CFTC CHAIRMAN GENSLER MAKES REMARKS ON " A TRANSFORMED MARKETPLACE"

FROM: COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler at a D.C. Bar Event - "A Transformed Marketplace"

December 11, 2013

Thank you, Alice and Peter, for your kind introductions. I also want to thank the DC Bar for inviting me here to speak today.

Five years ago, when President-elect Obama asked me to serve, the U.S. economy was in a free fall.

Five years ago, the financial system and the financial regulatory system failed the American public.

Five years ago, the unregulated swaps market was at the center of the crisis.

Five years ago, when Tim Geithner, Mary Schapiro and I sat down in the presidential transition offices with yellow pads to contemplate our upcoming confirmation hearings, we knew that modernizing the financial system wouldn’t be easy. We knew that ever since our founding, democracy is noisy and messy.

We knew, though, that we had to come together to bring common-sense rules of the road to the markets.

With 94 percent of private sector jobs outside of finance, President Obama was looking for solutions to ensure finance better serves the rest of the economy.

I was honored to be asked to join the Commodity Futures Trading Commission (CFTC), our nation’s futures market regulator.

The reforms of the 1930s had tasked the CFTC to swim in a very important lane – derivatives. The futures market has allowed farmers, ranchers and producers to lock in the price of a commodity since the 1860s. The derivatives lane, though, got a lot deeper a century later with the emergency of the vast swaps market. Both futures and swaps are essential to our economy and the way that businesses and investors manage risk.

The President placed great confidence in the CFTC when he asked the agency to help bring much-needed transparency and oversight to the dark, closed swaps market.

This confidence in the CFTC was well placed. As we’ve seen time and again in our nation’s history, when faced with real challenges, we Americans from different walks of life and perspectives find a way to come together to solve them.

The talented CFTC staff and my fellow Commissioners – Mike Dunn, Jill Sommers, Bart Chilton, Scott O’Malia and Mark Wetjen – really have delivered for the American public.

The CFTC has finalized 68 rules, orders and guidances. We have completed nearly all of the agency’s rulemakings, and the initial major compliance dates are behind us.

These reforms took into account nearly 60,000 public comments and input from more than 2,200 meetings and 21 public roundtables.

During this process, the Commission largely found consensus. In fact, two-thirds of our final actions have been unanimous, and nearly 85 percent have been bipartisan. Even when we disagreed, I believe that we did so agreeably.

Now, bright lights of transparency are shining on the $380 trillion swaps market.

Now, a majority of the swaps market is being centrally cleared – lowering risk and bringing access to anyone wishing to compete.

Now, 91 swap dealers have registered and – for the first time – are being overseen for their swaps activity.

Five years after the financial crisis, the swaps marketplace truly has been transformed.

Transparency

Foremost, the swaps marketplace has been transformed with transparency.

First, the public can see the price and volume of each swap transaction as it occurs.

This information is available, free of charge, to everyone in the public. The data is listed in real time – like a modern-day tickertape – on the websites of the three swap data repositories (SDRs).

Second, building on the CFTC’s long tradition of promoting transparency, we recently began publishing a Weekly Swaps Report to provide the public with a detailed view of the swaps marketplace.

Third, regulators also have gained transparency into the details on each of the 1.8 million transactions and positions in the SDRs.

Fourth, starting this fall, the public – for the first time –is benefitting from new transparency, impartial access and competition on regulated swap trading platforms.

We now have 19 temporarily registered swap execution facilities where more than a quarter of a trillion dollars in swaps trading is occurring on average per day.

This pre-trade transparency lowers costs for investors, businesses and consumers, as it shifts information from dealers to the broader public.

Fifth, I anticipate that by mid-February, the congressionally mandated trade execution requirement will become effective for a significant portion of the interest rate and credit index swap markets.

Clearing

The swaps market also has been transformed with mandated central clearing for financial entities as well as dealers.

Central clearing lowers risk and fosters competition by allowing customers ready access to the market.

Clearinghouses have operated successfully at the center of the futures market for over 100 years – through two world wars, the Great Depression and the 2008 crisis.

Reforms have taken us from only 21 percent of the interest rate swaps market being cleared five years ago to more than 70 percent of the market this fall. More than 60 percent of new credit index swaps are being cleared.

Further, we no longer have the significant time delays that were once associated with swaps clearing.

Five years ago, swaps clearing happened either at the end of the day or even just once a week. This left a significant period of bilateral credit risk in the market, undermining a key benefit of central clearing.

Now reforms require pre-trade credit checks and straight-through processing for swaps trades intended for clearing.

With 99 percent of swaps clearing occurring within 10 seconds, market participants no longer have to worry about credit risk when entering into swap trades intended to be cleared.

Swap Dealers

The market also has been transformed for swap dealers.

Five years ago, swap dealers had no specific requirements with regard to their swap dealing activity. AIG’s downfall was a clear example of what happens with no registration or licensing requirement for such dealers.

Today, all of the world’s largest financial institutions in the global swaps market are coming under reforms.

These reforms include new business conduct standards for risk management, documentation of swap transactions, confirmations, sales practices, recordkeeping and reporting.

With the approval of the Volcker Rule yesterday, swap dealers associated with banking entities will have to comply with new risk-reducing requirements prohibiting proprietary trading.

Further, the transformed marketplace covers the far-flung operations of U.S. enterprises, including their offshore branches and guaranteed affiliates.

The President and Congress were clear in financial reform that we had to learn the lessons of the 2008 financial crisis.

AIG nearly brought down the U.S. economy through its guaranteed affiliate operating under a French bank license in London.

Lehman Brothers had 3,300 legal entities when it failed. Its main overseas affiliate was guaranteed here in the United States, and it had 130,000 outstanding swap transactions.

The lessons of modern finance are clear. If reform does not cover the far flung operations of U.S. enterprises, trades inevitably would just be booked in offshore branches or affiliates. If reform does not cover these far-flung operations, rather than reforming the financial system, we simply would be providing a significant loophole.

Benchmark Interest Rates

Five years ago, as the public now knows, multiple banks were pervasively rigging the world’s most important benchmark interest rates.

The public trust has been violated through bad actors readily manipulating these benchmark interest rates.

I wish I could say that this won’t happen again, but I can’t.

As LIBOR and Euribor are not anchored in observable transactions, they are more akin to fiction than fact.

That’s the fundamental challenge that the CFTC and law enforcement agencies around the globe have so dramatically revealed.

We’ve made progress addressing governance and conflicts of interest regarding such benchmarks. But this alone will not resolve the fundamental vulnerability of these benchmarks – the lack of transactions in the interbank market underlying them.

That is why the work of the Financial Stability Board to find replacements for LIBOR and to recommend a means to transition to such alternatives is so critical. The CFTC looks forward to continuing work with the international community on these much-needed reforms.

Customer Protection

Market events in the last five years highlighted the need to further ensure for the protection of customer funds. Segregation and the protection of customer funds is the core foundation of the futures and swaps markets.

The CFTC went through a two-year process with market participants – and six sets of finalized rules – to comprehensively reform the customer protection regime for futures and swaps.

Resources

One of the most remarkable things about the CFTC is that today, it’s only five percent larger than it was 20 years ago.

Since then, though, this small, effective agency has taken on the job of overseeing the $380 trillion swaps market, which is a dozen times the size of the futures market we have historically overseen. Further, the futures market itself has grown fivefold since the 1990s.

Due to the budget challenges in Washington, not only has the CFTC been shrinking, but we had to notify employees of administrative furloughs.

Though the agency has yet to secure necessary funding from Congress, I continue to have faith that one day the CFTC will be funded at levels aligned with its vastly expanded mission.

The Journey Ahead

Though the CFTC has completed nearly all the rules of the road for the swaps market, reform is an ongoing journey.

Just as our nation has come together on financial reform these last five years, our regulations will continuously need to evolve. We always need to be open to changes in the markets and how best to promote transparency, competition and protect the public.

The journey is not over in transitioning to a replacement for LIBOR or in adequately funding the CFTC.

Further, as Tim, Mary and I understood five years ago, democracy – and reform – can be noisy and messy.

As market participants look to maximize their revenues and customer support, they, at times, may look to arbitrage our rules versus other rules around the globe.

