CREDIT SUISSE TO PAY $196 MILLION TO SETTLE SEC CHARGES OF WRONGDOING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against Zurich-based Credit Suisse Group AG for violating the federal securities laws by providing cross-border brokerage and investment advisory services to U.S. clients without first registering with the SEC.

Credit Suisse agreed to pay $196 million and admit wrongdoing to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings, Credit Suisse provided cross-border securities services to thousands of U.S. clients and collected fees totaling approximately $82 million without adhering to the registration provisions of the federal securities laws.  Credit Suisse relationship managers traveled to the U.S. to solicit clients, provide investment advice, and induce securities transactions.  These relationship managers were not registered to provide brokerage or advisory services, nor were they affiliated with a registered entity.  The relationship managers also communicated with clients in the U.S. through overseas e-mails and phone calls.

“The broker-dealer and investment adviser registration provisions are core protections for investors,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “As Credit Suisse admitted as part of the settlement, its employees for many years failed to comply with these requirements, and the firm took far too long to achieve compliance.”

According to the SEC’s order, Credit Suisse began conducting cross-border advisory and brokerage services for U.S. clients as early as 2002, amassing as many as 8,500 U.S. client accounts that contained an average total of $5.6 billion in securities assets.  The relationship managers made approximately 107 trips to the U.S. during a seven-year period and provided broker-dealer and advisory services to hundreds of clients they visited.  Credit Suisse was aware of the registration requirements of the federal securities laws and undertook initiatives designed to prevent such violations.  These initiatives largely failed, however, because they were not effectively implemented or monitored.

“As a multinational firm with a significant U.S. presence, Credit Suisse was well aware of the steps that a firm needs to take to legally conduct advisory or brokerage business with U.S. clients,” said Scott W. Friestad, an associate director in the SEC’s Division of Enforcement.  “Credit Suisse failed to effectively implement internal controls designed to keep its employees from crossing the line and being non-compliant with the federal securities laws.”

According to the SEC’s order, it was not until after a much-publicized civil and criminal investigation into similar conduct by Swiss-based UBS that Credit Suisse began to take steps in October 2008 to exit the business of providing cross-border advisory and brokerage services to U.S. clients.  Although the number of U.S. client accounts decreased beginning in 2009 and the majority were closed or transferred by 2010, it took Credit Suisse until mid-2013 to completely exit the cross-border business as the firm continued to collect broker-dealer and investment adviser fees on some accounts.

The SEC’s order finds that Credit Suisse willfully violated Section 15(a) of the Securities Exchange Act of 1934 and Section 203(a) of the Investment Advisers Act of 1940.  Credit Suisse admitted the facts in the SEC’s order, acknowledged that its conduct violated the federal securities laws, accepted a censure and a cease-and-desist order, and agreed to retain an independent consultant.  Credit Suisse agreed to pay $82,170,990 in disgorgement, $64,340,024 in prejudgment interest, and a $50 million penalty.

The SEC’s investigation was conducted by senior attorneys David S. Karp and Matthew R. Estabrook under the supervision of assistant director Laura B. Josephs and associate director Scott W. Friestad.  The SEC appreciates the assistance of the Swiss Financial Market Supervisory Authority.

SEC STATEMENT ON WHISTLEBLOWER COURT FILING

FROM:  SECURITIES AND EXCHANGE COMMISSION
Statement on Court Filing by SEC to Protect Whistleblowers From Retaliation
 Sean McKessy
Chief, Office of the Whistleblower

Feb. 20, 2014

“The Commission’s whistleblower program both encourages whistleblowers to report wrongdoing and protects them when they do.  Today's filing makes clear that under SEC rules, whistleblowers are entitled to protection regardless of whether they report wrongdoing to their employer or the Commission.  The Commission's brief supports the anti-retaliation protections under the Dodd-Frank Act that I believe are critical to the success of the SEC's whistleblower program.”

SEC CONCLUDES BRIBERY CASE AGAINST FORMER SIEMENS EXECUTIVES

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Concludes Its Case Against Former Siemens Executives Charged with Bribery in Argentina, Obtaining Judgments over $1.8 Million

The Securities and Exchange Commission announced today that on February 3, 2014, the U.S. District Court for the Southern District of New York entered a final judgment against Andres Truppel, a former CFO of Siemens Argentina. On February 4, 2014, the Court also entered

a final judgment against Ulrich Bock and Stephan Signer, both former Heads of Major Projects at Siemens Aktiengesellschaft (Siemens). The judgments resolve the Commission’s Civil Action against Truppel, Bock and Signer for their role in a decade long bribery scheme at Siemens and its regional company in Argentina.

On December 13, 2011, the Commission filed a Civil Action charging Bock, Signer, Truppel and four other senior executives of Siemens and its regional company in Argentina with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. The Commission alleged that between 2001 and 2007, the defendants paid bribes to senior government officials in Argentina to retain a $1 billion contract (“the DNI contract”) to produce national identity cards for Argentine citizens. The officials included two Argentine presidents and cabinet ministers in two presidential administrations.

The Commission’s complaint alleged that Bock and Signer, both senior Siemens managers based in Germany, took various actions to revive the DNI contract after it was cancelled by government officials in Argentina, and made sure that the bribery connected to the contract went undetected. Truppel, a former CFO of Siemens Argentina with close ties to government officials, assisted their efforts. The Commission’s complaint also alleged that Uriel Sharef, a member of Siemens Managing Board, or “Vorstand,” and the most senior officer charged in connection with the scheme, met with payment intermediaries in the U.S. and agreed to pay bribes to Argentine officials while enlisting subordinates to conceal payments and circumvent Siemens’ internal accounting controls.

The final judgment as to Bock and Signer enjoins them from violating Sections 30A and 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and from aiding and abetting Siemens’ violations of Exchange Act Sections 31(b)(2)(A) and 13(b)(2)(B), and orders them to each pay a civil penalty of $524,000, the highest penalty assessed against individuals in an FCPA case. The judgment also orders Bock to pay disgorgement of $316,452, plus prejudgment interest thereon in the amount of $97,505. Bock and Signer failed to respond to the Commission’s complaint.

The final judgment as to Truppel enjoins him from violating Sections 30A and 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and from aiding and abetting Siemens’ violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and orders him to pay a civil penalty of $80,000. Truppel settled the Commission’s charges without admitting or denying the allegations in the complaint.

This concludes the SEC’s case. The Commission previously announced that on April 16, 2013, a final judgment was entered by the Court against Uriel Sharef, a former officer and board member of Siemens, for his role in the long standing bribery scheme. The final judgment, to which Sharef consented without admitting or denying the allegations in the Commission’s complaint, enjoined him from violating the anti-bribery and related books and records and internal controls provisions of the FCPA, and ordered him to pay a $275,000 civil penalty. Bernd Regendantz settled with the Commission when the complaint was filed, and allegations against Herbert Steffen and Carlos Sergi were dismissed. The SEC appreciates the assistance of the Department of Justice, Fraud Section, the Federal Bureau of Investigation, the Office of the Prosecutor General in Munich, Germany and authorities in Argentina.

SEC COMMISSIONER AGUILAR'S REMARKS ON FINANCIAL FUTURE OF SENIORS AND RETIREES

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Protecting the Financial Future of Seniors and Retirees
 Commissioner Luis A. Aguilar
The American Retirement Initiative’s Winter 2014 Summit
Washington, DC

Feb. 4, 2014

Thank you, Keith [Green], for that kind introduction. I am pleased to sponsor The American Retirement Initiative’s Winter 2014 Summit. Protecting our nation’s seniors and retirees has continued to be an important mission for me. They are among the most vulnerable investors in our country. For these reasons, it is imperative to engage in solution-oriented dialogue and raise public awareness of the plight of American seniors and retirees. Before I continue my remarks, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC” or “Commission”), my fellow Commissioners, or members of the staff.

Let me start by stating the obvious: “baby boomers” are now “retiring boomers.” As baby boomers enter retirement, many are retiring much sooner than expected—often involuntarily. Specifically, a survey sponsored by The Society of Actuaries indicated that while Americans plan to retire at a median age of 65, they are actually retiring at a median age of 58.[1] This is a full seven years earlier than planned. The survey showed that many factors led to retirement. Some of these factors are voluntary,[2] but many are not. Many individuals felt forced out of their jobs or compelled to retire.[3] Others retired because of corporate downsizing and/or the availability of financial incentives to retire.[4] Interestingly, research shows that those Americans facing retirement contemplated that they would find some interesting work to keep them occupied during retirement—and earn some extra money.[5] Unfortunately, the data shows that this is just not the case. In reality, many retirees who anticipated working in retirement did not work.[6]

There are also retirement issues unique to certain groups-particularly African-Americans and Hispanics. As a result, we have two panels today focusing on the retirement issues confronting these groups. Although these two groups have made tremendous progress in our country, their relationship with our financial services industry can be characterized as lacking and in need of significantly more attention.

