CFTC CHAIRMAN GENSLER SPEECH AT FAREWELL EVENT

FROM:  U.S. COMMODITIES FUTURE TRADING COMMISSION 
Remarks of Chairman Gary Gensler at Farewell Event
December 19, 2013

John F. Kennedy once said: “Let the public service be a proud and lively career.”

What I’ve been most struck by these last five years is how all of you – the exceptional people of the Commodity Futures Trading Commission (CFTC) really embody this sense of public service as expressed by President Kennedy.

Being with you at our last “town hall” meeting, I wish to thank all of you for welcoming me into the CFTC family these last five years.

I’d like to thank Secretary Jack Lew, Senator Elizabeth Warren, Commissioner Mark Wetjen, former Chairs Sheila Bair and Brooksley Born, and our former Director of Enforcement David Meister for your kind words.

I’m humbled to see Secretary Lew; Director of the National Economic Council and Assistant to the President for Economic Policy Gene Sperling; the Chairman of the Federal Reserve Ben Bernanke; the Chair of the Securities and Exchange Commission (SEC) Mary Jo White; the Chairman of the Federal Deposit Insurance Corporation Marty Gruenberg, the Director of the Federal Housing Finance Agency Ed DeMarco, the Chair of the National Credit Union Administration Debbie Matz, and so many others here at our town hall meeting.

In addition, it’s wonderful to welcome back seven former Chairs of this agency – in addition to Sheila and Brooksley – Jim Newsome, Mary Schapiro, Mike Dunn, Walt Lukken, and Sharon Brown-Hruska.

Five years ago, when the President was formulating his financial reform proposals, he placed tremendous confidence in this small agency, which for eight decades had overseen the futures market.

This confidence in the CFTC was well placed.

And I’m so honored that the President asked me to serve at this agency, particularly at this moment in history.

This amazingly talented staff along with Commissioners – Mike Dunn, Jill Sommers, Bart Chilton, Scott O’Malia and Mark Wetjen – has transformed a market.

As President Kennedy said, you all have much to be proud of. And no doubt, it’s been pretty darn lively.

Based on your work, bright lights of transparency now shine on the nearly $400 trillion swaps market.

You’ve made central clearing of swaps a reality and comprehensively reform the customer protection regimes in our markets.

You brought oversight to the world’s largest swap dealers.

You’ve changed the world’s conversation about LIBOR and Euribor and the real need to bring integrity to benchmark rates.

You’ve worked tirelessly to coordinate with our fellow regulators here at home and abroad.

And to boot, you’ve gotten us through five clean audits, restructured the agency, started a new Weekly Swaps Report, all while reviewing 60,000 public comments, and taking over 2,200 meetings with the public.

You’ve helped the Commission sort through over 170 Dodd-Frank actions – nearly one a week since it was signed into law.

And I want to thank you for those wonderful murderboards for the 54 congressional testimonies. More seriously, I do want to thank Congress and so many members and their staffs for their leadership on reform and supporting the efforts of this agency.

I have worked with some remarkable people in my career – when on Wall Street, at the Treasury Department, and on political campaigns.

The CFTC staff is among some of the most professional and productive that I’ve worked with in my life.

You’ve shown how when faced with real challenges – we can come together as a nation to solve them.

None of this would have been possible without the help and collaboration from others across the Administration and the regulatory community.

Thanks to the leadership of Mary Schapiro and Mary Jo White, we’ve formed a true partnership between our nation’s two market regulators.

Just to mention one of many areas of collaboration – it was no small feat for the staffs of our two agencies came together on joint definitional rules.

Financial reform would not have been possible without the leadership of Treasury and the Federal Reserve. In the wake of the nation’s worst financial crisis in 80 years, Secretary Geithner, Chairman Bernanke and their teams deserve our debt of gratitude. Looking back now, you have to wonder how they made it through their days ... livelier maybe than President Kennedy hoped for any public servant.

I particularly want to thank Secretaries Geithner and Lew, Neal Wolin, Mary Miller, Lael Brainard and Michael Barr at Treasury. In addition to Chairman Bernanke, I want to thank Dan Tarullo, Scott Alvarez and Pat Parkinson.

As the crisis was global, so too has been our reform journey. I want to give a warm thank you to Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board; Martin Wheatley, Chief Executive of the Financial Conduct Authority; Commissioner Michel Barnier, European Commissioner for Internal Market and Services; Jonathan Faull, Director General of the European Commission; and Masamichi Kono, Vice Commissioner for International Affairs of Japan’s Financial Services Agency.

I also know how hard market participants have worked – with real costs and against deadlines – to implement reforms that truly are transforming the markets.

Looking forward, the public is very fortunate to have such talented and dedicated public servants as Mark Wetjen and, subject to Senate confirmation, Tim Massad taking the helm here at the CFTC.

Much will be in your hands my friends, and the journey will continue to evolve. Just one thing beyond the personal note I’m going to leave in the top drawer: this agency really does need more resources.

Lastly, I want to introduce and thank each one of my daughters: Anna, Lee and Isabel.

I am so proud of each of you growing up to be such beautiful and accomplished young ladies. It’s a testament to each of you that not only have you put up with me but also allowed me to devote so much time to my professional life these last five years. I know how much your mom would be beaming at the three of you today, though she certainly would be laughing a bit at your dad.

I would not be here today if it weren’t for Francesca’s encouragement to follow my dreams and to pursue public service.

Your mom and your Captain Grandpa, a Pearl Harbor survivor and appointee of President Johnson, taught us about public service.

Once again, I want to thank President Obama for the opportunity to serve at such a lively time.

And I just want tell everybody, once again, how darn proud I am of all of you.

STOCK PRICE MANIPULATION: A STORY OF EXECUTIVE INNOVATION

Photo:  NYSE.  Credit:  Wikimedia Commons. 

FROM: SECURITIES AND EXCHANGE COMMISSION

SEC OBTAINS JUDGEMENTS AGAINST FORMER SPONGETECH EXECUTIVES MICHAEL E. METTER AND STEVEN Y. MOSKOWITZ

The Securities and Exchange Commission announced that on December 18, 2012 and June 12, 2012, the Honorable Judge Dora L. Irizarry, United States District Judge for the Eastern District of New York, entered Judgments against, respectively, Michael E. Metter ("Metter"), the former Chief Executive Office of Spongetech Delivery Systems, Inc. ("Spongetech"), and Steven Y. Moskowitz ("Moskowitz"), Spongetech’s former Chief Financial Officer. The judgments permanently enjoin Metter and Moskowitz from violating antifraud and securities registration provisions of the federal securities laws, as well as reporting, recordkeeping, and internal controls provisions. The Judgments also bar Metter and Moskowitz from serving as an officer or director of a public company, bar them from engaging in any offering of penny stock, and order them to pay penalties and disgorgement in amounts to be determined by the court, upon motion by the Commission. On September 20, 2012, the Commission instituted a settled administrative proceeding suspending Moskowitz from appearing or practicing before the Commission as an accountant.

The Commission’s complaint, filed on May 5, 2010, alleged that Metter, Moskowitz, Spongetech, and others engaged in a scheme to increase demand illegally for, and profit from, the unregistered sale of publicly-traded Spongetech stock by, among other things, "pumping" up demand for the stock through false public statements about non-existent customers, fictitious sales orders, and phony revenue. They also repeatedly and fraudulently understated the number of Spongetech’s outstanding shares in press releases and public filings. The purpose of flooding the market with false public information was to fraudulently inflate the price for Spongetech shares so the defendants and others could then "dump" the shares by illegally selling them to the public through affiliated entities in unregistered transactions. Among other things, the complaint further alleged that Spongetech, at the direction of Metter and Moskowitz, filed periodic reports with the Commission that contained materially false and misleading statements and materially overstated revenues, created materially false purchase orders, invoices, and other documents, and failed to ensure that Spongetech maintained accurate books and records or implemented effective internal controls. Metter and Moskowitz consented to the entry of the Judgments without admitting or denying the allegations of the Commission’s complaint.

The Commission previously obtained judgments against other defendants in this action. On November 10, 2011, the court entered a judgment by consent against Spongetech. The judgment imposed full injunctive relief and ordered Spongetech to pay penalties and disgorgement in amounts to be determined by the court, upon motion by the Commission.