I think that we’re in very firm setting on clearing, data reporting, real-time reporting, and business conduct reforms -- all of which have been implemented. There are bound to be further challenges, however, from the financial community with regard to the appropriate level of pre-trade transparency on trading platforms, as well as the scope of the cross-border application of reform.

Conclusion

I’d like to close by saying I couldn’t be more proud of the dedicated group of public servants at the CFTC. I am honored to have served along with them during such a remarkable time in the history of the agency.

Our nation benefits from free market capitalism, but it’s critical that we have common-sense rules of road to ensure that finance best serves the public at large.

On a personal note, as this is my last public speech as Chairman of the CFTC, I want to thank both Stephanie Allen and her predecessor Scott Schneider, the speechwriters whose cleverness and agility with words, not to mention the willingness to work with me, has allowed me these last five years to bring transparency to what we’re doing at the CFTC.

I also want to extend my appreciation to all the members of the media who have reported on us and followed us during this remarkable journey these last five years. As always, I’ll do one more press avail after taking questions from the audience.

Thank you.

TWO DEFENDANTS SETTLE CHARGES WITH FTC REGARDING MORTGAGE AND RELIEF SERVICES SCHEMES

FROM:  FEDERAL TRADE COMMISSION 
Defendants in Two Financial Services Schemes Banned from Providing Mortgage and Debt Relief Services
December 12, 2013

The defendants in two separate alleged scams have settled charges with the Federal Trade Commission and will be banned from providing mortgage- and debt-relief services.  The cases are part of the FTC’s continuing crackdown on scams targeting consumers in financial distress, including debt relief and credit repair scams, and mortgage relief scams.

American Mortgage Consulting Group; Home Guardian Management Solutions:

Last year, as part of the federal Distressed Homeowner Initiative, the FTC charged Mark Nagy Atalla and his companies, American Mortgage Consulting Group and Home Guardian Management Solutions, with offering false promises of mortgage-rate reductions to consumers trying to hold onto their homes.  Under the settlement with the FTC, the defendants will surrender their assets and be banned from providing mortgage relief or debt relief services to consumers.

According to the FTC’s complaint, Atalla and his companies violated the FTC Act and the Mortgage Assistance Relief Services Rule (known as the MARS Rule or Regulation O) when they promised to substantially lower consumers’ monthly mortgage payments in exchange for an up-front fee ranging from $1,495 to $4,495.  The FTC’s complaint alleged that in addition to misrepresenting the likelihood that consumers would obtain a mortgage modification, the defendants falsely represented that consumers who did not receive a modification would receive full refunds, falsely represented that they were affiliated with the U.S. government, and falsely claimed to provide legal representation to consumers.  Also, in violation of the MARS Rule, the defendants allegedly told consumers to stop communicating with their lenders, and failed to make Rule-mandated disclosures intended to ensure that consumers understand transactions with mortgage-assistance relief service providers and their rights under the Rule.  A federal judge granted the FTC’s request for a temporary restraining order and preliminary injunction, froze the defendants’ assets, and appointed a receiver to take over the companies.      

Under the terms of the agreed-upon settlement, in addition to being banned from participating in the debt relief and mortgage relief industries, the defendants are prohibited from misrepresenting the features of any product or service, and making claims without competent and reliable evidence.

Also under the settlement, Atalla faces a $514,910 judgment, which will be suspended when he turns over various items of personal property and proceeds from the sale of other assets.

Southeast Trust, LLC:
The defendants in this case – Southeast Trust, LLC (formerly known as The Debt School, LLC, also doing business as Financial Freedom Credit Counseling) and the company’s principal, Paul A. Wexler – allegedly violated both the FTC Act and the agency’s Telemarketing Sales Rule by charging cash-strapped consumers hundreds of dollars based on misrepresentations that they could obtain credit card interest rates as low as zero percent.  The operation also routinely called consumers on the Do Not Call Registry, according to the FTC.

Under the agreed-upon settlement, the defendants are banned from providing debt- and mortgage-relief services and from making robocalls and prohibited from calling consumers on the Do Not Call list.

The complaint alleged that the defendants claimed to be a non-profit group that targeted consumers with robocalls, and with ads on websites such as southeasttrust.com and   thedebtschool.com.  The defendants promised a single monthly payment, an interest rate ranging from zero percent to six percent, and that consumers would be debt free in three to five years.

The defendants are prohibited from collecting money from consumers who used their services, making unauthorized withdrawals from consumers’ bank accounts, misrepresenting the features and characteristics of financial or other types of products and services, and making unsupported claims about products and services.  They also are required to keep any consumer information they have confidential, and destroy it promptly.

The order imposes a $2.7 million judgment against Wexler, which is suspended due to his inability to pay.  If it is determined that the financial information the defendants gave the FTC was untruthful, the full amount of the judgment will become due.

For more information about how to handle robocalls and debt relief offers, see Robocalls and Settling Your Credit Card Debts. For more information about avoiding mortgage and foreclosure rescue scams see Homes and Mortgages. The Commission vote approving both proposed consent decrees was 4-0.  The FTC filed the proposed consent decree for the American Mortgage Consulting Group and Home Guardian Management Solutions case in the U.S. District Court for the Central District of California Southern Division, and the court signed and entered it on September 23, 2013.  The FTC filed the proposed consent decree for the Southeast Trust, LLC case in the U.S. District Court for the Southern District of Florida, and the court signed and entered it on September 23, 2013.

NOTE:  Consent decrees have the force of law when approved and signed by the District Court judge.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them.  To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357).  The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad.  The FTC’s website provides free information on a variety of consumer topics.  Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.

SEC CHARGES MERRILL LYNCH IN CASE INVOLVING CDO BOOKS AND RECORDS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged Merrill Lynch with making faulty disclosures about collateral selection for two collateralized debt obligations (CDO) that it structured and marketed to investors, and maintaining inaccurate books and records for a third CDO.

Merrill Lynch agreed to pay $131.8 million to settle the SEC’s charges.

The SEC’s order instituting settled administrative proceedings finds that Merrill Lynch failed to inform investors that hedge fund firm Magnetar Capital LLC had a third-party role and exercised significant influence over the selection of collateral for the CDOs entitled Octans I CDO Ltd. and Norma CDO I Ltd.  Magnetar bought the equity in the CDOs and its interests were not necessarily aligned with those of other investors because it hedged its equity positions by shorting against the CDOs.

“Merrill Lynch marketed complex CDO investments using misleading materials that portrayed an independent process for collateral selection that was in the best interests of long-term debt investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “Investors did not have the benefit of knowing that a prominent hedge fund firm with its own interests was heavily involved behind the scenes in selecting the underlying portfolios.”

According to the SEC’s order, Merrill Lynch engaged in the misconduct in 2006 and 2007, when its CDO group was a leading arranger of structured product CDOs.  After four Merrill Lynch representatives met with a Magnetar representative in May 2006, an internal email explained the arrangement as “we pick mutually agreeable [collateral] managers to work with, Magnetar plays a significant role in the structure and composition of the portfolio ... and in return [Magnetar] retain[s] the equity class and we distribute the debt.”  The email noted they agreed in principle to do a series of deals with largely synthetic collateral and a short list of collateral managers.  The equity piece of a CDO transaction is typically the hardest to sell and the greatest impediment to closing a CDO.  Magnetar’s willingness to buy the equity in a series of CDOs therefore gave the firm substantial leverage to influence portfolio composition.

According to the SEC’s order, Magnetar had a contractual right to object to the inclusion of collateral in the Octans I CDO selected by the supposedly independent collateral manager Harding Advisory LLC during the warehouse phase that precedes the closing of a CDO.  Merrill Lynch, Harding, and Magnetar had finalized a tri-party warehouse agreement that was sent to outside counsel, yet the disclosure that Merrill Lynch provided to investors incorrectly stated that the warehouse agreement was only between Merrill Lynch and Harding.  The SEC has charged Harding and its owner with fraud for accommodating trades requested by Magnetar despite its interests not necessarily aligning with the debt investors.

The SEC’s order finds that one-third of the assets for the portfolio underlying the Norma CDO were acquired during the warehouse phase by Magnetar rather than by the designated collateral manager NIR Capital Management LLC.  NIR initially was unaware of Magnetar’s purchases, but eventually accepted them and allowed Magnetar to exercise approval rights over certain other assets for the Norma CDO.  The disclosure that Merrill Lynch provided to investors incorrectly stated that the collateral would consist of a portfolio selected by NIR.  Merrill Lynch also failed to disclose in marketing materials that the CDO gave Magnetar a $35.5 million discount on its equity investment and separately made a $4.5 million payment to the firm that was referred to as a “sourcing fee.”  The SEC also today announced charges against two managing partners of NIR.

