WALL STREET FRAUDSTERS

THE WANING OF THE WHIZ

2026-02-27T03:11:00.000-05:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

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“Stock Trading Whiz Kid” to Pay $1.5 Million to Settle Stock Newsletter Fraud Charges

FOR IMMEDIATE RELEASE

2016-184

Washington D.C., Sept. 13, 2016 — The Securities and Exchange Commission today announced that a self-proclaimed “stock trading whiz kid” and his stock newsletter company in Los Angeles have agreed to pay nearly $1.5 million to settle charges that they defrauded subscribers through false statements and misrepresentations.

According to the SEC’s complaint, Manuel E. Jesus and his newsletter company Wealthpire Inc. used advertising materials and websites touting him as “the untutored prodigy of stock investing” under the alias Manny Backus. A self-purported “math whiz” who boasted a “skyscraping” IQ and training as a professional chess player, Backus claimed to be actively trading in the stock market with “real money” by age 19. The SEC’s complaint also states that Wealthpire materials claimed that Backus made millions of dollars before “deciding to help other investors” by starting an alert service that let traders copy his every trading move.

The SEC alleges that from at least January 2012 to September 2014, Backus was not trading in the same stocks recommended by his services as he claimed. He wasn’t the one making all of the recommendations either. For instance, the SEC’s complaint alleges that Robert C. Joiner was paid by Wealthpire to make all of the stock picks for one alert service without any guidance from Backus on how to choose them. Joiner allegedly posed as Backus during chat room sessions by signing in using a password that Backus supplied, and Joiner told investors that he was buying and selling certain recommended stocks when no such transactions were actually taking place. Joiner also is named in the SEC’s complaint and agreed to settle the case.

The SEC’s complaint alleges a series of other misrepresentations to Wealthpire subscribers as well, including false claims about one particular stock alert service that purportedly made historic trading recommendations that yielded huge past returns higher than 1,400 percent.

“Investors who subscribe to trading alert services are relying on the purported expertise and success of those making the stock recommendations, but Wealthpire and Backus instead circulated repeated lies and falsehoods,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

The SEC has warned investors that investment newsletters can be used as tools for fraud, noting in an investor alert for example to beware false performance claims misrepresenting the track record of the newsletter’s investment recommendations and be suspicious if the newsletter does not disclose having received any compensation.

Backus and Wealthpire agreed to pay disgorgement of $1,135,145 plus interest of $112,902, and Backus also must pay a $235,000 penalty. Without admitting or denying the allegations, Backus, Wealthpire, and Joiner consented to the entry of a final judgment permanently enjoining each of them from future violations of the antifraud provisions of the federal securities laws.

The SEC’s investigation was conducted by Lucee Kirka and supervised by Robert Conrrad of the Los Angeles office.

SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

2021-06-21T16:10:00.005-04:00

SEC.gov | SEC Obtains Asset Freeze Against Offshore Fund and Its Operators

SEC finds yet another scheme to defraud investors.

ALLEGED INFLATION OF PERFORMANCE BY HEDGE FUND ADVISER LEADS TO SEC CHARGES

2018-05-09T16:56:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

SEC Charges Hedge Fund Adviser With Deceiving Investors by Inflating Fund Performance

FOR IMMEDIATE RELEASE

2018-83

Washington D.C., May 9, 2018 —
The Securities and Exchange Commission today announced that it has charged New York-based investment adviser Premium Point Investments LP with inflating the value of private funds it advised by hundreds of millions of dollars. The SEC also charged Premium Point’s CEO and chief investment officer Anilesh Ahuja as well as Amin Majidi, a former partner and portfolio manager at the firm, and former trader Jeremy Shor.

According to the SEC’s complaint, the scheme ran from at least September 2015 through March 2016 and relied on a secret deal where in exchange for sending trades to a broker-dealer, Premium Point received inflated broker quotes for mortgage-backed securities (MBS). In addition, the defendants allegedly used “imputed” mid-point valuations, which were applied in a manner that further inflated the value of securities. This practice allegedly boosted the value of many of Premium Point’s MBS holdings and further exaggerated returns. The complaint alleges that the defendants overstated the funds’ value in order to conceal poor fund performance and attract and retain investors.

“Investors rely on their investment advisers to fairly and accurately value securities, and that is especially true when the securities trade in opaque markets,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. “As we allege, Premium Point masked its true performance, which denied investors the opportunity to make informed investment decisions.”

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges the defendants with fraud, with aiding and abetting fraud, or both. The SEC complaint seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of this matter, today announced charges against Ahuja, Majidi, and Shor.

The SEC’s investigation, which is continuing, was conducted by H. Gregory Baker and Brian Fitzpatrick of the Asset Management Unit, Osman Nawaz of the Complex Financial Instruments Unit, and Preethi Krishnamurthy of the New York Regional Office under the supervision of Mark D. Salzberg of the Asset Management Unit. The litigation is being conducted by Ms. Krishnamurthy, Mr. Baker, and Mr. Nawaz. The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office and the FBI in this matter.

SEC CHARGES PANASONIC CORPORATION WITH VIOLATING FOREIGN CORRUPT PRACTICES ACT (FCPA)

2018-05-02T14:08:00.001-04:00

FROM: U.S. SECURITIES AND EXCHANGE WEBSITE

Panasonic Charged With FCPA and Accounting Fraud Violations

FOR IMMEDIATE RELEASE

2018-73

Washington D.C., April 30, 2018 —
The Securities and Exchange Commission today announced that Japan-based Panasonic Corp. will pay more than $143 million to resolve charges of Foreign Corrupt Practices Act (FCPA) and accounting fraud violations involving its global avionics business.

According to the SEC’s order, Panasonic’s U.S. subsidiary, Panasonic Avionics Corp. (PAC), a provider of in-flight entertainment and communication systems, offered a lucrative consulting position to a government official at a state-owned airline to induce the official to help PAC in obtaining and retaining business from the airline. At the time it orchestrated the bribery scheme, PAC was negotiating two agreements with the airline valued at more than $700 million. PAC ultimately retained the official and paid approximately $875,000 for a position that required little to no work, using an unrelated third-party vendor to conceal the payments.

The SEC’s order also found that Panasonic fraudulently overstated pre-tax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012. The fraud was accomplished by PAC backdating an agreement with the airline and providing misleading information to PAC’s auditor.

The SEC order further found that Panasonic lacked sufficient internal accounting controls and failed to make and keep accurate books and records in connection with purported consultants retained by PAC, as well as sales agents used to solicit business from state-owned airlines and other customers throughout the Middle East and Asia.

“Investors rightfully expect that the companies they invest in will not engage in bribery or fraud,” said Antonia Chion, Associate Director of the SEC’s Enforcement Division. “Issuers must implement effective controls for the selection and engagement of consultants and agents to ensure compliance with anti-bribery statutes.”

“Issuers need to ensure that their rules and controls address the specific bribery and corruption risks they face when operating in global markets with customers that are state-owned entities,” said Charles Cain, Chief of the Enforcement Division’s FCPA Unit. “It is not enough for a company merely to set up policies and procedures that are not enforced or are easily circumvented by employees.”

Panasonic consented to the SEC’s order finding that it violated the anti-bribery, anti-fraud, books and records, internal accounting controls, and reporting provisions of the Securities Exchange Act of 1934, and ordering it to pay approximately $143 million in disgorgement and pre-judgement interest. In a related matter, the U.S. Department of Justice today announced that PAC would pay a criminal penalty of more than $137 million as part of a deferred prosecution agreement related to causing books and records violations of the FCPA.

The SEC’s investigation was conducted by Anik Shah, Dmitry Lukovsky, Mark Yost, Gregory Bockin, and Sonali Singh, and supervised by Mr. Cain, Ms. Chion, Stacy Bogert, and Kristen Dieter. The SEC appreciates the assistance of the Department of Justice Criminal Division’s Fraud Section as well as the Swiss Financial Market Supervisory Authority, Ontario Securities Commission, Securities and Commodities Authority of the United Arab Emirates, Financial Services Agency of Japan, Monetary Authority of Singapore, Securities Commission of Malaysia, Australian Securities & Investments Commission, and the Securities and Exchange Commission of Pakistan.

WHISTLEBLOWER RECEIVES $2.2 MILLION AWARD

2018-04-08T00:00:00.000-04:00

From U.S. Securities and Exchange Commission

Press Release
SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency Before SEC
FOR IMMEDIATE RELEASE
2018-58

Washington D.C., April 5, 2018 —
The Securities and Exchange Commission today announced a whistleblower award of more than $2.2 million to a former company insider whose tips helped the agency open an investigation that led to an enforcement action. The whistleblower first reported the information to another federal agency and later provided the same information to the SEC.

This is the first award paid under the “safe harbor” of Exchange Act Rule 21F-4(b)(7), which provides that if a whistleblower submits information to another federal agency and submits the same information to the SEC within 120 days, then the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency.

The whistleblower voluntarily reported information to a federal agency covered by the rule, which referred the matter to the SEC. The SEC then opened an investigation. Within 120 days of the initial report, the whistleblower provided the same information to the SEC and later provided substantial cooperation in the investigation. Although the SEC report came after the staff had opened its investigation, the SEC treated the submission as though it had been made when the whistleblower provided the information to the other agency.

