay disgorgement of $2.8 million. The Order also prohibits AlphaMetrix from further violating anti-fraud provisions of the Commodity Exchange Act (CEA), as charged.

The Order stems from CFTC charges that AlphaMetrix failed to pay at least $2.8 million in rebates owed to some of its commodity pool participants by investing the rebate funds in the pools and instead transferred the funds to its parent company, which had no entitlement to the funds. Nevertheless, AlphaMetrix sent these pool participants account statements that included the rebate funds as if they had been reinvested in the pools, even though they were not (see CFTC Press Release 6767-13, November 6, 2013).

A civil action filed by the court-appointed receiver (see Deborah Thorne, not individually but as Court-Appointed Receiver of AlphaMetrix, LLC and AlphaMetrix Group, LLC v. Kins et al., Case No. 14-2472) remains pending in the U.S. District Court for the Northern District of Illinois. In that action, the receiver seeks to recover funds from former officers of AlphaMetrix and AlphaMetrix Group.

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.

CFTC Division of Enforcement staff members responsible for this action are Stephanie Reinhart, David Terrell, Joseph Patrick, Scott Williamson, and Rosemary Hollinger. The Division thanks the CFTC’s Division of Swaps and Intermediary Oversight and the National Futures Association for their assistance in this matter.