According to the SEC’s order, Merrill Lynch violated books-and-records requirements in another CDO called Auriga CDO Ltd., which was managed by one of its affiliates.  As it did in the Octans I and Norma CDO deals, Merrill Lynch agreed to pay Magnetar interest or returns accumulated on the warehoused assets of the Auriga CDO, a type of payment known as “carry.”  To benefit itself, however, Merrill Lynch improperly avoided recording many of the warehoused trades at the time they occurred, and delayed recording those trades.  Therefore, Merrill Lynch’s obligation to pay carry was delayed until after the pricing of the Auriga CDO when it became reasonably clear that the trades would be included in the portfolio.

“Keeping adequate books and records is not an elective requirement of the federal securities laws, and broker-dealers who fail to properly record transactions will be held accountable for their violations,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

Merrill Lynch consented to the entry of the order finding that it willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17a-3(a)(2).  The firm agreed to pay disgorgement of $56,286,000, prejudgment interest of $19,228,027, and a penalty of $56,286,000.  Without admitting or denying the SEC’s findings, Merrill Lynch agreed to a censure and is required to cease and desist from future violations of these sections of the Securities Act and Securities Exchange Act.

The SEC’s investigation was conducted by staff in the New York Regional Office and the Complex Financial Instruments Unit, including Steven Rawlings, Gerald Gross, Tony Frouge, Elisabeth Goot, Brenda Chang, John Murray, Sharon Bryant, Kapil Agrawal, Douglas Smith, Howard Fischer, Daniel Walfish, and Joshua Pater.  Several examiners in the New York office assisted, including Edward Moy, Luis Casais, Thomas Shupe, William Delmage, George DeAngelis, Syed Husain, and James Sawicki.

CFTC COMMISSIONER WETJEN'S STATEMENT ON THE VOLCKER RULE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Commissioner Mark Wetjen on the Volcker Rule

December 10, 2013

Thank you Chairman Gensler, and my thanks to the professional staff for the hard work they put into the rulemaking before us today.

The Volcker Rule, like many of the commission’s rules, is focused on the policy objective of compelling banks to limit or better manage risk in a way that lowers the odds of a taxpayer-financed bailout, or, short of that, a failure of one of those firms. Dodd-Frank tasked the prudential and market regulators with implementing that objective, and I believe the release before us today will do so appropriately.

Congress also sensibly required that the prudential regulators adopt a joint Volcker rule, and that the market regulators coordinate with the prudential regulators in their rulemaking efforts. One of the true hallmarks of today’s rule is that the market regulators involved went beyond the congressional requirement to simply coordinate. In fact, the rule before us today reflects the same substantive text as that adopted by the other agencies, and contains no substantive differences in the preamble language.

Building a consensus among five different government agencies is no easy task, and the level of coordination on a complicated rulemaking such as this is remarkable. Commission staff and the staffs of the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Securities Exchange Commission deserve special recognition for this feat alone.

I also believe Secretary Lew, Under Secretary Miller and other officials at the Treasury department deserve enormous credit for their role in helping coordinate the rulemaking effort. And finally, the heads of the involved agencies, including Chairman Gensler, deserve credit as well for their work in bringing today’s releases over the finish line.

The Volcker Rule is one of the last remaining CFTC rulemakings required by Dodd-Frank. Beyond this effort, almost all of the commission’s Dodd-Frank rules have been, or are in the process of being, implemented.

For this we can thank Chairman Gensler’s leadership. Today there is transparency in the swaps market where virtually none existed before. Swap dealers and major swap participants are registered. Swaps are promptly reported to swap data repositories. Most liquid swaps are now cleared. And soon many will be traded on a regulated platform for the first time. For his efforts on the Volcker Rule and the rest of his work in leading the CFTC to implement Title VII of Dodd-Frank, Chairman Gensler has done a tremendous service to the American public and the markets this agency regulates.

CFTC CHILTON'S STATEMENT ON VOTE FOR FINAL VOLKER RULE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
"High Roller's Room"

Statement of Commissioner Bart Chilton

December 10, 2013

I’m pleased to be voting on a final Volcker Rule. Frankly, two-and-a-half weeks ago, I had grave doubts about getting this done in a meaningful fashion. It had become weaker than the original proposal. But, thankfully, and I thank the Chairman for his tireless efforts, we have a rigorous and robust rule before us.

If you’ve ever been to a casino, many of them have a high roller’s room. There’s usually a sign about a $1000 minimum bet. Many have ornate gaming tables and heavy draperies. If you walk around, you can catch a glimpse inside. But other than betting a lot of money, I’m not sure what goes on in there. And, that’s fine...some high rollers lose and some win.

But, what if what the high rollers did in that room impacted all of us? What if it impacted consumers, our economy and our country? What if what the high rollers did in that room cost us $417 billion dollars (in a big bank bailout) because the games they were playing were tanking the economy?

That’s why we need a strong Volcker Rule. We should never again be put in a circumstance where too big to fail high rollers play games of chance with our nation. This rule takes a heavy velvet rope with brass ends across the doorway and closes the high roller's room. (Maybe they'll put in more Blazing 7s or Wheel of Fortunes.)

The dilemma in drafting the final rule has been that there are certain permitted forms of trading that have been difficult to define. Fortunately, the language has been solidified tightly to avoid loopholes.

First, the key parts of the law, and what I have focused on for a very long time, are the words surrounding hedging. Proprietary hedging is allowed under the law, but speculative trading--risky gambles for the house--are exactly what Volcker sought to end. This rule does that by requiring hedges be designed to mitigate and reduce actual risk, and not just by an accidental or collateral effect of the trade. We also have better correlation language in the rule, correlation that shows that the hedging “activity demonstrably reduces or otherwise significantly mitigates the specific, identifiable risk(s) being hedged.” This is key--the risk has to be specific and identifiable. You can’t just say, “Ah, oh, that? Hmm, it was a hedge.” Nope, we aren't going to let ya play that game. The position needs to be correlated with the risk.

Furthermore, there is now an ongoing requirement to recalibrate the position, the hedge, in order to ensure that the position remains a hedge and does not become speculative. When people say this version of the Volcker Rule will stop circumstances like the London Whale, this ongoing recalibration provision is exactly what will help avoid similar debacles.

Second, the same goes for market making. Yes, market making is allowed, but only for the benefit of the banks’ customers – for their customers and not in order to collect market maker fees provided by the exchange or for any speculative reason. The market making is only permitted when a bank is hedging a legitimate business risk for a customer. Full stop.

Third, on portfolio hedging: One of the changes that has been made is that we have defined what a portfolio is NOT – it can’t be some amorphous set of excuses for doing a trade. You can’t call deuces and one-eyed jacks wild after the hand has been dealt. You can’t do an after-the-fact extract of a set of trades as a rationale for a hedge.

Fourth, I’ve spoken many times about perverse bonus structures that reward the macho macho men traders. The idea, and it is contained in actual rule text language, is that big bonuses and rewards in banking should not be tied to flyer bets. Our first proposal was fairly poorly drafted on this. It didn’t differentiate between prohibited proprietary trading and permitted proprietary trading very well. My view of the language that compensation should be “designed” not to reward or incentivize prohibited trading is that this is a sufficiently narrow test. One of the ways we will determine if something is designed in this way is how, in fact, traders are paid. So we will look after-the-fact at the payouts.

Finally, the Volcker Rule won’t be implemented until July of 2015. That’s ages in these morphing markets where new games seem to be played all the time. I guarantee there will be efforts to find loopholes, figure out ways around what has been written. That’s the way of the world. So, my final thought is that this rule must not be static. Regulators need to continue to monitor what is taking place. We need our regulatory eyes in the sky, but also to look around the corner for what’s coming next, and be nimble and quick, to ensure that what we do today holds up and that the high roller's room isn’t re-opened.

While this may be the end of part of the rulemaking process, it is, and must be, the beginning of a process, that continues.

Thank you.