In 2010, the Department of Labor issued a report on a study concluding that disparities in retirement security existed for women and racial minorities.[7] The statistics are troubling. For example, more African-American workers are out of the labor force at ages 55-64 than other groups, primarily because of higher rates of disability.[8] The report also stated that older women who are alone,, after the age of 65, are much more likely to be poor than married women, and that women of color are much more likely to be poor than white women.[9] Moreover, the Urban Institute noted that, in 2009, 65% of white wage and salary workers were offered employer-sponsored retirement plans compared to only 56% for African-American workers.[10]

Just last month, a survey by the Social Security Administration based on the most recent data shows that African-Americans had lower earnings than the overall population.[11] This means that African-Americans will likely receive lower Social Security benefits at retirement, because these benefits are based on lifetime earnings.[12] Moreover, African-Americans are less likely to be married compared to the total U.S. population, suggesting that they are less likely to qualify for Social Security spouse and survivor benefits that might otherwise assist their financial well-being at retirement.[13]

Similarly, a recent survey of Hispanics and their financial and retirement planning shows that the annual household incomes of Hispanics are even lower than the African-American community and, of course, lower than the general U.S. population.[14] According to the survey, Hispanics also anticipate retiring at age 66 and continuing to work at least part-time during retirement,[15] which, as noted earlier, may be a bit too optimistic. The survey also indicates that more than 50% of Hispanics surveyed had a poor understanding of retirement plans at work.[16] Moreover, the data shows that only 38% of Hispanic workers had access to employer-sponsored retirement plans and, of those, only 71% actually contributed to the plans—compared to 85% of the general population.[17]

Obviously, these surveys and studies have important implications for those that are planning for retirement. Among other things, it means that they have a shorter period of time to accumulate wealth needed for retirement. The longer retirement period also means that they will need to be better prepared to address threats to their retirement nest eggs—such as inflation, health care costs, and long-term care. In addition, they will need to be more vigilant in protecting their assets from fraudsters and those who prey on, and target, seniors and retirees.

Today’s panels will discuss many of the issues I just mentioned. For the remaining time I have this morning, I would like to highlight:

Some serious issues related to elderly financial abuse; and
Some regulatory initiatives designed to protect the financial future of seniors and retirees.
Elder Financial Abuse
A recent survey showed that 84% of experts specializing in investment fraud and financial exploitation of American senior citizens agree that the problem of fraud targeting the elderly is getting worse.[18] Nearly all of those experts said that elderly Americans are vulnerable to financial swindles, and that the problem of investment fraud against seniors is serious.[19] Indeed, it has been estimated that about one in five Americans aged 65 or older—that’s about 7.3 million senior citizens—already have been victimized by financial fraud.[20] Given these statistics, it is imperative for regulators to work even harder to protect these vulnerable seniors by enforcing laws that reduce the opportunities for fraud.

Demographically, seniors will soon be the largest percentage of the American population. Experts have been forecasting this for some time, as the baby boomer generation ages and retires. What has not been emphasized—as clearly—is the tremendous generational inequality of wealth between some seniors and everyone else. The good news is that, in the aggregate, today’s senior population has been successful in accumulating assets. As noted by a former director of fraud education and outreach for the California Department of Corporations, the state’s securities regulator, aging baby boomers have accumulated substantial assets, either through inheritance, home equity, or a lifetime of saving for retirement.[21] The bad news is that these aging baby boomers are ripe for abuse. This disparity between seniors and everyone else, including their own children, exponentially increases the vulnerability of seniors to financial exploitation. To make matters worse, according to a survey of state securities regulators, financial planners, health care professionals, law enforcement officials, and other experts, the top financial exploiters of older Americans include family members and caregivers.[22] It’s not a pretty picture when those closest to you cannot be trusted.

The SEC’s own enforcement efforts show a continuing trend of fraudulent activities aimed at senior citizens and the elderly. I will mention just a few examples from this past year:

In March 2013, the SEC shut down a $3 million Ponzi scheme that targeted seniors—including an elderly investor suffering from a stroke and dementia—by falsely promising high profits from commercial and residential rental properties.[23]
In August 2013, the SEC filed an administrative action against an individual for targeting senior citizens on Medicaid, and selling them over $1.8 million in promissory notes that purportedly guaranteed a high return.[24]
In November 2013, the SEC charged an individual for defrauding elderly and retired investors into making purported safe investments in government bonds.[25] Instead, he misappropriated about $2.8 million of investor funds to pay his mortgage and make commission payments to his salespeople.[26]
In addition to these egregious fraudulent schemes, the SEC has issued guidance to warn the public about other types of fraud targeting seniors, including oil and gas scams, prime bank fraud, and scams promising high returns or risk-free investments.[27]

Regrettably, there will always be those who prey on the vulnerable and seek to exploit them. This is the reason why we must have in place a strong regulatory framework that limits the opportunities for fraud and deception.

Regulatory Initiatives
I would now like to discuss some of the actions the SEC is taking to safeguard retirement assets, including strengthening our examination programs, partnering with other regulators, and sponsoring events like today’s Summit that is designed to address issues that are important to senior investors.

National Examination Program (NEP) Priorities
One recent example involves the SEC’s National Examination Program, which last month published its 2014 examination priorities. The publication of the priorities is designed to inform investors and registrants about areas that are perceived to have heightened risks.[28] These exam priorities were developed based on, among other things, communications with other regulators and agencies, as well as comments and tips received directly from investors and SEC-registered entities.[29] I would like to point out two initiatives that are particularly important to seniors and retirees: (1) an initiative that focuses on retirement vehicles and rollovers; and (2) an initiative in the broker-dealer exam program that focuses on sales practices and supervision.[30]

First, the SEC is taking a closer look at what happens when, during changes in employment or when entering retirement, investors have several options for what to do with the retirement plan assets held at their former employers. In particular, the SEC will focus on the practices of financial advisers in making recommendations on rollover Individual Retirement Accounts, or IRAs. Indeed, a FINRA regulatory notice has recognized the conflict of interest between a broker-dealer’s financial incentive to recommend that plan assets be rolled over to an IRA—in which case the broker-dealer earns a commission—and a recommendation that an investor leaves her plan assets with her former employer or rollover the assets to a plan sponsored by a new employer, which will result in little or no compensation for the broker-dealer.[31] A financial adviser affiliated with a broker-dealer clearly has an economic incentive to encourage an investor to rollover plan assets into an IRA managed by the broker-dealer.[32] This issue is important because, among other reasons, about 98% of IRAs with balances of $25,000 or less are held in brokerage accounts,[33] and the largest source of contributions to IRAs are rollovers from employer-sponsored retirement plans.[34] Simply stated, there are a lot of potential commission dollars that can influence the advice given.

Given this inherent conflict of interest, the SEC plans to review the practices and incentives of investment advisers and broker-dealers in making recommendations on these rollover IRAs.[35] In particular, the SEC will examine the sales practices of investment advisers that are targeting retirement-age workers to rollover their employer-sponsored 401(k) plans into higher cost investments.[36] The SEC will also examine broker-dealers and investment advisers for possible improper or misleading marketing and advertising, conflicts, suitability, churning, and the use of potentially misleading professional designations when making recommendations on rollover IRAs.[37]

Second, as part of its exam priorities for 2014 and our continuing efforts to protect retail investors, especially elderly investors,[38] the SEC will examine broker-dealer sales practices to detect and prevent fraud and other violations, including affinity fraud targeting seniors.[39] The SEC will also focus on broker-dealers’ supervision of registered representatives with significant disciplinary histories.[40] Last year, a Wall Street Journal article reported that, from 2005 to 2012, more than 5,000 brokers licensed to sell securities had worked at a firm that had been expelled by FINRA.[41] Notwithstanding that their former firm had been expelled, these brokers remained in the industry. Often these brokers go from one problematic broker-dealer to another. This pattern of brokers moving from one problem broker-dealer to another is sometimes called “cockroaching.”[42] During my tenure as Commissioner, I have seen a multitude of enforcement cases involving recidivist brokers. In fact, this issue is of such serious concern that the Commission has discussed with the SEC staff the need to address this problem. I am glad to report some positive movement. Just last month, FINRA reported the formation of an enforcement team dedicated to reviewing brokers whose records show a pattern of complaints relating to sales practice abuses.[43] I expect that the staff of the SEC and FINRA will work closely to address the problem of recidivist brokers. We need to address this issue to reduce investor harm and restore investor trust and confidence, which is fundamental to encouraging Americans to invest their savings in our capital markets and fundamental to protecting their retirement assets.

Although it is important that seniors and retirees be vigilant and be the first line of defense in protecting their own assets, the importance of regulatory oversight cannot be understated. As one survey shows, most seniors do not have all the information they need to pick a financial adviser to help protect their retirement assets.[44] And about three in five experts said that seniors are not able to determine the “legitimacy, value, and authenticity of credentials held by their financial advisers and planners.”[45] For this and other reasons, the SEC and other regulators must continue to play an important role in securing the financial future of American retirees, and working proactively to protect retirement assets is a step in the right direction.

Reporting Elder Financial Abuse
As I near the end of my remarks, I would also like to say a few words about the need to report elder financial abuse. Unfortunately, recent studies have shown that only a small fraction of elder financial abuse is reported.[46] Senior citizens are attractive targets for financial exploitation by fraudsters because they generally have significant assets or equity in their homes.[47] In addition, they are particularly vulnerable because of isolation, cognitive decline, physical disability, and health problems.[48] One survey showed that one in five doctors and nurses often deal with older victims of investment fraud, and 92% of these doctors and nurses think that even mild cognitive impairment often make seniors more vulnerable to investment fraud.[49] Given this information, it is important to encourage the prompt reporting of suspected financial exploitation of the elderly to appropriate authorities in order to trigger intervention, prevent financial losses, and provide other types of assistance.[50]

Unfortunately, many financial institutions may hesitate to report suspected elder financial abuse if it entails disclosing nonpublic personal information about their customers. Their hesitation comes from a concern that this information cannot be shared with others due to limitations on sharing such information under the Gramm-Leach-Bliley Act. The law, however, is not meant to shield fraudulent activities targeting older adults. To make that clear, the SEC and other federal regulators issued guidance last year confirming that it is lawful for financial institutions to use customer information for purposes of reporting suspected financial abuse of older adults to local, state, or federal agencies.[51] The guidance also provides information on potential signs of elder financial abuse, such as erratic or unusual banking transactions.[52] The hope is that, by encouraging prompt reporting of elder financial abuse, seniors and retirees can get the assistance they need, when they need it.