On March 6, 2012, the court entered final judgments against RM Enterprises International, Inc. ("RM Enterprises"), a Spongetech affiliate, and George Speranza, a stock promoter. The final judgments imposed full injunctive relief against both, ordered Speranza to pay penalties, disgorgement, and prejudgment interest totaling $135,883.40, and barred Speranza from participating in any penny stock offering. The court deferred ruling on monetary remedies against RM Enterprises until the claims against other defendants are resolved.

Status of the Commission’s Spongetech Litigation

On March 14, 2011, the court issued an order granting the SEC’s motion for preliminary injunctions against six defendants, and granted the SEC’s requests for asset freezes against Metter, Moskowitz, and RM Enterprises. An asset freeze was not entered against Spongetech because the company filed for bankruptcy in July 2010, and has since been controlled by a court-appointed bankruptcy trustee. The asset freezes entered against Metter, Moskowitz, and RM, as subsequently modified by the court, remain in effect, as does the preliminary injunction entered against defendant Joel Pensley.

On March 27, 2012, the court granted the Commission’s motion to add BusinessTalkRadio.net, Inc. ("BTR") and Blue Star Media Group, Inc. ("Blue Star") as relief defendants. The amended complaint alleges that in 2009, RM Enterprises transferred illicit proceeds from the Spongetech fraud to satisfy a judgment that had been entered against Metter, these entities, and others.

The Commission’s action remains pending against BTR, Blue Star, and two of Spongetech’s former attorneys, Pensley and Jack Halperin, who are charged with violating the antifraud provisions by authoring false and misleading opinion letters to improperly remove the restrictions on trading shares of Spongetech stock.

On December 19, 2011, in a separate action, the court entered a Final Judgment permanently enjoining Myron Weiner from violating the securities registration provisions in connection with his purchase and sale of Spongetech’s stock, imposing a one-year penny stock bar, and ordered him to pay disgorgement and penalties totaling over $1.3 million. SEC v. Myron Weiner, Civil Action No. 11-CV-5731 (E.D.N.Y.). [See Litigation Release No. 22168 (Nov. 23, 2011), Litigation Release No. 22206 (Dec. 21, 2011)].

The Parallel Criminal Action

On May 5, 2010, the United States Attorney’s Office for the Eastern District of New York (USAO-EDNY) arrested Metter and Moskowitz, who were indicted for conspiracy to commit securities fraud and obstruction of justice, securities fraud, obstruction of justice, conspiracy to commit money laundering, and perjury. On October 14, 2010, the USAO-EDNY filed a superseding indictment against Speranza and four former Spongetech employees – Andrew Tepfer, Seymour Eisenberg, Thomas Cavanagh, and Frank Nicolois – on charges including securities fraud, obstruction of justice, money laundering, structuring, and contempt.

All of the criminal defendants have entered guilty pleas, with the exception of Metter. Moskowitz pleaded guilty to securities fraud and is awaiting sentencing. Speranza pleaded guilty to perjury for giving false testimony during the SEC’s investigation, and was sentenced to five years of probation. Cavanagh and Nicolois pleaded guilty to structuring transactions to avoid federal currency transaction reporting requirements, and were sentenced to 24 months and 16 months in prison, respectively, followed by three years of supervised release. Eisenberg and Tepfer also have pleaded guilty to securities fraud and await sentencing.

The Commission’s investigation is continuing, and is being conducted by Uta von Eckartsberg, Charles Davis, Scott Stanley, and Alexander Koch. The SEC’s lead trial counsel in the pending civil action is Paul Kisslinger.

FORMER CEO OF OIL-AND-GAS COMPANY CHARGED BY SEC WITH PARTICIPATION IN AN INSIDER TRADING SCHEME

FROM: SECURITIES AND EXCHANGE COMMISSION

SEC Charges Oil Company CEO as Source in Insider Trading Case

In November 28, 2012, the Securities and Exchange Commission announced charges against the former CEO of a Denver-based oil-and-gas company at the center of an insider trading scheme that the SEC began prosecuting last month.

According to the SEC’s complaint, the insider trading occurred in advance of Delta Petroleum Corporation’s public announcement that Beverly Hills-based private investment firm Tracinda had agreed to purchase a 35 percent stake in the company, which shot its stock value up by nearly 20 percent. The SEC initially charged insurance executive Michael Van Gilder for his illegal trading in the case, and is now additionally charging his source: Delta’s then-CEO Roger Parker.

The SEC’s amended complaint alleges that Parker, who lives in Englewood, Colo., illegally tipped his close friend Van Gilder and at least one other friend with confidential information about Tracinda’s impending investment. Despite his duty as CEO to protect nonpublic information, Parker repeatedly communicated with Van Gilder following meetings and other developments as the deal progressed. Parker also illegally tipped information about Delta’s quarterly earnings. The insider trading in this case generated more than $890,000 in illicit profits.

According to the SEC’s amended complaint filed in federal court in Denver, Parker tipped Van Gilder and another friend on several occasions in late November and December 2007 as the Tracinda investment was developing. Based on the inside information, Van Gilder and the other friend loaded up on Delta stock and highly speculative options contracts, and Van Gilder advised his relatives, his broker, and a co-worker to do the same.

The SEC alleges that the Tracinda announcement was not the only nonpublic information that Parker tipped to Van Gilder. In November 2007, Van Gilder received an e-mail from a mutual friend of Parker’s that included a news article expressing a negative view of Delta’s future prospects. After sending an e-mail to his broker indicating he might want to sell the Delta securities that he owned, Van Gilder called Parker three times that evening. Parker conveyed to Van Gilder confidential details about Delta’s third quarter 2007 earnings results that were to be announced later that week. Rather than sell his Delta stock, Van Gilder purchased an additional 1,250 shares and responded to the e-mail from the mutual friend by writing, "I had a dialogue with a friend, of whom you know. Do not sell this stock, rather buy more ... Delta will hit their numbers at this Thursday’s announcement." When Delta announced its earnings, it reported production and revenue numbers above the company’s previously stated guidance.

The SEC’s amended complaint charges Parker and Van Gilder with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The amended complaint seeks a final judgment ordering them to disgorge their and their tippees’ ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of the above provisions of the federal securities laws. The SEC also seeks to prohibit Parker from acting as an officer or director of a public company.

SEC CHARGES LIFE INSURANCE COMPANY WITH SECURITIES LAW VIOLATIONS

FROM: SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 15, 2012 — The Securities and Exchange Commission today charged Massachusetts Mutual Life Insurance Company with securities law violations for failing to sufficiently disclose the potential negative impact of a "cap" it placed on a complex investment product that investors were planning to use for retirement.

The SEC's investigation found that MassMutual included a cap feature in certain optional riders offered to investors, and the cap potentially affected $2.5 billion worth of MassMutual variable annuities. Neither the prospectuses nor the sales literature sufficiently explained that if the cap was reached, the guaranteed minimum income benefit (GMIB) value would no longer earn interest. MassMutual's disclosures instead implied that interest would continue to accrue after the GMIB value reached the cap, and dollar-for-dollar withdrawals would remain available to investors. A number of MassMutual's own sales agents were confused by the language in the disclosures, and investors were not sufficiently informed of the potential negative effect of taking withdrawals if they reached the cap approximately a decade from now.

MassMutual, which removed the cap after the SEC's investigation to ensure that no investors will be harmed, has agreed to settle the charges and pay a $1.625 million penalty.

"Investors shouldn't have their retirement nest eggs at risk because of undisclosed investment complexities," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Through our proactive investigative efforts, we exposed a problem with a complex variable annuity investment at least a decade before it could have harmed investors."

According to the SEC's order instituting settled administrative proceedings, MassMutual offered GMIB 5 and 6 riders from 2007 to 2009 as an optional feature on certain variable annuity products. The GMIB rider sets a minimum floor for a future amount that can be applied to an annuity option, known as the "GMIB value." Unlike the contract value of the annuity that fluctuates with the performance of the underlying investment, the GMIB value increases by a compound annual interest rate of either 5 or 6 percent and allows investors to make withdrawals any time during the annuity's accumulation phase.