AUSTRALIAN DEFENDANTS ORDERED TO PAY $192 MILLION RESTITUTION RELATED TO FOREX FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
December 9, 2013
Federal Court in Austin, Texas Orders Australian Defendants to Pay over $192 Million in Restitution and Fines for Forex Fraud

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court default judgment Order awarding restitution for defrauded customers and civil monetary penalties of more than $192 million against Defendants Senen Pousa and Investment Intelligence Corporation (IIC) (d/b/a ProphetMax Managed FX) in connection with an off-exchange foreign currency (forex) fraud scheme in which Pousa and IIC defrauded over 960 clients in the United States and abroad of over $32 million.

Judge Lee Yeakel of the U.S. District Court for Western District of Texas entered the final default judgment and permanent injunction Order on November 27, 2013, requiring Pousa and IIC to pay restitution, plus prejudgment interest, totaling $33,299,821 to defrauded customers and Pousa and IIC each to pay a $79.5 million civil monetary penalty. The Order also imposes permanent trading and registration bans against Pousa and prohibits him from further violating the Commodity Exchange Act (CEA) and a CFTC regulation, as charged. The Order stems from a CFTC Complaint filed on September 18, 2012, that charged Pousa and IIC with fraud, misappropriation, and other CEA violations (see CFTC Press Release 6353-12).

The Order finds that, from at least January 1, 2012, IIC, through Pousa and its other agents, utilized “wealth creation” webcasts, webinars, podcasts, emails, and other online seminars via the Internet to directly and indirectly fraudulently solicit actual and prospective clients worldwide to open forex trading accounts at IIC. The Order further enters findings of fact and conclusions of law finding Pousa and IIC liable as to all violations, as alleged in the CFTC complaint.

The CFTC’s litigation in this action continues against Defendants Michael Dillard, Joel Friant, and Elevation Group, Inc.

The CFTC appreciates the assistance of the Australian Securities & Investments Commission, U.K. Financial Conduct Authority, Hungarian Financial Supervisory Authority, Netherlands Authority for the Financial Markets, Financial Markets Authority of New Zealand, and the New Zealand Serious Fraud Office.

Further, the CFTC appreciates the assistance of the U.S. Securities and Exchange Commission, which filed a companion case, and the U.S. Department of Justice.

CFTC Division of Enforcement staff members responsible for this matter are Kyong Koh, Michael Amakor, JonMarc Buffa, Mary Lutz, Timothy J. Mulreany, and Paul Hayeck.

SEC HALTS ALLEGED OIL AND GAS PONZI SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Texas-Based Oil and Gas Investment Scheme

The Securities and Exchange Commission today announced charges and an emergency asset freeze against the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects.

The SEC alleges that Robert A. Helms and Janniece S. Kaelin, who work out of an office in Austin, misled investors about their experience in the oil and gas industry while raising nearly $18 million for supposed purchases of oil and gas royalty interests. Despite representations that nearly all of the money they raised would be used to make oil and gas investments, Helms and Kaelin actually used only a fraction of the offering proceeds for that purpose. Instead, the vast majority of investor funds were used to make Ponzi payments and cover various personal and business expenses.

The SEC's complaint unsealed late yesterday in U.S. District Court for the Western District of Texas also charges Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., with illegally selling investments for Helms and Kaelin without being registered with the SEC. They also allegedly misled investors about the sales commissions and referral fees they were receiving.

According to the SEC's complaint, Helms and Kaelin began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control. They have since attracted at least 80 investors in more than a dozen states while promising in offering documents that they would use more than 99 percent of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests. The offering documents were fraudulent as Helms and Kaelin invested only 10 percent of the proceeds, and the oil and gas projects in which they actually did invest generated only minuscule returns.

The SEC alleges that Helms and Kaelin directed Vendetta Royalty Partners to make approximately $5.9 million in so-called partnership income distributions to investors. They used money from newer investors to make the distributions to earlier investors. Helms and Kaelin created the illusion that Vendetta Royalty Partners was a profitable enterprise when, in fact, it was a fraudulent Ponzi scheme. Some offering documents touted Helms to have extensive oil-and-gas experience, misrepresenting that he had "worked with various mineral companies over the last 10 years advising management on issues involving the acquisition and management of royalty interests, mineral properties and related legal and financial issues." In fact, Helms's oil-and-gas experience came almost entirely from operating Vendetta Royalty Partners and its affiliated or predecessor companies.

The SEC alleges that Helms and Kaelin misled investors about other important matters besides their business background and industry reputation. They failed to disclose the existence of litigation against them and companies they control. They misrepresented the performance of the limited oil-and-gas royalty investments actually under their management. And they failed to inform investors that Vendetta Royalty Partners was behind on its line of credit. The company ultimately defaulted.

According to the SEC's complaint, Helms and Kaelin along with Sellers and Barrera told potential investors that any commissions or finder's fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.

At the SEC's request, the court entered an order temporarily restraining the defendants from further violations of the federal securities laws, freezing their assets, prohibiting the destruction of documents, requiring them to provide an accounting, and authorizing expedited discovery.

The SEC's complaint alleges that the defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint further alleges that Sellers and Barrera acted as unregistered brokers in violation of Section 15(a) of the Exchange Act. The complaint requests permanent injunctions and the disgorgement of ill-gotten gains plus prejudgment interest and penalties.

The SEC's investigation was conducted by Chris Davis, Carol Hahn, and Joann Harris of the Fort Worth Regional Office. The SEC's litigation will be led by Timothy McCole. The SEC appreciates the assistance of the Federal Bureau of Investigation, U.S. Secret Service, and Texas State Securities Board.

U.S. DISTRICT COURT ISSUES FINAL JUDGEMENT AGAINST INVESTMENT ADVISER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Obtains Final Judgment Against Massachusetts-Based Broker and Investment Adviser

The Securities and Exchange Commission announced today that on December 4, 2013, the U.S. District Court for the District of Massachusetts entered final judgments against Arnett L. Waters of Milton, Massachusetts, and two entities that he controlled, broker-dealer A.L. Waters Capital, LLC and investment adviser Moneta Management, LLC, who are defendants in an enforcement action filed by the Commission in May 2012. The Commission filed its action on an emergency basis in order to halt the defendants' fraudulent sales of fictitious investment-related partnerships. The final judgment, to which the defendants consented, enjoins them from violating the antifraud provisions of the federal securities laws. The Court also found the defendants jointly and severally liable for $839,000 in disgorgement, which has been deemed satisfied by a restitution order of over $9 million in a parallel criminal proceeding.

The Commission's enforcement action filed May 1, 2012 alleged that from at least 2009-2012, Waters, A.L. Waters Capital and Moneta Management engaged in a fraudulent scheme through which they raised at least $780,000 from at least 8 investors, including $500,000 from Waters' church, by promising to use investor funds to purchase a portfolio of securities, when they instead misappropriated the money and spent it on personal and business expenses. On May 3, 2012, the Court entered a preliminary injunction order that, among other things, froze the defendants' assets, as well as those of two relief defendants, one of whom was Waters' wife, and required them to provide an accounting of all their assets to the Commission.

On August 7, 2012, the Commission filed a civil contempt motion against Waters, alleging that he had violated the court's preliminary injunction and asset freeze order by establishing an undisclosed bank account, transferring funds to that account, dissipating assets, and failing to disclose the bank account to the Commission, as required by the Court's order. On August 9, 2012, the U.S. Attorney for the District of Massachusetts filed a separate criminal contempt action against Waters based on the same allegations. On October 2, 2012, Waters pleaded guilty to the criminal contempt charges, and the Commission on December 3, 2012 barred Waters from the securities industry based on his guilty plea in the criminal contempt action.

The U.S. Attorney for the District of Massachusetts charged Waters with an array of securities fraud and other violations on October 17, 2012. On November 29, 2012, Waters pleaded guilty to sixteen counts of securities fraud, mail fraud, money laundering, and obstruction of justice arising out of both the conduct that is the subject of the Commission's civil action and a criminal scheme through which Waters defrauded clients of his rare coin business out of as much as $7.8 million. The criminal information to which Waters pleaded guilty further alleged that he engaged in money laundering through two transactions totaling $77,000. Finally, Waters pleaded guilty to obstruction of justice in connection with multiple misrepresentations to Commission staff, including that there were no investors in his investment-related partnerships, in order to conceal the fact that investor money was misappropriated in a fraudulent scheme. As a result of his guilty plea to this criminal conduct, Waters was sentenced on April 26, 2013 to 17 years in federal prison and three years of supervised release, and was ordered to pay $9,025,691 in restitution and forfeiture.