SEC ANNOUNCING MORE BROKERS CHARGED FOR FRAUD

2017-12-06T17:56:00.002-05:00

The following press release comes from the U.S. Securities and Exchange Commission

Press Release

SEC Continues Crackdown on Brokers Defrauding Customers

FOR IMMEDIATE RELEASE

2017-223

Washington D.C., Dec. 6, 2017 —
The Securities and Exchange Commission today continued its crackdown on brokers who defraud customers, charging two New York-based brokers with making unsuitable trades that were costly for customers and lucrative for the brokers. The case follows similar charges of excessive trading by brokers brought in January, April, and September.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Zachary S. Berkey of Centerreach, New York, and Daniel T. Fischer of Greenwich, Connecticut, conducted in-and-out trading that was almost certain to lose money for customers while yielding commissions for themselves. According to the complaint, 10 customers of Four Points Capital Partners LLC, where Berkey and Fischer previously worked, lost a total of $573,867 while Berkey and Fischer received approximately $106,000 and $175,000, respectively, in commissions.

“We’re intensifying our focus on unscrupulous brokers and their harmful practices,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “As alleged in our complaint, Berkey and Fischer did grave harm to their customers by providing unsuitable recommendations and siphoning money in the form of high commissions and costs.”

According to the SEC’s complaint, since the customers incurred significant costs with every transaction and the securities were held briefly, the price of the securities had to rise significantly for customers to realize even a minimal profit. The complaint also alleges that Berkey and Fischer churned customer accounts and concealed material information from their customers, namely that the costs associated with their recommendations, including commissions and fees, would almost certainly exceed any potential gains on the trades. The complaint further alleges that Fischer engaged in unauthorized trading.

Without admitting or denying the SEC’s allegations, Fischer consented to a final judgment that permanently enjoins him from similar violations in the future and orders him to return his allegedly ill-gotten gains with interest and pay a $160,000 penalty. The settlement is subject to court approval. Fischer separately agreed to an SEC order barring him from the securities industry and penny stock trading. The SEC’s litigation against Berkey will proceed in federal district court in Manhattan.

The SEC’s investigation was conducted by Hane L. Kim, Karen Lee, David Stoelting, and Gerald A. Gross. The litigation will be led by Mr. Stoelting, Ms. Kim, and Ms. Lee. The case is being supervised by Mr. Wadhwa. The SEC examination that led to the investigation was conducted by Rosanne R. Smith, Terrence P. Bohan, William D. Ostrow, and Doreen Piccirillo. The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Office of Montana State Auditor, Commissioner of Securities and Insurance.

SEC TAKES ACTION AGAINST UNDISCLOSED PAID STOCK TOUTING

2017-04-10T14:56:00.001-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release
SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors
27 Firms and Individuals Charged With Fraudulent Promotion of Stocks

FOR IMMEDIATE RELEASE
2017-79
Washington D.C., April 10, 2017—
The Securities and Exchange Commission today announced enforcement actions against 27 individuals and entities behind various alleged stock promotion schemes that left investors with the impression they were reading independent, unbiased analyses on investing websites while writers were being secretly compensated for touting company stocks.

SEC investigations uncovered scenarios in which public companies hired promoters or communications firms to generate publicity for their stocks, and the firms subsequently hired writers to publish articles that did not publicly disclose the payments from the companies. The writers allegedly posted bullish articles about the companies on the internet under the guise of impartiality when in reality they were nothing more than paid advertisements. More than 250 articles specifically included false statements that the writers had not been compensated by the companies they were writing about, the SEC alleges.

“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public. These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses,” said Stephanie Avakian, Acting Director of the SEC’s Division of Enforcement.

According to the SEC’s orders as well as a pair of complaints filed in federal district court, deceptive measures were often used to hide the true sources of the articles from investors. For example, one writer wrote under his own name as well as at least nine pseudonyms, including a persona he invented who claimed to be “an analyst and fund manager with almost 20 years of investment experience.” One of the stock promotion firms went so far as to have some writers it hired sign non-disclosure agreements specifically preventing them from disclosing compensation they received.

“Deception takes many forms. Our markets cannot operate fairly when there are deliberate efforts to reach prospective investors with positive articles about a stock while hiding that the companies paid for those articles,” said Melissa Hodgman, Associate Director of the SEC’s Division of Enforcement.

The SEC filed fraud charges against three public companies and seven stock promotion or communications firms as well as two company CEOs, six individuals at the firms, and nine writers. Of those charged, 17 have agreed to settlements that include disgorgement or penalties ranging from approximately $2,200 to nearly $3 million based on frequency and severity of their actions. The SEC’s litigation continues against 10 others.

The SEC also instituted separate charges against another company for its involvement in circulating promotional materials that did not comply with prospectus requirements under the federal securities laws. The company settled the case.

The SEC today released an investor alert warning that articles on an investment research website that appear to be an unbiased source of information or provide commentary on multiple stocks may be part of an undisclosed paid stock promotion. Investors should never make an investment based solely on information published on an investment research website. When making an investment decision, thoroughly research the company using multiple sources.

“Stock promotion schemes may be conducted through investment research websites,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy. “Investors looking for objective investment information should be aware that fraudsters may use these websites to profit at investors’ expense.”

The SEC’s investigations were conducted by Beth Groves, Ian Rupell, Shelby Hunt, Jim Blenko, and Jonathan Jacobs with assistance from Michi Harthcock, Jamie Wohlert, Suzanne Romajas, and Frederick Block. The cases were supervised by Rami Sibay, and the litigation will be led by Ms. Romajas and Patrick Costello.

FINANCIAL MANAGEMENT COMPANY ACCUSED OF SCAMMING THE ELDERLY

2017-03-27T17:13:00.001-04:00

From: U.S. Securities and Exchange Commission
Press Release
SEC Halts Fraud Targeting Seniors
FOR IMMEDIATE RELEASE
2017-72
Washington D.C., March 27, 2017—
The Securities and Exchange Commission today announced an emergency asset freeze and temporary restraining order against a Chicago-based investment adviser and his financial management company accused of scamming elderly investors out of millions of dollars.

The SEC alleges that Daniel H. Glick and his unregistered investment advisory firm Financial Management Strategies (FMS) provided clients with false account statements to hide Glick’s use of client funds to pay personal and business expenses, purchase a Mercedes-Benz, and pay off loans and debts among other misuses.

According to the SEC’s complaint, Glick was barred by FINRA in 2014 and had his Certified Financial Planner designation and Certified Public Accountant license revoked for conduct unrelated to today’s SEC charges.

“As alleged in our complaint, Daniel Glick raised millions of dollars from elderly clients by claiming that he would pay their bills, handle their taxes, and invest on their behalf. In reality, Daniel Glick used much of their money to do what was best for Daniel Glick,” said David Glockner, Director of the SEC’s Chicago Regional Office.

The SEC’s complaint also names Glick Accounting Services, Glick’s business partner David B. Slagter, and Glick’s business acquaintance Edward H. Forte as relief defendants for the purposes of recovering client funds that Glick transferred or paid them in the form of advances or loans.

The court issued a temporary restraining order against Glick and FMS at the SEC’s request, and issued an order freezing the assets of Glick, FMS, and Glick Accounting Services.

The SEC encourages investors to check the background of anyone offering to sell them investments.

The SEC’s investigation, which is continuing, is being conducted by Michelle Muñoz Durk and John Kustusch, and the case is being supervised by Jeffrey A. Shank. The SEC’s litigation will be led by Steven C. Seeger. The SEC’s examination that led to the investigation was conducted by Terrence Bohan, Michael Altschuler, and Christine Little, and it was supervised by Rosanne Smith.

CASINO-GAMING COMPANY TO PAY HALF-MILLION PENALTY IN WHISTLEBLOWER RETALIATION CASE

2016-10-02T00:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

SEC: Casino-Gaming Company Retaliated Against Whistleblower

FOR IMMEDIATE RELEASE

2016-204

Washington D.C., Sept. 29, 2016 — The Securities and Exchange Commission today announced that casino-gaming company International Game Technology (IGT) has agreed to pay a half-million dollar penalty for firing an employee with several years of positive performance reviews because he reported to senior management and the SEC that the company's financial statements might be distorted.

In its second whistleblower retaliation case since the Dodd-Frank Act authorized the agency to bring such charges, the SEC found that the employee was removed from significant work assignments within weeks of raising concerns about the company's cost accounting model. He was terminated approximately three months later.

"Strong enforcement of the anti-retaliation protections is critical to the success of the SEC's whistleblower program. This whistleblower noticed something that he felt might lead to inaccurate financial reporting and law violations, and he was wrongfully targeted for doing the right thing and reporting it," said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.

"Bringing retaliation cases, including this first stand-alone retaliation case, illustrates the high priority we place on ensuring a safe environment for whistleblowers,” said Jane A. Norberg, Chief of the SEC’s Office of the Whistleblower. "We will continue to exercise our anti-retaliation authority when companies take reprisals for whistleblowing efforts."

According to the SEC's order, IGT conducted an internal investigation into the allegations made by the whistleblower, who did not oversee the company's accounting functions, and determined its reported financial statements contained no misstatements.

Without admitting or denying the SEC's findings, IGT agreed to pay the $500,000 penalty and cease and desist from committing or causing any further violations of Section 21F(h) of the Securities Exchange Act of 1934.

The SEC’s investigation was conducted by Brent W. Wilner, Rhoda H. Chang, and Gary Y. Leung, and the case was supervised by Diana K. Tani, John W. Berry, C. Dabney O’Riordan, and Michele W. Layne of the Los Angeles Regional Office. The SEC appreciates the assistance of the U.S. Labor Department's Occupational Safety and Health Administration.

FINANCE EXEC SENTENCE TO PRISON FOR OBSTRUCTION OF JUSTICE

2016-08-26T00:00:00.000-04:00

FROM: U.S. JUSTICE DEPARTMENT

Tuesday, August 23, 2016

Financial Services Company Executive Sentenced to 15 Months for Obstruction of Justice

The CEO of Preferred Merchants LLC, a financial services company based in Napa, California, was sentenced today in the U.S. District Court for the Western District of North Carolina to 15 months in prison for engaging in an elaborate obstruction of justice scheme to conceal from the government millions of dollars, which were subject to a freeze order and seizure warrant.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division; U.S. Attorney Jill Westmoreland Rose of the Western District of North Carolina; Special Agent in Charge Michael Rolin of the U.S. Secret Service’s Charlotte, North Carolina, Field Division; and Special Agent in Charge Thomas J. Holloman III of the Internal Revenue Service-Criminal Investigation (IRS-CI) Charlotte Field Office made the announcement.

On March 23, Jaymes Meyer, aka James Meyer, 47, pleaded guilty to one count of obstruction of justice. In addition to imposing the prison term, U.S. District Judge Max O. Cogburn Jr. of the Western District of North Carolina entered a monetary judgment of $4.8 million against Meyer.

According to the plea agreement, in or about 2012, the U.S. Securities and Exchange Commission’s (SEC’s) Division of Enforcement commenced a securities fraud investigation concerning a Ponzi scheme centering on Rex Ventures Group LLC (RVG), a North Carolina-based company for which Preferred Merchants held millions in assets in treasury and trust accounts. As a result of its investigation, the SEC filed a civil enforcement action against RVG, resulting in an order freezing all of RVG’s assets and appointing a receiver to marshal, manage and distribute remaining RVG assets to impacted investors. The U.S. Secret Service also obtained a seizure warrant of RVG assets held by Meyer through Preferred Merchants. Meyer admitted that in August 2012, the SEC informed him of, among other things, the investigation and the freeze order and requested that Meyer freeze any RVG assets in his possession, custody or control.

According to the plea agreement, in response to this request, Meyer misled the SEC by falsely implying that Preferred Merchants did not exercise dominion or control over any RVG assets when, in fact, Meyer controlled approximately $17.4 million in RVG assets. Meyer further admitted that he wired approximately $4.8 million from an RVG trust account to a brokerage account under his control after learning about the SEC’s investigation and used that money to purchase homes in Napa and the Turks and Caicos, and took additional measures to conceal his RVG assets.

Meyer also admitted that throughout the pending civil litigation surrounding the RVG scheme, he made fraudulent and misleading statements to the U.S. District Court for the Western District of North Carolina, the SEC and the court-appointed receiver during depositions.

In connection with his plea agreement, Meyer consented to the $4.8 million money judgment entered against him and forfeited the homes that he purchased in the Turks and Caicos and Napa as proceeds of the obstruction of justice offense.

The U.S. Secret Service and IRS-CI investigated the case. Assistant U.S. Attorney Jennifer Grus Sugar of the Western District of North Carolina and Trial Attorneys Kevin Lowell and Brian D. Frey of the Criminal Division’s Asset Forfeiture and Money Laundering Section – Bank Integrity Unit prosecuted the case.

SEC ANNOUNCES CHARGES AGAINST 71 MUNICIPAL BOND ISSUERS

2016-08-24T15:12:00.002-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges 71 Municipal Issuers in Muni Bond Disclosure Initiative

FOR IMMEDIATE RELEASE

2016-166

Washington D.C., Aug. 24, 2016 — The Securities and Exchange Commission today announced enforcement actions against 71 municipal issuers and other obligated persons for violations in municipal bond offerings.

The actions were brought under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents. The initiative offered favorable settlement terms to municipal bond underwriters, issuers, and obligated persons that self-reported certain violations of the federal securities laws. Obligated persons are typically nonprofit entities such as hospitals and colleges that borrow the proceeds of bond issuances and are obligated to pay principal and interest on the bonds.

The SEC found that from 2011 to 2014, the 71 issuers and obligated persons sold municipal bonds using offering documents that contained materially false statements or omissions about their compliance with continuing disclosure obligations. Continuing disclosure provides municipal bond investors with important information, including annual financial reports, on an ongoing basis. The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.

“The diversity among the 71 entities in these actions demonstrates that continuing disclosure failures were a widespread and pervasive problem in the municipal bond market,” said Andrew Ceresney, Director of the SEC Enforcement Division. “The MCDC Initiative has brought attention to this important issue and resulted in increased compliance by municipal issuers and underwriters.”

The parties settled the actions without admitting or denying the findings and agreed to cease and desist from future violations. Pursuant to the terms of the initiative, they also agreed to undertake to establish appropriate policies, procedures, and training regarding continuing disclosure obligations; comply with existing continuing disclosure undertakings, including updating past delinquent filings, disclose the settlement in future offering documents, and cooperate with any subsequent investigations by the SEC.

“The terms of the settlements reflect the credit these issuers earned for their cooperation in self-reporting pursuant to the MCDC initiative,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “Because the issuers also voluntarily agreed to take steps to prevent future violations, both they and their investors have benefited from the initiative.”

The SEC has now filed a total of 143 actions against 144 respondents as part of the MCDC Initiative. Today’s actions are the first against municipal issuers since the first action under the initiative was announced in July 2014 against a California school district. The SEC filed actions under the initiative against a total of 72 municipal underwriting firms, comprising 96 percent of the market share for municipal underwritings, in June 2015, in September 2015, and in February 2016.

The MCDC Initiative is being led by Kevin Guerrero of the Enforcement Division’s Public Finance Abuse Unit. The cases announced today were investigated by members of the unit, including Michael Adler, Joseph Chimienti, Kevin Currid, Susan Curtin, Peter Diskin, Brian Fagel, Natalie Garner, Warren Greth, Sally J. Hewitt, Jason Howard, Jason Lee, Robbie Mayer, Heidi Mitza, William Salzmann, Cori Shepherd, Ivonia K. Slade, Steven Varholik, Jonathan Wilcox, Monique C. Winkler, and Deputy Chief Mark R. Zehner with assistance from Peter Moores and Ellen Moynihan of the Boston Regional Office, Howard Kaplan of the Enforcement Division’s Center for Risk and Quantitative Analytics, and Rebecca Olsen, Hillary Phelps, and Adam Wendell of the Office of Municipal Securities.

SEC ANNOUNCES FRAUD CHARGES AGAINST HEDGE FUND INVOLVED WITH TERMINALLY ILL PATIENTS

2016-08-21T00:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

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Hedge Fund Manager Charged in Scheme Involving Terminally Ill

FOR IMMEDIATE RELEASE

2016-162

Washington D.C., Aug. 15, 2016 — The Securities and Exchange Commission today announced fraud charges against a hedge fund manager and his firm accused of paying terminally ill individuals to use their names on purportedly joint brokerage accounts so he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option.
An SEC examination of investment advisory firm Eden Arc Capital Management uncovered the scheme alleged by the SEC Enforcement Division in an order instituted today. Donald Lathen of New York City allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live, and he successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts. When a patient died, Lathen allegedly redeemed investments in the accounts by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts. Lathen’s hedge fund was the true owner of the survivor’s option investments. Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.

The SEC Enforcement Division further alleges that Lathen violated the custody rule by failing to properly place the hedge fund’s cash and securities in an account under the fund’s name or in an account containing only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the client.

“We allege that Lathen deceived issuers by falsely claiming that he and the deceased jointly owned the bonds when the hedge fund was the true owner of the investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than following the custody rule.”

The SEC Enforcement Division alleges that Lathen, Eden Arc Capital Management, and Eden Arc Capital Advisors violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Enforcement Division further alleges that Eden Arc Capital Management violated Section 206(4) of the Advisers Act and Rule 206(4)-2, and Lathen aided and abetted and caused those violations.

The matter will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted by Janna Berke, Judith Weinstock, Frank Milewski, Adam Grace, and Michael Birnbaum. The case was supervised by Lara Shalov Mehraban and the litigation will be led by Alexander Janghorbani, Ms. Weinstock, and Ms. Berke. The SEC examiners who detected the wrongdoing during the examination of Eden Arc Capital Management are Kathleen Raimondi, Lawrence Chinsky, and George DeAngelis.

FORMER HEAD RMBS TRADER AT GOLDMAN SACHS SETTLES FRAUD CHARGES

2016-08-18T00:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Former Goldman Sachs Trader Settles Fraud Charges

FOR IMMEDIATE RELEASE

2016-163

Washington D.C., Aug. 16, 2016 — The Securities and Exchange Commission today announced that the former head trader in residential mortgage-backed securities (RMBS) at Goldman Sachs has agreed to be barred from the securities industry and pay $400,000 to settle charges that he repeatedly misled customers and caused them to pay higher prices.