According to the SEC's order, MassMutual advertised its GMIB riders as providing "Income Now" if investors elected to make withdrawals during the accumulation phase or "Income Later" if they elected to receive annuity payments. MassMutual's sales literature highlighted the guarantee provided by the riders by stating, "Even if your contract value drops to zero, you can apply your GMIB value to a fixed or variable annuity." The riders included a maximum GMIB value, and investors could not reach this cap until 2022. If the GMIB value reached the cap, every dollar withdrawn would reduce the GMIB value by a pro-rata amount tied to the percentage decrease on the contract value. After a number of such withdrawals, depending on market conditions, both the contract value and the GMIB value could decline and adversely affect the amount a customer could apply to an annuity and the future income stream.

The SEC's investigation found that a number of MassMutual sales agents and others did not understand that all withdrawals taken after the GMIB value reached the cap would result in such pro-rata reductions. After reviewing MassMutual's prospectuses and other disclosures, they believed that if the GMIB value reached the cap, investors could take withdrawals and the GMIB value would remain at the cap. Some sales agents mistakenly believed that investors could maximize their benefits by waiting until the GMIB value reaches the cap, taking annual 5 or 6 percent withdrawals, and annuitizing their contracts in order to receive an income stream tied to the maximum GMIB value. But in reality, following such an investment strategy could have had severe adverse consequences for investors. By taking withdrawals annually after the cap is reached, investors would proportionately reduce their GMIB values and in turn potentially decrease their future income streams. In a worst-case scenario, they would withdraw all of their contract value, the GMIB value would decline to zero, and they would be left with nothing to annuitize and, consequently, no future income stream.

According to the SEC's order, while MassMutual was offering GMIB riders, there were indications that sales agents and others did not understand the effect of post-cap withdrawals on the GMIB value, which should have alerted the company to the fact that its disclosures were inadequate. Beginning May 1, 2009, after it stopped offering the riders, MassMutual revised its prospectuses to better explain the consequences of taking withdrawals after the GMIB value reaches the cap. Following the SEC's investigation, MassMutual undertook the remedial step of removing the cap entirely from these riders in order to guarantee that no investor will ever reach the cap. This action contributed to the determination of the penalty amount. MassMutual consented to the SEC's order without admitting or denying the findings. In addition to the $1.625 million penalty, MassMutual agreed to cease and desist from committing or causing any violations and any future violations of Section 34(b) of the Investment Company Act.

The SEC's investigation was conducted by Attorney-Advisor Daniel H. Rubenstein and supervised by Associate Director Stephen L. Cohen and Assistant Director C. Joshua Felker.

SEC CHARGES HEDGE FUND MAMAGER IN BATON ROUGE, LA., WITH DEFRAUDING INVESTORS



Credit:  Wikimedia Commons

FROM: SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Nov. 8, 2012 — The Securities and Exchange Commission today charged a hedge fund manager in Baton Rouge, La., with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities (RMBS).

The SEC alleges that Walter A. Morales and his firm Commonwealth Advisors Inc. caused the hedge funds they managed to buy the lowest and riskiest tranches of a collateralized debt obligation (CDO) called Collybus. They sold mortgage-backed securities into the CDO at prices they had obtained four months earlier while knowing that the RMBS market had declined precipitously in the meantime. As the CDO investments continued to perform poorly, Morales instructed Commonwealth employees to conduct a series of manipulative trades between the hedge funds they advised (called cross-trades) in order to conceal a $32 million loss experienced by one of the funds in its Collybus investment. Morales and Commonwealth lied to investors about the amount and value of mortgage-backed assets held in the hedge funds, and they created phony internal documents to justify their false valuations.

"Morales and Commonwealth Advisors concealed significant hedge fund losses from investors, including pension fund investors, instead of owning up to them and facing the consequences," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Investors put their fundamental trust in the hands of their investment adviser, and they deserve better than being manipulated and lied to through deceptive trades and phony documents."

According to the SEC’s complaint filed in U.S. District Court for the Middle District of Louisiana, Commonwealth’s hedge fund clients included pension funds and individual investors. Morales and Commonwealth invested a significant portion of hedge fund assets in RMBS. When the mortgage markets began to decline dramatically in 2007, bond rating agencies began to aggressively downgrade subprime RMBS. Therefore, Commonwealth clients were sustaining heavy investment losses and Morales knew those losses would probably continue.

The SEC alleges that rather than come clean with investors, Morales directed Commonwealth to execute more than 150 deceptive cross-trades from two hedge funds they advised to another one of their hedge funds in June 2008 at prices below Commonwealth’s own valuation for those securities. After the trades, Morales directed a Commonwealth employee to mark the securities at fair market value, which created a fraudulent $19 million gain for the acquiring hedge fund at the expense of the funds that sold. Morales ordered the cross-trades even though Commonwealth had represented in forms filed with the SEC that it would not execute such trades between these hedge fund clients. Moreover, when the trades raised concern from the prime broker, Morales falsely represented that the transactions were for a legitimate business purpose and at prevailing market prices.

The SEC further alleges that Morales deceived Commonwealth’s largest investor about its exposure to the CDO. Morales agreed to limit the investor’s exposure to Collybus through its investment in a particular Commonwealth hedge fund to 10 percent of that hedge fund’s equity. Morales, however, abided by this agreement only temporarily, and the investor’s exposure to Collybus more than doubled by mid-2008. After the large investor learned that Commonwealth was not following its stated valuation procedures, the investor requested valuation committee meeting minutes to review. Morales prepared false minutes that were delivered to the investor purporting to describe meetings that never occurred.

The SEC’s complaint charges Morales and Commonwealth with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. The SEC also alleges that Commonwealth violated Sections 204, 206(4), and 207 of the Advisers Act and Rules 204-2, 206(4)-2, and 206(4)-7, and that Morales aided and abetted Commonwealth’s violations of Section 10(b) of the Exchange Act, Rule 10b-5, and Sections 204, 206(1), 206(2), 206(4), and 207 of the Advisers Act and Rules 204-2, 206(4)-2, 206(4)-7, and 206(4)-8. Morales was a controlling person of Commonwealth pursuant to Section 20(a) of the Exchange Act, and is therefore liable as a control person for Commonwealth’s violations of the Exchange Act.

The SEC’s investigation, which is continuing, has been conducted by Gary M. Zinkgraf, Carol E. Schultze, Jacob D. Krawitz, and Paul Gunson in coordination with members of the SEC Enforcement Division’s Structured and New Products Unit and Asset Management Unit. Matthew Rossi and Jan Folena will handle the SEC’s litigation.

FORMER INDYMAC CEO AGREES TO SETTLE IN SEC LITIGATION

FROM: SECURITIES AND EXCHANGE COMMISSION
The U.S. Securities and Exchange Commission today announced that on September 28, 2012, the United States District Court for the Central District of California entered a settled final judgment as to Michael W. Perry, the former Chief Executive Officer and Chairman of the Board of IndyMac Bancorp, Inc. IndyMac, through its main subsidiary, IndyMac Bank, primarily made, purchased, and sold residential mortgage loans. In July 2008, IndyMac Bank was placed under Federal Deposit Insurance Corporation receivership and IndyMac filed for bankruptcy. The Commission’s complaint alleges that IndyMac and Perry, in connection with IndyMac’s first quarter 2008 Forms 10-Q and 8-K and related earnings call, all dated May 12, 2008, failed to disclose that IndyMac Bank had only been able to maintain its well-capitalized regulatory status by retroactively including in IndyMac’s first quarter capital balance an $18 million capital contribution from IndyMac to IndyMac Bank, even though it was made on May 9, 2008, over five weeks after the end of the first quarter.

Without admitting or denying the allegations in the complaint, Perry consented to the entry of the Final Judgment permanently enjoining him from future violations of Section 17(a)(3) of the Securities Act of 1933, and ordering him to pay a civil penalty in the amount of $80,000.