The final judgment in the Commission's enforcement action enjoins the defendants from violations of 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 also enjoins Waters and Moneta Management from violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. On November 18, 2013, the Court entered the parties' stipulation of dismissal against relief defendant Port Huron Partners, LLP, an unregistered entity owned by Waters. The Commission's case remains pending against relief defendant Janet Waters, Arnett Waters' wife.

The Commission acknowledges the assistance of the United States Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation and FINRA in this matter.

FIFTH THIRD BANK AND FORMER CFO CHARGED BY SEC WITH IMPROPER ACCOUNTING OF COMMERCIAL REAL ESTATE LOANS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis.

Fifth Third agreed to pay $6.5 million to settle the SEC’s charges, and Daniel Poston agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.  Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans.  Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as “held for sale” and value them at fair value.  Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent.  Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly suggested that the company had not made the decision to sell the loans.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

According to the SEC’s order, Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans.  Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required.  Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008.

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” said Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement.

Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.  Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.

The SEC’s investigation was conducted by Beth Groves, Paul Harley, Jonathan Jacobs, and Jim Blenko.  The SEC appreciates the assistance of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

COURT ORDERS COMPANY AND PRINCIPALS TO PAY OVER $22 MILLION FOR ROLES IN COMMODITY POOL FRAUD SCHEME

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
December 4, 2013

Federal Court Orders Defendants Arista LLC, Abdul Sultan Walji, and Reniero Francisco, All of Southern California, to Pay over $22 Million in Restitution and Fines for Commodity Pool Fraud and Making False Statements to the CFTC

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered a consent judgment and permanent injunction Order against Arista LLC (Arista), a registered Commodity Pool Operator with its principal place of business in Newport Coast, California, and against Arista’s principals, Abdul Sultan Walji (a/k/a Abdul Sultan Valji) of San Juan Capistrano, California, and Reniero Francisco of Coastal Oak, California, for carrying out a fraudulent scheme to misappropriate millions of dollars from investors in commodity futures and options, making false statements to the CFTC, and filing false quarterly reports with the National Futures Association (NFA).

The Order, entered on December 3, 2013, requires the Defendants to pay more than $8.25 million in restitution for the losses of defrauded investors.  In addition, the Order imposes civil monetary penalties of $6.45 million on Walji, $5.925 million on Francisco, and $1.54 million on Arista.  The Order further imposes permanent trading and registration bans on the Defendants and prohibits them from violating provisions of the Commodity Exchange Act (CEA) and a CFTC regulation, as charged.

The Court’s Order stems from a CFTC Complaint filed on December 12, 2012 and amended on May 28, 2013 (Complaint), which charged the Defendants with violating anti-fraud provisions of the CEA, making false statements to the CFTC, and filing false reports with the NFA (see CFTC Press Releases 6460-12 and 6600-13).

In the Order, the Defendants admit to all of the Order’s findings and all of the allegations in the CFTC’s Complaint.  The Order finds that, from at least February 2010 through January 2012, the Defendants collected funds from 39 investors totaling more than $9.5 million, of which the Defendants paid themselves $4.125 million in purported fees and lost more than $4.8 million trading in futures and options.  The Defendants also provided false quarterly statements to the investors, violated the CEA’s registration requirements, and, after subsequently registering, provided false reports to the NFA.  Further, in September 2011, the Defendants misrepresented certain account balances, asset values, and fee calculations in a letter sent in response to requests for information from the CFTC’s Division of Enforcement.  The Order enforces the false statements provision of the CEA, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In a related criminal proceeding, Walji and Francisco each pled guilty to conspiracy and fraud charges and were sentenced, respectively, to 151 months and 97 months of imprisonment.

The CFTC appreciates the assistance of the U.S. Department of Justice, the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the NFA.

CFTC Division of Enforcement staff members responsible for this case are Michael P. Geiser, Laura A. Martin, Douglas K. Yatter, Philip D. Rix, Lenel Hickson, and Manal M. Sultan.

SEC INJUNCTION BANS PENNY STOCK FRAUD OPERATOR FOR DOING BUSINESS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
District Court Enters Final Judgment of Permanent Injunction and Orders a Penny Stock and Officer-And-Director Bar Against Defendant Thomas Gaffney

The Commission announced that on November 20, 2013, the United States District Court for the Southern District of Florida entered a Final Judgment of Permanent Injunction and Other Relief by consent against Defendant Thomas Gaffney, enjoining him from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5(a).

In addition, United States District Judge Robert N. Scola, Jr., permanently barred Gaffney from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock. The Court also permanently barred him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act.

The Commission commenced this action by filing its Complaint on August 14, 2013, against Gaffney and Health Sciences Group, Inc. ("HESG"). The Complaint alleged the defendants engaged in a fraudulent scheme involving HESG's stock, illicit kickbacks, and phony agreements to mask those kickbacks.

SEC ANNOUNCES BOILER ROOM BROKER BARRED FROM PENNY-STOCK OFFERINGS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION   
Ohio-Based Broker Barred from Penny-Stock Offerings

The Securities and Exchange Commission announced today that on November 27, 2013, the United States District Court in Massachusetts entered judgment against Matthew K. Lazar, of Columbus, Ohio, in a case arising from his alleged participation in a boiler room operated by Edward M. Laborio, of Boston, Massachusetts and Boca Raton, Florida.  Lazar consented to the entry of the judgment.

On August 10, 2012, the Commission charged Laborio, Lazar and others with raising up to $5.7 million from more than 150 investors through the fraudulent sale of five unregistered offerings.  As to Lazar in particular, the Complaint charged that from October through December 2008, Lazar raised $585,000 from 10 investors through the sale of a PIPE (private investment in a public equity) by misrepresenting that the PIPE guaranteed an annual 8.5% dividend and that it was safe, like a fixed annuity or a certificate of deposit.  The Complaint alleged that Laborio hired Lazar in September 2008 to open an Ohio branch office operating under the name Envit Capital Private Wealth Management, LLC.  Along with Laborio and Lazar, the Complaint charged Jonathan Fraiman, of Boston, Massachusetts and Lantana, Florida, along with seven entities, most with the name “Envit,” that were owned and controlled by Laborio, including a non-existent hedge fund.

On November 27, 2013, the Court entered a final judgment against Lazar:  (i) permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 (Securities Act); Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder; and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act); (ii) barring him for three years from participating in any offering of penny stock; (iii) finding him liable for disgorgement of $16,820.99 and prejudgment interest of $2,917.65, for a total of $19,738.64; and (iv) waiving payment of the disgorgement and prejudgment interest, and not imposing a civil penalty, based upon the representations in Lazar’s sworn statement of financial condition.  Lazar agreed to settle the Commission’s charges without admitting or denying the allegations in the Complaint.

The Court previously entered a final judgment by consent against Jonathan Fraiman on October 8, 2013.  In related administrative proceedings instituted by the Commission on October 11, 2013, Fraiman consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after ten years.  The Commission’s civil injunctive action against Laborio and the Envit Companies, SEC v Laborio et al., 1:12-cv-11489-MBB (D. Mass., Aug. 10, 2012), is still pending.

In conducting its investigation, the Commission acknowledges assistance from the U.S. Attorney’s Office for the District of Massachusetts, the Federal Bureau of Investigation, the State of Florida Office of Financial Regulation, and the Financial Industry Regulatory Authority (FINRA).

CPA CHARGED BY SEC WITH VIOLATING SUSPENSION ORDER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Certified Public Accountant with Violating Commission Suspension Order

Seeks Disgorgement of Illicit Compensation Received During Suspending Period

The Securities and Exchange Commission today announced that it filed a complaint in U.S. District Court for the District of Utah against certified public accountant R. Gordon Jones. Securities and Exchange Commission v. R. Gordon Jones, C.P.A., 1:13-cv-00163-BSJ (D. Utah). Jones is a resident of Farmington, Utah, and has been licensed as a certified public accountant by the State of Utah since June 1980.