Conclusion
I will conclude my remarks by reaffirming my commitment to protect our nation’s seniors and retirees. This is an important priority for me personally and for the agency. Elder financial abuse is a problem growing exponentially, and the SEC must remain vigilant in detecting and prosecuting fraud targeted at the elderly. Gatherings like today’s event help support, protect, and empower our seniors and retirees.

I would like to thank the SEC staff, especially Maya Samms and Steven Mosier from the SEC University, for working with Keith and me over the last few months to put together this event. And, of course, I need to thank my Chief of Staff, Smeeta Ramarathnam, and my counsel, Paul Gumagay, for their work leading up to today. Because of everyone’s collective hard work, we can expect an exciting day filled with fulsome discussions of issues that are important to our nation’s seniors and retirees.

Today’s panels will consist of experts from outside and inside the SEC, and I want to thank each of them for taking the time for being here and contributing their knowledge. I expect today’s discussions to be informative, and I encourage the audience to participate.

Thank you and enjoy the event.


[1] The Society of Actuaries, 2013 Risks and Process of Retirement Survey Report of Findings, p. 3 (Dec. 2013), available at http://www.soa.org/Files/Research/Projects/research-2013-retirement-survey.pdf.

[2] For example, some retirees looked forward to enjoying retirement by pursuing passions and interests and no longer having to work for pay. Id. at 8.

[3] See id. at 8.

[4] See id.

[5] See id.

[6] Id. Undoubtedly, the urgent need to help Americans plan and save for retirement prompted President Barack Obama—during his State of the Union Address last week—to direct the U.S. Department of Treasury to create a retirement savings program intended to help American workers build a nest egg for retirement. See The White House, Office of the Press Secretary, President Barack Obama’s State of the Union Address (Jan. 28, 2014), available at http://www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address; see also, The White House, Office of the Press Secretary, Presidential Memorandum -- Retirement Savings Security: Memorandum for the Secretary of the Treasury (Jan. 28, 2014), available at http://www.whitehouse.gov/the-press-office/2014/01/28/presidential-memorandum-retirement-savings-security.

[7] See U.S. Department of Labor, Employee Benefits Security Administration, Disparities for Women and Minorities in Retirement Savings (2010), available at http://www.dol.gov/ebsa/publications/2010ACreport3.html.

[8] See id.

[9] Id.

[10] Id.

[11] Patricia P. Martin and John L. Murphy, U.S. Social Security Administration, Office of Retirement and Disability Policy, African-Americans: Description of Social Security and Supplemental Security Income Participation and Benefit Levels Using the American Community Survey, Research and Statistics Note No. 2014-01 (released Jan. 2014), available at http://www.ssa.gov/policy/docs/rsnotes/rsn2014-01.html.

[12] See id.

[13] See id.

[14] 2014 Prudential Research, The Hispanic American Financial Experience, p. 8 (Jan. 2014), available at http://www.prudential.com/media/managed/hispanic_en/prudential_hafe_researchstudy_2014_en.pdf.

[15] See id. at 13.

[16] See id. at 2.

[17] See id. at 14; supra note 7.

[18] Investor Protection Trust, Survey: More than 4 Out of 5 Experts Say Financial Abuse of Elderly is Getting Worse (June 13, 2012), available at http://www.investorprotection.org/downloads/IPT_Elder_Fraud_Survey_News_Release_06-13-12.pdf.

[19] See id.

[20] Investor Protection Trust, Survey: Elder Investment Fraud and Financial Exploitation, pp. 3, 26 (June 15, 2010), available at http://www.investorprotection.org/downloads/EIFFE_Survey_Report.pdf.

[21] Kimberly Blanton, Center for Retirement Research at Boston College, The Rise of Financial Fraud: Scams Never Change but Disguises Do, p. 3 (Feb. 2012), available at http://fsp.bc.edu/wp-content/uploads/2012/02/Scams-RFTF.pdf.

[22] Investor Protection Trust, Survey: Family Members, Caregivers and Swindlers are Top Financial Exploiters of Older Americans (Aug. 15, 2012), available at http://www.investorprotection.org/downloads/IPT-IPI_EIFFE_Expert_Survey_News_Release_08-15-12.pdf.

[23] SEC v. Brown, et al., Lit Rels. No. 22642 (Mar. 12, 2013), available at http://www.sec.gov/litigation/litreleases/2013/lr22642.htm.

[24] In the Matter of Richard D. Hicks, Admin. Proc. File No. 3-15413 (Aug. 13, 2013), available at http://www.sec.gov/litigation/admin/2013/33-9440.pdf.

[25] SEC Press Release, SEC Charges Colorado Man in Scheme Targeting Elderly Investors (Nov. 21, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540397404.

[26] Id.

[27] SEC’s Office of Investor Education and Advocacy, A Guide for Seniors: Protect Yourself Against Investment Fraud, pp. 7-8, available at http://www.sec.gov/investor/seniors/guideforseniors.pdf. Last year, the SEC issued an investor alert on Ponzi scheme using virtual currencies. See SEC’s Office of Investor Education and Advocacy, Investor Alert: Ponzi Schemes Using Virtual Currencies (July 2013), available at http://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf. Fraudsters are always finding ways to prey on others. For example, the recent interest in Bitcoin currency has already been used to defraud investors. In July 2013, the Commission charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, a virtual currency traded on online exchanges for conventional currencies like the U.S. dollar or used to purchase goods or services online. See SEC Press Release, SEC Charges Texas Man with Running Bitcoin-Denominated Ponzi Scheme (July 23, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539730583. This individual promised investors up to 7% weekly interest and claimed that invested funds would be used for Bitcoin arbitrage activities to generate returns. Id. Instead, he used investor funds to pay other investors in a Ponzi scheme and pay his personal expenses. Id.

[28] SEC’s Office of Compliance Inspections and Examinations, National Exam Program, Examination Priorities for 2014 (Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.

[29] Id. at 1.

[30] Id. at 3, 7.

[31] Financial Industry Regulatory Authority (“FINRA”), Regulatory Notice No. 13-45, Rollovers to Individual Retirement Accounts: FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers, p. 4 (Dec. 2013), available at https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p418695.pdf.

[32] See id.

[33] Id. at 2 (citing to Letter to Employee Benefits Security Administration from Davis & Harman, April 12, 2011 (transmitting study prepared by Oliver Wyman Inc.)).

[34] Id. at 2.

[35] SEC’s Office of Compliance Inspections and Examinations, National Exam Program, Examination Priorities for 2014, p. 3 (Jan. 9, 2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2014.pdf.

[36] Id.

[37] Id.

[38] See id. at 7 and n. 10.

[39] See id. at 7. The SEC will also examine broker-dealer sales practices to detect and prevent potential securities law violations such as microcap fraud, unsuitable recommendations of high-yield and complex products, sales and promotion of unregistered offerings by unregistered entities, and affinity fraud in general. Id.

[40] Id.

[41] Jean Eaglesham and Rob Barry, Wall Street Journal, More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities (Oct. 4, 2013), available at http://online.wsj.com/news/articles/SB10001424052702303643304579107442831410708.

[42] Id.

[43] FINRA News Release, FINRA Releases 2014 Regulatory and Exam Priorities (Jan. 2, 2014), available at https://www.finra.org/Newsroom/NewsReleases/2014/P412649 and https://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p419710.pdf. This initiative expanded FINRA’s High Risk Broker initiative, launched in 2013 to identify problem brokers. See id. at 3. FINRA said it would use an analytical tool called the Broker Migration Model to identify and monitor brokers who moved from one problem FINRA-regulated firm to another problem FINRA-regulated firm, as well as the firms that employ such brokers. See id.

[44] See supra note 22.

[45] Id. at 2.

[46] See SEC Press Release, Federal Regulators Issue Guidance on Reporting Financial Abuse of Older Adults (Sept. 24, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539837338; Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, available at http://www.sec.gov/news/press/2013/elder-abuse-guidance.pdf (citations omitted).

[47] See id.

[48] Id.

[49] Investor Protection Trust, Survey: 1 in 5 Doctors, Nurses Aware They are Often Dealing with Older Victims of Investment Swindles (June 12, 2013), available at http://www.investorprotection.org/downloads/IPT_EIFFE_Medical_Survey_Release_06-12-13.pdf.

[50] Id.

[51] In 2013, the SEC and a coalition of federal regulators issued an interagency guidance stating that the disclosure of nonpublic personal information about consumers to local, state, or federal agencies for purposes of reporting suspected financial abuse of older adults falls within an exception to the Gramm-Leach-Bliley Act. See Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, p. 3, available at http://www.sec.gov/news/press/2013/elder-abuse-guidance.pdf. This Act generally prohibits disclosures of nonpublic personal information about a consumer to a nonaffiliated third party unless certain procedures are followed. See id.