BROKER CHARGED WITH STEALING INVESTOR FUNDS

FROM: SECURITIES AND EXCHANGE COMMISSION
Charges Connecticut-Based Broker for Stealing Investor Funds

The Securities and Exchange Commission announced today that it has charged Stephen B. Blankenship, a resident of New Fairfield, Connecticut, and Deer Hill Financial Group, LLC, a Connecticut limited liability company under Blankenship’s control, with a scheme to defraud investors. The Commission’s Complaint alleges that, from at least 2002 through November 2011, Blankenship misappropriated at least $600,000 from at least 12 brokerage customers by falsely representing that he would invest their funds in securities through defendant Deer Hill.

The SEC alleges that until November 2011, Blankenship was a registered representative of Vanderbilt Securities, LLC, a registered broker-dealer based in Melville, New York. According to the complaint, Blankenship lied to his brokerage customers and in many instances, lured customers to withdraw money from their brokerage accounts with promises that they could obtain a greater rate of return by investing through Deer Hill. The complaint alleges that Blankenship assured his customers that he would invest their money in established securities such as publicly traded mutual funds. When customers requested account statements, Blankenship provided the customers with fictitious statements from Deer Hill that falsely represented that Blankenship had invested their money in a variety of investments.

According to the SEC’s Complaint, Blankenship never invested the customers’ money. Instead, Blankenship used the customers’ money for personal expenses, business expenses and to make Ponzi-like payments to other customers who requested a return of all or part of their investment.

The action was filed in federal court in Connecticut on September 13, 2012, and the Complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. The Commission also alleges that the defendants violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Section 15(a) of the Exchange Act. In its action, the Commission seeks the entry of a permanent injunction against the defendants, disgorgement of ill-gotten gains by the defendants plus pre-judgment interest thereon, and the imposition of civil monetary penalties.

Based on the same misconduct, the U.S. Attorney’s Office for the District of Connecticut charged Blankenship with criminal violations. The Connecticut Department of Banking‘s Securities Division has obtained, by consent, a revocation of Blankenship’s registration and has barred Blankenship and Deer Hill from operating in Connecticut. The SEC thanks the U.S. Attorney’s Office for the District of Connecticut, the Connecticut Department of Banking’s Securities Division, and the police department in Danbury, Conn., for their assistance in this matter. The Commission’s investigation is continuing.

SEC CHARGES ASSET MANAGER WITH LYING TO INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Asset Manager Lied to Investors, Hid Major Losses While Boasting Remarkable Performance During Financial Crisis

09/07/2012 03:35 PM EDT
FOR IMMEDIATE RELEASE
2012-185

Washington, D.C., Sept. 7, 2012 – The Securities and Exchange Commission today announced an emergency enforcement action against an asset manager who has boasted remarkable investment success throughout the global financial crisis while allegedly exaggerating the value of the assets he manages and concealing major losses from investors.

The SEC alleges that Nikolai Battoo claims to manage $1.5 billion on behalf of investors around the world, including at least $100 million for U.S.-based investors. But contrary to Battoo’s proclaimed track record of exceptional risk-adjusted returns for his investors, he actually suffered major losses in 2008 due to his investments in the Bernard Madoff Ponzi scheme and a failed derivative investment program. Rather than admit the losses to investors, Battoo has been overstating the value of his investments in a variety of ways. By boasting benchmark-beating returns, he has continued to attract new investors. However, during the past several months, investors have requested redemptions on their investments with Battoo. Instead of paying them, Battoo has provided a series of excuses ranging from the MF Global collapse to others placing a hold on investors’ money due to government investigations.

In U.S. District Court for the Northern District of Illinois this week, the SEC sought and obtained a freeze of U.S.-based assets belonging to Battoo and two of his companies – BC Capital Group S.A. based in Panama and BC Capital Group Limited based in Hong Kong – in order to prevent additional harm to U.S. investors. In addition to Battoo and his companies, the SEC has charged Tracy Lee Sunderlage – an unregistered broker-dealer who was banned from the industry in a previous SEC enforcement action – for his involvement with Battoo’s investment program.

“Battoo attracted quite a following of investors by proclaiming his investments withstood the test of the financial crisis, but reality seems to have finally caught up with him,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Now, Battoo is offering investors one excuse after another for holding their money hostage.”

According to the SEC’s complaint, Battoo’s financial empire is an amorphous syndicate of funds, entities, and affiliates. Battoo manages significant assets for companies that sell investment products to U.S. investors. Battoo also has investment proceeds channeled to him by a network of U.S.-based investment advisers. Battoo has created for clients individualized “portfolios” that he manages under a brand name Private International Wealth Management (PIWM). These portfolios consist of holdings in several hedge funds he manages, holdings in other hedge funds, and other investments.

The SEC’s complaint alleges that Battoo pitches himself as a highly successful alternative asset manager with a track record unblemished by the global financial crisis of 2008. Battoo hyped his purported success at a “due diligence conference” that he and Sunderlage sponsored for existing and prospective investors at the Four Seasons Hotel in Las Vegas in January 2009. A promotional material for that conference boasted, “How is it that PIWM-I can produce positive results or significantly reduce market losses when nearly everyone else is losing 35 to 50%?”

According to the SEC’s complaint, Battoo arranged for “asset verifications” in 2009 to reassure clients that their money was safe and secure following the market collapse. The asset verifications, however, contained false and backdated information. For example, they identify investments in at least seven hedge funds that Battoo did not manage. Battoo’s actual investments in these hedge funds amounted to about $9 million while his asset verifications falsely stated the investments to be worth approximately $33 million. Moreover, these asset verifications improperly included backdated investments that also inflated the value of the PIWM portfolios..

The SEC’s complaint alleges that while Battoo claimed success, he actually sustained particularly heavy losses in 2008. First, he was terminated as an investment adviser to the master fund of a large international bank, which terminated him from a “fund linked certificate” program through which Battoo-managed hedge funds collectively invested about $138 million. After Battoo’s termination, the net asset value of the hedge fund managed for the bank plummeted by nearly 50 percent, and Battoo’s losses on the fund linked certificates exceeded $100 million. The other major loss suffered by Battoo’s asset management business later that year flowed from Bernie Madoff’s Ponzi scheme, in which several Battoo-managed hedge funds were heavily invested. However, following Madoff’s arrest, Battoo assured his investors that the Madoff fraud had only a nominal or minimal impact on the portfolios. However, several Battoo-managed portfolios held substantial investments in hedge funds that fed into the Madoff scheme. In fact, Battoo had borrowed money to amplify the size of his Madoff investments. Battoo similarly concealed from investors the losses stemming from the fund linked certificates. Without knowledge of these substantial losses, investors have collectively invested tens of millions of dollars with Battoo since 2009.

According to the SEC’s complaint, once investors increasingly began seeking redemptions late last year, Battoo offered several false explanations for not paying them. Originally, Battoo claimed that the significant exposure of some of his investment portfolios to the MF Global liquidation prevented him from redeeming invesmtents. However, Battoo’s actual exposure to MF Global is only a small fraction of what he has claimed. More recently, Battoo has said that certain counterparties had frozen the assets he manages based on investigations by U.S. government agencies, and that his attorneys were negotiating a “release” with the SEC. Prior to filing this complaint, Battoo’s assets were not frozen and he was not negotiating any release with the SEC.

The SEC alleges that Sunderlage – who was charged and banned from the industry by the SEC for participating in an offering fraud in 1986 (SEC v. Sunderlage, et al., 86 C 6101 (N.D. Ill.)) – received commissions from the sale of investments and also received management fees for acting as the designated investment adviser to numerous client trusts that invested with Battoo. Sunderlage thus acted as an unregistered broker-dealer and investment adviser in violation of his industry bar.

The SEC alleges that Battoo and his companies violated Sections 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule 206(4)-8 thereunder. The SEC alleges that Sunderlage violated Section 15(a)(1) and 15(b)(6)(B)(i) of the Exchange Act and Section 203(f) of the Advisers Act.

The SEC’s investigation, which is ongoing, has been conducted in the Chicago Regional Office by John D. Mitchell, Brian D. Fagel, Pesach Glaser and John T. Brodersen under the leadership of John J. Sikora, Jr. The SEC's litigation will be led by Jonathan S. Polish, Daniel J. Hayes, and Eric M. Phillips.

The SEC acknowledges the cooperation and assistance of the U.S. Commodity Futures Trading Commission (CFTC), which has filed charges against Battoo in a parallel action.