The Commission alleged in its complaint that Jones violated a May 4, 2001 Commission Order issued under Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice (the "2001 Order") that suspended Jones from appearing or practicing before the Commission as an accountant. In The Matter of R. Gordon Jones, CPA and Mark F. Jensen, CPA, Securities Exchange Act of 1934 Rel. No. 44265, Accounting and Auditing Enforcement Rel. No. 1390, Administrative Proceeding File No. 3-10210 (May 4, 2001). According to the complaint, beginning in 2001 through the present, Jones provided accounting and financial statement preparation work for public companies. The complaint alleges that Jones, through his company J&J Consultants, LLC, has, among other things, created, compiled, and edited financial statements, information and data incorporated into Forms 10-K, 10-Q and 8-K; drafted and edited footnotes to financial statements; drafted and edited Management Discussion and Analysis sections relating to financial information of public filings; drafted and edited responses to Commission comment letters relating to financial information on public filings; and provided issuers with accounting advice that was subsequently reflected in financial statements filed with the Commission. The complaint further alleges that Jones supervised the financial statement preparation work for public company clients performed by J&J employees, and was intrinsically involved in and had the final sign off on the work of the other J&J employees. Through these actions, Jones violated the 2001 Order.

The SEC's complaint seeks a district court order enforcing its 2001 Order suspending Jones from appearing or practicing before the Commission as an accountant, and asks that the court order Jones to pay disgorgement, representing illicit compensation gained as a result of his engaging in work that was proscribed by the 2001 Order, together with prejudgment interest.

The Commission's investigation was conducted by Kimberly Greer, Ian Karpel, and Donna Walker in the Denver Regional Office. The Commission's litigation will be led by Polly Atkinson.

FUTURES TRADER TO PAY OVER $3 MILLION IN CFTC ACTION AND PLEADS GUILTY IN CRIMINAL CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
November 26, 2013

Federal Court in Connecticut Orders Feisal Sharif to Pay over $3 Million to Settle Fraud Charges in CFTC Action

In a related criminal action, Sharif pled guilty to criminal violations of the Commodity Exchange Act

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against defendant Feisal Sharif of Branford, Connecticut, requiring him to pay restitution of $2,230,000 to defrauded customers and a $900,000 civil monetary penalty, as well as permanent trading and registration bans against Sharif for violations of the Commodity Exchange Act (CEA).

The Order, entered on November 21, 2013, by the Honorable Stefan R. Underhill of the U.S. District Court for the District of Connecticut, stems from a CFTC Complaint filed on November 26, 2012, charging Sharif with fraudulent solicitation, misappropriation, and registration violations (see CFTC Press Release 6424-12).

The Order finds that, between January 2007 and September 2012, Sharif, by and through the commodity pool First Financial LLC, fraudulently solicited and accepted over $5.4 million from at least 50 members of the general public to trade commodity futures contracts through a pool. The Order further finds that Sharif traded only a portion of the pool participant funds in proprietary accounts and sustained overall and significant losses. Sharif misappropriated the majority of the pool participant funds to make so-called returns to participants in payments that he claimed were the profitable proceeds of their trading, the Order finds. Sharif also misappropriated pool participant funds for personal use, according to the Order.

Sharif concealed his fraud and trading losses from pool participants by issuing false account statements reflecting profits, the Order finds. Sharif also made excuses regarding the safety of pool participants’ investments.

The Order also finds that Sharif failed to register with the CFTC as a Commodity Pool Operator as required by the CEA.

In a related criminal action, Sharif pled guilty to criminal violations of the CEA. Sharif is scheduled to be sentenced in January 2014 (see USA v. Sharif No. 3:13-cr-00172-SRU-1).

The CFTC thanks the Securities and Business Investments Division of the State of Connecticut Department of Banking, the Federal Bureau of Investigation, and the U.S. Attorney’s Office for the District of Connecticut for their assistance.

CFTC Division of Enforcement staff members responsible for this case are Amanda Harding, James Deacon, Jessica Harris, Kenneth McCracken, Rick Glaser, and Richard Wagner.

2 HOUSTON-BASED INVESTMENT ADVISORY FIRMS CHARGED BY SEC FOR MAKING TRANSACTIONS WITHOUT NOTIFYING CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions

The Securities and Exchange Commission today announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.

In a principal transaction, an investment adviser acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They must also obtain the client’s consent.

The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.

“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions.

According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions.

The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors.

According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.

The SEC’s investigation was conducted by R. Joann Harris and Asset Management Unit member Barbara L. Gunn of the Fort Worth Regional Office.  The SEC’s litigation will be led by Jennifer Brandt.

ELDERLY INVESTORS TARGETED WITH OFFERING FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Gary C. Snisky with Offering Fraud

The Securities and Exchange Commission (Commission) filed a civil injunctive action on November 21, 2013, in the United States District Court for the District of Colorado against Gary C. Snisky of Longmont, Colorado. The Commission alleges that Snisky recruited and trained a sales force that raised at least $3.8 million from more than 40 elderly investors in Colorado and seven other states by promising guaranteed returns and safety of principal through a purported investment in government secured bonds.

The Commission's complaint alleges that Snisky and his sales force targeted mostly elderly, annuity-holding investors to purchase interests in Arete, LLC, a purportedly safe alternative to an annuity that also allowed for withdrawal of principal. Additionally, the complaint alleges that Snisky and his salespeople represented to investors that Arete provided a guaranteed annual return of 6% to 7%, a 10% bonus to compensate for any annuity withdrawal penalties, and that investor funds would be placed in bonds backed by the "full faith and credit" of the United States Government. These representations, however, were false, as Snisky misappropriated approximately $2.8 million in investor funds, mostly in cash withdrawals, and used these funds to pay commissions to his salespeople and for his personal use.

The Commission's complaint alleges that Snisky violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Sections 206(1), (2), and (4) of the Advisers Act of 1940 and Rule 206(4)-8 thereunder; violated the unregistered broker-dealer provisions of the securities laws in Section 15(a) of the Exchange Act; violated the security registration provisions of the securities laws in Sections 5(a) and (c) of the Securities Act; and aided and abetted Arete's failure to register as an investment company under Section 7(a) of the Investment Company Act of 1940. The Commission's complaint seeks a permanent injunction, disgorgement plus prejudgment interest, a civil monetary penalty, and other relief against Snisky.

The Commission's investigation was conducted in the Denver Regional Office by John C. Martin, Kerry M. Matticks and James A. Scoggins. Polly A. Atkinson will lead the Commission's litigation. The SEC acknowledges the assistance of the U.S. Attorney's Office, the Internal Revenue Service and the Federal Bureau of Investigation for the District of Colorado. The SEC's investigation is continuing.

SEC ANNOUNCES AGENDA AND PANELISTS FOR DECEMBER 5 STAFF ROUNDTABLE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced the agenda and panelists for its December 5 staff roundtable on the use of proxy advisory firm services by institutional investors and investment advisers.

The roundtable, announced earlier this month, will begin at 9:30 a.m. and will be divided into two sessions.  In the first session, participants will discuss, among other topics, the current use of proxy advisory services, including the factors that may have contributed to their use, the purposes and effects of using the services, and competition in the marketplace for such services.  In the second session, participants will discuss, among other topics, issues identified in the Commission’s 2010 concept release on the U.S. proxy voting system, including potential conflicts of interest that may exist for proxy advisory firms and users of their services, and the transparency and accuracy of recommendations by proxy advisory firms.

The roundtable panelists are:

Karen Barr - General Counsel, Investment Adviser Association
Jeffrey Brown - Head of Legislative and Regulatory Affairs, Charles Schwab
Mark Chen - Associate Professor of Finance, Georgia State University
Michelle Edkins - Managing Director and Global Head Corporate Governance and Responsible Investment, BlackRock, Inc.
Yukako Kawata - Partner, Davis Polk & Wardwell LLP
Hoil Kim - Vice President, Chief Administrative Officer and General Counsel, GT Advanced Technologies, Inc.
Eric Komitee - General Counsel, Viking Global Investors LP
Jeff Mahoney - General Counsel, Council of Institutional Investors
Nell Minow - Co-Founder and Board Member, GMI Ratings
Trevor Norwitz - Partner, Wachtell, Lipton, Rosen & Katz
Harvey Pitt - CEO, Kalorama Partners
Katherine Rabin - CEO, Glass Lewis & Co. LLC
Gary Retelny - President, Institutional Shareholder Services, Inc.
Michael Ryan - Vice President, Business Roundtable, and former president and COO of Proxy Governance, Inc.
Anne Sheehan - Director of Corporate Governance, CalSTRS
Damon Silvers - Director of Policy and Special Counsel, AFL-CIO
Darla Stuckey - Senior Vice President of Policy and Advocacy, Society of Corporate Secretaries
Lynn Turner - Managing Director, LitiNomics, Inc.
The roundtable will be held at the SEC’s headquarters in Washington, D.C., and is open to the public on a first-come, first-served basis.  The event also will be webcast live on the SEC’s website and will be archived for later viewing.