[52] Id. at 4. Other signs include situations where a financial institution is unable to speak directly with the older adult; a new caretaker suddenly begins conducting financial transactions without proper documentation on behalf of the older adult; or the older adult’s financial management suddenly changes, for example, through a change of power of attorney. Id. at 5.

SEC SUSPENDS TRADING IN 255 SHELL COMPANIES TO FIGHT FRAUD

FROM:  SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced the latest actions in its microcap fraud-fighting initiative known as Operation Shell-Expel, suspending trading in 255 dormant shell companies ripe for abuse in the over-the-counter market.

Pump-and-dump schemes are among the most common types of fraud involving microcap companies.  Perpetrators will tout a thinly-traded microcap stock through false and misleading statements about the company to the marketplace. After purchasing low and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it into the market at the higher price.

Since Operation Shell-Expel began in 2012, the SEC Enforcement Division’s Office of Market Intelligence has been cleaning up the microcap marketplace by scrutinizing penny stocks nationwide and identifying clearly inactive companies.  This has enabled the SEC to proactively suspend trading in several hundred dormant shell companies before fraudsters have an opportunity to manipulate them.

“A frequent element in pump-and-dump schemes has been the use of dormant shells,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “Because these shells all too often are used by those looking to manipulate stock prices, we will continue to protect unwary investors by suspending trading in shells.”

Today’s massive trading suspension involves dormant shell companies uncovered in 26 states and two foreign countries.  Once a stock has been suspended from trading, it cannot be relisted unless the company provides updated financial information to prove it is still operational.  It is extremely rare for a company to fulfill this requirement, so the trading suspension essentially renders the shells worthless and useless to scam artists.

“Policing this sector of the markets can be a challenge,” said Margaret Cain, a microcap specialist in the Office of Market Intelligence.  “There is often little or no reliable information about a microcap issuer, and the sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors.  The approach we take with Operation Shell-Expel is both economical and efficient as the SEC continues its commitment to preventing microcap fraud.”

In addition to Ms. Cain, the Operation Shell-Expel initiative has been led by William Hankins, Robert Bernstein, Victoria Adraktas, Jessica P. Regan, Leigh Barrett, John Gibbons, and Megan Alcorn in the Office of Market Intelligence with assistance from the Enforcement Division’s Delinquent Filings Group.  The SEC appreciates the assistance of the FBI’s Economic Crimes Unit.

TWO COLLEGE PROFESSORS CHARGED IN ELABORATE NAKED SHORT SELLING SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a pair of college professors in Tallahassee, Fla., with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits.

Abusive naked short selling occurs when shares are sold without having the shares to deliver, and then intentionally failing to deliver the securities within the standard three-day settlement period.  An SEC investigation found that Gonul Colak and Milen Kostov repeatedly engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy.  Colak and Kostov were required to deliver the securities underlying their short positions within the standard three days.  Instead, their sham reset transactions created the illusion that they had delivered the underlying securities when in fact they had taken no steps to do so.  They maintained the uncovered naked short positions and profited.

Colak and Kostov agreed to settle the SEC’s charges by paying more than $670,000.

Colak and Kostov used multiple brokerage accounts to disguise the spurious nature of the sham transactions, moving a short position from one brokerage firm to another every few days in order to spread the failures to deliver across multiple firms in an effort to avoid detection.  SEC investigators uncovered the complicated scheme while looking into unusual trading in one of the companies whose options were being traded by Colak and Kostov.  An SEC examiner separately noted Kostov’s large volume options trading in a different company.  By cross referencing their findings and crunching blue sheet data, it became clear that Colak and Kostov were likely trading with one another.  SEC investigators pieced together the complex trading strategy – which involved literally thousands of trades – by tracing one of the trading sequences from start to finish.

“Colak and Kostov engaged in trickery and deceit to avoid their delivery obligations and conceal their short selling scheme,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.  “No matter how complex the trading scheme, we are committed to exposing and halting abusive naked short selling and holding wrongdoers like Colak and Kostov accountable for their misconduct.”

According to the SEC’s order instituting settled administrative proceedings, Colak and Kostov set their scheme in motion in early 2010 and went on to sell more than $800 million worth of call options in more than 20 companies.  Their trading strategy involved purchasing and writing two pairs of options for the same underlying stock, and targeting options in hard-to-borrow securities in which the price of the put options was higher than the price of the call options.  Colak and Kostov profited by avoiding the cost of instituting and maintaining the short positions caused by their paired options trading.

The SEC’s order finds that Colak and Kostov violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-21 thereunder.  Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty.  Kostov agreed to pay $134,400 in disgorgement, $10,340 in prejudgment interest, and a penalty of $70,000.  Without admitting or denying the findings, Colak and Kostov agreed to cease and desist from committing or causing such violations.

The SEC’s investigation was conducted by Jason Breeding and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office with assistance from the unit’s securities operations specialist Patrick McCluskey.  The investigation was supervised by Daniel M. Hawke and Joseph G. Sansone.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).

SEC CHARGES PRIVATE EQUITY MANAGER WITH STEALING $9 MILLION

THE SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a Manhattan-based private equity manager and his firm with stealing $9 million from investors in their private equity fund.

The SEC has obtained an emergency court order to freeze the assets of Lawrence E. Penn III and his firm Camelot Acquisitions Secondary Opportunities Management as well as another individual and three entities involved in the theft of investor funds.

The SEC alleges that Penn and his longtime acquaintance Altura S. Ewers concocted a sham due diligence arrangement where Penn used fund assets to pay fake fees to a front company controlled by Ewers.  Instead of conducting any due diligence in connection with potential investments by Penn’s fund, Ewers’ company Ssecurion promptly kicked the money back to companies and accounts controlled by Penn so he could secretly spend investor funds for other purposes.  For example, Penn paid hefty commissions to third parties to secure investments from pension funds.  Penn also rented luxury office space and used the funds to project the false image that Camelot was a thriving international private equity operation.

“Penn held himself out as an ultra-sophisticated and well-connected investor in the private equity world,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “Behind the scenes, Penn disregarded his obligations to the fund’s investors and treated their assets as his own personal and professional slush fund.”

According to the SEC’s complaint filed in federal court in Manhattan, Penn tapped into a network of public pension funds, high net worth individuals, and overseas investors to raise assets for his private equity fund Camelot Acquisitions Secondary Opportunities LP, which he started in early 2010.  Penn eventually secured capital commitments of approximately $120 million. The fund is currently invested in growth-stage private companies that are seeking to go public.

The SEC alleges that Penn has diverted approximately $9.3 million in investor assets to Ssecurion.  With the assistance of Ewers, who lives in San Francisco, Penn repeatedly misled the fund’s auditors about the nature and purpose of the due diligence fees.  However, the scam began to unravel in 2013 when Camelot’s auditors became increasingly skeptical about the fees.  In their haste to cover their tracks, Penn and Ewers brazenly lied to the auditors and forged documents as recently as July 2013, pretending the files were generated by Ssecurion.

The SEC’s complaint charges Penn, two Camelot entities, Ewers, and Ssecurion with violating the antifraud, books and records, and registration application provisions of the federal securities laws.  The complaint seeks final judgments that would require them to disgorge ill-gotten gains with interest, pay financial penalties, and be barred from future violations of the antifraud provisions of the securities laws.  The SEC’s complaint also charges another company owned by Ewers – A Bighouse Photography and Film Studio LLC – as a relief defendant for the purposes of recovering investor funds it allegedly obtained in the scheme.

The SEC’s investigation, which is continuing, has been conducted by Katherine Bromberg, Karen Willenken, James D’Avino, and Michael Osnato of the SEC’s New York Regional Office.  The investigation stemmed from a referral by the New York Regional Office’s investment adviser/investment company examination program including Anthony Fiduccia, Jennifer Klein, Beth Abraham, and Joseph Hirsch.  The SEC’s litigation will be led by Howard Fischer.  The SEC appreciates the assistance of the New York County District Attorney’s Office.

SEC CHARGES SCOTTRADE WITH FAILING TO PROVIDE COMPLETE INFORMATION ON TRADES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged Scottrade with failing to provide the agency with complete and accurate information about trades done by the firm and its customers, which is commonly called “blue sheet” data.

Scottrade, which is headquartered in St. Louis, agreed to settle the charges by paying a $2.5 million penalty and admitting it violated the recordkeeping provisions of the federal securities laws.

According to the SEC’s order instituting settled administrative proceedings, broker-dealers like Scottrade are required upon request to electronically provide the SEC with blue sheet data so the agency can use it to identify and analyze trades in the course of investigations and other work.  Blue sheets contain the details of each equity or options trade that is routed through clearing broker-dealers.  The term “blue sheet” stems from the color of the forms originally mailed to broker-dealers to complete and return to the SEC.  The process shifted to an electronic format in the 1980s.

“Blue sheet information is the lifeblood of many SEC investigations and examinations,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “When firms fail to provide us with accurate or complete trade data, it risks compromising our ability to detect and investigate securities law violations.”

According to the SEC’s order, the SEC staff sent electronic blue sheet requests to Scottrade in December 2011 in connection with an investigation the agency was conducting into suspicious trades made in a Scottrade online brokerage account that was the apparent victim of account intrusion.  After receiving the blue sheet information, SEC staff discovered that Scottrade’s submission was incomplete as it failed to include data from a number of trades that resulted from unauthorized account intrusions.  After the SEC staff contacted Scottrade questioning the data, the firm informed the agency that a computer coding error had resulted in the inadvertent omission of the trades.

The SEC’s order finds that Scottrade’s computer coding error resulted in the omission of trades from blue sheet responses it made to the SEC from March 2006 to April 2012.  During that time, Scottrade failed to provide the required blue sheet information on 1,231 occasions.  Scottrade has corrected the deficient code responsible for its inaccurate and incomplete blue sheet responses.

“Scottrade’s failure over six years to provide accurate and complete blue sheet trading data was egregious and violated its obligations under the securities laws,” said Daniel M. Hawke, director of the SEC’s Philadelphia Regional Office and chief of the Enforcement Division’s Market Abuse Unit.  “Firms need to ensure that that they comply with their blue sheet production obligations or, as in Scottrade’s case, they will pay a heavy price if they fail to do so.”

Scottrade admits the facts underlying the charges made in the SEC’s order, which requires Scottrade to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-4(j), 17a-25, and 17a-4(f)(3)(v).  In addition to the $2.5 million penalty, Scottrade has agreed to undertake such remedial measures as retaining an independent consultant to review its supervisory, compliance, and other policies and procedures designed to detect and prevent securities laws violations related to blue sheet submissions.

The SEC’s investigation was conducted by Lawrence Parrish and Daniel Koster of the Philadelphia Regional Office.  The case was supervised by Kingdon Kase.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

WESTERN ASSET MANAGEMENT TO PAY $21 MILLION IN SETTLEMENTS

FROM:  LABOR DEPARTMENT 

US Labor Department and Securities and Exchange Commission 
reach combined $21M in settlements with Western Asset Management
Multiple settlements resolve allegations brought by both agencies

WASHINGTON — The U.S. Department of Labor today announced a settlement with Western Asset Management Company, a subsidiary of Legg Mason Inc. This follows investigations, which revealed the purchase of prohibited securities that resulted in losses to the accounts of nearly 100 employee benefit plans and investment funds holding plan assets. The settlement also resolves findings that the company engaged in prohibited cross-trading of securities in the accounts of other retirement plans and funds, which caused additional losses. The settlement was achieved in coordination with the U.S. Securities and Exchange Commission. The settlement and related SEC charges require Western Asset to restore a total of more than $17.4 million to employee benefit plans and other accounts and require the company to pay more than $3.6 million in penalties.

"Workers invest too much in retirement plans to have them diminished by the very people they trust to grow their savings," said U.S. Secretary of Labor Thomas E. Perez. "The department is committed to protecting retirement savings so that more of America's workers have the opportunity to build nest eggs and live securely when they retire."

The investigation found that from Jan. 31, 2007, through June 12, 2009, Western Asset used funds from accounts covered by the Employee Retirement Income Security Act to purchase approximately $90 million of securities that were prohibited for purchase and ownership by such accounts. Specifically, Western Asset purchased Glen Meadow Pass-Through Trust Securities for 99 ERISA-covered accounts that were under its management. The investigation determined that the company's own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities. However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios.

The department determined that the company's management and compliance personnel became aware of the issue by October 2008, but failed to immediately correct the error or inform their clients about the situation. This violated the company's own policies. The accounts continued to hold the prohibited securities until June 2009, at which time they were sold, resulting in significant losses.
The department's investigation also found that from 2007 through 2010, Western Asset arranged 514 cross-trades involving ERISA-covered accounts. Western Asset sold fixed-income securities from client accounts, including ERISA-covered accounts to various broker-dealers. The company then repurchased the same securities from the same broker-dealers on behalf of different clients at a mark-up and without obtaining independent offers. Cross-trade transactions are prohibited by ERISA, except under certain circumstances, to protect employee benefit plans from an investment manager's conflicts of interest. The department's investigation determined that as a result of unfair pricing involving these cross-trades, certain ERISA-covered accounts suffered more than $6 million in losses.

"Western Asset violated its fiduciary duty to act solely in the best interest of its plan clients," said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. "Its failure to follow not only the law, but its own rules, cost hard-working employees millions of dollars."

Western Asset is headquartered in Pasadena. Its clients include numerous ERISA-covered employee benefit plans. This case was investigated by the regional office of the Employee Benefits Security Administration in Los Angeles, in coordination with the SEC's Los Angeles Regional Office and New York Regional Office.

KPMG CHARGED IN CONFLICT OF INTEREST CASE INVOLVING CLIENT AUDITS

FROM:  SECURITIES AND EXCHANGE COMMISSION

 The Securities and Exchange Commission today charged public accounting firm KPMG with violating rules that require auditors to remain independent from the public companies they’re auditing to ensure they maintain their objectivity and impartiality.

The SEC issued a separate report about the scope of the independence rules, cautioning audit firms that they’re not permitted to loan their staff to audit clients in a manner that results in the staff acting as employees of those companies.

An SEC investigation found that KPMG broke auditor independence rules by providing prohibited non-audit services such as bookkeeping and expert services to affiliates of companies whose books they were auditing.  Some KPMG personnel also owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules.

KPMG agreed to pay $8.2 million to settle the SEC’s charges.

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office.  “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”

According to the SEC’s order instituting settled administrative proceedings, KPMG repeatedly represented in audit reports that it was “independent” despite providing services to three audit clients that impaired KPMG’s independence.  The violations occurred at various times from 2007 to 2011.

According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client.  KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client.  In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client.  KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client.  These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934.

The SEC’s order finds that KPMG’s actions violated Rule 2-02(b) of Regulation S-X and Rule 10A-2 of the Exchange Act, and caused violations of Section 13(a) of the Exchange Act and Rule 13a-1.  The order further finds that KPMG engaged in improper professional conduct as defined by Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice.  Without admitting or denying the findings, KPMG agreed to pay $5,266,347 in disgorgement of fees received from the three clients plus prejudgment interest of $1,185,002.  KPMG additionally agreed to pay a penalty of $1,775,000 and implement internal changes to educate firm personnel and monitor the firm’s compliance with auditor independence requirements for non-audit services.  KPMG will engage an independent consultant to evaluate such changes.

The SEC’s investigation separately considered whether KPMG’s independence was impaired by the firm’s practice of loaning non-manager tax professionals to assist audit clients on-site with tax compliance work performed under the direction and supervision of the clients’ management.  While the SEC did not bring an enforcement action against KPMG on this basis, it has issued a report of investigation noting that by their very nature, so-called “loaned staff arrangements” between auditors and audit clients appear inconsistent with Rule 2-01 of Regulation S-X, which prohibits auditors from acting as employees of their audit clients.

The report also emphasized:

An auditor may not provide otherwise permissible non-audit services (such as permissible tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules.

An arrangement that results in an auditor acting as an employee of the audit client implicates Rule 2-01 regardless of whether the accountant also acts as an officer or director, or performs any decision-making, supervisory, or ongoing monitoring functions, for the audit client.

Audit firms and audit committees must carefully consider whether any proposed service may cause the auditors to resemble employees of the audit client in function or appearance even on a temporary basis.

The SEC’s Office of the Chief Accountant has a Professional Practice Group that is devoted to addressing questions about auditor independence among other matters.  Auditors and audit committees are encouraged to consult the SEC staff with questions about the application of the auditor independence rules, including the permissibility of a contemplated service.

“The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients,” said Paul A. Beswick, the SEC’s chief accountant.  “Resolving questions about permissibility of non-audit services is always best done before commencing the services.”

The SEC’s investigation was conducted by Britt K. Collins, Dawn A. Edick, Michael Foster, Heidi M. Mitza, and Kathleen Shields.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board.

"SHELL PACKING" CO. & CEO AGREE TO SETTLE FRAUD CASE REGARDING BOGUS SECURITIES SALES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced nearly $300,000 in settlements against a Virginia-based “shell packaging” company and its CEO who were charged with facilitating a penny stock scheme as well as a Bronx, N.Y.-based stock promoter who received proceeds from the fraud.

Virginia-based Belmont Partners LLC and its CEO Joseph Meuse are in the business of identifying and selling public shell companies for use in reverse mergers.  In an enforcement action in late 2011, the SEC alleged that Meuse and his firm aided and abetted a New York-based company that fraudulently issued and sold unregistered shares of its common stock.  The SEC separately named Thomas Russo as a relief defendant in the case for the purposes of recovering ill-gotten gains in his possession as a result of his business partner’s participation in the scheme.  According to the SEC’s complaint, Russo co-owned a stock promotion service called TheStockProphet.com.

In a final judgment ordered late yesterday by the Honorable Shira A. Scheindlin of the U.S. District Court for the Southern District of New York, Belmont Partners and Meuse agreed to pay $224,500.  Meuse additionally has agreed to be barred from the penny stock business or from serving as an officer or director of a public company for at least five years.  In a separate judgment entered last week, Russo agreed to pay $70,075.

“The SEC will continue to pursue and punish gatekeepers whose misconduct enables penny stock frauds to occur,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “Meuse and his firm not only sold the shell company but they fabricated the documents necessary to dupe the transfer agent into issuing shares that should never have been sold to the public.  Russo received proceeds from the subsequent sale of the illicit stock.”

Belmont Partners and Meuse agreed to be permanently enjoined from violating Section 5 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  They neither admitted nor denied the SEC’s allegations.

The SEC previously entered into a bifurcated settlement with the Long Island-based issuer at the center of the scheme – Alternative Green Technologies (AGTI) – as well as its CEO Mitchell Segal, who agreed to be barred from the penny stock business or from serving as a corporate officer or director for at least five years.  Financial penalties against Segal will be determined at a later date.

The SEC’s investigation was conducted by Steven G. Rawlings and Megan R. Genet, and the litigation has been led by Todd Brody and Ms. Genet.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC CHARGES ALCOA INC., WITH VIOLATING FOREIGN CORRUPT PRACTICES ACT

FROM:  SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today charged global aluminum producer Alcoa Inc. with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business.

An SEC investigation found that more than $110 million in corrupt payments were made to Bahraini officials with influence over contract negotiations between Alcoa and a major government-operated aluminum plant.  Alcoa’s subsidiaries used a London-based consultant with connections to Bahrain’s royal family as an intermediary to negotiate with government officials and funnel the illicit payments to retain Alcoa’s business as a supplier to the plant.  Alcoa lacked sufficient internal controls to prevent and detect the bribes, which were improperly recorded in Alcoa’s books and records as legitimate commissions or sales to a distributor.

Alcoa agreed to settle the SEC’s charges and a parallel criminal case announced today by the U.S. Department of Justice by paying a total of $384 million.

“As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible,” said George Canellos, co-director of the SEC Enforcement Division.  “It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”

Kara N. Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit added, “The extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”

According to the SEC’s order instituting settled administrative proceedings, Alcoa is a global provider of not only primary or fabricated aluminum, but also smelter grade alumina – the raw material that is supplied to plants called smelters that produce aluminum.  Alcoa refines alumina from bauxite that it extracts in its global mining operations.  From 1989 to 2009, one of the largest customers of Alcoa’s global bauxite and alumina refining business was Aluminium Bahrain B.S.C. (Alba), which is considered one of the largest aluminum smelters in the world.  Alba is controlled by Bahrain’s government, and Alcoa’s mining operations in Australia were the source of the alumina that Alcoa supplied to Alba.

According to the SEC’s order, Alcoa’s Australian subsidiary retained a consultant to assist in negotiations for long-term alumina supply agreements with Alba and Bahraini government officials.  A manager at the subsidiary described the consultant as “well versed in the normal ways of Middle East business” and one who “will keep the various stakeholders in the Alba smelter happy…”  Despite the red flags inherent in this arrangement, Alcoa’s subsidiary inserted the intermediary into the Alba sales supply chain, and the consultant generated the funds needed to pay bribes to Bahraini officials.  Money used for the bribes came from the commissions that Alcoa’s subsidiary paid to the consultant as well as price markups the consultant made between the purchase price of the product from Alcoa and the sale price to Alba.

The SEC’s order finds that Alcoa did not conduct due diligence or otherwise seek to determine whether there was a legitimate business purpose for the use of a middleman.  Recipients of the corrupt payments included senior Bahraini government officials, members of Alba’s board of directors, and Alba senior management.  For example, after Alcoa’s subsidiary retained the consultant to lobby a Bahraini government official, the consultant’s shell companies made two payments totaling $7 million in August 2003 for the benefit of the official.  Two weeks later, Alcoa and Alba signed an agreement in principle to have Alcoa participate in Alba’s plant expansion.  In October 2004, the consultant’s shell company paid $1 million to an account for the benefit of that same government official, and Alba went on to reach another supply agreement in principle with Alcoa.  Around the time that agreement was executed, the consultant’s companies made three payments totaling $41 million to benefit another Bahraini government official as well.

The SEC’s cease-and-desist order finds that Alcoa violated Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934.  Alcoa will pay $175 million in disgorgement of ill-gotten gains, of which $14 million will be satisfied by the company’s payment of forfeiture in the parallel criminal matter.  Alcoa also will pay a criminal fine of $209 million.

The SEC appreciates the assistance of the Fraud Section of the Criminal Division at the Department of Justice as well as the Federal Bureau of Investigation, Internal Revenue Service, Australian Federal Police, Ontario Securities Commission, Guernsey Financial Services Commission, Liechtenstein Financial Market Authority, Norwegian ØKOKRIM, United Kingdom Financial Control Authority, and Office of the Attorney General of Switzerland.

SEC AND BIOTECH COMPANY SETTLE CIVIL ACTION IN UNREGISTERED DISTRIBUTION OF STOCK CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Settles Civil Action Against Advanced Cell Technology, Inc. Concerning Its Illegal Unregistered Distributions of Stock - Relief Includes Payment of More Than $4 Million

The Commission today settled a pending civil action against Advanced Cell Technology, Inc. (“Advanced Cell”), arising out of Advanced Cell’s issuance of hundreds of millions of unregistered shares of common stock on thirteen separate occasions without qualifying for any exemption from registration. The settlement, which was filed with the Court earlier today, is subject to the Court’s approval.

In its Complaint filed on May 30, 2012, the Commission alleged that seven defendants, including Advanced Cell, a biotechnology company with headquarters in Marlborough, Massachusetts, violated the federal securities laws by engaging in the illegal unregistered distribution of billions of shares of penny stocks through the repeated misuse of the exemption from registration contained in Section 3(a)(10) of the Securities Act of 1933. Section 3(a)(10) permits a company to issue common stock to public investors other than pursuant to an effective registration statement “in exchange for one or more bona fide outstanding securities, claims or property interests . . . where the terms and conditions of such issuance and exchange are approved after a hearing [held before a court or other governmental authority authorized to conduct such hearings] upon the fairness of such terms and conditions.” The Section 3(a)(10) exemption may not be relied upon for capital formation by issuers, and it was improperly used for that purpose in these transactions.

According to the Commission’s Complaint, in or about early 2006, Mark A. Lefkowitz, a penny stock financier, developed an illegal strategy for penny stock issuers to pay off past due debts and also raise capital by issuing stock purportedly pursuant to the Section 3(a)(10) exemption. The Complaint alleges that in September 2008, Lefkowitz introduced the strategy to William Caldwell IV, who was then the Chief Executive Officer of Advanced Cell.

The Complaint alleges that from September 2008 through January 2009, pursuant to an agreement between Lefkowitz and Caldwell, several entities affiliated with Lefkowitz (collectively, the “Lefkowitz Related Entities”) purchased past due debts of Advanced Cell from various Advanced Cell debtholders. Shortly after a Lefkowitz Related Entity acquired each debt, Lefkowitz and Caldwell agreed on the terms of a settlement, and the Lefkowitz Related Entity filed a lawsuit against Advanced Cell in a Florida state court purportedly to collect on the debt. The principal purpose of the lawsuits, according to the Complaint, was to present the settlements to the Florida state court for a fairness hearing, as required by Section 3(a)(10).

The Complaint alleges that, in each instance, the Florida state court found the settlements to be fair and entered an order granting a Section 3(a)(10) exemption. However, the Commission’s Complaint asserts that the parties never informed the Florida state court of the full terms and conditions of the settlements, thereby compromising the fairness hearings. According to the Complaint, the parties falsely represented to the Florida state court that they were settling for the face value of the past due debts and did not inform the Florida state court of the actual market value of the settlement shares or that the market value of the shares greatly exceeded the amount of the debts that were to be extinguished. Nor was the Florida state court told that the Lefkowitz Related Entities had agreed to sell the settlement shares quickly and remit a substantial portion of the sales proceeds to Advanced Cell.

According to the Complaint, Advanced Cell ultimately issued a total of 260,115,983 shares of unrestricted common stock to settle the thirteen lawsuits filed against it by the Lefkowitz Related Entities. The settlement shares, which had a total market value of approximately $9,230,000 as of the respective settlement dates, were issued to satisfy past due debts totaling approximately $1,110,000. According to the Complaint, after retaining a portion of the profits from the sale of the shares for themselves, the Lefkowitz Related Entities remitted $3.5 million to Advanced Cell.

The Complaint alleges that, as a result of the foregoing, Advanced Cell’s unregistered distributions to the Lefkowitz Related Entities violated Section 5 of the Securities Act. The Complaint also alleges that Advanced Cell failed to timely disclose the settlement agreements and its issuance of unregistered shares of common stock in connection with the Section 3(a)(10) settlements by filing current reports on Forms 8-K with the Commission.

The proposed final judgment would enjoin Advanced Cell from violating Section 5(a) and 5(c) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-11 thereunder. It would also order Advanced Cell to disgorge $3.5 million in ill-gotten payments from the Lefkowitz Related Entities, plus prejudgment interest in the amount of $586,619, for a total of $4,086,619, but would not impose a civil penalty based upon Advanced Cell’s financial condition. Advanced Cell consented to the entry of the proposed Final Judgment without admitting or denying the allegations in the Commission’s Complaint.

The Commission’s litigation against the five remaining defendants, Mark A. Lefkowitz, Mark A. Lopez, Unico, Inc., Steven R. Peacock, and Shane H. Traveller, is ongoing.

A FAMILY WORKING TOGETHER IN A PYRAMID AND PONZI ENTERPRISE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

SEC Charges Woman and Stepson for Involvement in Zeekrewards Pyramid and Ponzi Scheme; Parallel Criminal Charges and Plea Agreements Also Announced

On December 20, 2013, the Securities and Exchange Commission filed suit in the United States District Court for the Western District of North Carolina against Dawn Wright-Olivares and Daniel Olivares for their roles in perpetrating the fraudulent unregistered offer and sale of securities through Rex Venture Group LLC d/b/a ZeekRewards.com, an internet-based combined Ponzi and pyramid scheme. According to the Complaint, from approximately January 2011 until August 2012 when the ZeekRewards website was shut down, Rex Venture Group raised more than $850 million from approximately one million internet customers nationwide and overseas through the website. Both defendants have agreed to settle the Commission’s allegations against them, and their settlement papers were submitted to the Court for its consideration.

The Complaint alleged that defendants solicited investors through the internet and other means to participate in the ZeekRewards program, a self-described “affiliate advertising division” for the companion website, Zeekler.com, through which the defendants operated penny auctions. The ZeekRewards program offered customers several ways to earn money, two of which — the “Retail Profit Pool” and the “Matrix” — involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

According to the Complaint, Wright-Olivares and others lured investors to ZeekRewards by promising investors a share of the company’s daily net profits in the form of daily profit share awards. The company’s purported calculations consistently resulted in daily award averaging approximately 1.5 percent per day, fraudulently conveying the false impression that the company was extremely profitable. In fact, the daily award percentage was fabricated and investor payouts bore no relation to the company’s net profits. Approximately 98% of ZeekRewards’ total revenues and the “net profits” paid to investors were comprised of funds received from new investors in classic Ponzi scheme fashion. When the company was shut down in August 2012, it was teetering on collapse.

The Complaint further alleged that Wright-Olivares conceived of the idea for operating penny auctions, helped develop the technical specifications for the Zeekler.com program and its key features, marketed ZeekRewards to investors, managed some of RVG’s operations, and helped design and implement features that concealed the fraud. She was a principal spokesperson for ZeekRewards, and she also served as chief operating officer from September 2011 to June 2012. For the duration of the company’s existence, Olivares was the chief architect of the company’s computer databases that tracked all investments (including subscription and bid purchases), managed the electronic operations, and perpetuated the illusion of a successful retail business.

The Commission alleged that Wright-Olivares offered and sold securities in violation of the registration provisions of Section 5 of the Securities Act, and both defendants violated the antifraud provisions of the Section 17 of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The Complaint requested permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the defendants. Without denying the allegations—and while also admitting the facts set forth in the Factual Summary filed contemporaneously with their respective plea agreements in the parallel criminal case — both defendants have agreed to settle the Commission’s charges against them, and their settlement papers were submitted to the Court for its consideration. In particular, both consented to permanent injunctions against future violations of the respective registration and antifraud provisions with which they were each charged. Wright-Olivares also agreed to disgorge at least $8,184,064.94 and Olivares agreed to disgorge at least $3,272,934.58 — amounts that represent the entirety of their ill-gotten gains plus prejudgment interest. In light of their anticipated incarceration, no civil penalty will be imposed. The settlements are subject to approval by the court. In a parallel action, the U.S. Attorney’s Office for the Western District of North Carolina simultaneously announced criminal charges against, and plea agreements by, the pair.

The SEC acknowledges the assistance of the United States Attorney’s Office for the Western District of North Carolina and the United States Secret

SEC ALLEGES ADM SUBSIDIARIES PAID BRIBES TO UKRAINIAN OFFICIALS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged global food processor Archer-Daniels-Midland Company (ADM) for failing to prevent illicit payments made by foreign subsidiaries to Ukrainian government officials in violation of the Foreign Corrupt Practices Act (FCPA).

An SEC investigation found that ADM’s subsidiaries in Germany and Ukraine paid $21 million in bribes through intermediaries to secure the release of value-added tax (VAT) refunds.  The payments were then concealed by improperly recording the transactions in accounting records as insurance premiums and other purported business expenses.  ADM had insufficient anti-bribery compliance controls and made approximately $33 million in illegal profits as a result of the bribery by its subsidiaries.

ADM, which is based in Decatur, Ill., has agreed to pay more than $36 million to settle the SEC’s charges.  In a parallel action, the U.S. Department of Justice today announced a non-prosecution agreement with ADM and criminal charges against an ADM subsidiary that has agreed to pay $17.8 million in criminal fines.

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials,” said Gerald Hodgkins, an associate director in the SEC’s Division of Enforcement.  “Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of Illinois, the bribery occurred from 2002 to 2008.  Ukraine imposed a 20 percent VAT on goods purchased in its country.  If the goods were exported, the exporter could apply for a refund of the VAT already paid to the government on those goods.  However, at times the Ukrainian government delayed paying VAT refunds it owed or did not make any refund payments at all.  On these occasions, the outstanding amount of VAT refunds owed to ADM’s Ukraine affiliate reached as high as $46 million.

The SEC alleges that in order to obtain the VAT refunds that the Ukraine government was withholding, ADM’s subsidiaries in Germany and Ukraine devised several schemes to bribe Ukraine government officials to release the money.  The bribes paid were generally 18 to 20 percent of the corresponding VAT refunds.  For example, the subsidiaries artificially inflated commodities contracts with a Ukrainian shipping company to provide bribe payments to government officials.  In another scheme, the subsidiaries created phony insurance contracts with an insurance company that included false premiums passed on to Ukraine government officials.  The misconduct went unchecked by ADM for several years because of its deficient and decentralized system of FCPA oversight over subsidiaries in Germany and Ukraine.

The SEC’s complaint charges ADM with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.  ADM consented to the entry of a final judgment ordering the company to pay disgorgement of $33,342,012 plus prejudgment interest of $3,125,354.  The final judgment also permanently enjoins ADM from violating those sections of the Exchange Act, and requires the company to report on its FCPA compliance efforts for a three-year period.  The settlement is subject to court approval.  The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.

The SEC’s investigation was conducted by Nicholas A. Brady and supervised by Moira T. Roberts and Anita B. Bandy.  The SEC appreciates the assistance of the Justice Department’s Fraud Section and the Federal Bureau of Investigation.

DETROIT MAN AND COMPANY CHARGED BY SEC WITH RUNNING A PUMP AND DUMP SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Detroit Area Man and His Company with Conducting a Pump and Dump Scheme

On December 10, 2013, the Securities and Exchange Commission charged Randy A. Hamdan and a related entity, Oracle Consultants LLC, with carrying out a pump-and-dump scheme in the securities of CompuSonics Video Corporation. Through his trading entity, Hamdan generated illicit proceeds of approximately $30,000.

According to the Commission's Complaint filed in U.S. District Court for the Eastern District of Michigan, Hamdan, who lives in the Dearborn, Michigan area, carried out the pump-and-dump scheme by engaging in manipulative trading, conducting a fraudulent marketing campaign, and, by pretending to be a representative of CompuSonics, causing a news service to issue a false press release on behalf of CompuSonics. Through the phony press release and fraudulent marketing campaign, Hamdan disseminated false claims that CompuSonics had "reached an out-of-court settlement" regarding the company's patent portfolio and the phony press release added the claim that CompuSonics was "considering many options to bring back shareholder value," including a cash dividend and a stock buy-back program. The Complaint alleges that in order to conduct the scheme, Hamdan employed numerous tactics to hide his true identity, including a proxy internet server, an anonymous email service, fictitious contact information, and a prepaid cellphone.

The Complaint alleges that Hamdan and Oracle violated of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. As to both Hamdan and Oracle, the Commission is seeking permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, penalties, and a penny stock bar.

The Commission acknowledges the assistance of the British Columbia Securities Commission and the Office of Fraud Detection and Market Intelligence of the Financial Industry Regulatory Authority ("FINRA") for its assistance in this investigation.

SUBSIDIARY OF CONVERGEX GROUP & 2 EMPLOYEES PLEAD GUILTY TO SECURITIES FRAUD

FROM:  U.S. JUSTICE DEPARTMENT 
Wednesday, December 18, 2013
Convergex Group Subsidiary and Two Employees Plead Guilty to Securities and Wire Fraud Charges

A brokerage subsidiary of ConvergEx Group LLC pleaded guilty today to charges of wire fraud and conspiracy to commit securities fraud and wire fraud.   ConvergEx Group has also agreed to pay $43.8 million in criminal penalties and restitution as part of a deferred prosecution agreement with the Department of Justice.   In addition, Jonathan Daspin, the head trader at the brokerage subsidiary, and Thomas Lekargeren, a sales trader at a different ConvergEx subsidiary, both pleaded guilty today to conspiracy to commit securities and wire fraud before U.S. District Judge Jose Linares in the District of New Jersey.

Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, Assistant Director in Charge Valerie Parlave of the FBI’s Washington Field Office, and Inspector in Charge Phillip Bartlett from the U.S. Postal Inspection Service (USPIS) made the announcement.

ConvergEx Global Markets Limited (CGM Limited), a former broker-dealer registered in Bermuda, has also agreed to plead guilty today.   The department also filed today a criminal information in connection with a deferred prosecution agreement, charging ConvergEx Group with one count of conspiracy to commit securities fraud and wire fraud and one count of wire fraud.   To resolve the charges, ConvergEx Group and CGM Limited have agreed to pay in total a criminal penalty of approximately $18.0 million and forfeit approximately $12.8 million, for a total penalty of $30.8 million, and additionally to pay restitution of approximately $12.8 million to defrauded customers.

In a parallel action, the U.S. Securities and Exchange Commission also reached a resolution today with three ConvergEx Group subsidiaries, Daspin and Lekargaren.

“As described in the guilty plea agreements and charging documents announced today, ConvergEx – which was a broker for some of the most sophisticated institutional investors in the world – along with several of its employees, engaged in a concerted and coordinated effort to fleece its clients by charging them millions of dollars in unwarranted fees – which ConvergEx called “trading profits,” or “spread” – and then concealing those charges from its clients through a pattern of deception,” said Acting Assistant Attorney General Mythili Raman.  “Although the theft of money from ConvergEx’s clients was large in scale, the fraud scheme was committed in the most basic of ways:  ConvergEx and its traders, plain and simple, lied to their clients to hide that they were stealing their money.  This coordinated bilking of clients by a broker-dealer – accomplished through intentional and repeated misrepresentations – not only inflicted real financial losses on investors, but also undermines investors’ confidence in the integrity and reliability of the financial markets.  As the guilty pleas and resolutions announced today show, we will not tolerate this type of criminal conduct and we will hold both institutions and individuals to account.”

“With today’s guilty pleas, ConvergEx and two of its employees admitted their roles in a scheme in which they committed securities fraud,” said Assistant Director in Charge Parlave.  “By doing so, they hid the fact that they were secretly earning millions of dollars by deliberately fabricating transaction reports which were provided to clients with false details regarding their orders.   The FBI will continue to investigate allegations of securities fraud and abuse to ensure those who participate in the global trading market are doing so fairly.”

“This is yet another example of the significant results that can be achieved when law enforcement agencies partner, share information, and collaborate,” said USPIS Inspector Bartlett.   “The Inspection Service values its partnership with the FBI and SEC in this case.”

According to court documents, certain ConvergEx Group broker-dealers that provided agency brokerage services and disclosed to clients that they would charge commissions for their services regularly routed securities orders to CGM Limited in Bermuda so that it could take a mark-up (an additional amount paid for the purchase of a security) or mark-down (a reduction of the amount received for the sale of a security) when executing the orders.   ConvergEx employees referred to such mark-ups and mark-downs as “spread,” “trading profits,” or “TP.”

To hide the fact that spread had been taken on trades, traders at CGM Limited and sales traders at a ConvergEx Group subsidiary in New York sent false transaction reports to clients with fabricated details regarding the execution orders, including the number of shares involved in a trade, the time at which a trade was executed and the price at which shares were either purchased or sold.   CGM Limited traders, including Daspin, created these false reports using exchange data from transactions entered into by others on the same trade date as the trades that had been executed by CGM Limited on behalf of its clients.   Daspin instructed a sales trader while creating a false report to “Please put all Prints in one spreadsheet in the least Friendly Format….If possible take this out of spreadsheet Format and make a PDF – Or put this in picture file or something tricky to manipulate.”   In another instance, Daspin notified an executive that “We need to be creative putting something together as did not have time and sales for the price given. Fyi.”   In total, CGM Limited took approximately $12.8 million in trading profits from these clients after it had sent the false statements to them.

Daspin and others also came up with a plan to continue taking spread on a client by violating the client’s instructions to provide “real-time” transactional data, i.e., an immediate data feed of the details of trades that CGM Limited executed for the client in offshore markets through  foreign brokers.   If the client’s instructions had been followed, CGM Limited’s traders would not have been able to take spread on the client’s trades.   Daspin and other CGM Limited traders “turned off” real time for certain portions of the client’s orders and took spread while “real-time” was turned off.   On several occasions, when the client asked why it was not receiving real-time data, Lekargeren falsely blamed it on various “IT” issues.

Certain employees of CGM Limited and the broker-dealers offering agency brokerage services also took other steps designed to conceal the fact that CGM Limited was taking spread and the fact that spread was included in the trade prices reported to clients, including: taking smaller amounts of spread on certain price-sensitive clients; taking larger amounts of spread when it was less likely to be discovered; insuring that the marked-up price they charged to clients was within the high or low price at which the security traded that day; and using multiple local brokers during the course of a trade so that a client would not be able to track the execution of the client’s order through publicly available resources.

The head of the division offering transition management services – which provided clients in the process of changing fund managers or investment strategies the ability to execute large orders to buy and sell securities – provided several clients with false information to hide trading profits.   In July 2010, for example, this executive caused a client to be told that “no principal trading has been carried out in any transition” for that client, when this executive knew CGM Limited had traded in a principal capacity and had taken approximately $1.75 million of trading profits on the client’s trades a month earlier.   After that false response was sent to the client, CGM Limited’s traders took approximately $4.5 million of additional trading profits on that client’s trades.

In addition, ConvergEx employees assisted an unaffiliated provider of transition services in concealing that it was receiving a 50 to 60 percent share of the trading profits CGM Limited was taking on the unaffiliated company’s clients, in violation of the unaffiliated company’s client agreements.   The unaffiliated company sent invoices addressed to ConvergEx Group that falsely stated that they were for trading cost analysis, when in fact the invoices were sent to cover up that the payments were in fact for the unaffiliated company’s share of the spread taken by CGM Limited on its clients.

As part of the deferred prosecution agreement with ConvergEx Group, the department highlighted the internal investigation conducted by the company; its extraordinary and ongoing cooperation; its extensive remediation, including terminating officers and employees, ceasing all trading activities at CGM Limited and voluntarily relinquishing the subsidiary’s Bermudan securities license; and enhancing its compliance program and internal controls; as well as the guilty plea by CGM Limited and its agreement to pay restitution and the significant sanctions imposed by the SEC.

The case was investigated by the FBI’s Washington Field Office and the Washington, D.C., and New York offices of the U.S. Postal Inspection Service.   The case is being prosecuted by Trial Attorneys Justin Goodyear, Jason Linder and Patrick Pericak of the Criminal Division’s Fraud Section.

The SEC referred the matter to the Justice Department for investigation, and the department expresses its appreciation for the significant assistance provided by the SEC.

The department also recognizes the assistance of the Criminal Division’s Office of International Affairs, the Financial Industry Regulatory Authority, and the United States Attorney’s Office for the District of New Jersey.

FORMER MICROSOFT PORTFOLIO MANAGER AND BUSINESS PARTNER CHARGED WITH INSIDER TRADING BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a senior portfolio manager at Microsoft Corporation and his friend and business partner with insider trading ahead of company announcements.

The SEC alleges that Brian D. Jorgenson, who lives in Lynwood, Wash., obtained confidential information about upcoming company news through his work in Microsoft’s corporate finance and investments division.  Jorgenson tipped Sean T. Stokke of Seattle in advance of the Microsoft announcements, the most recent occurring in October.  After Stokke traded on the inside information that Jorgenson provided, the two equally split the illicit profits in their shared brokerage accounts.  They made joint trading decisions with the goal of generating enough profits to create their own hedge fund.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington today announced criminal charges against Jorgenson and Stokke.

“Abusing access to Microsoft’s confidential information and generating unlawful trading profits is not a wise or legal business model for starting a hedge fund,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit and director of the SEC’s Philadelphia Regional Office.  “We thwarted the misguided plans of Jorgenson and Stokke as they sought to illegally profit at others’ expense.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Washington, Jorgenson and Stokke made a combined $393,125 in illicit profits in their scheme, which began in April 2012.

The SEC alleges that Stokke first traded in advance of a public announcement that Microsoft intended to invest $300 million in Barnes & Noble’s e-reader business.  Jorgenson learned of the impending transaction after his department became involved in the financing aspects of the deal.  Jorgenson tipped Stokke so he could purchase approximately $14,000 worth of call options on Barnes & Noble common stock.  Following a joint public announcement on April 30, Barnes & Noble’s stock price closed at $20.75 per share, a 51.68 percent increase from the previous day.  Jorgenson and Stokke made nearly $185,000 in ill-gotten trading profits.

The SEC alleges that Stokke later traded in advance of Microsoft’s fourth-quarter earnings announcement in July 2013.  As part of his duties at Microsoft, Jorgenson prepared a written analysis of how the market would react to the negative news that Microsoft’s fourth quarter earnings were more than 11 percent below consensus estimates.  He estimated that Microsoft’s stock price would decline by at least six percent.  Jorgenson tipped this confidential information to Stokke, who purchased almost $50,000 worth of Microsoft options.  After Microsoft’s announcement on July 18, its stock price declined more than 11 percent the next day from $35.44 to $31.40 per share.  Jorgenson and Stokke realized more than $195,000 in illicit profits.

According to the SEC’s complaint, Stokke traded in advance of another Microsoft announcement on Oct. 24, 2013.  Jorgenson was aware that the company would be announcing first quarter 2014 earnings that were more than 14 percent higher than consensus estimates.  Rather than purchase Microsoft securities directly, Jorgenson and Stokke purchased more than $45,000 worth of call options on an exchange-traded fund in which Microsoft comprised more than eight percent of the fund’s holdings.  Following the announcement, Microsoft’s share price increased nearly six percent and the price of the ETF increased 0.51 percent.  Jorgenson and Stokke made approximately $13,000 in illegal trading profits.

Jorgenson and Stokke are charged with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, both directly and pursuant to 20(d) of the Exchange Act.  The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against Jorgenson and Stokke as well as an officer-and-director bar against Jorgenson.

The SEC’s investigation was conducted by Brendan P. McGlynn, Patricia A. Paw, John S. Rymas, and Daniel L. Koster of the Philadelphia Regional Office.  The SEC’s litigation will be led by John V. Donnelly and G. Jeffery Boujoukos.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Washington, Federal Bureau of Investigation, Options Regulatory Surveillance Authority, and Financial Industry Regulatory Authority.