SEC CHARGES OWNER OF WEBSITE ZEEKREWARDS.COM WITH RUNNING A $600 MILLION PONZI SCHEME

THE SECURITIES AND EXCHANGE COMMISSION
　
Washington, D.C., Aug. 17, 2012 – The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze to halt a $600 million Ponzi scheme on the verge of collapse. The emergency action assures that victims can recoup more of their money and potentially avoid devastating losses.
　
The SEC alleges that online marketer Paul Burks of Lexington, N.C. and his company Rex Venture Group have raised money from more than one million Internet customers nationwide and overseas through the website ZeekRewards.com, which they began in January 2011.
　
According to the SEC’s complaint filed in federal court in Charlotte, N.C., customers were offered several ways to earn money through the ZeekRewards program, two of which 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.
　
The SEC alleges that investors were collectively promised up to 50 percent of the company’s daily net profits through a profit sharing system in which they accumulate rewards points that they can use for cash payouts. However, the website fraudulently conveyed the false impression that the company was extremely profitable when, in fact, the payouts to investors bore no relation to the company’s net profits. Most of ZeekRewards’ total revenues and the "net profits" paid to investors have been comprised of funds received from new investors in classic Ponzi scheme fashion.
　
"The obligations to investors drastically exceed the company’s cash on hand, which is why we need to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors," said Stephen Cohen, an Associate Director in the SEC’s Division of Enforcement. "ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing. In reality, their cash was just going to the earlier investor."
　
The SEC’s complaint alleges that the scheme is teetering on collapse with investor funds at risk of dissipation without its emergency enforcement action. Last month, ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million. If customers continue to increasingly elect to receive cash payouts rather than reinvesting their money to reach higher levels of rewards points, ZeekRewards’ cash outflows would eventually exceed its total revenue.
　
Burks has agreed to settle the SEC’s charges against him without admitting or denying the allegations, and agreed to cooperate with a court-appointed receiver.
　
According to the SEC’s complaint, ZeekRewards has paid out nearly $375 million to investors to date and holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds will be frozen under the emergency asset freeze granted by the court at the SEC’s request. Meanwhile, Burks has personally siphoned several million dollars of investors’ funds while operating Rex Venture and ZeekRewards, and he distributed at least $1 million to family members. Burks has agreed to relinquish his interest in the company and its assets plus pay a $4 million penalty. Additionally, the court has appointed a receiver to collect, marshal, manage and distribute remaining assets for return to harmed investors.
　
The SEC’s investigation was conducted by Brian M. Privor and Alfred C. Tierney in the SEC’s Enforcement Division in Washington D.C. The SEC acknowledges the assistance of the Quebec Autorite des Marches Financiers and the Ontario Securities Commission.

BRISTOL-MYERS SQUIBB EXEC. CHARGED BY SEC WITH INSIDER TRADING OF STOCK OPTIONS

FROM: SECURITIES AND EXCHANGE COMMISSIONOn August 2, 2012, the Securities and Exchange Commission charged an executive at Bristol-Myers Squibb with insider trading on confidential information about companies being targeted for potential acquisitions. His illegal trading took place as recently as just weeks ago.

The SEC alleges that Robert D. Ramnarine, who lives in East Brunswick, N.J., made more than $300,000 in illegal profits by misusing nonpublic information he obtained while helping Bristol-Myers Squibb evaluate whether to acquire three other pharmaceutical companies. He used multiple personal brokerage accounts to illegally trade in stock options of these potential target companies. Prior to some trading, Ramnarine conducted Internet research from his Bristol computer to determine whether he could be detected by regulators. He searched for such phrases as "can stock option be traced to purchaser" and "illegal insider trading options trace" and viewed such articles as "Ways to Avoid Insider Trading." Ramnarine even viewed a press release on the SEC’s website announcing an enforcement action arising from illegal trading in call options in advance of an acquisition announcement.

The SEC is seeking a court order to freeze Ramnarine’s brokerage account assets. In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey announced the arrest of Ramnarine today.

According to the SEC’s complaint filed in federal court in New Jersey, Ramnarine is an executive in the treasury department at Bristol-Myers Squibb. He conducted his insider trading schemes from August 2010 to July 2012, illegally trading in stock options of Pharmasset Inc., Amylin Pharmaceuticals Inc., and ZymoGenetics Inc. in advance of announcements that those companies would be acquired.

The SEC alleges that just as Bristol was finalizing its agreement with ZymoGenetics in late August 2010, Ramnarine started to buy out-of-the-money call options. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Ramnarine made $30,551 in illegal profits by trading ZymoGenetics call options in advance of a Sept. 7, 2010 public announcement that Bristol-Myers Squibb was acquiring ZymoGenetics.

The SEC further alleges that in advance of a Nov. 21, 2011 announcement that Pharmasset would be acquired by Gilead Sciences Inc., Ramnarine bought Pharmasset call options based on material, nonpublic information that he obtained from participating in Bristol-Myers Squibb’s evaluation of a possible acquisition of Pharmasset. This was part of an auction process conducted by Pharmasset and its investment bankers during the weeks before the Gilead-Pharmasset announcement. Ramnarine made $225,026 in illegal profits when he sold the calls immediately after the public announcement of Pharmasset’s sale.

According to the SEC’s complaint, Ramnarine very recently sold or "wrote" put options and purchased call options in advance of a June 29, 2012 announcement by Bristol-Myers Squibb that it would acquire Amylin. A put option is a security that derives its value from the underlying common stock. When investors sell or "write" puts, they obligate themselves to sell the underlying security at a certain price before the expiration date. Investors usually write puts when they believe the price of the underlying stock price is moving up. Ramnarine’s trades were based on material nonpublic information that he obtained by working on financing and capital structure matters as part of Bristol’s due diligence process leading up to the acquisition announcement. Ramnarine made $55,784 in illegal profits by trading Amylin put and call options in advance of the public announcement.

The SEC alleges that Ramnarine violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and (14)(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, an officer-and-director bar, a permanent injunction, and an order freezing the assets in Ramnarine’s brokerage accounts.

The SEC has coordinated its action with the U.S. Attorney’s Office for the District of New Jersey, and also appreciates the assistance of the Options Regulatory Surveillance Authority and Federal Bureau of Investigation.

SEC ALLEGES A SCHEME INVOLVING BRIBING STOCK BROKERS TO INCREASE STOCK PRICE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Thursday, July 5, 2012
CEO of Axius Inc. and Finance Professional Indicted for Alleged Roles in Scheme to Bribe Stock Brokers and Manipulate Stock Prices
WASHINGTON – The chief executive officer (CEO) of Axius Inc., a Nevada corporation, and a finance professional were indicted today on multiple charges for their alleged roles in a scheme to bribe stock brokers and manipulate the share price of Axius stock, announced Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division and U.S. Attorney Loretta E. Lynch for the Eastern District of New York.

Roland Kaufmann, a Swiss citizen and the CEO of Axius, and Jean-Pierre Neuhaus, a Swiss citizen and finance professional, were each charged in an indictment filed today in the Eastern District of New York with one count of conspiracy to commit securities fraud and to violate the Travel Act, one count of securities fraud, one count of wire fraud, one count of violating the Travel Act, one count of conspiracy to commit money laundering and one count of money laundering.  According to court documents, Axius is incorporated in Nevada and its principal offices are in Dubai, United Arab Emirates.  Axius is a “holding company and business incubator” that develops other businesses.

“As CEO of Axius, Mr. Kaufmann allegedly conspired with Mr. Neuhaus to fraudulently manipulate the value of his company’s stock,” said Assistant Attorney General Breuer.  “According to today’s indictment, he attempted to bribe stock brokers into artificially propping up the value of Axius stock.  With our partners in the U.S. Attorneys’ Offices, the Criminal Division’s Fraud Section is pursuing a nationwide effort to investigate and prosecute fraudulent conduct in our securities markets.”

“Rather than rely on the market to set the true value of Axius’ stock, the defendants allegedly sought to buy the best price possible through bribery and deception,” said U.S. Attorney Lynch.  “Their scheme stood to enrich themselves at the expense of the investing public.  We will vigorously investigate and prosecute any such corruption in the securities markets.”