Members of the public are welcome to submit comments on the topics to be addressed at the roundtable.  Comments may be submitted electronically or on paper; please use one method only.  Any comments submitted will become part of the public record of the roundtable and posted on the SEC’s website.

FINAL JUDGEMENT ENTERED FINAL JUDGEMENT AGAINST DEFENDANT FOR ALLEGEDLY MISLEADING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Court Enters Final Judgment by Consent Against SEC Defendant Corey Ribotsky

The Securities and Exchange Commission announced that, on November 14, 2013 the Honorable Joseph F. Bianco, United States District Court Judge for the Eastern District of New York, entered a final judgment by consent against Defendant Corey Ribotsky. In addition, Judge Bianco also dismissed all claims against Defendant The NIR Group, LLC at the SEC's request because that entity is defunct and has no assets.

The SEC filed this enforcement action on September 28, 2011, alleging, among other things, that during the financial crisis Ribotsky and NIR made false statements to investors regarding the poor performance and trading strategy of the various AJW Funds he managed through NIR. The SEC also alleged that Ribotsky misappropriated client assets and mislead investors about the decision to form the AJW Master Fund.

Ribotsky consented to the final judgments without admitting or denying the allegations in the Commission's complaint. The final judgment against Ribotsky imposed permanent injunctions prohibiting Ribotsky from violating Section 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Ribotsky has also agreed to pay $12,500,000 in disgorgement, $1,000,000 in prejudgment interest, and a $1,000,000 civil penalty.

To settle the Commission's related administrative proceedings that the Commission will separately institute, Ribotsky has consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after four years.

SEC CHARGES FORMER EMPLOYEE OF SEMICONDUCTOR COMPANY WITH TIPPING NONPUBLIC INFORMATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former employee at a Silicon Valley-based semiconductor company for his role tipping nonpublic information used in connection with Raj Rajaratnam’s massive insider trading scheme.

The SEC alleges that Sam Miri, who worked in the communications division at Marvell Technology Group, tipped confidential information about the company’s financial performance to former Galleon Management portfolio manager Ali Far.  He used the nonpublic information provided by Miri to trade Marvell securities on behalf of hedge funds that he founded after leaving Galleon.  Far and Spherix Capital, who were among those earlier charged by the SEC in the Galleon matter, earned hundreds of thousands of dollars in illicit profits based on Miri’s tips.  In exchange for the illegal tips, Far arranged four quarterly payments to Miri totaling approximately $10,000.

Miri, who lives in Palo Alto, Calif., has agreed to settle the SEC’s charges by paying more than $60,000 and being barred from serving as an officer or director of a public company.

“Miri finds himself playing the role of defendant because he chose to violate his duty to protect his employer’s confidential information by selling it to a hedge fund manager in exchange for quarterly payments,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “A total of 35 firms and individuals have now been held accountable for their varying roles in the Galleon scheme.”

According to the SEC’s complaint filed in federal court in Manhattan, Miri tipped Far in May 2008 with inside information about Marvell’s plans to announce a permanent chief financial officer after a string of interim chief financial officers.  With an earnings announcement scheduled for later that month, Miri also revealed confidential information about Marvell’s sales revenue and profitability as well as projections of future earnings potential.  In the days leading up to the announcement, Spherix Capital hedge funds purchased approximately 300,000 shares of Marvell common stock.  When the stock climbed more than 20 percent after Marvell announced its quarterly financial results and new CFO on May 29, Far’s hedge funds reaped approximately $680,000 in ill-gotten gains.

The SEC’s complaint charges Miri with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Miri agreed to pay $10,000 in disgorgement, $1,842.90 in prejudgment interest, and a $50,000 penalty.  Miri also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the charges, Miri agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by John Henderson, Diego Brucculeri, and James D’Avino of the New York Regional Office.  The case has been supervised by Joseph Sansone of the Market Abuse Unit and Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC CHARGES TRADER WITH DEFRAUDING OLDER INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a self-described institutional trader in Colorado with defrauding elderly investors into making purported investments in government-secured bonds as he used their money to pay his mortgage.

The SEC alleges that Gary C. Snisky of Longmont, Colo., primarily targeted retired annuity holders by using insurance agents to sell interests in his company Arete LLC, which posed as a safe and more profitable alternative to an annuity.  Investors were told their funds would be used to purchase government-backed agency bonds at a discount, and Snisky as an institutional trader would use the bonds to engage in overnight banking sweeps.  However, Snisky did not purchase bonds or conduct any such trading, and he misappropriated approximately $2.8 million of investor funds to pay commissions to his salespeople and make personal mortgage payments.

“With one hand Snisky ushered investors into a supposedly safe investment opportunity with guaranteed profits, and with the other hand he put investors’ money into his own pocket,” said Julie K. Lutz, director of the SEC’s Denver Regional Office.

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

According to the SEC’s complaint filed in federal court in Denver, Snisky raised at least $3.8 million from more than 40 investors in Colorado and several other states. Beginning in August 2011, Snisky recruited veteran insurance salespeople who could sell the Arete investment to their established client bases that owned annuities. The majority of investors in Arete used funds from IRAs or other retirement accounts.

The SEC alleges that Snisky described Arete as an “annuity-plus” investment in which, unlike typical annuities, investors could withdraw principal and earned interest with no penalty after 10 years while still enjoying annuity-like guaranteed annual returns of 6 to 7 percent.  Snisky emphasized the safety of the investment, calling himself an institutional trader who could secure government-backed agency bonds at a discount and save middleman fees.  Snisky’s sales pitch was so convincing that even one of his salespeople personally invested retirement funds in Arete.

The SEC alleges that Snisky created and provided all of the written documents that the hired salespeople used as offering materials to solicit investors.  Snisky also showed salespeople fraudulent investor account statements purporting to show earnings from Arete’s investment activity.  Following an initial influx of investors, Snisky organized at least two seminars where he met with investors and salespeople.  He introduced himself as the institutional trader behind Arete’s success, and encouraged investors to spread the word.  Snisky hand-delivered fraudulent account statements to investors attending the seminars to mislead them into believing their investments were performing as promised.

The SEC’s complaint against Snisky seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a financial penalty.

The SEC’s investigation, which is continuing, has been conducted by John C. Martin, Kerry M. Matticks, and James A. Scoggins of the Denver office.  The SEC’s litigation will be led by Polly A. Atkinson.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Colorado, Internal Revenue Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service.

FORMER BROKER SENT TO PRISON FOR FOGUE TRADES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Former Rochdale Securities Broker Sentenced to 30 Months' Imprisonment for Rogue Trades

The Securities and Exchange Commission announced today that on November 19, 2013, the Honorable Robert N. Chatigny of the United States District Court for the District of Connecticut sentenced David Miller, 41, of Rockville Center, New York, to 30 months imprisonment, followed by three years of supervised release, for his role in a fraudulent scheme to place a series of unauthorized purchases of more than 1.6 million shares of Apple, Inc. stock on October 25, 2012 while employed as an institutional sales trader for Rochdale Securities LLC ("Rochdale") of Stamford, Connecticut. Judge Chatigny also ordered Miller to make full restitution to Rochdale, which suffered a loss of $5,292,202.50 and ceased all business operations as a result of Miller's actions. Miller was arrested on December 4, 2012, and on April 15, 2013 he pleaded guilty to one count of conspiracy to commit wire fraud and securities fraud, and one count of wire fraud.

On April 15, 2013, the Commission filed a partially settled civil injunctive action against Miller in federal court in Connecticut arising out of the same conduct. To settle the Commission's charges, Miller consented to be enjoined from future violations of the antifraud provisions of the federal securities laws. The amount of a civil monetary penalty will be determined at a later date. In related administrative proceedings that the Commission separately instituted on April 25, 2013, Miller consented to a Commission Order barring him from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and barring him from participating in any offering of penny stock.