An SEC investigation found that Edwin Chin generated extra revenue for Goldman by concealing the prices at which the firm had bought various RMBS, then re-selling them at higher prices to the buying customer with Goldman keeping the difference. On other occasions, Chin misled purchasers by suggesting he was actively negotiating a transaction between customers when he was merely selling RMBS out of Goldman’s inventory.

“With no public exchange showing the price for each RMBS trade as it occurs, investors purchasing these securities rely on dealers to be honest about the purchase price they paid,” said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Chin repeatedly abused his fundamental duty to serve as an honest transmitter of market information so he could increase Goldman’s trading profits and, indirectly, his own compensation.”

The SEC’s order finds that Chin’s misconduct began in 2010 and continued until he left Goldman in 2012. Without admitting or denying the findings, Chin agreed to the entry of the order finding that he violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5. He agreed to pay $200,000 in disgorgement, $50,000 in prejudgment interest, and a $150,000 penalty.

The SEC’s continuing investigation has been conducted by Andrew Feller, David London, and Heidi Mitza, and the case has been supervised by Celia Moore and Michael Osnato.

ALLEGED FALSE CLAIMS LEADS TO SEC FRAUD CHARGES AGAINST INVESTMENT ADVISER

2016-08-12T07:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC: Investment Adviser Boasted Phony Assets and Track Record, Stole From Client

FOR IMMEDIATE RELEASE

2016-161

Washington D.C., Aug. 11, 2016 — The Securities and Exchange Commission today announced fraud charges against a San Francisco man and his investment advisory firm accused of pretending to manage millions of dollars in assets and then stealing money from the first client who invested with them based on their misrepresentations.

The SEC alleges that Nicholas M. Mitsakos and Matrix Capital Markets, which is a state-registered investment adviser in California, solicited investors in a purported hedge fund while falsely marketing themselves as experienced money managers with a highly successful track record. They claimed assets under management in the millions when in fact they did not manage any client assets at all, and they fabricated a hypothetical portfolio of investments earning 20 to 66 percent annual returns and passed it off to investors as real trading. When Mitsakos and Matrix Capital Markets were given $2 million in client assets to manage in September 2015, they proceeded to steal approximately $800,000 from that client and used most of it to pay for unauthorized personal and business expenses.

“We allege that Mitsakos and his firm tried to lure prospective investors with a mirage of assets under management and phony performance results, and when they finally won some actual business from a client, they proceeded to steal a large portion of it,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Whenever pitched an investment opportunity with claims of lofty historical performance, it’s important for investors to take the time to verify the information and make sure they’re getting the truth before deciding to invest.”

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

The SEC’s complaint was filed in U.S. District Court for the Southern District of New York and charges Mitsakos and Matrix Capital Markets with violating the antifraud provisions of the federal securities laws. Mitsakos also is charged with aiding and abetting Matrix Capital’s violations. The SEC seeks permanent injunctions and disgorgement of ill-gotten gains plus penalties.

The SEC’s continuing investigation is being conducted by Alison R. Levine, Kerri Palen, Alex Janghorbani, and Valerie A. Szczepanik, and the case is supervised by Lara S. Mehraban. The litigation will be led by Alex Janghorbani and Alison R. Levine. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York.

SEC ANNOUNCES MORGAN STANLEY TO PAY $1 MILLION PENALTY TO SETTLE CHARGES OF FAILING TO SAFEGUARD CUSTOMER INFORMATION

2016-06-12T00:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC: Morgan Stanley Failed to Safeguard Customer Data

FOR IMMEDIATE RELEASE

2016-112

Washington D.C., June 8, 2016 — The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney LLC has agreed to pay a $1 million penalty to settle charges related to its failures to protect customer information, some of which was hacked and offered for sale online.

The SEC issued an order finding that Morgan Stanley failed to adopt written policies and procedures reasonably designed to protect customer data. As a result of these failures, from 2011 to 2014, a then-employee impermissibly accessed and transferred the data regarding approximately 730,000 accounts to his personal server, which was ultimately hacked by third parties.

“Given the dangers and impact of cyber breaches, data security is a critically important aspect of investor protection. We expect SEC registrants of all sizes to have policies and procedures that are reasonably designed to protect customer information,” said Andrew Ceresney, Director of the SEC Enforcement Division.

According to the SEC’s order instituting a settled administrative proceeding:

The federal securities laws require registered broker-dealers and investment advisers to adopt written policies and procedures reasonably designed to protect customer records and information.
Morgan Stanley’s policies and procedures were not reasonable, however, for two internal web applications or “portals” that allowed its employees to access customers’ confidential account information.
For these portals, Morgan Stanley did not have effective authorization modules for more than 10 years to restrict employees’ access to customer data based on each employee’s legitimate business need.
Morgan Stanley also did not audit or test the relevant authorization modules, nor did it monitor or analyze employees’ access to and use of the portals.
Consequently, then-employee Galen J. Marsh downloaded and transferred confidential data to his personal server at home between 2011 and 2014.
A likely third-party hack of Marsh’s personal server resulted in portions of the confidential data being posted on the Internet with offers to sell larger quantities.

The SEC’s order finds that Morgan Stanley violated Rule 30(a) of Regulation S-P, also known as the “Safeguards Rule.” Morgan Stanley agreed to settle the charges without admitting or denying the findings. In a separate order, Marsh agreed to an industry and penny stock bar with the right to apply for reentry after five years. He was criminally convicted for his actions last year and received 36 months of probation and a $600,000 restitution order.

The SEC’s investigation was conducted by William Martin and Simona Suh of the Enforcement Division’s Market Abuse Unit and supervised by Joseph G. Sansone, Co-Chief of the unit. The SEC appreciates the assistance of the New York Field Office of the Federal Bureau of Investigation and the U.S. Attorney’s Office for the Southern District of New York.

SEC ANNOUNCES $17 MILLION WHISTLEBLOWER AWARD

2016-06-10T00:00:00.000-04:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington D.C., June 9, 2016 — The Securities and Exchange Commission today announced a whistleblower award of more than $17 million to a former company employee whose detailed tip substantially advanced the agency’s investigation and ultimate enforcement action.

The award is the second-largest issued by the SEC since its whistleblower program began nearly five years ago. The SEC issued a $30 million award in September 2014 and a $14 million award in October 2013.

“Company insiders are uniquely positioned to protect investors and blow the whistle on a company’s wrongdoing by providing key information to the SEC so we can investigate the full extent of the violations,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “The information and assistance provided by this whistleblower enabled our enforcement staff to conserve time and resources and gather strong evidence supporting our case.”

Sean X. McKessy, Chief of the SEC’s Office of the Whistleblower, added, “In the past month, five whistleblowers have received a total of more than $26 million, and we hope these substantial awards encourage other individuals with knowledge of potential federal securities law violations to make the right choice to come forward and report the wrongdoing to the SEC.”

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.

The SEC’s whistleblower program has now awarded more than $85 million to 32 whistleblowers since the program’s inception in 2011. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with unique and useful information that leads to a successful enforcement action. Whistleblower awards can range from 10 percent to 30 percent of the money collected when the monetary sanctions exceed $1 million. All payments are made out of an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards.

WALL STREET FIRM CHARGED WITH NOT MONITORING SUSPICIOUS ACTIVITY

2016-06-05T00:00:00.000-04:00

FROM: U.S. JUSTICE DEPARTMENT

Brokerage Firm Charged With Anti-Money Laundering Failures

FOR IMMEDIATE RELEASE

2016-102

Washington D.C., June 1, 2016 — The Securities and Exchange Commission today charged a Wall Street-based brokerage firm with failing to sufficiently evaluate or monitor customers’ trading for suspicious activity as required under the federal securities laws.

An SEC investigation found that Albert Fried & Company failed to file Suspicious Activity Reports (SARs) with bank regulators for more than five years despite red flags tied to its customers’ high-volume liquidations of low-priced securities. On more than one occasion, an AF&Co customer’s trading in a security on a given day exceeded 80 percent of the overall market volume. In other instances, customers were trading in stocks issued by companies that were delinquent in their regulatory filings or involved in questionable penny stock promotional campaigns. Certain customers also were the subject of grand jury subpoenas received by AF&Co.

AF&Co agreed to pay a $300,000 penalty to settle the charges.

“Albert Fried & Company ignored numerous instances when customer trading activity should have triggered the firm to file SARs. Brokerage firms must take their anti-money laundering responsibilities seriously so they can serve as a line of defense against misconduct and market risks,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.

The SEC’s order finds that AF&Co violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8. AF&Co agreed to be censured and pay the $300,000 penalty without admitting or denying the findings in the order, which credits the firm for its cooperation and the remedial measures already undertaken.

While the SEC has charged other firms with anti-money laundering failures under the federal securities laws, this is the first case against a firm solely for failing to file SARs when appropriate.

The case stemmed from the work of the Enforcement Division’s Broker-Dealer Task Force, led by Associate Director Antonia Chion and New York Regional Office Director Andrew M. Calamari. The task force focuses on current issues and practices within the broker-dealer community and develops national initiatives for potential investigations.

The SEC’s investigation was conducted by Matt Reilly and supervised by Melissa Hodgman with assistance from Eric Kringel, Daniel Goldberg, Damon Reed, and Andrae Eccles of the Enforcement Division’s Bank Secrecy Act Review Group.

GOLDMAN SACHS TO PAY $5 BILLION SETTLEMENT RELATED TO MORTGAGE BUSINESS

2016-04-11T19:29:00.000-04:00

FROM: U.S. JUSTICE DEPARTMENT

Monday, April 11, 2016

Goldman Sachs Agrees to Pay More than $5 Billion in Connection with Its Sale of Residential Mortgage Backed Securities

The Justice Department, along with federal and state partners, announced today a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. The resolution announced today requires Goldman to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing. Goldman will also pay $875 million to resolve claims by other federal entities and state claims. Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Goldman between 2005 and 2007.

“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Acting Associate Attorney General Stuart F. Delery. “This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences.”

“Today’s settlement is another example of the department’s resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “Viewed in conjunction with the previous multibillion-dollar recoveries that the department has obtained for similar conduct, this settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices in selling RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing.”

“Today’s settlement is yet another acknowledgment by one of our leading financial institutions that it did not live up to the representations it made to investors about the products it was selling,” said U.S. Attorney Benjamin B. Wagner of the Eastern District of California. “Goldman’s conduct in exploiting the RMBS market contributed to an international financial crisis that people across the country, including many in the Eastern District of California, continue to struggle to recover from. I am gratified that this office has developed investigations, first against JPMorgan Chase and now against Goldman Sachs, that have led to significant civil settlements that hold bad actors in this market accountable. The results obtained by this office and other members of the RMBS Working Group continue to send a message to Wall Street that we remain committed to pursuing those responsible for the financial crisis.”

The $2.385 billion civil monetary penalty resolves claims under FIRREA, which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud. The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability. In addition, as part of the settlement, Goldman agreed to fully cooperate with any ongoing investigations related to the conduct covered by the agreement.

Of the $875 million Goldman has agreed to pay to settle claims by various other federal and state entities: Goldman will pay $575 million to settle claims by the National Credit Union Administration, $37.5 million to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle, $37.5 million to settle claims by the Federal Home Loan Bank of Chicago, $190 million to settle claims by the state of New York, $25 million to settle claims by the state of Illinois and $10 million to settle claims by the state of California.

Goldman will pay out the remaining $1.8 billion in the form of relief to aid consumers harmed by its unlawful conduct. $1.52 billion of that relief will be paid out pursuant to an agreement with the United States that Goldman will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country, as well as financing for affordable rental and for-sale housing throughout the country. This agreement represents the largest commitment in any RMBS agreement to provide financing for affordable housing—a crucial need following the turmoil of the financial crisis. $280 million will be paid out by Goldman pursuant to an agreement separately negotiated with the state of New York.

The settlement includes a statement of facts to which Goldman has agreed. That statement of facts describes how Goldman made false and misleading representations to prospective investors about the characteristics of the loans it securitized and the ways in which Goldman would protect investors in its RMBS from harm (the quotes in the following paragraphs are from that agreed-upon statement of facts, unless otherwise noted):

Goldman told investors in offering documents that “[l]oans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines,” other than possible situations where “when the originator identified ‘compensating factors’ at the time of origination.” But Goldman has today acknowledged that, “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized.”
Specifically, Goldman has now acknowledged that, even when the results of its due diligence on samples of loans from those pools “indicated that the unsampled portions of the pools likely contained additional loans with credit exceptions, Goldman typically did not . . . identify and eliminate any additional loans with credit exceptions.” Goldman has acknowledged that it “failed to do this even when the samples included significant numbers of loans with credit exceptions.”
Goldman’s Mortgage Capital Committee, which included senior mortgage department personnel and employees from Goldman’s credit and legal departments, was required to approve every RMBS issued by Goldman. Goldman has now acknowledged that “[t]he Mortgage Capital Committee typically received . . . summaries of Goldman’s due diligence results for certain of the loan pools backing the securitization,” but that “[d]espite the high numbers of loans that Goldman had dropped from the loan pools, the Mortgage Capital Committee approved every RMBS that was presented to it between December 2005 and 2007.” As one example, in early 2007, Goldman approved and issued a subprime RMBS backed by loans originated by New Century Mortgage Corporation, after Goldman’s due diligence process found that one of the loan pools to be securitized included loans originated with “[e]xtremely aggressive underwriting,” and where Goldman dropped 25 percent of the loans from the due diligence sample on that pool without reviewing the unsampled 70 percent of the pool to determine whether those loans had similar problems.
Goldman has acknowledged that, for one August 2006 RMBS, the due diligence results for some of the loan pools resulted in an “unusually high” percentage of loans with credit and compliance defects. The Mortgage Capital Committee was presented with a summary of these results and asked “How do we know that we caught everything?” One transaction manager responded “we don’t.” Another transaction manager responded, “Depends on what you mean by everything? Because of the limited sampling . . . we don’t catch everything . . .” Goldman has now acknowledged that the Mortgage Capital Committee approved this RMBS for securitization without requiring any further due diligence.
Goldman made detailed representations to investors about its “counterparty qualification process” for vetting loan originators, and told investors and one rating agency that Goldman would engage in ongoing monitoring of loan sellers. Goldman has now acknowledged, however, that it “received certain negative information regarding the originators’ business practices” and that much of this information was not disclosed to investors.
For example, Goldman has now acknowledged that in late 2006 it conducted an internal analysis of the underwriting guidelines of Fremont Investment & Loan (an originator), which found many of Fremont’s guidelines to be “off market” or “at the aggressive end of market standards.” Instead of disclosing its view of Fremont’s underwriting, Goldman has acknowledged that it “[u]ndertook a significant marketing effort” to tell investors about what Goldman called Fremont’s “commitment to loan quality over volume” and “significant enhancements to Fremont underwriting guidelines.” Fremont was shut down by federal regulators within several months of these statements.
In another example, Goldman was aware in early-mid 2006 of certain issues with Countrywide Financial Corporation’s origination process, including a pattern of non-responsiveness and inability to provide sufficient staff to handle the numerous loan pools Countrywide was selling. In April 2006, while Goldman was preparing an RMBS backed by Countrywide loans for securitization, a Goldman mortgage department manager circulated a “very bullish” equity research report that recommended the purchase of Countrywide stock. Goldman’s head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded “If they only knew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .”
Meanwhile, as Goldman has acknowledged in this statement of facts, “[Around the end of 2006], Goldman employees observed signs of uncertainty in the residential mortgage market [and] by March 2007, Goldman had largely halted new purchases of subprime loan pools.”
Assistant U.S. Attorneys Colleen Kennedy and Kelli Taylor of the Eastern District of California investigated Goldman’s conduct in connection with RMBS, with the support of the Federal Housing Finance Agency’s Office of the Inspector General (FHFA-OIG) and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

“Goldman Sachs had a fiduciary responsibility to investors, which they blatantly side stepped,” said Deputy Inspector General for Investigation Rene Febles of FHFA-OIG. “They knowingly put investors at risk and in so doing contributed significantly to the financial crisis. The losses caused by this irresponsible behavior deeply affected not only financial institutions but also taxpayers and one can only hope that Goldman Sachs has learned the difference between risk and deceit. Two Federal Home Loan Banks suffered significant losses so we are pleased to see both entities receive a portion of this settlement. We will continue to work with our law enforcement partners to hold those accountable who have engaged in misconduct.”

“Goldman took $10 billion in TARP bailout funds knowing that it had fraudulently misrepresented to investors the quality of residential mortgages bundled into mortgage backed securities,” said Special Inspector General Christy Goldsmith Romero for TARP. “Many of these toxic securities were traded in a taxpayer funded bailout program that was designed to unlock frozen credit markets during the crisis. While crisis investigations take time, SIGTARP is committed to working with our law enforcement partners to protect taxpayers and bring accountability and justice.”

The settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered tens of billions of dollars on behalf of American consumers and investors for claims against large financial institutions arising from misconduct related to the financial crisis. The RMBS Working Group brings together attorneys, investigators, analysts and staff from multiple state and federal agencies, including the Department of Justice, U.S. Attorneys’ Offices, the FBI, the U.S. Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, SIGTARP, the Federal Reserve Board’s OIG, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network and multiple state Attorneys General offices around the country. The RMBS Working Group is led by Director Joshua Wilkenfeld and five co-chairs: Principal Deputy Assistant Attorney General Mizer, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Director Andrew Ceresney of the SEC’s Division of Enforcement, U.S. Attorney John Walsh of the District of Colorado and New York Attorney General Eric Schneiderman. This settlement is the fifth multibillion-dollar RMBS settlement announced by the working group.

MAN WHO RAN OFFSHORE BROKERAGE SENTENCED FOR ROLE IN INTERNATIONAL STOCK FRAUD

2016-03-27T00:00:00.000-04:00

FROM: U.S. JUSTICE DEPARTMENT

Friday, March 18, 2016

Former Head of Offshore Brokerage Sentenced to 18 Years for Conspiracy to Commit International Stock Fraud and Money Laundering

A California man was sentenced to 216 months in prison today for two counts of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering in connection with an international “pump and dump” scheme involving stocks traded on the over-the-counter (OTC) market.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Dana J. Boente of the Eastern District of Virginia and Assistant Director in Charge Paul M. Abbate of the FBI’s Washington Field Office made the announcement.

Harold Bailey Gallison II, 58, of Valley Center, California, pleaded guilty on Dec. 10, 2015, and was sentenced by U.S. District Judge Anthony J. Trenga of the Eastern District of Virginia, who also ordered Gallison to pay $1,724,770 in restitution. Gallison was charged in an indictment unsealed on July 14, 2015, along with eight other individuals for their roles in complex international stock manipulation and money laundering schemes.

In his guilty plea, Gallison admitted that he conspired to artificially “pump” or inflate the trading volume and price of the shares of Warrior Girl Corp., quoted on the OTC market under the ticker symbol WRGL, and Everock Inc., quoted on the OTC market under the ticker symbol EVRN, by touting business activities and deceptive revenue forecasts and by engaging in coordinated trading activity to create the appearance of increasing market demand. Gallison also admitted that he and others then “dumped” or sold the shares at the inflated prices and laundered proceeds through bank accounts in the United States and overseas. Gallison facilitated the schemes through an offshore brokerage and money laundering platform that went by various names, including Sandias Azucaradas, Moneyline Brokers and Trinity Asset Services (collectively Moneyline), he admitted. According to the plea, through Moneyline, Gallison created nominee accounts in the names of shell companies to conceal both the true source and ownership of the securities and the flow of funds. In addition, Gallison pleaded guilty to one count of conspiring to launder the proceeds of a number of securities fraud schemes, including Warrior Girl and Everock, totaling more than $25 million.

The FBI’s Washington Field Office is investigating the case. Senior Trial Attorney N. Nathan Dimock and Trial Attorney Michael O’Neill of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Kosta S. Stojilkovic of the Eastern District of Virginia are prosecuting the case. The Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Criminal Division’s Office of International Affairs also provided significant assistance.

MORGAN STANLEY RESOLVES CLAIMS RELATED TO IT'S RESIDENTIAL BACKED SECURITIES SALES

2016-02-11T19:56:00.000-05:00

FROM: U.S. JUSTICE DEPARTMENT

Thursday, February 11, 2016

Morgan Stanley Agrees to Pay $2.6 Billion Penalty in Connection with Its Sale of Residential Mortgage Backed Securities

The Justice Department today announced that Morgan Stanley will pay a $2.6 billion penalty to resolve claims related to Morgan Stanley’s marketing, sale and issuance of residential mortgage-backed securities (RMBS). This settlement constitutes the largest component of the set of resolutions with Morgan Stanley entered by members of the RMBS Working Group, which have totaled approximately $5 billion. As part of the agreement, Morgan Stanley acknowledged in writing that it failed to disclose critical information to prospective investors about the quality of the mortgage loans underlying its RMBS and about its due diligence practices. Investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued by Morgan Stanley in 2006 and 2007.

“Today’s settlement holds Morgan Stanley appropriately accountable for misleading investors about the subprime mortgage loans underlying the securities it sold,” said Acting Associate Attorney General Stuart F. Delery. “The Department of Justice will not tolerate those who seek financial gain through deceptive or unfair means, and we will take appropriately aggressive action against financial institutions that knowingly engage in improper investment practices.”

“Those who contributed to the financial crisis of 2008 cannot evade responsibility for their misconduct,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “This resolution demonstrates once again that the Financial Institutions Reform, Recovery and Enforcement Act is a powerful weapon for combatting financial fraud and that the department will not hesitate to use it to hold accountable those who violate the law.”

An RMBS is a type of security comprised of a pool of mortgage loans created by banks and other financial institutions. The expected performance and price of an RMBS is determined by a number of factors, including the characteristics of the borrowers and the value of the properties underlying the RMBS. Morgan Stanley was one of the institutions that issued RMBS during the period leading up to the economic crisis in 2007 and 2008.

As acknowledged by Morgan Stanley in a detailed statement of facts that is a part of this agreement (and is quoted below), the company made representations to prospective investors about the characteristics of the subprime mortgage loans underlying its RMBS – representations with which it did not comply:

In particular, Morgan Stanley told investors that it did not securitize underwater loans (loans that exceeded the value of the property). However, Morgan Stanley did not disclose to investors that in April 2006 it had expanded its “risk tolerance” in evaluating loans in order to purchase and securitize “everything possible.” As Morgan Stanley’s manager of valuation due diligence told an employee in 2006, “please do not mention the ‘slightly higher risk tolerance’ in these communications. We are running under the radar and do not want to document these types of things.” As a result, Morgan Stanley ignored information – including broker’s price opinions (BPOs), which are estimates of a property’s value from an independent real estate broker – indicating that thousands of securitized loans were underwater, with combined-loan-to-value ratios over 100 percent. From January 2006 through mid-2007, Morgan Stanley acknowledged that “Morgan Stanley securitized nearly 9,000 loans with BPO values resulting in [combined loan to value] ratios over 100 percent.”
Morgan Stanley also told investors that it did not securitize loans that failed to meet originators’ guidelines unless those loans had compensating factors. Morgan Stanley’s offering documents “represented that ‘[the mortgage loans originated or acquired by [the originator] were done so in accordance with the underwriting guidelines established by [the originator]’ but that ‘on a case-by-case-basis, exceptions to the [underwriting guidelines] are made where compensating factors exist.’” Morgan Stanley has now acknowledged, however, that “Morgan Stanley did not disclose to securitization investors that employees of Morgan Stanley received information that, in certain instances, loans that did not comply with underwriting guidelines and lacked adequate compensating factors . . . were included in the RMBS sold and marketed to investors.” So, in fact, “Morgan Stanley . . . securitized certain loans that neither comported with the originators’ underwriting guidelines nor had adequate compensating factors.”
Likewise, “Morgan Stanley also prepared presentation materials . . . that it used in discussions with potential investors that described the due diligence process for reviewing pools of loans prior to securitization,” but “certain of Morgan Stanley’s actual due diligence practices did not conform to the description of the process set forth” in those materials.
For example, Morgan Stanley obtained BPOs for a percentage of loans in a pool. Morgan Stanley stated in these presentation materials that it excluded any loan with a BPO value exhibiting an “unacceptable negative variance from the original appraisal,” when in fact “Morgan Stanley never rejected a loan based solely on the BPO results.”
Through these undisclosed practices, Morgan Stanley increased the percentage of mortgage loans it purchased for its RMBS, notwithstanding its awareness about “deteriorating appraisal quality” and “sloppy underwriting” by the sellers of these loans. The bank has now acknowledged that “Morgan Stanley was aware of problematic lending practices of the subprime originators from which it purchased mortgage loans.” However, it “did not increase its credit-and-compliance due diligence samples, in part, because it did not want to harm its relationship with its largest subprime originators.” Indeed, Morgan Stanley’s manager of credit-and-compliance due diligence was admonished to “stop fighting and begin recognizing the point that we need monthly volume from our biggest trading partners and that . . . the client [an originator] does not have to sell to Morgan Stanley.”
“In today’s agreement, Morgan Stanley acknowledges it sold billions of dollars in subprime RMBS certificates in 2006 and 2007 while making false promises about the mortgage loans backing those certificates,” said Acting U.S. Attorney Brian J. Stretch of the Northern District of California. “Morgan Stanley touted the quality of the lenders with which it did business and the due diligence process it used to screen out bad loans. All the while, Morgan Stanley knew that in reality, many of the loans backing its securities were toxic. Abuses in the mortgage-backed securities industry such as these helped bring about the most devastating financial crisis in our lifetime. Our office is committed to dedicating the resources necessary to hold those who engage in such reckless actions responsible for their conduct.”

The $2.6 billion civil monetary penalty resolves claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). FIRREA authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud. The settlement expressly preserves the government’s ability to bring criminal charges against Morgan Stanley, and likewise does not release any individuals from potential criminal or civil liability. In addition, as part of the settlement, Morgan Stanley promised to cooperate fully with any ongoing investigations related to the conduct covered by the agreement.

In conjunction with today’s announcement of the federal government’s settlement with Morgan Stanley, the states of New York and Illinois – also members of the RMBS Working Group – have announced settlements with Morgan Stanley for $550 million and $22.5 million, respectively, arising from its sale of RMBS. Among other resolutions, Morgan Stanley previously paid $225 million to resolve claims brought by the National Credit Union Administration arising from losses related to corporate credit unions’ purchases of RMBS; $1.25 billion to resolve claims by Federal Housing Finance Agency (FHFA) for Morgan Stanley’s alleged violations of federal and state securities laws and common law fraud in connection with RMBS purchased by Fannie Mae and Freddie Mac; and $86.95 million to resolve federal and state securities laws claims brought by the Federal Deposit Insurance Corporation as receiver on behalf of failed financial institutions. Morgan Stanley also previously entered into a consent decree with the U.S. Securities and Exchange Commission (SEC) to pay $275 million to resolve certain RMBS claims. With today’s announcement, Morgan Stanley will have paid nearly $5 billion to members of the RMBS Working Group in connection with its sale of RMBS.

Today’s settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group, which has recovered billions of dollars arising from misconduct related to the financial crisis. The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis. The RMBS Working Group brings together attorneys, investigators, analysts and staff from multiple state and federal agencies, including the Department of Justice, U.S. Attorneys’ Offices, the FBI, the SEC, the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA Office of Inspector General (OIG), the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s OIG, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network and multiple state Attorneys General offices around the country. The RMBS Working Group is led by Director Joshua Wilkenfeld and five co-chairs: Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division, Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, Director Andrew Ceresney of the SEC’s Division of Enforcement, U.S. Attorney John Walsh of the District of Colorado and New York Attorney General Eric Schneiderman.

“The securitization of defective mortgages and the billions of dollars that were lost as a result caused such a hardship to our economy, the housing industry and our nation as a whole that we are still feeling the effects years after,” said Deputy Inspector General for Investigations Rene Febles of FHFA-OIG. “Morgan Stanley is responsible for their role, which caused enormous losses to investors. This settlement is one step in recovering from those losses. We are proud to work with the RMBS Working Group and the U.S. Department of Justice on this and all RMBS matters.”

The settlement was the result of a coordinated effort between the Civil Division’s Commercial Litigation Branch and the U.S. Attorney’s Office of the Northern District of California, with investigative support from FHFA-OIG and the Special Inspector General for the Troubled Asset Relief Program.

JPMORGAN CHASE ORDERED TO PAY $100 MILLION FOR DISCLOSURE FAILURES

2015-12-27T00:00:00.000-05:00

FROM: U.S. COMMODITY FUTURES

CFTC Orders JPMorgan Chase Bank, N.A. to Pay $100 Million for Failure to Disclose Conflicts of Interest

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against JPMorgan Chase Bank, N.A. (JPMCB). The Order finds that JPMCB failed to disclose certain conflicts of interest to clients of its U.S.-based wealth management business, J.P. Morgan Private Bank. Specifically, JPMCB failed to fully disclose its preference for investing its client funds in certain commodity pools or exempt pools, namely hedge funds and mutual funds managed and operated by an affiliate and subsidiary of JP Morgan Chase & Co. (Proprietary Funds). JPMCB also failed to disclose its preference for investing its clients’ funds in third-party-managed hedge funds, each a commodity pool or exempt pool, that shared management and/or performance fees with a JPMCB affiliate. JPMorgan has admitted to facts set forth in the Order and acknowledged that its conduct violated the Commodity Exchange Act and/or related Regulations.

The CFTC Order requires JPMCB to pay a $40 million civil monetary penalty, to pay disgorgement in the amount of $60 million, and to cease and desist from further violations as charged.

Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Investors are entitled to know if a bank managing their money favors placing investments in its own proprietary funds or other vehicles that generate fees for the bank. As demonstrated by the enforcement actions made public today, we and our regulatory partners will aggressively pursue financial institutions that fail to provide adequate disclosures to clients.”

As set forth in the Order, JPMCB serves as the investment manager for certain of its clients’ investment management accounts (IM Accounts) and certain private funds, known as the Global Access Portfolios (GAP), which are also offered to JPMCB clients. Since at least 2008, JPMCB has preferred to invest IM Accounts and GAP private fund assets in Proprietary Funds and has expected that a significant percentage of relevant portfolio assets will be invested in Proprietary Funds. Although JPMCB had historically made some disclosures regarding this preference, JPMCB did not disclose its preference for Proprietary Funds from January 2011 through January 2014, and never disclosed its preference for investment in proprietary hedge funds prior to January 2014.

Additionally, prior to August 2015, JPMCB failed to disclose its preference to invest IM accounts and GAP private funds in third-party hedge funds (each a commodity pool or exempt pool) for which JPMCB acts as the placement agent and earns fees for placement, shareholder servicing and other ongoing services.

These placement agent fees are typically referred to as “retrocessions.” Since at least 2005, JPMCB sought “retrocessions” from third-party hedge fund managers that were under consideration for IM account and GAP private funds investments. During introductory meetings, third-party hedge fund managers were typically asked about their willingness to pay retrocessions. If a manager declined to pay retrocessions, JPMCB typically sought an alternative manager with a similar investment strategy who was willing to pay JPMCB retrocessions. JPMCB did not disclose its preference for retrocession-paying third-party hedge fund managers until August 2015, when it added additional language to certain client documentation.

The CFTC Order is being announced simultaneously with the issuance of an order by the U.S. Securities and Exchange Commission settling charges for related conduct. The CFTC thanks and appreciates the assistance of the U.S. Securities and Exchange Commission.

The CFTC Division of Enforcement staff members responsible for this case are Neel Chopra, Katie Rasor, Chad Silverman (former staff), K. Brent Tomer, Lenel Hickson and Manal Sultan.

FORMER OFFSHORE BROKERAGE HEAD PLEADS GUILTY TO CHARGES STEMMING FROM INTERNATIONAL PUMP AND DUMP SCHEME

2015-12-13T00:00:00.000-05:00

FROM: U.S. JUSTICE DEPARTMENT

Thursday, December 10, 2015

Former Head of Offshore Brokerage Pleads Guilty to Conspiracy to Commit International Stock Fraud and Money Laundering Scams

A California man pleaded guilty today to two counts of conspiracy to commit wire fraud and one count of conspiracy to commit international money laundering in connection with an international “pump and dump” scheme involving stocks traded on the over-the-counter (OTC) market.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Dana J. Boente of the Eastern District of Virginia and Assistant Director in Charge Paul M. Abbate of the FBI’s Washington Field Office made the announcement.

Harold Bailey Gallison II, 58, of Valley Center, California, was charged in an indictment unsealed on July 14, 2015, along with eight other individuals for their roles in complex, international stock manipulation and money laundering schemes.

In entering his guilty plea, Gallison admitted that he conspired to artificially “pump” or inflate the trading volume and price of the shares of Warrior Girl Corp., quoted on the OTC market under the ticker symbol WRGL, and Everock Inc., quoted on the OTC market under the ticker symbol EVRN, by touting business activities and deceptive revenue forecasts and by engaging in coordinated trading activity to create the appearance of increasing market demand. Gallison admitted that he and others then “dumped” or sold the shares at the inflated prices and laundered proceeds through bank accounts in the United States and overseas. Gallison further admitted that he facilitated the schemes through an offshore brokerage and money laundering platform that went by various names, including Sandias Azucaradas, Moneyline Brokers and Trinity Asset Services (collectively Moneyline). Through Moneyline, Gallison created nominee accounts in the names of shell companies to conceal both the true source and ownership of the securities and the flow of funds. In addition, Gallison pleaded guilty to one count of conspiring to launder the proceeds of a number of securities fraud schemes, including Warrior Girl and Everock, totaling more than $25 million.

Several of Gallison’s co-defendants are scheduled to proceed to trial on Jan. 25, 2016, and are presumed innocent until and unless proven guilty. Gallison is scheduled to be sentenced on March 18, 2016.

The FBI’s Washington Field Office is investigating the case. Senior Trial Attorney N. Nathan Dimock and Trial Attorney Michael O’Neill of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Kosta Stojilkovic of the Eastern District of Virginia are prosecuting the case. Assistant U.S. Attorneys James P. Gillis and G. Zachary Terwilliger of the Eastern District of Virginia assisted in the prosecution. The Securities and Exchange Commission, the Financial Industry Regulatory Authority and the Criminal Division’s Office of International Affairs also provided significant assistance.

SEC SAYS FALSE TWEETS SENT TWO STOCKS DROPPING

2015-11-15T00:00:00.000-05:00

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

PRESS RELEASE

SEC Charges: False Tweets Sent Two Stocks Reeling in Market Manipulation

Criminal Charges Also Filed

2015-254

Washington D.C., Nov. 5, 2015 — The Securities and Exchange Commission today filed securities fraud charges against a Scottish trader whose false tweets caused sharp drops in the stock prices of two companies and triggered a trading halt in one of them.

According to the SEC’s complaint filed in federal court in the Northern District of California, James Alan Craig of Dunragit, Scotland, tweeted multiple false statements about the two companies on Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms.

The U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Craig.

The SEC’s complaint alleges that Craig’s first false tweets caused one company’s share price to fall 28 percent before Nasdaq temporarily halted trading. The next day, Craig’s false tweets about a different company caused a 16 percent decline in that company’s share price. On each occasion, Craig bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings.

The SEC’s investigation also determined that Craig later used aliases to tweet that it would be difficult for the SEC to determine who sent the false tweets because real names weren’t used.

“As alleged in our complaint, Craig’s fraudulent tweets disrupted the markets for two public companies and caused significant financial losses for their investors,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office. “Craig also said in later tweets that the SEC would have a hard time catching the perpetrator. As today’s enforcement action demonstrates, those tweets turned out to be false as well.”

According to the SEC’s complaint:

On Jan. 29, 2013, Craig used a Twitter account he created to send a series of tweets that falsely said Audience Inc. was under investigation. Craig purposely made the account look like it belonged to the securities research firm Muddy Waters by using the actual firm’s logo and a similar Twitter handle. Audience’s share price plunged and trading was halted before the fraud was revealed and the company’s stock price recovered.

On Jan. 30, 2013, Craig used another Twitter account he created to send tweets that falsely said Sarepta Therapeutics Inc. was under investigation. In this case Craig deliberately made the Twitter account seem like it belonged to the securities research firm Citron Research, again using the real firm’s logo and a similar Twitter handle. Sarepta’s share price dropped 16 percent before recovering when the fraud was exposed.

The SEC’s complaint charges that Craig committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a permanent injunction against future violations, disgorgement, and a monetary penalty from Craig.

The SEC has issued an Investor Alert titled Social Media and Investing – Stock Rumors prepared by the Office of Investor Education and Advocacy. The alert aims to warn investors about fraudsters who may attempt to manipulate share prices by using social media to spread false or misleading information about stocks, and provides tips for checking for red flags of investment fraud.

The SEC’s investigation was conducted by staff in the Market Abuse Unit including Elena Ro, John Rymas, and Steven D. Buchholz. The case was supervised by Joseph G. Sansone, Co-Chief of the Market Abuse Unit. The SEC’s litigation will be led by Ms. Ro and John S. Yun of the San Francisco Regional Office. The SEC appreciates the assistance of the U.S. Department of Justice and the Federal Bureau of Investigation.

COURT ORDERS $31 MILLION RESTITUTION AND PENALTY PAYMENT AGAINST MAN, COMPANY FOR FRAUD

2015-10-25T00:00:00.000-04:00

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

October 20, 2015

Federal Court in Ohio Orders over $31 Million in Restitution and Civil Monetary Penalties against John R. Bullar and His Company, Executive Management Advisors L.L.C., for Commodity Pool Operator and Commodity Trading Advisor Fraud and Ponzi Scheme

In a Related Criminal Action, John R. Bullar was sentenced to 8 Years 4 Months in Prison and Ordered to Pay over $6 Million in Criminal Restitution

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Michael R. Barrett of the U.S. District Court for the Southern District of Ohio entered an Order for Final Judgment by Default against Defendant John R. Bullar, a resident of Cincinnati, Ohio, and a Consent Order against his company, Defendant Executive Management Advisors L.L.C. (EMA), imposing restitution on Bullar and EMA of over $6.2 million. In addition, the Orders require Bullar and EMA to pay civil monetary penalties totaling more than $24.8 million for their fraud, misappropriation, embezzlement, and operation of a Ponzi scheme, while illegally acting as Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) without registering as such with the CFTC. The Orders also impose permanent trading and registration bans on the Defendants and prohibit them from further violations of the Commodity Exchange Act, as charged.

The Orders arise out of a CFTC Complaint filed on September 23, 2014, which charged Bullar and EMA with embezzlement, fraudulent solicitation, misappropriation of customer funds, fraud by a CPO and CTA, commodity futures and options fraud, and failure to register as a CPO and CTA (see Complaint and Press Release 7006-14, September 23, 2014).

Embezzlement and Misappropriation

The Orders find that Bullar, from at least January 2008, and EMA, from at least March 2009 through September 2013, fraudulently solicited and accepted at least $8.3 million from at least 40 investors (EMA Pool Participants), who were told their funds would be pooled and traded in commodity futures and option contracts. In fact, according to the Orders, most of the funds received from the EMA Pool Participants were not traded at all, and over $6.2 million of the EMA Pool Participants’ funds were embezzled or misappropriated by the Defendants and used by Bullar to pay his personal expenses, to pay money to him or to accounts he controlled, and to purchase property, vehicles, landscaping and other home improvements. Additionally, some EMA Pool Participants’ funds were used by Defendants to pay for other EMA Pool Participants’ withdrawals of principal or fictitious profits, in the manner typical of a Ponzi scheme, the Orders find.

The Orders further find that to conceal their embezzlement and fraud the Defendants issued false account statements that showed fictitious profits and account balances and other false information. Throughout the periods of their misconduct, Bullar and EMA failed to register with the CFTC as a CPO or CTA, as required, the Orders find.

Related Criminal Action

In a related criminal action brought by the U.S. Attorney’s Office for the Southern District of Ohio, Bullar pleaded guilty to one count of wire fraud and one count of money laundering and was sentenced on June 22, 2015 to 100 months (8 years and 4 months) in prison and ordered to pay criminal restitution totaling over $6 million.

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

The CFTC thanks and acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of Ohio, the Internal Revenue Service-Criminal Investigation (Cincinnati Field Office), the Ohio Department of Commerce (Division of Securities-Enforcement), and the Office of the Hamilton County Prosecutor’s Office.

CFTC Division of Enforcement staff members responsible for this case are Xavier Romeu-Matta, Christopher Giglio, Douglas K. Yatter, Steven Ringer, Lenel Hickson, Jr., and Manal M. Sultan.

* * * * * *

CFTC’s Commodity Pool Fraud Advisory

The CFTC has issued several customer protection Fraud Advisories that provide the warning signs of fraud, including the Commodity Pool Fraud Advisory, which warns customers about a type of fraud that involves individuals and firms, often unregistered, offering investments in commodity pools.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a Toll-Free Hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

CFTC ANNOUNCES DEUTSCHE BANK AG ORDERED TO PAY $2.5 MILLION PENALTY IN CASE INVOLVING SWAPS REPORTING VIOLATIONS AND SUPERVISION FAILURES

2015-10-02T00:00:00.000-04:00

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION

September 30, 2015

CFTC Orders Deutsche Bank AG to Pay a $2.5 Million Civil Monetary Penalty for Swaps Reporting Violations and Related Supervision Failures

CFTC Finds that Deutsche Bank Did Not Diligently Address and Correct Errors until after Bank Was Notified of CFTC Investigation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Deutsche Bank AG, a global banking and financial services company and provisionally registered Swap Dealer, for failing to properly report its swaps transactions from in or about January 2013 until July 2015 (the Relevant Period). The CFTC Order also finds that Deutsche Bank did not diligently address and correct the reporting errors until the Bank was notified of the CFTC’s investigation, and failed to have an adequate swaps supervisory system governing its swaps reporting requirements.

This is the CFTC's first action enforcing the new Dodd-Frank requirements that provide for the real-time public reporting of swap transactions and the reporting of swap data to swap data repositories.

The Order requires Deutsche Bank to pay a $2.5 million civil monetary penalty and comply with undertakings to improve its internal controls to ensure the accuracy and integrity of its swaps reporting.

CFTC Director of Enforcement Aitan Goelman commented: “This is another in a series of cases the CFTC has brought this year highlighting the importance of complete and accurate reporting – here involving reporting of swap transactions. When reporting parties fail to meet their reporting obligations, the CFTC cannot carry out its vital mission of protecting market participants and promoting market integrity.”

As a provisionally registered Swap Dealer, Deutsche Bank is required to comply with certain disclosure, recordkeeping, and reporting requirements related to its swap transactions. Specifically, Parts 43 and 45 of the CFTC’s Regulations specify requirements for real-time public reporting, public availability of swap transaction and pricing data, and reporting of creation and continuation data. These Regulations also include requirements for a reporting counterparty to report and correct errors and omissions in its swaps reporting, including cancellations, to the registered Swap Data Repository (SDR) to which the reporting counterparty originally reported the swap.

The reporting requirements are designed to enhance transparency, promote standardization, and reduce systemic risk in swaps trading. Accurate swap data is essential to effective fulfillment of the regulatory functions of the CFTC, including meaningful surveillance and enforcement programs. Moreover, real-time public dissemination of swap transaction and pricing data supports the fairness and efficiency of markets and increases transparency, which in turn improves price discovery and decreases risk.

According to the CFTC Order, during the Relevant Period, Deutsche Bank failed to properly report cancellations of swap transactions in all asset classes, which in the aggregate included between tens of thousands and hundreds of thousands of reporting violations and errors and omissions in its swap reporting. Deutsche Bank was aware of problems relating to its cancellation messages since its reporting obligations began on December 31, 2012, but failed to provide timely notice to its SDR and did not diligently investigate, address and remediate the problems until it was notified of the Division of Enforcement’s investigation in June 2014. Because of Deutsche Bank’s reporting failures, misinformation was disseminated to the market through the real time public tape and to the CFTC.

The Order further finds that Deutsche Bank’s reporting failures resulted in part due to deficiencies with its swaps supervisory system. Deutsche Bank did not have an adequate system to supervise all activities related to compliance with the swaps reporting requirements until at least sometime between April and July of 2014 – well after its reporting obligations went into effect, according to the Order.

The Order recognizes Deutsche Bank’s significant cooperation with the CFTC during the investigation of this matter.

The CFTC’s Data and Reporting Branch in the Division of Market Oversight (DMO) is responsible for the supervision of swaps data collection and reporting obligations of registered entities. This matter originated from referrals by DMO, and the Data and Reporting Branch provided substantial assistance to the Division of Enforcement during the investigation.

The CFTC Division of Enforcement staff members responsible for this matter are Allison Passman, Joseph Patrick, Robert Howell, Scott Williamson, and Rosemary Hollinger, with assistance from DMO staff Lawrence Grannan, Athanasia Papadopoulos, Kristin Liegel, Benjamin DeMaria, and Daniel Bucsa.