“Conspiring to inflate the price of Axius shares artificially was likely to result in unjust enrichment for the defendants and undeserved losses for investors,” said Assistant Director-in-Charge Janice K. Fedarcyk of the FBI in New York.  “Market-driven fluctuations in share prices are risks investors have to accept. Illegal manipulations become the subject of FBI investigations.”

The indictment alleges that Kaufmann, 60, agreed with Neuhaus, 55, to defraud investors in Axius common stock by bribing stock brokers and manipulating the share price.  As part of the scheme, they enlisted the assistance of an individual they believed to have access to a group of corrupt stock brokers; this individual was in fact an undercover law enforcement agent.  Kaufmann and Neuhaus believed that the undercover agent controlled a network of stockbrokers in the United States with discretionary authority to trade stocks on behalf of their clients.

The indictment alleges that Kaufmann and Neuhaus instructed the undercover agent to direct brokers to purchase Axius shares that were owned or controlled by Kaufmann in return for a secret kickback of approximately 26 to 28 percent of the share price.  Kaufmann and Neuhaus allegedly instructed the undercover agent as to the price the brokers should pay for the stock, and Kaufmann specifically instructed the undercover agent that the brokers would have to pay gradually higher prices for the shares they were buying.  The indictment alleges that Kaufmann and Neuhaus directed the undercover agent that the brokers were to refrain from selling the Axius shares they purchased on behalf of their clients for a one-year period.  By preventing sales of Axius stock, Kaufmann and Neuhaus allegedly intended to maintain the fraudulently inflated share price for Axius stock.

Kaufmann and Neuhaus were originally charged in a criminal complaint filed in the Eastern District of New York on March 8, 2012.  They were arrested on March 8, 2012.  No investors were actually defrauded in the undercover operation.

In a related action, the Securities and Exchange Commission (SEC) today filed a civil enforcement action against Kaufmann and Neuhaus in the Eastern District of New York.  The department thanks the SEC for its cooperation in this matter.

DOJ OFFICIAL ON PROTECTING INVESTORS FROM FRAUD

FROM:  U.S. DEPARTMENT OF JUSTICE
Protecting Investors from Fraud
The following post appears courtesy of Barbara L. McQuade, the U.S. Attorney for the Eastern District of Michigan
Investor fraud schemes are among the most pervasive types of cases handled by the White Collar Crime Unit of the U.S. Attorney’s Office for the Eastern District of Michigan.
In the past year, our prosecutors have charged a number of investment advisors and stock brokers with defrauding their investors. In one case, a defendant encouraged elderly investors to liquidate legitimate investments to invest with him. In fact, he kept their funds for his own use, depleting many of the victims of their life savings, totaling $4 million. In another case, a defendant offered investments over the Internet, promising high returns and taking in $72 million in investor dollars. Instead, the investments either generated losses or were never made at all.

Victims of fraud include individual investors with modest portfolios as well as institutional investors with large investments, such as pension funds.

President Obama’s Financial Fraud Enforcement Task Force was designed to attack fraud, waste and abuse by increasing coordination among agencies and fully leveraging the government’s law enforcement and regulatory system. As part of that effort, the U.S. Attorney’s Office for the Eastern District of Michigan is aggressively prosecuting financial fraud cases. In the largest investment scheme in the history of the district, a defendant was recently convicted of defrauding more than 1,200 individuals by convincing them to invest more than $350 million in fictitious limited liability corporations. He was sentenced to 16 years in prison.

In addition to prosecuting perpetrators, we are also combating fraud by raising public awareness to help investors protect themselves. Knowledge of common fraud schemes can help prevent individuals from becoming victims of these crimes.

One of the most common investor fraud schemes is the classic “Ponzi” scheme, named for Charles Ponzi, who devised the concept in the 1920s. In a Ponzi scheme, the investment promoter promises investors a high rate of return for their investment and then uses the funds of new investors to pay the promised return to the earlier investors. These early investors then unwittingly help advance the scheme by bragging about the high rate of return on their investment. Eventually, of course, the scheme collapses when the swindler needs to pay out more than he can take in. A recent example of this type of fraud was the massive scheme Bernard Madoff operated that cost investors billions of dollars.

Another common scheme is known as affinity fraud. In these schemes, perpetrators prey on members of an identifiable group, such as a church community, a school parent-teacher organization, a country club or a professional group. The investment advisor will join the group, or pretend to be part of it. As a result, he enjoys an inflated credibility that encourages members of the group to trust him and be less cautious than they might otherwise be when making an investment.

Another frequently used tactic used by perpetrators of investment fraud is to ingratiate themselves with their victims. In one recent case, a defendant regularly visited his clients at home, shared details of his personal life with them, attended family functions, such as birthday parties and weddings, provided gifts to family members, made donations to the clients’ preferred charities, and assisted clients in life decisions. After obtaining their trust, he took their money for his own use.

FINANCIAL ADVISER DISAPPEARS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., July 2, 2012 – The Securities and Exchange Commission today obtained a court order to freeze the assets of a Georgia-based investment adviser who has apparently gone into hiding after orchestrating a $40 million investment fraud.

The SEC alleges that Aubrey Lee Price raised money from more than 100 investors living primarily in Georgia and Florida by selling shares in an unregistered investment fund (PFG) that he managed. Price purported to invest fund assets in traditional marketable securities, but he also made illiquid investments in South America real estate and a troubled South Georgia bank. In order to conceal mounting losses of investor funds, Price created bogus account statements with false account balances and returns that were provided to investors and bank regulators.

“Price raised nearly $40 million from investors and made woeful financial transactions that he hid from them,” said William P. Hicks, Associate Director of the SEC’s Atlanta Regional Office. “Now both the money and Price are missing.”

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Georgia, Price is believed to be a resident of Lowndes County in Georgia after moving from Manatee County, Fla.

The SEC alleges that Price began his scheme in 2008. According to PFG’s private placement memorandum, the investment objective was to achieve “positive total returns with low volatility” by investing in a variety of opportunities, including equity securities traded on the U.S. markets. A significant portion of PFG investor funds – approximately $36.9 million – was placed in a securities trading account at a broker-dealer. The trading account suffered massive trading losses and money was frequently wire-transferred to PFG’s operating bank account. Throughout the time during which PFG suffered trading losses, client account statements prepared by Price were made available to investors indicating fictitious amounts of assets and investment returns.

According to the SEC’s complaint, Price has sent a letter to some individuals dated June 2012 and titled “Confidential Confession For Regulators – PFG, LLC and PFGBI, LLC Summary.” In the 22-page letter, Price admits that he “falsified statements with false returns” in order to conceal between $20 million and $23 million in investor losses.

The Honorable Timothy C. Batten, Sr. granted the SEC’s request for a temporary restraining order and entered an asset freeze for the benefit of investors against Price, PFG, and his affiliated entities.

Anyone with information about Price’s whereabouts should contact the Atlanta office of the Federal Bureau of Investigation at 404-679-9000 or the Lowndes County, Georgia Sheriff’s Office at 229-671-2985.

The SEC’s investigation, which is continuing, was conducted in the Atlanta Regional Office by Senior Trial Counsels David Baddley, Kristin Wilhelm and W. Shawn Murnahan, and Assistant Regional Director Aaron W. Lipson. Mr. Murnahan is leading the SEC’s ongoing litigation. The Commission thanks the Federal Bureau of Investigation for the significant assistance provided in this matter.

COMPANY SETTLES CHARGES OF ALLEGED BRIBERY

FROM:  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 27, 2012 –The Securities and Exchange Commission today charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co.

FalconStor admitted to the bribery scheme and agreed to pay a $2.9 million penalty and to institute enhanced compliance measures to settle the SEC’s civil lawsuit, filed in U.S. District Court for the Eastern District of New York. The settlement is subject to court approval. FalconStor will pay an additional $2.9 million as part of a deferred prosecution agreement with the U.S. Attorney’s Office for the EDNY, which filed a related criminal case against the Melville, N.Y., company.

According to the SEC, FalconStor’s now deceased co-founder, chairman, and former chief executive ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives, starting in October 2007. Lavish entertainment at casinos, and payments in cash, traveler’s checks, gift cards, and grants of FalconStor options and restricted stock, helped FalconStor secure a multi-million dollar contract with the J.P. Morgan Chase subsidiary, the SEC said.