SEC ANNOUNCES CHARGES AGAINST TWO INVESTMENT ADVISERS FOR FAILURE TO DISCLOSE COMPENSATION

FROM;  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission announced charges against two Tampa-area investment advisers accused of committing fraud by failing to truthfully inform clients about compensation received from offshore funds they were recommending as safe investments despite substantial risks and red flags.

The advisers also are charged with contributing to violations of the “custody rule” that requires investment advisory firms to establish specific procedures to safeguard and account for client assets.

The SEC’s Enforcement Division alleges that Gregory J. Adams and Larry C. Grossman solicited and directed clients of their investment firm Sovereign International Asset Management to invest almost exclusively in funds controlled by an asset manager named Nikolai Battoo, who the SEC charged in a separate enforcement action last year.  Grossman and Adams failed to inform clients about the conflict of interest in recommending these investments as Battoo was paying them millions of dollars in compensation for steering investors to his funds.

“Investment advisers have a fiduciary duty to act in utmost good faith when recommending investments, and they must fully disclose all of the relevant facts to their clients,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Adams and Grossman breached this duty when they misstated their compensation and failed to disclose serious conflicts of interest.”

According to the SEC’s order instituting administrative proceedings, Grossman was paid approximately $3.3 million and Adams received $1 million in the undisclosed compensation arrangements.  Grossman and Adams promoted the investments as safe, diversified, independently administered and audited, and suitable for the investment objectives and risk profiles of their clients who were often retirees.  However, Battoo’s funds were in fact risky, lacked diversification, and lacked independent administrators and auditors.  Grossman and Adams also failed to investigate – and in some cases wholly disregarded – numerous red flags surrounding Battoo and his funds.

The SEC’s Enforcement Division alleges that Grossman and Adams aided and abetted Sovereign’s violations of the custody rule when they instructed clients to transfer their investment funds to a bank account controlled by a related entity.  Grossman and Adams pooled clients’ money in this bank account before investing it in Battoo’s offshore funds.  Sovereign failed to comply with the custody rule, which requires an investment adviser to comply with surprise examinations or certain other procedures to verify and safeguard client assets.

According to the SEC’s order, Grossman and Adams willfully violated Section 17(a)(2) of the Securities Act of 1933, Section 15(a) of the Securities Exchange Act of 1934, and Sections 206(1), 206(2), 206(3) and 207 of the Investment Advisers Act of 1940.  They willfully aided and abetted violations of Section 15(a) of the Exchange Act and Section 206(4) of the Advisers Act and Rules 204-3 and 206(4)-2.

The SEC’s investigation was conducted by Andre J. Zamorano, Sunny H. Kim, and Kathleen Strandell in the SEC’s Miami office.  The case was supervised by Thierry Olivier Desmet, and the litigation will be led by Patrick R. Costello.  The SEC examination of Sovereign that led to the investigation was conducted by Roda A. Johnson and Jean M. Cabot under the supervision of John C. Mattimore.

THREE SENTENCED FOR ROLES IN $1 BILLION HIGH-YIELD INVESTMENT FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 
Wednesday, November 20, 2013
Three Investment Advisors Sentenced in California for $1 Billion High-yield Investment Fraud

Three former investment advisers were sentenced on Nov. 19, 2013 for their roles in attempting to defraud a wealthy investor of $1 billion through a high-yield investment fraud scheme.

Acting Assistant Attorney General Mythili Raman of the Criminal Division and U.S. Attorney Andre Birotte Jr. of the Central District of California made the announcement.

William J. Ferry, a former stock broker and investment advisor; Dennis J. Clinton, a former real estate investment manager; and Paul R. Martin, a former senior vice president and managing director of Bankers Trust, were convicted on July 31, 2012, of conspiracy, mail fraud and wire fraud.   The investor they attempted to defraud was, in reality, part of an undercover FBI team that posed as wealthy investors and investment managers to stop fraudsters before they actually harmed victims.

Ferry, 71, of Newport Beach, Calif., was sentenced to serve 15 months in prison.  Clinton, 65, of San Diego, Calif., was sentenced to serve 30 months in prison.   Martin, 64, of New Jersey, was sentenced to 30 months in prison.            

Evidence at trial established that from February to December 2006, Ferry, Clinton, Martin and others conspired to promote a high-yield investment fraud scheme that promised an extremely high return at little or no risk to principal.   The defendants claimed their investment program was a “Fed Trade Program” that was regulated by the Federal Reserve Bank, that they had to follow strict Fed guidelines, and that a Fed trade administrator administered their program, with compliance duties handled by a Fed compliance officer.

Investors also were told that once the investment program passed compliance, it would become registered in Washington, D.C., with the Fed.   The defendants falsely represented to FBI undercover agents that they would arrange for them to meet a Federal Reserve official and/or the chairman of the board of a major U.S. bank to confirm the existence of the defendants’ investment program.   The defendants falsely claimed that these Fed investment programs existed primarily to generate funds for project funding and humanitarian purposes, such as Hurricane Katrina relief.   The promised profits from investing in a Fed program had to be divided in equal amounts, with one portion going to some humanitarian purpose, another portion to some kind of project financing and the remainder to the investor.   The defendants represented to the undercover agents that the agents’ offshore bank account would be managed by a Swiss banker who was already managing billions of dollars for the defendants.

Throughout the scheme, Ferry acted as an underwriter and member of the compliance team; Martin acted as a banking expert; and Clinton acted as a trouble shooter during the compliance phase and transfer of funds to the Swiss banker.
           
Another conspirator, Brad Keith Lee, of California, who acted as the contact with the Swiss banker, pleaded guilty to conspiracy and wire fraud on April 13, 2009, and was sentenced to 24 months in prison on Jan. 11, 2010.   Oregon resident John Brent Leiske, who acted as a trader during the scheme, pleaded guilty in the District of Oregon to conspiracy, mail fraud and wire fraud on Jan. 24, 2012, and was sentenced to 120 months in prison on Feb. 14, 2013.

This continuing investigation is being conducted by the FBI.   This case is being prosecuted by Senior Litigation Counsel David Bybee and Trial Attorney Fred Medick of the Criminal Division’s Fraud Section.

MAN ORDERED TO PAY RESTITUTION AND PENALTY FOR OFF-EXCHANGE FOREIGN CURRENCY POOL FRAUD

FROM:  COMMODITY FUTURES TRADING COMMISSION 
November 19, 2013
Federal Court Sanctions David Prescott for Forex Pool Fraud
Prescott Ordered to Pay Restitution and a Civil Monetary Penalty Totaling More than $1.8 Million

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained $455,098 in restitution for defrauded off-exchange foreign currency (forex) customers and a $1,365,294 civil monetary penalty in a federal court default judgment Order against Defendant David Prescott, individually and doing business as Cambridge Currency Partners (Cambridge). The court’s Order stems from a CFTC civil Complaint filed on April 30, 2013, charging Prescott with fraudulently soliciting individuals to invest in Cambridge’s forex pool and then misappropriating their monies (see CFTC Press Release 6581-13).

The Order, entered by the Honorable Charles N. Clevert, Jr. of the U.S. District Court for the Eastern District of Wisconsin on October 31, 2013, requires Prescott to pay the restitution and civil monetary penalties, and permanently bars Prescott from engaging in any commodity-related activity, including trading, and from registering or seeking exemption from registration with the CFTC.

Specifically, the Order finds that, from at least June 2010 through April 2013, Prescott fraudulently solicited individuals to invest in Cambridge’s off-exchange forex pool and misappropriated $455,098 of pool participants’ monies, using some of those funds for air travel, hotel accommodations, and gambling. According to the Order, Prescott defrauded pool participants and prospective pool participants by misrepresenting the risks involved in forex trading and executing demand promissory notes in their favor that promised the repayment of the note amount and monthly interest payments, knowing or recklessly disregarding that he could not make those payments by his forex trading.

The Order also finds that Prescott failed to inform participants and prospective participants that, under the name of David Weeks, he previously had been convicted of conspiracy to commit securities fraud, mail fraud and wire fraud, and perjury, had been ordered to pay restitution of over $1 million to defrauded investors, and was permanently enjoined from violating the anti-fraud provisions of the Securities Exchange Act.

CFTC Division of Enforcement staff members responsible for this case are Diane M. Romaniuk, Ava M. Gould, Mary Beth Spear, Scott R. Williamson, Rosemary Hollinger, and Richard B. Wagner.