The J.P. Morgan Chase subsidiary became one of FalconStor’s largest customers and FalconStor touted the relationship in earnings calls and releases as proof of the strength of its products and its strides in moving to direct sales rather than relying on third-party distributors. The SEC said FalconStor never told investors about the bribes and inaccurately recorded the payments as “compensation,” “sales promotion,” or “entertainment” expenses.

“FalconStor overstepped the bounds in its pursuit of business. This case shows that when such conduct results in securities law violations, the Commission will not hesitate to hold wrongdoers accountable,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office, adding, “FalconStor claimed the contract was a vindication of the company’s technology, but neglected to tell investors that the contract derived from the bribes that it paid.”

FalconStor’s CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer, and FalconStor’s stock fell by more than 22 percent on the news.

According to the SEC’s complaint, FalconStor made materially misleading statements in earnings releases filed with the SEC in April 2008 and February 2009. The SEC said FalconStor also granted restricted stock and options to relatives of two of the JP Morgan Chase executives even though they provided no bona fide services to the company, making the grants ineligible under FalconStor’s incentive stock plan. In addition, the SEC said FalconStor failed to accurately record the expenses associated with the bribes on its books and records, and lacked effective internal controls to detect or prevent bribery, which violated state law and FalconStor’s own policies. The complaint charges FalconStor with violating the books-and-records and internal controls provisions of U.S. securities laws, and violations of the offering registration provisions and certain antifraud provisions.

The SEC thanks the U.S. Attorney’s Office for the Eastern District of New York and the Federal Bureau of Investigation for their assistance in this matter, and acknowledges the cooperation of the New York County District Attorney’s Office in the investigation.

Leslie Kazon, Joseph P. Ceglio, Christopher C. Mele, and Preethi Krishnamurthy of the SEC’s New York Regional Office conducted the SEC’s investigation.

SEC CHARGES FORMER OIL COMPANY EXECUTIVE WITH INSIDER TRADING

Photo:  NYSE.  Credit:  Wikimedia
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
May 11, 2012
The Securities and Exchange Commission today announced charges against a former executive at a Bakersfield, Calif.-based oil and gas production company for insider trading in his company’s stock using confidential information received while he was the CEO and chairman of the board.

The Commission alleges that Frank Lynn Blystone received e-mail updates prior to his March 5, 2010, retirement from Tri-Valley Corporation that contained confidential information about the company’s ongoing efforts to raise capital and problems it had encountered in a securities offering. Based on the non-public information he received, Blystone liquidated stock he held in a brokerage account shortly before a Tri-Valley announcement on April 6, 2010, that it had entered into an agreement with six institutional investors to sell its securities at a deep discount from the prevailing market price. Blystone avoided losses of approximately $36,000 when the company’s stock price fell 38 percent after the announcement.

Blystone has agreed to pay $75,000 to settle the Commission’s charges without admitting or denying the allegations.

According to the Commission’s complaint filed in the U.S. District Court for the Eastern District of California, based on the confidential information he received, Blystone concluded that the terms of a contemplated securities offering by Tri-Valley would be onerous. He foresaw that either the company’s securities would be sold at a discount to the market price or additional securities would be issued if the price of the stock fell, which would dilute the value of Tri-Valley’s stock. After leaving the company, Blystone’s concerns about Tri-Valley’s securities offering were reinforced when he learned of plans to sell two oil drilling leases in what he characterized in an e-mail to a friend as a “fire sale.” Therefore, Blystone liquidated 50,100 shares of Tri-Valley stock that he held in a brokerage account. He sold 90 percent of those shares on April 5, the day before Tri-Valley’s public announcement.

The complaint charges Blystone with violating Section 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5(a) and (c) thereunder. Blystone agreed to pay disgorgement of $36,267, prejudgment interest of $2,493, and a penalty of $36,267. He also agreed to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 and barring him from serving as an officer or director of a public company. The settlement is subject to court approval.

SHANGHAI-BASED ACCOUNTING FIRM REFUSED TO TURN OVER AUDIT WORK PAPERS TO SEC

Photo:  Wikimedia
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 9, 2012 — The Securities and Exchange Commission today announced an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for its refusal to provide the agency with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.

According to the SEC’s order instituting administrative proceedings against D&T Shanghai, the agency has been making extensive efforts for more than two years to obtain documents related to the firm’s work for the company, which issues U.S. securities registered with the SEC. The firm is charged with violating the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. D&T Shanghai has nonetheless failed to provide the documents, citing Chinese law as the reason for its refusal.

“As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.  “Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors.”
Scott Friestad, Associate Director of the SEC’s Division of Enforcement, added, “Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors.”

In a separate matter last year, the SEC filed a subpoena enforcement action against D&T Shanghai in federal court after the firm failed to produce documents in response to a subpoena related to an SEC investigation into possible fraud by one of its longtime clients, Longtop Financial Technologies Limited. The SEC later filed charges against Longtop for alleged reporting failures.

According to the SEC’s order in this latest enforcement action, D&T Shanghai is a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB). In April 2010, SEC staff began seeking D&T Shanghai’s audit work papers related to its independent audit work for the client involved in an SEC investigation. The SEC served Deloitte LLP, the U.S. member firm, with a subpoena requesting various related documents. Counsel for Deloitte LLP informed the staff that the U.S. firm did not perform any audit work for the client and therefore did not possess the documents related to the subpoena.

According to the SEC’s order, in the SEC staff’s continuing quest for the audit work papers in D&T Shanghai’s possession, they were later informed by counsel for Deloitte’s global firm that the agency’s request for audit work papers had been specifically communicated to D&T Shanghai. Subsequently, the staff served D&T Shanghai with a request through Deloitte LLP for the audit work papers pursuant to Section 106 of the Sarbanes-Oxley Act. D&T Shanghai would not produce the relevant audit work papers because of its interpretation that it is prevented from doing so by Chinese law. SEC staff also has sought to obtain the relevant audit work papers through international sharing mechanisms, yet these efforts have been unsuccessful.

This is the first time the Commission has brought an enforcement action against a foreign audit firm failing to comply with a Section 106 request.

In the SEC’s order, the Enforcement Division alleges that D&T Shanghai willfully violated the Sarbanes-Oxley Act and the Securities Exchange Act of 1934 by failing to provide the SEC with the audit work papers. The administrative proceeding will be assigned to an Administrative Law Judge at the agency. The judge would determine the appropriate remedial sanctions if the judge finds in favor of the SEC staff.

MARKET TIMERS TIME HAS RUN OUT

FROM:  SECURITIES AND EXCHANGE COMMISSION 
May 8, 2012
Court Enters Final Judgments Against Defendants in Market Timing Case
The Commission announced that a Massachusetts federal court entered final judgments by consent against James Tambone and Robert Hussey, defendants in a case filed by the Commission on May 19, 2006. The Commission alleged in its complaint that from 1998 through 2003, Tambone and Hussey, two senior executives at Columbia Funds Distributor, Inc., the underwriter for the Columbia complex of mutual funds, allowed certain preferred customers to engage in frequent short-term trading in certain Columbia mutual funds in contravention of the prospectuses that represented that the funds did not permit, or were otherwise hostile to, market timing or other short-term or excessive trading.

Without admitting or denying the allegations in the Commission’s complaint, Hussey consented to a final judgment entered by the Court on April 13, 2012 and Tambone consented to a final judgment entered by the Court on May 7, 2012. The final judgment ordered Hussey to pay disgorgement in the amount of $37,500, plus prejudgment interest in the amount of $20,980, and a civil penalty of $75,000, for a total amount of $133,480. The final judgment ordered Tambone to pay disgorgement in the amount of $26,687, plus prejudgment interest in the amount of $15,344.38, and a civil penalty of $75,000, for a total amount of $117,031.38.

On March 19, 2012, the parties stipulated to dismiss the claim in the complaint alleging that Tambone and Hussey aided and abetted violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The claim in the complaint alleging direct violations of Section 10(b) and Rule 10b-5 was dismissed earlier in the litigation.

MONTANA PARALEGAL AND FATHER CHARGED IN INSIDER TRADING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Montana-Based Paralegal and Her Father in Insider Trading Scheme
Washington, D.C., May 7, 2012 — The Securities and Exchange Commission today charged a former paralegal at a Kalispell, Mont.-based semiconductor company and her father with insider trading on confidential information about the 2009 acquisition of the company.

The SEC alleges that Angela Milliard wired money to her boyfriend’s brokerage account so she could illegally trade on nonpublic details she learned while working as a legal assistant on Semitool Inc.’s then-secret deal with a Silicon Valley company. She also tipped her father Kenneth Milliard with the confidential information. He then traded on the nonpublic information and tipped his sons, who also made trades. The morning the acquisition was announced, the Milliards sold their shares for illicit profits of more than $67,000.

Angela and Kenneth Milliard have agreed to settle the SEC’s charges by paying more than $175,000.  “Angela Milliard exploited her access to confidential merger and acquisition information to illicitly enrich herself and her family,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “As a member of a legal department entrusted with sensitive deal documents, she had a duty to safeguard that information, not trade on it.”

According to the SEC’s complaint filed in federal court in Montana, Angela Milliard first gained access to confidential deal information in October 2009, when she learned that Semitool and the acquiring company – Applied Materials Inc. – had entered into advanced merger negotiations. After learning that the tender offer was to happen in mid-November at a nearly 30 percent premium over Semitool’s then-trading price, she wired money to her boyfriend’s brokerage account and used it to surreptitiously buy shares of Semitool.
The SEC alleges that Angela Milliard tipped her father, who also purchased Semitool shares and encouraged his sons to do the same, which they did. They reaped their illegal insider trading profits following the public announcement of the merger on Nov. 17, 2009.

The Milliards settled the SEC’s charges without admitting or denying the allegations. Angela Milliard agreed to pay full disgorgement of her trading profits totaling $20,355 plus prejudgment interest of $1,614.60 and a penalty of $54,022.11. Kenneth Milliard agreed to pay full disgorgement of his and his sons’ trading profits totaling $47,805 plus prejudgment interest of $3,765.19 and a penalty of $47,805.11.
The SEC’s investigation was conducted by Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office.

TWO INVESTOR SEMINAR SALESPEOPLE ARE CHARGED FOR SECURITIES LAW VIOLATIONS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
May 1, 2012
SEC Charges Two Former Investor Seminar Salespeople with Securities Law Violations
On April 30, 2012, the Securities and Exchange Commission filed a settled civil injunctive action against two former salespeople in the investor seminar industry. Defendants Darlene Nelson Powell and Robert Eldridge consented to the entry of final judgments without admitting or denying the allegations of the Commission’s complaint.

The Commission’s complaint alleges that Powell and Eldridge were independent contractors for Long Term-Short Term Inc., d/b/a BetterTrades, and sold products and services to investors who wanted to learn how to trade options and other securities. The complaint alleges that Eldridge put on a live online securities trading mentoring program under the name “Daily Cash Flow Trading Lab.” According to the complaint, Eldridge made misleading statements that he was an experienced, successful securities trader and made additional misleading statements about the success of securities trading in the Daily Cash Flow Trading Lab. Based on Eldridge’s misrepresentations, the complaint alleges that customers purchased subscriptions to the trading lab and traded securities he recommended. The complaint further alleges that Powell misleadingly portrayed herself as an expert securities investor who made her living trading securities. Contrary to her representation that she became wealthy trading securities, the complaint alleges that she was not a successful securities trader. According to the complaint, Powell’s self-portrayal as a successful securities trader misled investors into believing that they too would profit trading securities if they purchased the instructional courses and other products and sold and followed the securities trading strategies she espoused. The complaint alleges that, by their conduct, the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Exchange Act Rule 10b-5.

Defendants Powell and Eldridge consented to final judgments enjoining them from violating the antifraud provisions of the federal securities laws, and enjoining them for five years from receiving compensation from participating in securities trading seminars. Powell consented to the entry of a final judgment imposing a civil money penalty of $130,000 and ordering her to pay disgorgement of $81,036 and prejudgment interest of $21,840. Eldridge consented to a judgment that does not impose civil penalties based on his sworn representations in a Statement of Financial Condition and other documents.

SEC CHARGES UBS PUERTO RICO AND TWO EXECUTIVES WITH DEFRAUDING FUND CUSTOMERS

FROM:  SECURITIES AND EXCHANGE COMMISSION
SEC Charges UBS Puerto Rico and Two Executives with Defrauding Fund Customers
Washington, D.C., May 1, 2012 — The Securities and Exchange Commission today charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.

UBS Puerto Rico agreed to settle the SEC’s charges by paying $26.6 million that will be placed into a fund for harmed investors.
According to the SEC’s order instituting settled administrative proceedings against UBS Puerto Rico, the firm knew about a significant “supply and demand imbalance” and discussed the “weak secondary market” internally. However, UBS Puerto Rico misled investors and failed to disclose that it controlled the secondary market, where investors sought to sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, UBS Puerto Rico later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors.

The SEC instituted contested administrative proceedings against UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz.

“UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law – accurate price and liquidity information, and a trading desk that did not advantage UBS’s trades over those of its customers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We will aggressively prosecute firms that use conflicts of interest for their own financial gain.”
According to the SEC’s order, starting in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance and continuously high premiums to net asset value (up to 45 percent) as the result of supply and demand in a competitive and liquid secondary market. When investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Despite a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business. Throughout this period, UBS Puerto Rico failed to disclose the true state of the market to investors.

According to the SEC’s order, UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . . [so] prices transparently develop based on supply and demand.” To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing” in one document, which included:
Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidate UBS Puerto Rico’s inventory first, preventing customers from selling their shares.

Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

UBS Puerto Rico also increased solicitation efforts to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support.

According to the SEC’s order against Ferrer, he made misrepresentations and did not disclose numerous material facts about the closed-end funds. For example, although Ferrer was well aware of the supply and demand imbalance and privately discussed UBS Puerto Rico’s growing inventory and support of the market, he caused UBS Puerto Rico to conduct new primary closed-end fund offerings while directing financial advisors to represent to customers that the market was experiencing “low volatility” and providing “superior returns.” Ferrer also repeatedly made misleading statements about closed-end fund market prices and touted that the funds would always trade at high premiums to net asset value, even while UBS Puerto Rico was substantially reducing its inventory and causing huge investor losses.

According to the SEC’s order against Ortiz, he falsely represented that closed-end fund shares were priced based on supply and demand while in reality he and the firm concealed the inventory increases and rarely changed prices, allowing UBS Puerto Rico to promote the façade of a liquid, stable market. As UBS Puerto Rico was reducing its inventory in 2009, Ortiz touted increased closed-end fund secondary market liquidity and superior price performance to investors at a UBS investor conference. At the same time, Ortiz was executing UBS Puerto Rico’s inventory reduction scheme that involved “eliminat[ing]” marketable customer sell orders to dump UBS Puerto Rico’s inventory first, putting UBS Puerto Rico’s interests ahead of their customers’ orders.

UBS Puerto Rico agreed to settle the SEC’s charges, without admitting or denying the findings, that it violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order requires UBS Puerto Rico to pay $11.5 million in disgorgement, $1.1 million in prejudgment interest, and a penalty of $14 million. In addition to the monetary relief, the SEC’s order censures UBS Puerto Rico, directs it to cease-and-desist from committing or causing any further violations of the provisions charged, and orders the firm to comply with its undertaking to retain an independent consultant at UBS Puerto Rico’s expense.
Among other things, the independent consultant will review the adequacy of UBS Puerto Rico’s closed-end fund disclosures and trading and pricing policies, procedures, and practices. UBS Puerto Rico shall abide by the determinations of the consultant and adopt and implement all recommendations.

This case was investigated by Jason R. Berkowitz and Sean M. O’Neill of the SEC’s Miami Regional Office following an examination conducted by Carlos A. Gutierrez and Brian H. Dyer under the supervision of Nicholas A. Monaco and John C. Mattimore of the Miami office. Robert K. Levenson, Regional Trial Counsel, and Edward D. McCutcheon, Senior Trial Counsel, will lead the SEC’s litigation.
The SEC acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA).