SEC.gov Updates: Press Releases

Jon Rymer Named Interim Inspector General

Wed, 30 May 2012 17:01:37 EDT

FOR IMMEDIATE RELEASE
2012-106

Washington, D.C., May 30, 2012 — The Securities and Exchange Commission today announced that Jon T. Rymer will serve as Interim Inspector General until the Commission hires a permanent Inspector General. Mr. Rymer, who currently serves as Inspector General of the Federal Deposit Insurance Corporation, will continue his duties at the FDIC’s Office of Inspector General after starting at the SEC on May 30.

Mr. Rymer is a Certified Internal Auditor and a Certified Government Auditing Professional. He currently serves as the Chair of the Audit Committee of the Council of the Inspectors General on Integrity and Efficiency and as Vice Chair of the Council of Inspectors General on Financial Oversight. He also is a member of the Comptroller General’s Advisory Council on Government Auditing Standards.

From 1981 to 1992, Mr. Rymer was an executive at First American National Bank of Tennessee. He was an executive at Boatmen’s Bank of Arkansas from 1992 to 1997. He joined the accounting firm of KPMG LLP in 1997 as a Director and provided services for banking clients on matters of process improvement, assurance processes, and internal auditing. His clients ranged from international banks to community banks, thrifts, and credit unions.

Mr. Rymer has served for more than 31 years in the active and reserve components of the U.S. Army. His awards include the meritorious service medal with oak leaf cluster and the humanitarian service medal. He is a graduate of the U.S. Army’s Inspector General School.

Mr. Rymer is a graduate of the University of Tennessee, where he received a Bachelor of Arts degree in Economics. He also earned a Master of Business Administration degree from the University of Arkansas at Little Rock.

Noelle Maloney, who has served as interim Inspector General since January, will return to her previous role as Deputy Inspector General.

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SEC Charges Phoenix-Based Investment Adviser and Firm With Fraud

Wed, 30 May 2012 12:31:25 EDT

FOR IMMEDIATE RELEASE
2012-105

Washington, D.C., May 30, 2012 – The Securities and Exchange Commission today charged a Phoenix-based investment adviser and his firm for recommending investments without telling clients about his personal stake and exploiting a client who was buying an ownership share in the firm.

The SEC’s Enforcement Division alleges that Walter J. Clarke advised clients at Oxford Investment Partners LLC to invest in two businesses without disclosing the conflicts of interest that he co-owned one of them and had financial ties to the owners of the other. Both investments later failed. And when Clarke’s own financial problems prompted him to sell a stake in Oxford to a client, he fraudulently inflated the value of his firm by at least $1.5 million to make the client overpay by at least $112,000.

“Investment advisers have a fiduciary duty to be forthcoming with their clients and act in their best interests,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “Clarke breached that duty by deliberately overvaluing the firm and staying mum on his personal ties to the recommended investments.”

According to the SEC’s order instituting administrative proceedings against Clarke and Oxford, Clarke convinced three clients in late 2007 and early 2008 to fund more than $300,000 in loans originated by Cornerstone Funding Group, a company co-owned by Clarke. However, the clients were never told that Clarke was a co-owner and would personally profit from successfully originated loans. Within months of the loans being funded, the underlying borrowers defaulted, causing the clients to lose their investments. In November 2008, Clarke convinced four clients to invest approximately $40,000 in HotStix, a privately-held company. The clients were not informed that the owners of HotStix were also co-owners and paid consultants of Oxford. Shortly after the clients made these investments, HotStix sought bankruptcy protection and the clients lost their money.

The SEC’s investigation further found that amid financial woes, Clarke sold a client 7.5 percent of his ownership interest in Oxford in March 2008. The client paid $750,000 based on Clarke’s valuation of Oxford at $10 million. However, Clarke used several ploys to fraudulently inflate Oxford’s value. First, Clarke applied an excessive and baseless multiple to Oxford’s 2007 annual revenue. Second, Clarke calculated Oxford’s 2007 revenue by quadrupling Oxford’s revenue in the fourth quarter of 2007 – its most profitable quarter that year – and ignoring Oxford’s lower revenue in the previous three quarters. Third, Clarke added a baseless $1 million “premium” to Oxford’s valuation.

According to the SEC’s order, Oxford and Clarke willfully violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.

The SEC’s investigation was conducted by Paris A. Wynn and Mr. Sprung, who work in the Los Angeles Regional Office and are members of the Enforcement Division’s Asset Management Unit. Securities compliance examiner Ryan Hinson conducted the related examination under the supervision of Daniel C. Jung. The SEC’s litigation will be led by Mr. Wynn and David Van Havermaat.

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Miami Hedge Fund Adviser Charged for Misleading Investors About "Skin in the Game" and Related-Party Deals

Tue, 29 May 2012 10:33:40 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., May 29, 2012 – The Securities and Exchange Commission today charged a Miami-based hedge fund adviser for deceiving investors about whether its executives had personally invested in a Latin America-focused hedge fund.

The SEC’s investigation found that Quantek Asset Management LLC made various misrepresentations about fund managers having “skin in the game” along with investors in the $1 billion Quantek Opportunity Fund. In fact, Quantek’s executives never invested their own money in the fund. The SEC’s investigation also found that Quantek misled investors about the investment process of the funds it managed as well as certain related-party transactions involving its lead executive Javier Guerra and its former parent company Bulltick Capital Markets Holdings LP.

Bulltick, Guerra, and former Quantek operations director Ralph Patino are charged along with Quantek in the SEC’s enforcement action. They agreed to pay more than $3.1 million in total disgorgement and penalties to settle the charges, and Guerra and Patino agreed to securities industry bars.

“When making an investment decision, private fund investors are entitled to the unvarnished truth about material information such as management’s skin in the game or the adviser’s handling of related-party transactions,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Quantek’s investors deserved better than the misleading information they received in marketing materials, side letters, and other fund documents.”

According to the SEC’s order instituting settled administrative proceedings, fund investors frequently inquire about the extent of the manager’s personal investment during their due diligence process, and many require it in fund selection. Quantek, particularly Patino, misrepresented to investors from 2006 to 2008 that management had skin in the game. These misstatements were made when responding to specific questions posed in due diligence questionnaires that were used to market the funds to new investors. Quantek made similar misrepresentations in side letter agreements executed by Guerra with two sought-after institutional investors.

The SEC’s order also found that Quantek misled investors about certain related-party loans made by the fund to affiliates of Guerra and Bulltick. Because the fund permitted related-party transactions with Bulltick and other Quantek affiliates, investors were wary of deals that were not properly disclosed. In 2006 and 2007, Quantek caused the fund to make related-party loans to affiliates of Guerra and Bulltick that were not properly documented or secured at the outset. Quantek and Bulltick employees later re-created the missing related-party loan documents, but misstated key terms of the loans and backdated the materials to give the appearance that the loans had been sufficiently documented and secured at all times. Quantek and Guerra provided this misleading loan information to the fund’s investors.

“The related-party transactions were problematic to begin with, and the false deal documents left investors in the dark about the adviser’s conflicts of interest,” said Scott Weisman, Assistant Director in the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s order, Quantek also repeatedly failed to follow the robust investment approval process it had described to investors in the fund. Quantek concealed this deficiency by providing investors with backdated and misleading investment approval memoranda signed by Guerra and other Quantek principals.

Quantek, Guerra, Bulltick, and Patino settled the charges without admitting or denying the findings. Quantek and Guerra agreed jointly to pay more than $2.2 million in disgorgement and pre-judgment interest, and to pay financial penalties of $375,000 and $150,000 respectively. Bulltick agreed to pay a penalty of $300,000, and Patino agreed to a penalty of $50,000. Guerra consented to a five-year securities industry bar, and Patino consented to a securities industry bar of one year. Quantek and Bulltick agreed to censures. They all consented to orders that they cease and desist from committing or causing violations of certain antifraud, compliance, and recordkeeping provisions of the Investment Advisers Act of 1940 and the Securities Act of 1933.

The SEC’s investigation was conducted by Matthew Rossi in the Enforcement Division’s Asset Management Unit under the supervision of Mr. Weisman.

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SEC Halts Fraudulent Investment Scheme by New York-Based Fund Manager

Fri, 25 May 2012 10:34:02 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., May 25, 2012 — The Securities and Exchange Commission today announced charges against a New York-based fund manager and his two firms for luring investors into a trading program that would purportedly maximize their profits but instead spent their money in unauthorized ways.

Additional Materials

SEC Complaint

The SEC alleges that since at least November 2011, Jason J. Konior and his firms raised approximately $11 million by selling investors limited partnership interests in Absolute Fund LP, an investment vehicle that Konior claimed had $220 million in trading capital. Konior and his firms falsely claimed that Absolute Fund would allocate millions of dollars in matching investment funds, place the combined funds in brokerage accounts through which investors could trade securities, and operate a “first loss” trading program that would allow investors to dramatically increase their potential profits.

However, the SEC alleges that instead of using investor funds for trading purposes, Konior and his firms Absolute Fund Advisors (AFA) and Absolute Fund Management (AFM) siphoned off approximately $2 million of the proceeds to pay redemptions from earlier investors and to pay their personal and business expenses.

The SEC obtained an asset freeze against Konior and his companies late yesterday in federal court in Manhattan.

“Konior falsely portrayed Absolute Fund as a legitimate investment vehicle designed to maximize investors’ access to trading capital in order to grow their hedge fund businesses,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “In reality, Konior’s operation became a way for Konior to funnel cash to his firms and himself for unauthorized purposes.”

According to the SEC’s complaint, Konior falsely represented to several investors that upon receipt of their investments, Absolute Fund would:

Allocate capital of up to nine times the amount of the investor’s capital contribution.
Place the combined funds in a sub-account at a broker-dealer through which the investor could trade securities.
Allocate any trading losses first to the investor’s contribution amount, and then any trading profits would be shared between Absolute Fund and the investor.

The SEC alleges that Absolute Fund did not actually operate the first loss trading program as promised for these investors. Absolute Fund also did not provide these investors with any matching funds or satisfy investor demands for returns of their capital contribution.

The SEC’s complaint charges Konior, AFA, and AFM with violating the antifraud provisions of the Securities Exchange Act of 1934 and seeks, among other things, permanent injunctive relief, disgorgement of ill-gotten gains, and financial penalties. Without admitting or denying the allegations in the SEC's complaint, Konior, AFA, and AFM have consented to the entry of an order freezing their assets, imposing a preliminary injunction against further violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and providing other relief. The Honorable Judge Louis L. Stanton issued the court order granting such relief.

The SEC’s investigation, which is continuing, is being conducted by Catherine Lifeso, Lara Mehraban, Kerri Palen, and Ken C. Joseph of the New York Regional Office. Ms. Lifeso, Ms. Mehraban, and Mr. Joseph are members of the Enforcement Division’s Asset Management Unit. Aaron Arnzen is leading the SEC’s litigation.

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SEC Bars Former Staffer From Practice Before the Commission

Thu, 24 May 2012 17:47:54 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., May 24, 2012 – The Securities and Exchange Commission today announced that it has barred Spencer Barasch, a former enforcement official in the Commission’s Fort Worth office, from appearing and practicing before the Commission for one year for violating federal conflict of interest rules.

The bar was imposed in an order instituting an administrative proceeding and resolves allegations involving Barasch’s representation of Stanford Group Company after Barasch went into private practice. Barasch consented to the Commission’s action without admitting or denying the Commission’s allegations.

Earlier this year, Barasch agreed to pay a $50,000 civil fine to the U.S. Justice Department for the same conduct.

Barasch, a Dallas resident, was the Associate District Director for the Division of Enforcement in the Commission’s Fort Worth office from June 1998 to April 2005. According to the Commission’s order, while at the Commission, Barasch took part “personally and substantially” in decisions involving allegations of securities law violations by entities associated with Robert Allen Stanford, including Stanford Group Company.

According to the Commission’s order, when Barasch joined a private law firm in 2005, he contacted the Commission’s Ethics Office about whether he could represent Stanford Group Company before the Commission and was told that he was permanently barred from doing so with respect to any matters on which he had participated while at the Commission. The order finds that Barasch declined to represent Stanford Group Company then, but that in the fall of 2006, he accepted an engagement from the Stanford entity and billed it for 12 hours of legal work related to Stanford matters Barasch had participated in while at the Commission.

During this representation, in violation of 18 U.S.C. § 207(a)(1), Barasch tried to obtain information about the Commission’s Stanford investigation from Commission staff in Fort Worth, but a staff attorney questioned whether Barasch could represent the firm. The staff attorney declined to have any substantive discussions with Barasch and suggested that Barasch contact the Commission’s Ethics Office on the matter. The order finds that Barasch did so and was again told that he was permanently barred from representing Stanford Group Company in the matter, prompting him to end his representation.

U.S. laws prohibit former federal officers and employees from knowingly seeking to influence or appear before any agency on a matter in which they had “participated personally and substantially” during their federal employment. The Commission’s order finds that Barasch violated this conflict of interest rule, which constitutes “improper professional conduct” under Rule 102(e) of the Commission’s rules of practice.

Before Barasch can resume appearing and practicing before the Commission, the Commission must determine that Barasch has truthfully sworn that he has satisfied several conditions that reflect on his character and fitness to practice before the Commission.

“This action shows that the Commission takes seriously ethical lapses by attorneys who appear and practice before it, and that such violations will result in serious disciplinary action,” said SEC Associate General Counsel Richard M. Humes.

The Commission’s case was investigated by Thomas J. Karr, Karen J. Shimp and Sarah E. Hancur of the Office of the General Counsel, following an investigation and report on the Stanford matter by the Commission’s Office of the Inspector General. The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of Texas.

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SEC Charges Northern California Fund Manager in $60 Million Scheme

Thu, 24 May 2012 13:25:36 EDT

FOR IMMEDIATE RELEASE
2012-101

Washington, D.C., May 24, 2012 – The Securities and Exchange Commission today charged an investment adviser in Scotts Valley, Calif., with running a $60 million investment fund like a Ponzi scheme and defrauding investors by touting imaginary trading profits instead of reporting the actual trading losses he incurred.

The SEC alleges that John A. Geringer, who managed the GLR Growth Fund, used false and misleading marketing materials to lure investors into believing that the fund was earning double-digit annual returns by investing 75 percent of its assets in investments tied to major stock indices. In reality, Geringer’s trading generated consistent losses and he eventually stopped trading entirely. To mask his fraud, Geringer paid millions of dollars in “returns” to investors largely by using money received from newer investors. He also sent investors periodic account statements showing fictitious growth in their investments.

“Geringer painted the picture of a successful fund weathering America’s financial crisis through a diversified, conservative investment strategy,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “The reality, however, was the complete opposite. Geringer lost millions of dollars in the market, tied up remaining investor funds in a pair of illiquid private companies, and lied about it in phony account statements.”

According to the SEC’s complaint filed in federal court in San Jose, Geringer raised more than $60 million since 2005, mostly from investors in the Santa Cruz area. Geringer used fraudulent marketing materials claiming that the fund had between 17 and 25 percent annual returns in every year of the fund’s operation through investments tied to well-known stock indices like the S&P 500, NASDAQ, and Dow Jones. Although the fund was started in 2003, marketing materials claimed 25 percent returns in 2001 and 2002 – before the fund even existed. The marketing materials also falsely indicated a nearly 24 percent return in 2008 from investing mainly in publicly-traded securities, options, and commodities, while the S&P 500 Index lost 38.5 percent.

The SEC alleges that Geringer’s actual securities trading was unsuccessful, and by mid-2009 the fund did not invest in publicly-traded securities at all. Instead, the fund invested heavily in illiquid investments in two private startup technology companies. The rest of the money was paid to investors in Ponzi-like fashion and to three entities Geringer controlled that also are charged in the SEC’s complaint.

According to the SEC’s complaint, Geringer further lied to investors on account statements that falsely claimed “MEMBER NASD AND SEC APPROVED.” The SEC does not “approve” funds or investments in funds, nor was the fund (or any related entity) a member of the NASD (now called the Financial Industry Regulatory Authority – FINRA). Geringer also falsely claimed that the fund’s financial statements were audited annually by an independent accountant. No such audits were performed.

The SEC’s complaint alleges Geringer and three related entities violated or aided and abetted violations of the antifraud provisions of the securities laws as well as a statute barring people from claiming that the SEC has passed on the merits of a particular investment. The SEC seeks financial penalties, disgorgement of ill-gotten gains, preliminary and permanent injunctions, and other relief. Geringer, the fund, and two of the related entities consented to the entry of a preliminary injunction and a freeze on the fund’s bank account.

The SEC’s investigation, which is continuing, has been conducted by Robert J. Durham and Robert S. Leach of the San Francisco Regional Office. The SEC’s litigation will be led by Sheila O’Callaghan of the San Francisco Regional Office.

The SEC thanks the U.S. Attorney’s Office for the Northern District of California, Federal Bureau of Investigation, and FINRA for their assistance in this matter.

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SEC Charges Two Feeders for One of South Florida's Largest-Ever Ponzi Schemes

Tue, 22 May 2012 10:28:49 EDT

FOR IMMEDIATE RELEASE
2012-100

Washington, D.C., May 22, 2012 — The Securities and Exchange Commission today charged two individuals who provided the biggest influx of investor funds into one of the largest-ever Ponzi schemes in South Florida.

Additional Materials

SEC Complaint

The SEC alleges that George Levin and Frank Preve, who live in the Fort Lauderdale area, raised more than $157 million from 173 investors in less than two years by issuing promissory notes from Levin's company and interests in a private investment fund they operated. They used investor funds to purchase discounted legal settlements from former Florida attorney Scott Rothstein through his prominent law firm Rothstein Rosenfeldt and Adler PA. However, the settlements Rothstein sold were not real and the supposed plaintiffs and defendants did not exist. Rothstein simply used the funds in classic Ponzi scheme fashion to make payments due other investors and support his lavish lifestyle. Rothstein's Ponzi scheme collapsed in October 2009, and he is currently serving a 50-year prison sentence.

The SEC alleges that Levin and Preve misrepresented to investors that they had procedural safeguards in place to protect investor money when in fact they often purchased settlements without first seeing any legal documents or doing anything to verify that the settlement proceeds were actually in Rothstein's bank accounts. Moreover, as the Ponzi scheme was collapsing and Rothstein stopped making payments on prior investments, Levin and Preve sought new investor money while falsely touting the continued success of their investment strategy. With their fate tied to Rothstein, Levin and Preve's settlement purchasing business collapsed along with the Ponzi scheme.

"Levin and Preve fueled Rothstein's Ponzi scheme with the false sense of security they gave investors," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "They promised to safeguard investors' assets, but gave Rothstein money with nothing to show for it."

According to the SEC's complaint filed in federal court in Miami, Levin and Preve began raising money to purchase Rothstein settlements in 2007 by offering investors short-term promissory notes issued by Levin's company - Banyon 1030-32 LLC. In 2009, seeking additional funds from investors, they formed a private investment fund called Banyon Income Fund LP that invested exclusively in Rothstein's settlements. Banyon 1030-32 served as the general partner of the fund, and its profit was generated from the amount by which the settlement discounts obtained from Rothstein exceeded the rate of return promised to investors.

The SEC alleges that the offering materials for the promissory notes and the private fund contained material misrepresentations and omissions. They misrepresented to investors that prior to any settlement purchase, Banyon 1030-32 would obtain certain documentation about the settlements to ensure the safety of the investments. Levin and Preve, however, knew or were reckless in not knowing that Banyon 1030-32 often purchased settlements from Rothstein without obtaining any documentation whatsoever.

Furthermore, the SEC alleges that Banyon Income Fund's private placement memorandum misrepresented that the fund would be a continuation of a successful business strategy pursued by Banyon 1030-32 during the prior two-and-a-half years. Levin and Preve failed to disclose that by the time the Banyon Income Fund offering began in May 2009, Rothstein had already ceased making payments on a majority of the prior settlements Levin and his entities had purchased. They also failed to inform investors that Levin's ability to recover his prior investments from Rothstein was contingent on his ability to raise at least $100 million of additional funding to purchase more settlements from Rothstein.

The SEC's complaint seeks disgorgement of ill gotten gains, financial penalties, and permanent injunctive relief against Levin and Preve to enjoin them from future violations of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by senior counsels D. Corey Lawson and Steven J. Meiner and staff accountant Tonya T. Tullis under the supervision of Assistant Regional Director Chad Alan Earnst. Senior trial counsels James M. Carlson and C. Ian Anderson are leading the litigation.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of Florida, the Federal Bureau of Investigation, and the Internal Revenue Service.

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SEC Charges Former Yahoo Executive and Former Ameriprise Manager with Insider Trading

Mon, 21 May 2012 18:17:53 EDT

FOR IMMEDIATE RELEASE
2012-99

Washington, D.C., May 21, 2012 — The Securities and Exchange Commission today charged a former executive at Yahoo! Inc. and a former mutual fund manager at a subsidiary of Ameriprise Financial Inc. with insider trading on confidential information about a search engine partnership between Yahoo and Microsoft Corporation.

Additional Materials

SEC Complaint

The SEC alleges that Robert W. Kwok, who was Yahoo's senior director of business management, breached his duty to the company when he told Reema D. Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Shah had reached out to Kwok amid market rumors of an impending partnership between the two companies, and Kwok told her the information was kept quiet at Yahoo and only a few people knew of the coming announcement. Based on Kwok's illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000.

The SEC further alleges that a year earlier, the roles were reversed. Shah tipped Kwok with material nonpublic information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754.

Kwok and Shah, who each live in California, have agreed to settle the SEC's charges. Financial penalties and disgorgement will be determined by the court at a later date. Under the settlements, Shah will be permanently barred from the securities industry and Kwok will be permanently barred from serving as an officer or director of a public company.

"Kwok and Shah played a game of you scratch my back and I'll scratch yours," said Scott W. Friestad, Associate Director in the SEC's Division of Enforcement. "When corporate executives and mutual fund professionals misuse their access to confidential information, they undermine the integrity of our markets and violate the trust placed in them by investors."

In a parallel criminal case announced today by the U.S. Attorney's Office for the Southern District of New York, Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charge. Both are awaiting sentencing.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Shah and Kwok first met in January 2008 when Shah was attending a real estate conference in California at the same facility where Yahoo was holding a meeting. The two met in a hallway and began discussing their respective businesses, and thereafter they spoke frequently by phone or in person. Kwok provided Shah with information about Yahoo, including whether Yahoo's quarterly financial performance was expected to be in line with market estimates. In return, Shah provided Kwok with information she learned in the course of her work, and he used it to help make his personal investment decisions. Both Shah and Kwok benefitted from this exchange of information.

The SEC alleges that in early 2008, shortly after their initial meeting, Shah told Kwok that she had learned through an inside source at Autodesk Inc. that it intended to acquire Moldflow Corporation. Based on this illegal tip that Kwok received from Shah, he purchased 1,500 shares of Moldflow in a personal account from April 7 to April 25. Autodesk and Moldflow announced the acquisition on May 1, and the price of Moldflow stock increased 11 percent. Kwok then sold his shares for a profit.

According to the SEC's complaint, Shah followed Yahoo closely as a portfolio manager at Ameriprise subsidiary RiverSource Investments LLC and previously at J. & W. Seligman & Co. She believed that the announcement of a partnership between Yahoo and Microsoft would have a positive impact on Yahoo's stock. In July 2009, when certain media began reporting that a deal could be forthcoming with Microsoft making a large up-front payment to Yahoo, Shah reached out to Kwok for inside information. Both Kwok and Shah knew that Kwok was tipping Shah in breach of his duty to Yahoo. Based on the confidential information she received from Kwok, Shah prompted certain RiverSource funds she helped managed to purchase 700,300 shares of Yahoo on July 16. The largest purchase was made in the Seligman Communications and Information Fund, which alone added approximately 450,000 shares of Yahoo to its holdings. On July 28, the shares were sold and a profit was realized.

The SEC's complaint charges Kwok and Shah with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In the settlements that are subject to court approval, Kwok and Shah acknowledged the facts to which they pled guilty and consented to judgments that impose permanent injunctions. The settlements also include the bars and to-be-determined financial sanctions.

The SEC's investigation, which is continuing, has been conducted by Brian O. Quinn and Brian D. Vann in the SEC's Division of Enforcement. The SEC thanks the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.

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James McNamara Named Managing Executive of SEC’s Division of Trading and Markets

Fri, 18 May 2012 14:04:48 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., May 18, 2012 — The Securities and Exchange Commission today announced that James P. McNamara has been named to the newly-created position of Managing Executive of the SEC’s Division of Trading and Markets.

Mr. McNamara is currently an Assistant Director in the SEC’s Office of Financial Management. In his new position, Mr. McNamara will be responsible for the administrative and operational aspects of the Division of Trading and Markets, including human resources, budget, information technology, and strategic planning.

“The breadth of Jamey’s management experience, including his expertise with respect to managing and improving business processes in the financial, human resources, and IT areas, will be invaluable to the Division,” said Robert Cook, Director of the SEC’s Division of Trading and Markets.

Mr. McNamara previously worked in the Division of Trading and Markets from 2003 to 2005, when he served as a Branch Chief for Administration. He then moved to the Office of Financial Management and became a Branch Chief for Budget Formulation and Performance Management until 2006, when he left to work in the private sector. Mr. McNamara returned to the SEC’s Office of Financial Management in 2010, serving as the agency’s Budget Officer for a year before becoming an Assistant Director.

“I am honored to have been selected for this position. I look forward to returning to the Division and working with Robert and the talented staff in Trading and Markets,” Mr. McNamara said.

Mr. McNamara began his federal service at the U.S. Department of Justice, where he worked for 10 years in positions of increasing responsibility in human resources management and budget formulation in the agency’s largest litigating division.

Mr. McNamara received his bachelor’s degree in history from Brown University.

Erica Williams Named SEC's Deputy Chief of Staff

Thu, 17 May 2012 16:34:07 EDT

FOR IMMEDIATE RELEASE
2012-97

Washington, D.C., May 17, 2012 – The Securities and Exchange Commission today announced that Erica Williams will become the agency’s Deputy Chief of Staff.

Ms. Williams has been a member of Chairman Schapiro’s staff since February 2011, primarily focusing on enforcement and regulatory issues. Prior to that, Ms. Williams served as assistant chief litigation counsel in the Enforcement Division’s trial unit for seven years, leading trial teams in a host of successful prosecutions.

“Erica is well-steeped in the securities laws and has a true grasp of the intricacies of the agency,” said Chairman Schapiro. “She also fully embraces the agency’s mission and I am thrilled that she is willing to take on this new responsibility.”

Ms. Williams said, “This is an incredible opportunity that allows me to continue protecting investors and ensuring our markets operate fairly and efficiently.”

Ms. Williams replaces James R. Burns, who will become the Deputy Director of the Division of Trading and Markets.

In 2009, Ms. Williams was selected by U.S. Senator Ted Kaufman as Federal Employee of the Week. Before coming to the SEC, Ms. Williams was a commercial litigator in private practice.

Ms. Williams received her law degree from the University of Virginia School of Law. She holds a bachelor’s degree from the University of Virginia.

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James Burns Named Deputy Director in SEC's Division of Trading and Markets

Thu, 17 May 2012 16:34:07 EDT

FOR IMMEDIATE RELEASE
2012-96

Washington, D.C., May 17, 2012 – The Securities and Exchange Commission today announced that James R. Burns will become a Deputy Director in the Division of Trading and Markets.

Mr. Burns will oversee several of the Division’s core regulatory functions, including market oversight and operations, derivatives policy and trading practices, and chief counsel and enforcement liaison functions. He also will contribute to the Division’s ongoing implementation of key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, Mr. Burns will assist with the overall management of the Division, working closely with the Division’s Director Robert Cook and other Deputy Director John Ramsay.

Mr. Burns has been a member of Chairman Mary Schapiro’s staff since March 2010, most recently serving as the agency’s Deputy Chief of Staff. Mr. Burns advised the Chairman on the development and execution of the agency’s rulemaking and policy agenda as well as other key agency initiatives. He also served as counsel to Chairman Schapiro on issues involving the Division of Trading and Markets, including the agency’s analysis and response to the Flash Crash on May 6, 2010, and numerous other market structure and Dodd-Frank related rulemakings, studies, and programs.

“Jim has played an instrumental role in the implementation of the financial reform legislation and navigating through complex market structure issues,” said Chairman Schapiro. “In his new position, he will continue to help put in place the new regulatory regime governing complex derivatives as well as critical market structure improvements.”

Mr. Cook said, “At a time when the Division is taking on unprecedented challenges and new responsibilities, I am delighted that we will have the benefit of Jim’s leadership, initiative, and experience. Investors will be well-served by Jim’s dedication to the Commission’s mission and his wide-ranging knowledge of the diverse markets and intermediaries we regulate.”

Mr. Burns said, “I am honored to take on this new role. I have deep respect for Robert and the Division’s staff, who are carrying out tremendous responsibilities on behalf of our markets and investors, and I look forward to working with them to help advance the agency’s mission.”

Mr. Burns is expected to begin his new role in the Division in late May. He fills the Deputy Director position that was vacated by James Brigagliano when he left the agency for the private sector.

Prior to joining the Chairman’s staff, Mr. Burns was a counsel to Commissioner Kathleen Casey, advising her chiefly on investment management and enforcement matters. Before joining the SEC in 2008, Mr. Burns was a securities lawyer in private practice who focused on investment management and broker-dealer regulatory and enforcement matters. He previously served as a law clerk to now-chief Judge William B. Traxler on the U.S. Court of Appeals for the Fourth Circuit, and also worked at Oriel College, Oxford University.

Mr. Burns received his JD, cum laude, from Georgetown University Law Center. He holds masters and doctoral degrees from Oxford University, and graduated with an AB, magna cum laude, from Harvard College.

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SEC Charges Seattle-Based Fund Manager for Secretly Diverting Client Funds to His Own Start-Up Companies

Thu, 17 May 2012 15:37:02 EDT

FOR IMMEDIATE RELEASE
2012-95

Washington, D.C., May 17, 2012 – The Securities and Exchange Commission today charged a Seattle-based investment adviser and his firm with defrauding clients by secretly investing their money in two risky start-up companies he co-founded.

The SEC alleges that Mark Spangler, a former chairman of the National Association of Personal Financial Advisors, funneled approximately $47.7 million of client money into these private ventures despite representing that he would invest primarily in publicly-traded securities. Spangler served as chairman and CEO of one of the companies, which is now bankrupt. Such risky investments were inconsistent with the investment strategies that Spangler promised his clients and contrary to their investment objectives.

Additional Materials

SEC Complaint

The U.S. Attorney’s Office for the Western District of Washington today announced parallel criminal charges against Spangler.

“Spangler assured his clients he was investing them in publicly-traded equities and bonds, not risky start-ups in which he had a personal interest,” said Marc Fagel, Director of the SEC’s San Francisco Regional Office. “For an investment adviser to put his self-interest above the best interests of his clients is a disturbing abuse of trust.”

According to the SEC’s complaint filed in federal court in Seattle, Spangler raised more than $56 million from his clients since 1998 for several private investment funds he managed. Beginning around 2003, without notifying investors in the funds, Spangler and his advisory firm The Spangler Group (TSG) began diverting the majority of client money into two private technology companies he created. One of the companies received nearly $42 million from the funds before shutting down operations. It had long been a cash-poor company with a history of net losses, generating less than $100,000 in revenue during its 11-year history. Yet Spangler continued to treat the funds as the company’s piggy bank.

The SEC alleges that Spangler also did not tell investors that TSG collected fees for “financial and operational support” from these companies, which were essentially paying these fees with the client money they had received from the funds. Therefore, Spangler and his firm secretly reaped $830,000 from the companies in addition to any management fees that TSG received from clients.

According to the SEC’s complaint, Spangler concealed his diversion of client funds for years. He disclosed it only after he placed TSG and the funds he managed into state court receivership in 2011.

The SEC’s complaint charges Spangler and TSG with violating, among other things, the antifraud provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. The complaint seeks injunctive relief, disgorgement with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Karen Kreuzkamp and Robert S. Leach of the San Francisco Regional Office with assistance from Michael Tomars, Peter Bloom, and Christine Pelham of the investment adviser/investment company examination program. Robert L. Tashjian will lead the SEC’s litigation.

The SEC thanks the U.S. Attorney’s Office for the Western District of Washington, Federal Bureau of Investigation, and Internal Revenue Service for their assistance in this matter.

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SEC Charges New Jersey Man in Real Estate Investment Scam

Thu, 17 May 2012 13:17:02 EDT

FOR IMMEDIATE RELEASE
2012-94

Washington, D.C., May 17, 2012 – The Securities and Exchange Commission today charged a New Jersey man with operating a Ponzi-like scheme involving a series of investment vehicles formed for the purported purpose of purchasing and managing rental apartment buildings in New Jersey and Pennsylvania.

The SEC alleges that David M. Connolly induced investors to buy shares in real estate investment vehicles he created through his firm Connolly Properties Inc. He promised investors monthly dividends based on cash-flow profits from rental income at the apartment buildings as well as the growth of their principal from the appreciation of the property. However, the real estate investments did not produce the projected dividends, and Connolly instead made Ponzi-like dividend payments to earlier investors using money from new investors. Connolly, who lives in Watchung, N.J., also siphoned off at least $2 million in investor funds for his personal use.

“David Connolly presented himself to investors as a successful real estate investment manager with a track record of paying consistent, high returns,” said George S. Canellos, Director of the SEC’s New York Regional Office. “In truth, Connolly’s operation was essentially a shell game intended to raise additional funds from new or existing investors in order to perpetuate his fraudulent scheme.”

The U.S. Attorney’s Office for the District of New Jersey, which conducted a parallel investigation of the matter, today announced that Connolly was indicted on one count of securities fraud among other criminal charges.

According to the SEC’s complaint filed in federal court in New Jersey, none of Connolly’s securities offerings in the investment vehicles were registered with the SEC as required under the federal securities laws. He began offering the investments in 1996 and ultimately raised in excess of $50 million from more than 200 investors in more than 25 investment vehicles. However, beginning in at least 2006, Connolly misrepresented to investors that their funds would be used exclusively for the property related to the particular vehicle in which they invested. Connolly instead commingled the funds in bank accounts that he alone controlled and used for a variety of purposes that weren’t disclosed to investors, including $2 million in payments he made to himself that vastly exceeded any dividends to which he would be entitled through his ownership stake. Between 2007 and 2010, Connolly also wrote checks to “cash” in excess of $2.5 million. Even after Connolly stopped making dividend payments to investors in April 2009, he still continued to pay himself dividends as well as a $250,000 “salary” out of investor funds.

The SEC alleges that Connolly lacked sufficient revenues from rental income at the apartment buildings, so he continued to raise millions of dollars for new investment vehicles. He used the funds to pay purported monthly cash-flow dividends in excess of 10 percent to investors in older investment vehicles. Connolly refinanced properties and improperly used the cash proceeds to continue the scheme, which ultimately collapsed in 2009 when new investor funds dried up and rental income was insufficient to support payments on the mortgages. The properties owned by the investment vehicles were forced into foreclosure, wiping out the equity of the investors.

The SEC’s complaint charges Connolly with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC’s complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Justin Smith and William Edwards in the New York Regional Office. Jack Kaufman will lead the litigation.

The SEC thanks the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, and the Internal Revenue Service for their assistance in this matter.

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SEC Charges U.S. Perpetrators in $35 Million International Boiler Room Scheme

Wed, 16 May 2012 16:00:12 EDT

FOR IMMEDIATE RELEASE
2012-93

Washington, D.C., May 16, 2012 — The Securities and Exchange Commission today charged a Hawaii resident and two firms he used to orchestrate a scheme in which he covertly founded small companies, installed management, and recruited overseas boiler rooms that pressured investors into buying their stock while he pocketed more than $2 million in consulting fees from proceeds of the fraudulent stock sales.

Additional Materials

SEC Complaint

The SEC alleges that Nicholas Louis Geranio worked behind the scenes to create eight U.S.-based companies used to raise money through the sale of Regulation S stock, which is exempt from SEC registration under the securities laws because it is offered solely to investors located outside the United States. Geranio handpicked the management for the companies, primarily Keith Michael Field of Sherman Oaks, Calif., who served as an officer, director, or investor relations representative for each company and also is charged in the SEC’s complaint. Geranio then set up consulting arrangements through his firms — The Good One Inc. and Kaleidoscope Real Estate Inc. — so he could instruct management on how to run the companies and raise money offshore. Geranio extracted consulting fees from the companies, which generally had few or no employees, little or no office space, and no sales or customers.

The SEC alleges that Field drafted misleading business plans, marketing materials, and website information about the companies that were provided to investors as part of fraudulent solicitation efforts by teams of telemarketers operating in boiler rooms that Geranio recruited primarily in Spain. The boiler rooms used high-pressure sales tactics and false statements about the companies to raise more than $35 million from investors. Meanwhile, Geranio instructed Field and others to buy and sell shares in some of the companies to create an illusion of trading activity and manipulate upwards the price of the publicly-traded stock.

“Geranio covertly set up companies and manipulated the market for their stock to profit from aggressive offshore boiler room activity,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement. “Geranio pulled the strings while Field scripted the show for the boiler rooms to bring a payday to everyone but the investors.”

According to the SEC’s complaint filed in the U.S. District Court for the Central District of California, Geranio was the subject of a previous SEC enforcement action in 2000. In his latest misconduct, he concealed his role from investors and the public at all times by acting through The Good One and Kaleidoscope. The scheme lasted from April 2007 to September 2009. Geranio began by locating and acquiring shell companies to create the issuers used in the scheme: Blu Vu Deep Oil & Gas Exploration Inc., Green Energy Live Inc., Microresearch Corp., Mundus Group Inc., Power Nanotech Inc., Spectrum Acquisition Holdings Inc., United States Oil & Gas Corp., and Wyncrest Group Inc. Geranio then appointed management for these companies, in some cases turning to business associates, friends, or others. For example, the former CEO of Blu Vu was someone Geranio met while kite surfing in Malibu.

According to the SEC’s complaint, Geranio worked behind the scenes to keep the companies’ publicly-traded shares trading at prices conducive to the boiler room sales. He did this by directing Field, personal friends, and others to open accounts and buy or sell shares in at least five of the companies as part of matched orders and manipulative trades that created the false impression of active trading and market value in these stocks. The manipulative trades allowed the boiler rooms to sell the Regulation S shares to overseas investors at higher prices.

The SEC alleges that boiler room representatives recruited by Geranio induced investors by using aggressive techniques consistent with boiler room activity. For instance, they promised immediate and substantial investment returns, convinced investors that they needed to purchase the shares immediately or miss the grand opportunity altogether, and threatened legal action if an investor did not agree to purchase shares that the representatives believed the investor had already agreed to purchase. The boiler rooms also used “advance fee” solicitations, telling investors that only if they purchased shares in one of these companies would the boiler room agree to sell their other shares. Many of the investors were elderly and living in the United Kingdom.

According to the SEC’s complaint, investors were directed to pay for their Regulation S stock by sending money to U.S.-based escrow agents. As arranged by Geranio, the escrow agents paid 60 to 75 percent of the approximately $35 million raised from investors to the boiler rooms as their sales markups, kept 2.5 percent as their own fee, and paid the remaining proceeds back to the companies that Geranio created. The companies (or in some cases the escrow agents) then funneled approximately $2.135 million of the proceeds back to Geranio through The Good One and Kaleidoscope in the form of consulting fees, and paid Field approximately $279,000.

The SEC alleges that Geranio also assisted in diverting $240,000 in investor funds toward an undisclosed down payment on a property to start a Hawaiian wedding planning company.

The SEC’s complaint alleges that Geranio, Field, The Good One and Kaleidoscope violated Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder. The complaint alleges that Field also violated Section 17(a)(2) of the Securities Act and aided and abetted the companies’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Geranio is liable as a control person of The Good One and Kaleidoscope under Exchange Act Section 20(a). The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, penny stock bars, and permanent injunctions against all of the defendants, as well as officer and director bars against Geranio and Field. The complaint seeks disgorgement and prejudgment interest against relief defendant BWRE Hawaii LLC based on its alleged receipt of investor funds.

The SEC's investigation, which is continuing, has been conducted by Ricky Sachar, Carolyn Kurr, and Wendy Kong under the supervision of Josh Felker with assistance from Jim Daly in the Office of International Affairs. Richard Simpson will lead the litigation. The SEC acknowledges the assistance of the City of London Police, Macedonian Securities and Exchange Commission, Macedonian Public Prosecutor, Lithuanian Securities Commission, Australian Securities and Investments Commission, Comision Nacional del Mercado de Valores (Spain), and Financial Market Supervisory Authority (Switzerland).

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More information about boiler room schemes: http://www.sec.gov/investor/pubs/coldcall.htm and http://www.sec.gov/investor/pubs/worthless.htm

SEC PAUSE list of unregistered soliciting entities that have been the subject of investor complaints: http://www.sec.gov/investor/oiepauselist.htm

SEC Charges China-Based Company and Executive for Concealing Loans to Benefit His Family

Mon, 14 May 2012 15:38:44 EDT

FOR IMMEDIATE RELEASE
2012-92

Washington, D.C., May 14, 2012 – The Securities and Exchange Commission today charged a China-based natural gas company and an executive for defrauding investors by secretly loaning company funds to benefit his son and nephew while failing to disclose the true nature of the loans.

The SEC alleges Qinan Ji, the former CEO who remains chairman of China Natural Gas Inc., coordinated two short-term loans totaling more than $14 million in January 2010. One loan went to a real estate firm co-owned by Ji’s son and nephew through a sham borrower. The other loan went to a business partner of the real estate firm. Ji signed the company’s SEC filings that falsely stated the loans were made to third parties. Ji then lied about the true borrower to China Natural Gas’s board, investors, and auditors as well as during the company’s internal investigation.

“Ji betrayed China Natural Gas investors by misusing company funds to benefit his family and repeatedly lying about it,” said John M. McCoy III, Associate Director of the SEC’s Los Angeles Regional Office. “Ji’s misconduct caused China Natural Gas to file a series of false reports with the SEC and showed total disregard for his obligations as an officer and director of a company whose stock trades in the U.S.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Ji’s nephew approached China Natural Gas in late 2009 to obtain a loan for a large real estate development project being run by Demaoxing Real Estate Co., a firm that was 90 percent owned by Ji’s son and 10 percent owned by Ji’s nephew. Ji recognized it was inappropriate for China Natural Gas to loan money directly to his nephew, so he asked his niece’s husband, who was the company’s internal audit chief, to use a sham borrower. The internal audit chief located an individual named Taoxiang Wang, and fabricated notes of a meeting with her to discuss loan terms. Wang signed a loan agreement for $9.9 million, and the money was wired directly into a Demaoxing bank account with a note stating that the amount was for “raw material expenses.”

The SEC alleges that around the same time, China Natural Gas made a $4.4 million loan to Shaanxi Juntai Housing Purchase Co., a business partner on Demaoxing’s real estate development project. Shaanxi Juntai’s then-general manager was Ji’s friend. The internal audit chief talked with Ji’s nephew about the project when arranging the loan, which directly benefitted Demaoxing.

According to the SEC’s complaint, Ji was the company CEO until he resigned in October 2011. He approved both loans without obtaining prior authorization from the board or informing the CFO. Ji repeatedly lied to conceal the related party nature of both loans. When questioned about the loans by the China Natural Gas board, Ji falsely stated that the loans involved senior Chinese government officers who were in charge of the company’s liquid natural gas project. During a May 10, 2010 conference call about quarterly earnings, Ji responded to a question about the loans by again stating that they were made to obtain approvals from government officials. He later told the board that he made the loans to earn quick and lucrative interest, and lied about the true nature of the loans during the company’s internal investigation. Ji also lied to the company’s auditors by signing a letter stating that the two loans were for business purposes and the borrowers were not related parties.

The SEC also alleges that in the fourth quarter of 2008, China Natural Gas paid $19.6 million to acquire a natural gas company but did not timely and properly report the transaction in its SEC filings. As with the loans, Ji approved the acquisition without obtaining prior authorization from the board.

Ji and China Natural Gas are charged with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, as well as the proxy solicitation rules and various Exchange Act provisions including corporate reporting, recordkeeping, internal controls, and false statements to auditors. Ji also is charged with violating provisions of the Sarbanes-Oxley Act that require him to repay China Natural Gas the bonuses and stock sale profits he received after the company filed false reports with the SEC.

The SEC’s complaint seeks a final judgment that imposes financial penalties, bars Ji from acting as an officer or director of a public company, and permanently enjoins Ji and China Natural Gas from future violations of these provisions.

The SEC’s investigation, which is continuing, has been conducted by Junling Ma, Rhoda Chang, and Marshall S. Sprung of the SEC’s Los Angeles Regional Office. The SEC’s Cross Border Working Group – which focuses on U.S. companies with substantial foreign operations – and the SEC’s Office of International Affairs assisted the Los Angeles office’s enforcement staff in the investigation. The SEC’s litigation will be led by David Van Havermaat.

SEC Microcap Fraud-Fighting Initiative Expels 379 Dormant Shell Companies to Protect Investors From Potential Scams

Mon, 14 May 2012 09:30:00 EDT

FOR IMMEDIATE RELEASE
2012-91

Washington, D.C., May 14, 2012 — The Securities and Exchange Commission today suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.

Microcap companies typically have limited assets and low-priced stock that trades in low volumes. An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.

"Empty shell companies are to stock manipulators and pump-and-dump schemers what guns are to bank robbers — the tools by which they ply their illegal trade," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This massive trading suspension unmasks these empty shell companies and deprives unscrupulous scam artists of the opportunity to profit at the expense of unsuspecting retail investors."

Thomas Sporkin, Director of the SEC's Office of Market Intelligence, added, "It's critical to assess risks to investors in the capital markets and, through strategic planning, develop ways to neutralize them. We were able to conduct a detailed review of the microcap issuers quoted in the over-the-counter market and cull out these high-risk shell companies."

The SEC's previously largest trading suspension was an order in September 2005 that involved 39 companies. The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.

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

The existence of empty shell companies can be a financial boon to stock manipulators who will pay as much as $750,000 to assume control of the company in order to pump and dump the stock for illegal proceeds to the detriment of investors. But with this trading suspension's obligation to provide updated financial information, these shell companies have been rendered essentially worthless and useless to scam artists.

"This mass trading suspension is an effective and novel way for the SEC to neutralize potential threats to investors," said Chris Ehrman, Co-National Coordinator of the SEC's Microcap Fraud Working Group. "With the ability to leverage staff expertise throughout the agency's offices and divisions, the Working Group is uniquely positioned to take on risk-based matters like these and focus resources where they are needed most."

This SEC enforcement effort has been led by Mr. Ehrman, Robert Bernstein, Jessica P. Regan, Leigh Barrett, and Megan Alcorn in the Office of Market Intelligence along with Microcap Fraud Working Group staff from each of the SEC's regional offices: Tanya Beard, David Berman, Sharon Binger, Melissa Buckhalter-Honore, Lisa Cuifolo, Tracy Davis, Elisha Frank, Kurt Gottschall, Lucy Graetz, Jennifer Hieb, C.J. Kerstetter, Victoria Levin, Aaron Lipson, Michael Paley, Farolito Parco, Jonathan Scott, and Lauchlan Wash.

The SEC appreciates the assistance and cooperation of the Federal Bureau of Investigation's Economic Crimes Unit.

SEC Charges Scotland-Based Firm for Improperly Boosting Hedge Fund Client at Expense of U.S. Fund Investors

Thu, 10 May 2012 09:08:24 EDT

FOR IMMEDIATE RELEASE
2012-90

Washington, D.C., May 10, 2012 — The Securities and Exchange Commission today charged a Scotland-based fund management group for fraudulently using one of its U.S. fund clients to rescue another client, a China-focused hedge fund struggling in the midst of the global financial crisis.

Martin Currie agreed to pay a total of nearly $14 million to the SEC and the United Kingdom's Financial Services Authority (FSA) to settle the charges that it steered a U.S. publicly-traded fund called The China Fund Inc. into an investment to bolster the hedge fund. The hedge fund had acquired a significant and largely illiquid exposure to a single Chinese company. Martin Currie directly alleviated the hedge fund's liquidity problems by deciding to use the China Fund — to the detriment of the fund and its shareholders — in a bond transaction that reduced the hedge fund's exposure.

"The misconduct in this case strikes at the heart of the fiduciary relationship between an investment adviser and its client. Advisers must treat each client with undivided and disinterested loyalty, and must make full and fair disclosure of all material conflicts of interest," said Robert Khuzami, Director of the SEC's Division of Enforcement.

Bruce Karpati, Co-Chief of the SEC's Asset Management Unit, added, "The China Fund's board was led to believe it was making a routine investment in a Chinese company. But in reality, the investment proved harmful to fund shareholders while sparing an affiliated hedge fund from its own problems during the financial crisis."

According to the SEC's order instituting settled administrative proceedings against Martin Currie, the firm managed the China Fund side-by-side with the hedge fund through its SEC-registered investment adviser subsidiaries. These funds and other Martin Currie accounts made similar investments in Chinese companies under the direction of two senior portfolio managers based in Shanghai. One company was Jackin International, a printer-cartridge recycling company listed on the Hong Kong Stock Exchange.

According to the SEC's order, in June 2007, Martin Currie's lead portfolio manager in Shanghai caused the hedge fund to purchase $10 million of unlisted illiquid Jackin bonds that deviated from the fund's normal equities-trading strategy. Martin Currie improperly classified those bonds as cash in its risk-management system, and as a result the liquidity and credit risks associated with the hedge fund's exposure to Jackin weren't revealed until November 2008 after the hedge fund had purchased additional Jackin bonds. By that time, the hedge fund's total investment in Jackin had come close to breaching the fund's limit on portfolio exposure to a single issuer.

The SEC's order says that as the global financial crisis deepened, the hedge fund faced a significant increase in redemption requests by its investors, exacerbating the fund's liquidity problems. At the same time, Jackin was starved for capital to continue funding its operations and make debt payments to bondholders such as the hedge fund. In response to the hedge fund's overlapping problems, Martin Currie decided to use the China Fund to purchase $22.8 million in convertible bonds from a Jackin subsidiary. The subsidiary instantly lent $10 million of the proceeds to Jackin, which in turn redeemed $10 million in otherwise-illiquid bonds held by the troubled hedge fund. The bond transaction closed in April 2009.

According to the SEC's order, Martin Currie officials were aware that the China Fund's involvement presented a direct conflict of interest and may have been unlawful. In an attempt to cure that conflict, they sought and obtained approval from the China Fund's board of directors. However, they failed to disclose that proceeds of the fund's investment would be used to redeem bonds held by another client — the hedge fund. Martin Currie also failed to sufficiently consider whether the investment's rationale and pricing were in the China Fund's best interests.

The SEC's order noted that the China Fund's bond investment in the Jackin subsidiary turned out poorly. In April 2011, the China Fund sold the bonds for about 50 percent of their face value for a loss of $11.5 million.

The SEC's order found that Martin Currie engaged in separate improper conduct by failing to follow the China Fund's policies and procedures for fair valuing the convertible bonds at issue. Between April 2009 and October 2010, Martin Currie advised the China Fund's board to value the convertible bonds at cost ($22.8 million) while failing to disclose information that was relevant for the board to fair value the bonds.

The SEC charged Martin Currie with certain violations of the antifraud, affiliated transaction, reporting, and compliance provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Without admitting or denying the SEC's findings, Martin Currie agreed to settle the SEC's charges by paying a penalty of $8.3 million and accepting censures and cease-and-desist orders against future violations. Martin Currie also agreed to pay a penalty of £3.5 million ($5.6 million in U.S. dollars) to settle the FSA's action. In reaching the settlement, the SEC took into account that Martin Currie had compensated the China Fund for losses and expenses arising from the misconduct. Martin Currie cooperated with the SEC's investigation and implemented several remedial measures, including severing association with its lead Shanghai-based portfolio manager and making enhancements to its compliance program.

The SEC's investigation, which is continuing, has been conducted by Paul Kim and Natasha Guinan under the supervision of Scott Weisman, who are all members of the Enforcement Division's Asset Management Unit. The case originated from an SEC examination conducted by Jason Rosenberg and Lucas Tepper under the supervision of Mavis Kelly.

The SEC thanks the FSA for its assistance in this matter.

SEC Charges New York Man With Manipulating Biopharmaceutical Stocks and Conducting Unregistered Sales of Securities

Wed, 9 May 2012 15:47:30 EDT

FOR IMMEDIATE RELEASE
2012-89

Washington, D.C., May 9, 2012 – The Securities and Exchange Commission today charged a Manhattan resident with carrying out a complex market manipulation scheme in biopharmaceutical stocks after he was kicked out of the brokerage industry for fraud.

The SEC alleges that David Blech established more than 50 brokerage accounts in the names of family members, friends, and even a private religious institution. He used those accounts to buy and sell significant amounts of stock in two biopharmaceutical companies in order to create the artificial appearance of activity in their securities so he could maintain their market price and use it to his own financial advantage. Blech, who was previously convicted of securities fraud, also solicited investments for biopharmaceutical companies – including the two companies whose stock he manipulated – despite being barred by the SEC from acting as a broker-dealer.

The SEC further alleges that Blech and his wife Margaret Chassman, who also is charged in the case, flouted federal securities laws when they repeatedly made unregistered sales of securities and failed to disclose their transactions in the various brokerage accounts.

“Blech tried to rig the market in favor of his own investments and create a mirage of activity in the stocks of biopharmaceutical companies for which he was soliciting investors,” said George S. Canellos, Director of the SEC’s New York Regional Office. “But he seriously misjudged the SEC’s determination to ensure that the securities markets function fairly.”

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, added, “Blech hoped to avoid scrutiny by devising a complex scheme using accounts ostensibly belonging to family members and friends to place highly manipulative trades through different broker-dealers. This enforcement action demonstrates the SEC’s ability to dissect such trades and lay bare their true economic substance.”

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

According to the SEC’s complaint filed in federal court in Manhattan, Blech engaged in his scheme at various points in 2007 and 2008, specifically manipulating the stocks of Pluristem Therapeutics Inc. and Intellect Neurosciences Inc. Blech first opened dozens of nominee accounts at several broker-dealers in the names of his wife, uncle, and sister-in law as well as a longtime friend and a company he controlled, and religious institution Central Yeshiva Beth Joseph that is managed by Blech’s cousin. Blech then used the accounts to engage in deceptive activities and carry out matched trades in Pluristem’s and Intellect’s stocks. Blech’s activity in these thinly-traded securities artificially inflated the stock price of both companies and created the false impression of a liquid market for each company. Blech then used the artificially inflated stock price to sell off his holdings of Pluristem and Intellect through the nominee accounts, and as collateral for a line of credit he established in his wife’s name.

According to the SEC’s complaint, Blech has committed prior violations of the securities laws. He pled guilty in 1998 to two counts of securities fraud and was sentenced to five years of probation. In 2000, he settled a related SEC enforcement action by accepting a permanent bar from associating with any broker-dealer.

The SEC’s complaint charges Blech with violating Section 17(a)(1) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c), and for acting as an unregistered broker-dealer in violation of Section 15(b)(6)(B) of the Exchange Act The complaint also charges Blech and Chassman with violating Sections 5(a) and 5(c) of the Securities Act and for failing to make filings required by Sections 13(d) and 16(a) of the Exchange Act.

The SEC’s complaint seeks a final judgment ordering Blech and Chassman to disgorge their ill-gotten gains plus prejudgment interest, pay financial penalties, and be permanently enjoined from future violations of the provisions of the federal securities laws they violated. The complaint seeks orders requiring Blech to comply with a prior SEC order barring him from association with a broker or dealer, and prohibiting him from various other stock activities.

The SEC’s investigation was conducted by Charles D. Riely and Amelia A. Cottrell – members of the SEC’s Market Abuse Unit in New York – and Shannon A. Keyes and Kathy Murdocco of the SEC’s New York Regional Office. The office’s broker-dealer examination team of Richard Heaphy, Michael McAuliffe, Simone Celio Jr., and Doreen Piccirillo provided assistance with the investigation.

The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.

The SEC’s investigation is continuing.

SEC Charges Former Detroit Officials and Investment Adviser to City Pension Funds in Influence Peddling Scheme

Wed, 9 May 2012 12:23:39 EDT

FOR IMMEDIATE RELEASE
2012-88

Washington, D.C., May 9, 2012 – The Securities and Exchange Commission today charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and the investment adviser to the city’s public pension funds involved in a secret exchange of lavish gifts to peddle influence over the funds’ investment process.

Additional Materials

SEC Complaint

The SEC alleges that Kilpatrick and Beasley, who were trustees to the pension funds, solicited and received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry Realty Advisors LLC, an investment adviser whose CEO Chauncey Mayfield was recommending to the trustees that the pension funds invest approximately $117 million in a real estate investment trust (REIT) controlled by the firm. Despite their fiduciary duties, neither Kilpatrick and Beasley nor Mayfield and his firm informed the boards of trustees about these trips and the conflicts of interest they presented. The funds ultimately voted to approve the REIT investment, and MayfieldGentry received millions of dollars in management fees.

“It is a disappointing day when pension fund trustees such as ex-Mayor Kilpatrick and others corrupt the investment process by selling out hardworking police officers, firefighters and other municipal employees for the price of a few vacations and paltry extras like concert tickets and rounds of golf,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Michigan, members of Kilpatrick’s administration began to exert pressure on Mayfield in early 2006 after he supported Kilpatrick’s opponent in his 2005 re-election and hired that candidate’s daughter at MayfieldGentry. Beasley met with Mayfield in February 2006 and told him he was “in the dog house” with Kilpatrick and offered to help him “clear the air.” Throughout 2007, Mayfield appeared before the boards of trustees for Detroit’s public pension funds recommending the REIT investment.

Meanwhile, the SEC alleges, MayfieldGentry began footing the bills for trips taken by Kilpatrick, Beasley and others that extended beyond business. In January 2007, Beasley demanded and Mayfield agreed to pay more than $3,000 for hotel rooms in Charlotte, N.C. for Beasley, Kilpatrick, and others. Beasley told Mayfield that the reason for the trip was to inspect a building recently acquired by one of the pension funds, but in fact Beasley and Kilpatrick never inspected the building. Mayfield knew that Beasley and Kilpatrick never inspected the building, but did not ask any further questions about the matter.

According to the SEC’s complaint, the non-business travel continued:

In April 2007, MayfieldGentry paid for Kilpatrick, Beasley, and their associates to travel by private jet to Las Vegas, where they enjoyed luxury hotel accommodations, two concerts, three rounds of golf, meals, and massages. The Las Vegas trip cost more than $60,000.
In July 2007, MayfieldGentry paid more than $24,000 for a private jet to take Kilpatrick, Beasley’s son and others to Tallahassee, Fla., where Kilpatrick had a second home.
In October 2007, MayfieldGentry paid more than $34,000 for a private jet to fly Kilpatrick and his wife to and from Bermuda, and Kilpatrick’s father and his girlfriend back from Bermuda.

The SEC alleges that neither Kilpatrick nor Beasley nor Mayfield nor MayfieldGentry told anyone associated with the pension funds about any of the travel. The boards of trustees for the funds thus voted to invest approximately $117 million with Mayfield and his firm without the knowledge that they had supplied Kilpatrick, Beasley, and their associates with the extravagant travel and perks during the preceding 10 months.

The SEC’s complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a), 10b-5(b) and 10b-5(c) thereunder. The SEC also alleges that MayfieldGentry and Chauncey Mayfield violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933. In addition, the SEC charges that MayfieldGentry and Chauncey Mayfield violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Kilpatrick and Beasley aided and abetted those violations. The SEC seeks disgorgement of ill-gotten gains, penalties, and permanent injunctions, including an injunction against Kilpatrick and Beasley to prohibit them from participating in any decisions involving investments in securities by public pensions.

The SEC’s investigation, which is continuing, has been conducted jointly by the Chicago Regional Office led by Merri Jo Gillette and Timothy L. Warren, the Enforcement Division’s Asset Management Unit led by Bruce Karpati and Robert Kaplan, and the Municipal Securities and Public Pensions Unit led by Elaine C. Greenberg and Mark R. Zehner. The investigative attorneys are Brian D. Fagel, Rebecca R. Goldman and Eric A. Celauro, led by Assistant Directors Peter K.M. Chan and John J. Sikora, Jr. The SEC’s litigation will be led by Timothy S. Leiman and John E. Birkenheier.

# # #

SEC Charges Deloitte and Touche in Shanghai with Violating U.S. Securities Laws in Refusal to Produce Documents

Wed, 9 May 2012 11:33:24 EDT

FOR IMMEDIATE RELEASE
2012-87

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

Additional Materials

Order Instituting Proceedings

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

“As a voluntarily registered U.S. public accounting firm, D&T Shanghai cannot benefit from the financial and reputational rewards that come with auditing U.S. issuers without also meeting its U.S. legal obligations,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Foreign firms auditing U.S. issuers should not be permitted to shield themselves from regulatory scrutiny to the detriment of U.S. investors.”

Scott Friestad, Associate Director of the SEC’s Division of Enforcement, added, “Without access to work papers of foreign public accounting firms, our investigators are unable to test the quality of the underlying audits and fulfill our responsibilities to investors.”

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

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

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

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

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

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SEC Charges Movie Producer and Ring of Relatives and Business Partners with Insider Trading

Tue, 8 May 2012 11:56:47 EDT

FOR IMMEDIATE RELEASE
2012-86

Washington, D.C., May 8, 2012 — The Securities and Exchange Commission today announced charges against a Hollywood movie producer along with his brother, cousin, and three others in his circle of friends and business partners for insider trading in the stock of a company for which he served on the board of directors.

Additional Materials

SEC Complaint

The SEC alleges that Mohammed Mark Amin, prior to a company board meeting, learned confidential information about expanding business opportunities for DuPont Fabros Technology Inc., which develops and manages highly-specialized and secure facilities that maintain large computer servers for technology companies through long-term leases with them. Amin tipped his brother Robert Reza Amin, cousin Michael Mahmood Amin, and long-time friend and business manager Sam Saeed Pirnazar with nonpublic details about three new leases that DuPont Fabros was negotiating and three loans it was obtaining to develop new facilities. The three illegally traded on the basis of that inside information. Reza Amin went on to tip his friends and business associates Mary Coley and Ali Tashakori, who also illegally traded. Together they made more than $618,000 in insider trading profits when DuPont Fabros stock rose 36 percent after the company issued an earnings release highlighting the development of these new facilities.

Mark Amin and the five others agreed to settle the SEC’s charges by collectively paying nearly $2 million.

“Mark Amin disregarded his board responsibilities and betrayed shareholders at DuPont Fabros in favor of giving his circle of relatives and friends an inside scoop to trade on nonpublic information,” said John M. McCoy III, Associate Regional Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Mark Amin is a motion picture executive with his own production company. He lives in Los Angeles and is credited as the producer or executive producer for more than 75 Hollywood movies including Frida, Eve’s Bayou, and four movies in the Leprechaun series. In 2007, Amin began serving on the board of directors at DuPont Fabros, a real estate investment trust (REIT) whose common stock is listed on the New York Stock Exchange. DuPont Fabros develops and operates wholesale data centers that maintain computer servers for such companies as Microsoft, Facebook, and Google. Amin resigned from the board in February 2011.

The SEC alleges that Mark Amin first learned nonpublic information about new leases and loans pending for DuPont Fabros during a board meeting in December 2008, and he further discussed their status in a phone conversation with the company’s CEO on Jan. 7, 2009. That same day, Mark Amin tipped his cousin Michael Amin of Los Angeles and his friend and business manager Pirnazar of Manhattan Beach, Calif. In fact, Mark Amin initially asked Michael to lend him money and discussed Michael’s purchasing DuPont Fabros stock for both of them in Michael’s name.

The SEC further alleges that on February 4, Mark Amin received materials for a special board meeting to approve the three new loans. The next morning, he tipped this inside information to his brother Reza Amin of Los Angeles, who began buying DuPont Fabros stock just 17 minutes after receiving the tip. The board approved the three new loans later that day.

According to the SEC’s complaint, Reza Amin tipped Coley, a British citizen who lives in Los Angeles with whom he has a daughter. They are also business partners in a small chain of video stores. On February 6, he brought Coley into the local E*Trade branch office where he maintained a brokerage account so she could open a new brokerage account to purchase DuPont Fabros shares. Reza Amin also tipped his friend Tashakori, who lives in Rolling Hills, Calif. As a self-employed licensed general contractor, Tashakori was engaged in various construction projects for both Mark and Reza Amin. Tashakori purchased DuPont Fabros stock based on Reza Amin’s tip.

According to the SEC’s complaint, DuPont Fabros issued its 2008 earnings release after the market closed on Feb. 11, 2009, and highlighted that it had obtained the three new loans and entered into the three new leases. From January 8 to February 10, Michael Amin had purchased 145,000 DuPont Fabros shares that yielded him $318,646 in insider trading profits when the stock price soared upon news of the earnings release. Pirnazar purchased 10,500 shares and made $19,915 in illicit profits. From February 5 to February 11, Reza Amin purchased 214,600 DuPont Fabros shares for an eventual illegal profit of $241,767. Coley purchased 20,050 shares and realized insider trading profits of $23,690. Tashakori purchased 15,000 shares and profited $14,479.

The SEC’s complaint charges the Amins, Pirnazar, Coley, and Tashakori with violating Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5(a) and (c) thereunder. They have agreed to collectively pay disgorgement of $618,497, prejudgment interest of $78,000, and penalties totaling $1,236,994. They also have agreed to the entry of a final judgment permanently enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5. Mark Amin has additionally agreed to a bar from serving as an officer or director of a public company for 10 years. The settlement is subject to court approval.

The SEC’s investigation was conducted by Los Angeles Regional Office enforcement attorney John Britt. The SEC thanks the Financial Industry Regulatory Authority (FINRA) for its assistance in this matter.

# # #

SEC Charges Montana-Based Paralegal and Her Father in Insider Trading Scheme

Mon, 7 May 2012 13:11:39 EDT

FOR IMMEDIATE RELEASE
2012-84

Washington, D.C., May 7, 2012 — The Securities and Exchange Commission today charged a former paralegal at a Kalispell, Mont.-based semiconductor company and her father with insider trading on confidential information about the 2009 acquisition of the company.

Additional Materials

SEC Complaint

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

Angela and Kenneth Milliard have agreed to settle the SEC’s charges by paying more than $175,000.

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

According to the SEC’s complaint filed in federal court in Montana, Angela Milliard first gained access to confidential deal information in October 2009, when she learned that Semitool and the acquiring company – Applied Materials Inc. – had entered into advanced merger negotiations. After learning that the tender offer was to happen in mid-November at a nearly 30 percent premium over Semitool’s then-trading price, she wired money to her boyfriend’s brokerage account and used it to surreptitiously buy shares of Semitool.

The SEC alleges that Angela Milliard tipped her father, who also purchased Semitool shares and encouraged his sons to do the same, which they did. They reaped their illegal insider trading profits following the public announcement of the merger on Nov. 17, 2009.

The Milliards settled the SEC’s charges without admitting or denying the allegations. Angela Milliard agreed to pay full disgorgement of her trading profits totaling $20,355 plus prejudgment interest of $1,614.60 and a penalty of $54,022.11. Kenneth Milliard agreed to pay full disgorgement of his and his sons’ trading profits totaling $47,805 plus prejudgment interest of $3,765.19 and a penalty of $47,805.11.

The SEC’s investigation was conducted by Jennifer J. Lee and Jina L. Choi of the San Francisco Regional Office.

# # #

For more information about this enforcement action, contact:

Marc J. Fagel
Director, SEC’s San Francisco Regional Office
(415) 705-2449

Michael S. Dicke
Associate Director (Enforcement), SEC’s San Francisco Regional Office
(415) 705-2458

SEC Reopens Comment Period for Proposed Amendments to Its Net Capital, Customer Protection, Books and Records, and Notification Rules for Broker-Dealers

Thu, 3 May 2012 17:00:35 EDT

FOR IMMEDIATE RELEASE

Washington, D.C., May 3, 2012 —The Securities and Exchange Commission today announced that it is re-opening the public comment period for proposed amendments to its net capital, customer protection, books and records, and notification rules for broker-dealers.

Additional Materials

The proposed rule amendments are designed to update the financial responsibility rules for broker-dealers and make certain technical amendments. The Commission issued the proposed amendments on March 9, 2007, and the public comment period on the proposal closed on June 18, 2007.

The Commission did not act on the rule amendments it proposed in 2007. Given economic events, regulatory developments, and passage of time since then, as well as the continuing public interest in this area, the Commission believes that it would be appropriate to seek additional public comment on the proposed rule amendments. Accordingly, the Commission is reopening the public comment period for 30 days.

###

SEC Charges Florida Stock Scheme Mastermind and 10 Cohorts

Wed, 02 May 2012 10:06:00 EDT

FOR IMMEDIATE RELEASE
2012-82

Washington, D.C., May 2, 2012 — The Securities and Exchange Commission today charged a Florida man and 10 cohorts involved in two separate schemes to illegally sell stock, including one that sought to capitalize on circumstances in Haiti following the earthquake that destroyed much of the country's infrastructure in January 2010.

Additional Materials

The SEC alleges that Kevin Sepe of Miami masterminded the schemes involving two microcap companies — Recycle Tech and HydroGenetics — with the help of three licensed attorneys and several others who collectively reaped illegal profits of more than $3.5 million. Aventura, Fla.-based attorney Ronny Halperin assisted Sepe in both schemes. The Recycle Tech scheme involved a promotional campaign to pump the price and volume of the purported home container building company's stock in the wake of the Haiti earthquake. The HydroGenetics scheme took millions of unregistered shares of the company — purportedly in the business of acquiring emerging alternative energy companies — and improperly converted its debt into free-trading shares that were dumped on the investing public.

Six of the 11 individuals involved have agreed to settlements ordering them and companies they own to collectively pay more than $3.2 million.

"Sepe, Halperin, and others chose to ignore the laws governing stock sales and play by their own set of rules," said Eric I. Bustillo, Director of the SEC's Miami Regional Office. "Some of these individuals were attorneys and corporate officers who should have known better, and we will continue to crack down on any such gatekeepers who put investors at risk with their harmful activities to manipulate the markets."

According to the SEC's complaint filed in federal court in Miami, Sepe and Halperin evaded registration requirements by converting backdated and fabricated promissory notes into unrestricted stock of Recycle Tech, quoted on the Pink Sheets. With help from Recycle Tech's CEO and president Ryan Gonzalez, they conducted a pump-and-dump scheme from January to March 2010 by enlisting the help of two promoters — Anthony Thompson and Jay Fung — who touted Recycle Tech in their newsletters. David Rees, a Utah-based attorney, became involved in the scheme when he drafted an improper legal opinion letter authorizing the issuance of unrestricted Recycle Tech shares.

The SEC alleges that the participants collectively made more than $1 million in illegal profits through the scheme, which touted that Recycle Tech signed a binding letter of intent to build up to 50 container homes in Haiti following the earthquake. However, Recycle Tech failed to disclose to investors that it had no funds, no finished container homes, and minimal operations. Sepe orchestrated, coordinated, and funded the scheme and sold Recycle Tech stock along with Halperin and Rees without any exemption from registering those securities with the SEC. Gonzalez, who lives in Miami, made the scheme possible by incorporating a sham private company, turning the public shell of that company into Recycle Tech through a reverse merger, and signing various fraudulent documents to authorize the issuance of Recycle Tech securities. Gonzalez also drafted and issued false press releases used to hype Recycle Tech stock. Thompson and Fung — through their firms OTC Solutions LLC and Pudong LLC — touted Recycle Tech in their newsletters without disclosing that they were selling shares or adequately disclosing the compensation they received for their touts.

According to the SEC's other complaint filed in Miami, Sepe and Halperin schemed with Miami-based attorney Melissa Rice and others to illegally issue and liquidate 90 million unregistered shares of HydroGenetics from April 2008 until at least June 2009. Sepe headed a group that purchased convertible debt of a South Florida publicly-held company. He then formed HydroGenetics and parsed out portions of the convertible debt to friends, family, and others who converted the debt to stock that they then sold publicly. Sepe sold HydroGenetics stock without any exemption from registration the securities with the SEC. Halperin was the HydroGenetics CEO and a director. He executed corporate resolutions to help issue millions of shares of HydroGenetics stock, including 11 million shares to his daughter who he told to sell it and funnel a portion of the illegal proceeds back to him. Rice assisted Sepe in converting convertible debt to unrestricted HydroGenetics shares, and wrote four opinion letters improperly opining that the Rule 144 safe harbor was applicable and the debt could be converted to unrestricted HydroGenetics shares. Rice also sold her shares of HydroGenetics stock.

The SEC alleges that three other Miami residents also received illegal profits in the HydroGenetics scheme: Luz Rodriguez, who worked as an office administrator and assistant to Sepe; Howard Ettelman, a provider of accounting services to various companies owned by Sepe and Rice; and Seth Eber, a self-employed jeweler who was on the list of individuals that Sepe provided Rice to assign shares.

The SEC further alleges that Charles Hansen III of Lighthouse Point, Fla., succeeded Halperin as HydroGenetics CEO in April 2009 and signed five corporate resolutions authorizing HydroGenetics to illegally issue stock that Rice then used along with her opinion letter to facilitate the scheme.

The individuals agreeing to settle the SEC's charges in the complaints without admitting or denying the allegations are Sepe, Halperin, Rees, Rice, Ettelman, and Hansen.

Sepe agreed to disgorgement of $1,416,466.16, prejudgment interest of $126,761.86, and penalties of $185,000 as well as a permanent bar from participating in an offer or sale of penny stocks.
Halperin agreed to disgorgement of $427,609.95, prejudgment interest of $33,595.33, and a penalty of $100,000 as well as a permanent penny stock bar and a five-year officer and director bar. He also agreed to surrender 1.97 million shares of HydroGenetics stock.
Rees agreed to disgorgement of $5,982, prejudgment interest of $406.25, and a penalty of $7,500 as well as a one-year prohibition from providing professional legal services connected to the offer or sale of securities.
Rice agreed to disgorgement of $422,445, prejudgment interest of $39,239.18, and a penalty of $60,000 as well as a five-year penny stock bar and three-year prohibition from providing professional legal services connected to the offer or sale of securities.
Ettelman agreed to disgorgement of $32,667, prejudgment interest of $3,093.27, and a penalty of $25,000 as well as a five-year penny stock bar and the surrender of 300,000 shares of HydroGenetics stock.
Hansen agreed to a $37,500 penalty.

Two companies — Charter Consulting Group (owned and controlled by Sepe) and West Coast Investments Enterprises (owned by Rice) — were named as relief defendants in the SEC's complaints because they received a portion of the illegal trading profits in the schemes. They each settled the case, with Charter agreeing to disgorgement of $150,000 and prejudgment interest of $9,125 and West Coast agreeing to disgorgement of $125,000 and prejudgment interest of $11,262.71.

Separately, the SEC issued orders to suspend trading in the securities of Recycle Tech and HydroGenetics and to institute administrative proceedings against each company to determine whether the registration of their securities should be revoked or suspended based on their failure to file required periodic reports.

The SEC also instituted separate settled administrative proceedings against HydroGenetics in which the company, without admitting or denying the findings, consented to an order requiring it to cease and desist from committing or causing violations of the registration provisions of the federal securities laws.

The SEC's investigations were conducted by staff in its Miami Regional Office. Accountant Kathleen Strandell was involved in the Recycle Tech investigation under the supervision of Thierry Olivier Desmet, and James Carlson is leading the litigation. Special Investigations Counsel Gary Miller and accountants Karaz Zaki and Timothy Galdencio were involved in the HydroGenetics investigation under the supervision of Elisha Frank, and Amie Riggle Berlin is leading the litigation.

The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in these cases.

# # #

SEC Charges UBS Puerto Rico and Two Executives with Defrauding Fund Customers

Tue, 01 May 2012 15:15:48 EDT

FOR IMMEDIATE RELEASE
2012-81

Washington, D.C., May 1, 2012 — The Securities and Exchange Commission today charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.

UBS Puerto Rico agreed to settle the SEC’s charges by paying $26.6 million that will be placed into a fund for harmed investors.

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

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

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

Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We will aggressively prosecute firms that use conflicts of interest for their own financial gain.”

According to the SEC’s order, starting in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance and continuously high premiums to net asset value (up to 45 percent) as the result of supply and demand in a competitive and liquid secondary market. When investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Despite a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business. Throughout this period, UBS Puerto Rico failed to disclose the true state of the market to investors.

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

Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidate UBS Puerto Rico’s inventory first, preventing customers from selling their shares.
Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

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

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

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

UBS Puerto Rico agreed to settle the SEC’s charges, without admitting or denying the findings, that it violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order requires UBS Puerto Rico to pay $11.5 million in disgorgement, $1.1 million in prejudgment interest, and a penalty of $14 million. In addition to the monetary relief, the SEC’s order censures UBS Puerto Rico, directs it to cease-and-desist from committing or causing any further violations of the provisions charged, and orders the firm to comply with its undertaking to retain an independent consultant at UBS Puerto Rico’s expense.

Among other things, the independent consultant will review the adequacy of UBS Puerto Rico’s closed-end fund disclosures and trading and pricing policies, procedures, and practices. UBS Puerto Rico shall abide by the determinations of the consultant and adopt and implement all recommendations.

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

The SEC acknowledges the assistance and cooperation of the Financial Industry Regulatory Authority (FINRA).

# # #

SEC Charges Mother, Daughter, and Their Attorney in Illegal Penny Stock Scheme

Mon, 30 Apr 2012 17:56:48 EDT

FOR IMMEDIATE RELEASE
2012-80

Washington, D.C., April 30, 2012 — The Securities and Exchange Commission today charged a mother and daughter along with their attorney in a scheme to unlawfully acquire and sell billions of shares of penny stock in unregistered transactions.

Additional Materials

SEC Complaint

The SEC alleges that Christel S. Scucci and her mother Karen S. Beach, who live in Florida, used alter ego companies (Protégé Enterprises LLC and Capital Edge Enterprises LLC) to make more than $1.5 million from selling approximately 3.3 billion shares of purportedly unrestricted stock that they acquired in so-called debt conversion “wrap around” transactions. They were able to sell most of this stock only because Florida-based attorney Cameron H. Linton issued baseless legal opinions for them stating that the stock could be issued without restrictive legends and that their re-sales were exempt from the registration requirements of the federal securities laws.

“This case shines a spotlight on unlawful profiting from transactions designed to circumvent the registration requirements of the federal securities laws,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. “This should alert transfer agents, securities attorneys and other industry gatekeepers to closely scrutinize efforts to lift restrictive legends by ‘tacking’ onto delinquent debt through wrap around agreements.”

According to the SEC’s complaint filed in federal court in Orlando, Fla., this scheme involving the illegal use of wrap around agreements lasted from January 2010 to October 2011. Under the wrap around agreements, affiliates or others purportedly owed money by certain microcap issuers for more than one year assigned from the issuers to Protégé or Capital Edge the right to collect the debts. The wrap around agreements also purported to amend the initial debt agreements thereby allowing Protégé and Capital Edge to convert the money owed to them by the issuers into shares of the issuers’ common stock at a deep discount (usually 50 percent) to the prevailing market price. Protégé and Capital Edge almost always elected to receive stock from the issuers shortly after execution of the wrap around agreements. None of the transactions were registered with the SEC.

The SEC alleges that Protégé and Capital Edge paid Linton to write attorney opinion letters for them stating that their sales of the stock acquired under these wrap around agreements lawfully could be issued to them without a restrictive legend and immediately sold to the public. Protégé and Capital Edge regularly sold the stock into the public market, often for large profits, merely days or weeks after they acquired the shares through the wrap around conversions.

According to the SEC’s complaint, Linton’s legal opinion letters lacked any basis. The premise of Linton’s opinion letters was that – through the wrap around agreements and debt conversion – Protégé and Capital Edge were able to “tack” the period that had elapsed from the initiation of the original debt at least one year earlier to claim a registration exemption relying on Securities Act Rule 144(d)(3)(ii). When Linton wrote the opinion letters, he lacked an understanding of the applicable legal principles and failed to substantiate the factual predicate for his opinions. Furthermore, in mid-2010, Linton became aware of an injunction issued in a separate SEC enforcement action (SEC v. K&L International Enterprises) in which two of his letters were used in a similar scheme. Without Linton’s opinion letters, Protégé and Capital Edge couldn’t have acquired most of the stock without a restrictive legend and quickly turn around and sell it publicly.

The SEC’s complaint alleges that Protégé, Capital Edge, Scucci and Beach violated Section 5 of the Securities Act. The complaint further alleges that Linton violated, or aided and abetted the violation of, Section 5 of the Securities Act. The SEC seeks disgorgement, penalties, injunctions, and penny stock bars against the defendants.

The SEC’s case was investigated by Daniel Rubenstein and Adam Eisner under the supervision of C. Joshua Felker, an Assistant Director in the Division of Enforcement. Kenneth Guido will lead the SEC’s litigation.

# # #

George Canellos Named Deputy Director of SEC Enforcement Division

Mon, 30 Apr 2012 15:54:36 EDT

FOR IMMEDIATE RELEASE
2012-79

Washington, D.C., April 30, 2012 — The Securities and Exchange Commission today announced that George S. Canellos, currently Director of the SEC’s New York Regional Office, has been named Deputy Director of the Division of the Enforcement.

“For the past three years, George has been an incredibly effective advocate for investors and has helped the New York office take on some of the most difficult cases in the securities arena,” said SEC Chairman Mary Schapiro. “With his experience, he is extremely well-suited to help head an Enforcement Division that has brought a record number of cases and is pursuing a host of complex investigations.”

“Everyone interested in the fair, thoughtful and vigorous enforcement of the federal securities laws will be thrilled with the appointment of George Canellos as Deputy Director of the Division of Enforcement,” said Robert S. Khuzami, Director of the SEC’s Enforcement Division. “He is known to all as possessing a keen and uniquely probing intellect, an innovative approach to problem-solving, and a deep commitment to prosecuting wrongdoers and protecting the public. I am excited that he has agreed to bring his formidable talents to this position.”

Mr. Canellos said, “I’m extremely excited to have this opportunity to serve the national enforcement program and to work with colleagues throughout the country who have contributed so much to the recent success of the SEC’s enforcement efforts. Their exceptional achievement in face of many challenges gives me great confidence for the future.”

Mr. Canellos, 47, has been Director of the New York Regional Office since July 2009, overseeing 400 professional staff of enforcement attorneys, accountants, investigators and compliance examiners involved in the investigation and prosecution of enforcement actions and the performance of compliance inspections in the New York region. The New York office has responsibility for the largest concentration of SEC-registered financial institutions including more than 4,000 investment banks, investment advisers, broker-dealers, mutual funds and hedge funds.

A former federal prosecutor, Mr. Canellos became an Assistant U.S. Attorney in the Southern District of New York in 1994. During his nine years there, Mr. Canellos served in a number of positions including Chief of the Major Crimes Unit, Senior Trial Counsel of the Securities and Commodities Fraud Task Force, and Deputy Chief Appellate Attorney.

Following his service at the U.S. Attorney’s Office and immediately prior to assuming his position at the SEC, Mr. Canellos served more than six years as a litigation partner at the law firm of Milbank, Tweed, Hadley & McCloy LLP. He began his legal career as a litigation associate at Wachtell, Lipton, Rosen & Katz.

Mr. Canellos is a graduate of Harvard College and Columbia University School of Law.

Mr. Canellos will begin serving as Deputy Director on June 4, 2012, at which time Andrew Calamari will become Acting Director of the New York Regional Office. Mr. Calamari is currently Senior Associate Regional Director and co-head of Enforcement for the New York Regional Office and has served in that position since 2004. Before coming to the SEC in 2000, Mr. Calamari was engaged in private law practice for nearly 15 years, including as a litigation partner at Donovan Leisure Newton & Irvine. He is a 1985 graduate of Fordham Law School.

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SEC Charges Former Morgan Stanley Executive with FCPA Violations and Investment Adviser Fraud

Wed, 25 Apr 2012 16:53:13 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 25, 2012 — The Securities and Exchange Commission today charged a former executive at Morgan Stanley with violating the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisers by secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds.

Additional Materials

SEC Complaint

The SEC alleges that Garth R. Peterson, who was a managing director in Morgan Stanley’s real estate investment and fund advisory business, had a personal friendship and secret business relationship with the former Chairman of Yongye Enterprise (Group) Co. – a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai. Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official that he disguised as finder’s fees that Morgan Stanley’s funds owed to third parties. Peterson also secretly arranged for him, the Chinese official, and an attorney to acquire a valuable Shanghai real estate interest from a Morgan Stanley fund. Peterson was acquiring an interest from the fund but negotiated both sides of the transaction. In exchange for offers and payments from Peterson, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. Peterson’s deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley’s funds as their representative.

Peterson agreed to a settlement of the SEC’s charges in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct. The U.S. Department of Justice has filed a related criminal case against Peterson.

“Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company's internal controls.”

Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, added, “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Peterson’s violations occurred from at least 2004 to 2007. His principal responsibility at Morgan Stanley was to evaluate, negotiate, acquire, manage and sell real estate investments on behalf of Morgan Stanley’s advisers and funds. He was terminated in 2008 due to his FCPA misconduct.

The SEC alleges that Peterson led Morgan Stanley’s effort to build a Chinese real estate investment portfolio for its real estate funds by cultivating a relationship with the Chinese official and taking advantage of his ability to steer opportunities to Morgan Stanley and his influence in helping with needed governmental approvals. Morgan Stanley thus partnered with Yongye on a number of significant Chinese real estate investments. At the same time, Peterson and the Chinese official expanded their personal business dealings both in a real estate interest secretly acquired from Morgan Stanley as well as by investing together in Chinese franchises of well-known U.S. fast food restaurants. Peterson failed to disclose these investments in annual disclosures that Morgan Stanley required him to make as part of his employment.

According to the SEC’s complaint, Peterson openly credited the Chinese official with helping obtain approvals required from other Chinese government entities for a deal to close. He wrote to several Morgan Stanley employees in response to an e-mail discussing the terms of one of Yongye’s purported investments, “Everyone pls keep in mind the big picture here. YY gave us this deal. ... So we owe them a favor relating to this deal. ... This should be very easy and friendly.” In another e-mail a week later, Peterson described “YYI” as “our friends who are coming in because WE OWE THEM A FAVOR.”

The SEC alleges that a Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA. Peterson also received at least 35 FCPA compliance reminders from Morgan Stanley, but nonetheless committed the FCPA violations.

The SEC’s complaint charges Peterson with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson consented to a court order requiring him to disgorge $254,589 and relinquish to a court-appointed receiver the interest he secretly acquired from Morgan Stanley’s fund in the Jin Lin Tiandi Serviced Apartments. Peterson’s interest has a current estimated value of approximately $3.4 million. The proposed settlement is subject to court approval. Peterson also has consented to permanent industry bars based on the anticipated entry of the injunctions against him and his criminal conviction.

The SEC acknowledges the assistance of the Fraud Section of DOJ’s Criminal Division, the U.S. Attorney’s Office for the Eastern District of New York, and the Federal Bureau of Investigation. Morgan Stanley, which is not charged in the matter, cooperated with the SEC’s inquiry and conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved.

The SEC’s investigation was conducted by David Neuman of the Asset Management Unit and Assistant Director Greg Faragasso, and the litigation was led by Richard Hong.

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Attorney, Wall Street Trader, and Middleman Settle SEC Charges in $32 Million Insider Trading Case

Wed, 25 Apr 2012 12:16:35 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 25, 2012 — The Securities and Exchange Commission today announced a settlement in a $32 million insider trading case filed by the agency last year against a corporate attorney and a Wall Street trader.

Additional Materials

SEC Complaint

The SEC alleged that the insider trading occurred in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney — Matthew H. Kluger — worked. He and the trader — Garrett D. Bauer — were linked through a mutual friend now identified as Kenneth T. Robinson, who acted as a middleman to facilitate the illegal tips and trades. Kluger and Bauer used public telephones and prepaid disposable mobile phones to communicate with Robinson in an effort to avoid detection. Robinson, now also charged, cooperated in the SEC’s investigation.

Bauer, Kluger, and Robinson each agreed to give up their ill-gotten gains plus interest in order to settle the SEC’s charges. Those amounts under the terms of their consent agreements are approximately $31.6 million for Bauer, $516,000 for Kluger, and $845,000 for Robinson.

"Bauer, Kluger and Robinson schemed to outsmart law enforcement by structuring their relationships and communications to avoid detection and frustrate insider trading detection mechanisms," said Robert Khuzami, Director of the SEC's Division of Enforcement. "They were ultimately unsuccessful due to the SEC's sustained efforts to combat hard-to-detect insider trading, particularly among lawyers and other gatekeepers who have solemn duties to maintain the confidentiality of information entrusted to them."

In parallel criminal actions brought by the U.S. Attorney’s Office for the District of New Jersey, Bauer, Kluger, and Robinson have all pled guilty and are scheduled to be sentenced on June 4, 2012.

Acknowledging the facts to which they have admitted as part of their guilty pleas, Bauer, Robinson, and Kluger consented to final judgments in the SEC’s civil actions that are subject to court approval. In the proposed final judgments, Bauer would be ordered to disgorge $30,812,796 plus prejudgment interest of $859,135; Kluger would be ordered to disgorge $502,500 plus prejudgment interest of $14,010; and Robinson would be ordered to disgorge $829,129 plus prejudgment interest of $16,106. They also would be permanently enjoined from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Each of the orders of disgorgement will be deemed partially satisfied and offset on a dollar-for-dollar basis by assets seized at the direction of the U.S. Attorney’s Office for the District of New Jersey based upon orders of forfeiture.

Bauer also has agreed to settle a related SEC administrative proceeding by consenting to the entry of an order that would bar him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock. Kluger agreed to settle a related administrative proceeding by consenting to the entry of an order which would permanently suspend him from appearing or practicing before the SEC as an attorney pursuant to Commission Rule of Practice 102(e).

The terms of the proposed settlement with Robinson reflect credit given to him by the SEC for his substantial assistance and cooperation in the investigation.

The SEC’s investigation was conducted by Colleen K. Lynch, David W. Snyder and John S. Rymas, members of the Market Abuse Unit in the Philadelphia Regional Office, under the supervision of Daniel M. Hawke, Chief of the Market Abuse Unit and Regional Director, and Elaine C. Greenberg, Associate Regional Director for Enforcement in the Philadelphia Regional Office. G. Jeffrey Boujoukos and Scott A. Thompson have been handling the litigation.

The SEC brought this enforcement action in coordination with the U.S. Attorney’s Office for the District of New Jersey. The SEC also appreciates the assistance of the Federal Bureau of Investigation, Financial Industry Regulatory Authority, and Options Regulatory Surveillance Authority.

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H and R Block Subsidiary Agrees to Pay $28.2 Million to Settle SEC Charges Related to Subprime Mortgage Investments

Tue, 24 Apr 2012 15:35:05 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 24, 2012 — The Securities and Exchange Commission today charged H&R Block subsidiary Option One Mortgage Corporation with misleading investors in several offerings of subprime residential mortgage-backed securities (RMBS) by failing to disclose that its financial condition was significantly deteriorating.

Additional Materials

SEC Complaint

Option One, which is now known as Sand Canyon Corporation, agreed to pay $28.2 million to settle the SEC’s charges.

The SEC alleges that Option One promised investors in more than $4 billion worth of RMBS offerings that it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties. But Option One did not tell investors about its deteriorating financial condition and that it could not meet its repurchase obligations on its own.

“Option One’s financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The company nonetheless concealed from investors that its perilous finances created risk that it would not be able to fulfill its duties to repurchase or replace faulty mortgages in its RMBS portfolios.”

Kenneth Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “We will take action against those who fail to disclose or downplay important facts that make an investment riskier, even if those risks do not materialize. We remain committed to uncovering misconduct involving complex financial instruments including RMBS.”

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, Option One was one of the nation’s largest subprime mortgage lenders with originations of $40 billion in its 2006 fiscal year. Option One originated subprime loans and sold them in the secondary market through RMBS securitizations or whole loan pool sales.

According to the SEC’s complaint, Option One was generally profitable prior to its 2007 fiscal year. However, when the subprime mortgage market started to decline in the summer of 2006, Option One experienced a decline in revenues and significant losses, and faced hundreds of millions of dollars in margin calls from its creditors. At the time Option One offered and sold the RMBS, it needed H&R Block, through a subsidiary, to provide it with financing under a line of credit in order to meet its margin calls and repurchase obligations. But Block was under no obligation to provide that funding. Option One did not disclose this information to investors. The SEC further alleges that Block never guaranteed Option One’s loan repurchase obligations and that Option One’s mounting losses threatened Block’s credit rating at a time when Block was negotiating a sale of Option One.

Without admitting or denying the SEC’s allegations, Option One consented to the entry of an order permanently enjoining it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and requiring it to pay disgorgement of $14,250,558, prejudgment interest of $3,982,027, and a penalty of $10 million. The proposed settlement is subject to court approval.

The SEC has now charged 102 individuals and entities in financial crisis-related enforcement actions, including 55 CEOs, CFOs, and other senior corporate officers. These enforcement actions have resulted in more than $1.98 billion in penalties, disgorgement, and other monetary relief for investors.

The SEC also is a co-chair of the Residential Mortgage-Backed Securities Working Group formed under the Financial Fraud Enforcement Task Force in January 2012. The Working Group is marshaling parallel efforts on the state and federal levels to collaborate on current and future investigations, pooling resources and streamlining processes to investigate in a comprehensive way those responsible for misconduct in the RMBS market. In addition to the SEC, other co-chairs of the Working Group include representatives from the Civil and Criminal Divisions of the U.S. Department of Justice, the Attorney General of the State of New York, and the United States Attorney’s Office.

The SEC’s investigation of Option One was conducted by the Enforcement Division’s Structured and New Products Unit led by Kenneth Lench and Reid Muoio and the Chicago Regional Office. The investigative attorneys were Daniel Ryan, Michael Wells, Anne McKinley, and Robert Burson along with litigation counsel Jonathan Polish and John Birkenheier in the Chicago Regional Office.

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Egan-Jones Ratings Co. and Sean Egan Charged with Making Material Misrepresentations to SEC

Tue, 24 Apr 2012 14:36:35 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 24, 2012 — The Securities and Exchange Commission today announced charges against Egan-Jones Ratings Company (EJR) and its owner and president Sean Egan for material misrepresentations and omissions in the company’s July 2008 application to register as a Nationally Recognized Statistical Rating Organization (NRSRO) for issuers of asset-backed securities (ABS) and government securities. EJR and Egan also are charged with material misrepresentations in other submissions furnished to the SEC and violations of record-keeping and conflict-of-interest provisions governing NRSROs.

Additional Materials

SEC Order

The Commission issued an order instituting proceedings in which the SEC’s Division of Enforcement alleges that EJR — a credit rating agency based in Haverford, Pa. — submitted an application to register as an NRSRO for issuers of asset-backed and government securities in July 2008. EJR had previously registered with the SEC in 2007 as an NRSRO for financial institutions, insurance companies, and corporate issuers.

The SEC’s Division of Enforcement alleges that in its 2008 application, EJR falsely stated that as of the date of the application it had 150 outstanding ABS issuer ratings and 50 outstanding government issuer ratings. EJR further falsely stated in its 2008 application that it had been issuing credit ratings in the ABS and government categories as a credit rating agency on a continuous basis since 1995. In fact, at the time of its July 2008 application, EJR had not issued — that is, made available on the Internet or through another readily accessible means — any ABS or government issuer ratings, and therefore did not meet the requirements for registration as an NRSRO in these categories. EJR continued to make material misrepresentations regarding its experience rating asset-backed and government securities in subsequent annual certifications furnished to the SEC.

The SEC’s Division of Enforcement also alleges that EJR made other misstatements and omissions in submissions to the SEC by providing inaccurate certifications from clients, failing to disclose that two employees had signed a code of ethics different than the one EJR disclosed, and inaccurately stating that EJR did not know if subscribers were long or short a particular security.

The SEC’s Division of Enforcement further alleges that EJR violated other provisions of Commission rules governing NRSROs. EJR failed to enforce its policies to address conflicts of interest arising from employee ownership of securities, and allowed two analysts to participate in determining credit ratings for issuers whose securities they owned. EJR also failed to make and retain certain required records, including a detailed record of its procedures and methodologies to determine credit ratings and e-mails regarding its determination of credit ratings.

The SEC’s Division of Enforcement alleges that Egan provided inaccurate information that was included in EJR’s applications and annual certifications. He signed the submissions and certified that the information provided in them was “accurate in all significant respects,” when he knew that it was not. Egan also failed to ensure EJR’s compliance with the recordkeeping requirements and conflict-of-interest provisions.

The SEC’s Division of Enforcement alleges that, by the conduct described above, EJR willfully violated Exchange Act Sections 15E(a)(1), 15E(b)(2), 15E(h)(1) and 17(a), and Rules 17g-1(a), 17g-1(b), 17g-1(f), 17g-1(a)(2), 17g-2(a)(6), 17g-2(b)(2), 17g-2(b)(7), and 17g-5(c)(2). The Division of Enforcement further alleges that by the conduct described above, Egan willfully made, or caused EJR to make, material misstatements in its Form NRSRO, and caused or willfully aided, abetted, counseled, commanded, induced or procured EJR’s violations of Sections 15E and 17(a) of the Exchange Act and Rules 17g-1, 17g-2, and 17g-5.

The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation will be led by James Kidney.

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SEC Charges Chinese Company and Executives with Lying About Asset Values and Use of IPO Proceeds

Mon, 23 Apr 2012 10:33:21 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 23, 2012 — The Securities and Exchange Commission today charged a China-based oil field services company and two senior officers involved in a scheme to intentionally mislead investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC additionally charged the company’s chairman of the board involved in a separate $40 million theft from the company.

Additional Materials

SEC Complaint

The SEC alleges that SinoTech Energy Limited grossly overstated the value of its primary operating assets in financial statements, specifically the lateral hydraulic drilling (LHD) units that are central to its business. The company’s IPO registration statement in November 2010 promised investors it would spend $120 million raised in the IPO to acquire LHD units, but the company’s purchase contracts and other documents otherwise show it acquired far fewer LHD units, lied about the number it acquired, and grossly overstated the value of the units. SinoTech CEO Guoqiang Xin and former CFO Boxun Zhang were responsible for the fraud.

Meanwhile, the company’s chairman Qinzeng Liu is accused of secretly siphoning at least $40 million from a SinoTech bank account in the summer of 2011. He then stood silently by as SinoTech – attempting to counter negative Internet reports that the company was potentially fraudulent – falsely assured investors that the company had that money and more in the bank. Liu later admitted his theft to SinoTech’s auditor and board of directors, but he retained his position and investors were not informed of the incident.

“SinoTech’s brief life as a public company in the U.S. markets has been rife with falsehoods,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “Investors deserve the utmost honesty and transparency from companies and their officers when they tap public markets in the United States.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Louisiana (Lake Charles Division), SinoTech’s public filings certified by both Xin and Zhang represented that the company had purchased 16 LHD units worth $94 million. In fact, the company only acquired 11 such units worth less than $17 million. SinoTech continually misled investors about the value of its equipment in press releases and SEC filings between December 2010 and November 2011. Xin went so far as to try (unsuccessfully) to convince SinoTech’s LHD unit supplier to issue public statements verifying the company’s false valuations to investors. The supplier refused.

The SEC’s complaint alleges that Liu’s admitted theft of $40 million in company funds occurred sometime between June 30 and August 17. Liu withdrew the money from SinoTech’s primary bank account at the Agricultural Bank of China. SinoTech did not record Liu’s withdrawal in the company’s books and records, and it retained Liu as its chairman despite his confession.

The SEC alleges that the theft remained hidden when SinoTech attempted to rebut an Internet report alleging fraud in August 2011. In an effort to persuade investors that SinoTech was legitimate, the company issued a press release stating that SinoTech’s bank balances totaled more than $93 million and included $54 million on deposit at the Agricultural Bank of China. Liu knew this claim was false due to his earlier theft from that account. .

The SEC’s complaint seeks permanent injunctive relief and financial penalties against all defendants as well as disgorgement of ill-gotten gains by SinoTech and Liu. The SEC also requests bars against each of the individual defendants from serving as officers or directors of U.S. public companies.

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SEC Charges Former CalPERS CEO and Friend With Falsifying Letters in $20 Million Placement Agent Fee Scheme

Mon, 23 Apr 2012 10:33:21 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 23, 2012 — The Securities and Exchange Commission today charged the former CEO of the California Public Employees' Retirement System (CalPERS) and his close personal friend with scheming to defraud an investment firm into paying $20 million in fees to the friend's placement agent firms.

Additional Materials

SEC Complaint

The SEC alleges that former CalPERS CEO Federico R. Buenrostro and his friend Alfred J.R. Villalobos fabricated documents given to New York-based private equity firm Apollo Global Management. Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures. In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos's firms. The false letters bearing a fake CalPERS logo and Buenrostro's signature were provided to Apollo, which then went ahead with the payments.

"Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees," said John M. McCoy III, Associate Regional Director of the SEC's Los Angeles Regional Office.

According to the SEC's complaint, Apollo began requiring signed investor disclosure letters in 2007 from investors such as CalPERS before it would pay fees to a placement agent that assisted in raising funds. Villalobos's firm ARVCO Capital Research LLC (which later became ARVCO Financial Ventures LLC) agreed to this contractual provision in a placement agent agreement with Apollo related to CalPERS's investment in Apollo Fund VII. However, when ARVCO requested an investor disclosure letter from CalPERS's Investment Office to provide Apollo, it was informed that CalPERS's Legal Office had advised it not to sign a disclosure letter. ARVCO never again contacted CalPERS's Investment Office for an investor disclosure letter.

The SEC alleges that in January 2008, Villalobos instead fabricated a letter using a phony CalPERS logo. At Villalobos's request, Buenrostro then signed what appeared to be a CalPERS disclosure letter. Upon receipt of the fake disclosure letter for Apollo Fund VII, Apollo paid ARVCO about $3.5 million in placement agent fees.

The SEC's complaint further alleges that less than two weeks later, Villalobos and Buenrostro created false CalPERS disclosure letters for at least four more Apollo funds under similarly suspicious circumstances. As part of the scheme, Buenrostro signed blank sheets of fake CalPERS letterhead that Villalobos and ARVCO then used to generate additional investor disclosure letters as they needed them. Based on these false documents, Apollo was induced to pay ARVCO more than $20 million in placement agent fees it would not have paid without the disclosure letters.

The SEC seeks an order requiring Buenrostro, Villalobos, and ARVCO to disgorge any ill-gotten gains, pay financial penalties, and be permanently enjoined from violating the antifraud provisions of the federal securities laws.

As alleged in the SEC's complaint, the defendants violated Section 17(a)(1) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder.

The SEC's investigation was conducted by Leslie A. Hakala of the Los Angeles Regional Office. The SEC's litigation will be led by David Van Havermaat.

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SEC Charges Father-and-Son Hedge Fund Managers Who Agree to Pay $4.8 Million to Settle Fraud Case

Fri, 20 Apr 2012 11:00:02 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 20, 2012 – The Securities and Exchange Commission today charged twin brothers from the U.K. with defrauding approximately 75,000 investors through an Internet-based pump-and-dump scheme in which they touted a fake “stock picking robot” that purportedly identified penny stocks set to double in price. Instead, the brothers were merely touting stocks they were being paid separately to promote.

Additional Materials

SEC Complaint

The SEC alleges that Alexander John Hunter and Thomas Edward Hunter were just 16 years old when they set their fraud in motion beginning in 2007. They disseminated e-mail newsletters through a pair of websites they created to tout stocks selected by the robot – which they described as a highly sophisticated computer trading program that was the product of extensive research and development. Their claims were persuasive as the Hunters received at least $1.2 million from investors primarily in the U.S. who paid $47 apiece for annual newsletter subscriptions. Some investors paid an additional fee for the “home version” of the robot software.

In reality, the SEC alleges that the Hunters used a third website to offer their services as stock promoters, claiming that they could “rocket” a stock’s price and increase its volume by sending out newsletters. The Hunters were consequently paid at least $1.865 million in fees from known or suspected stock promoters, and they did not disclose to their newsletter followers the conflicting relationship between their two businesses.

“The Hunters used the anonymity of the Internet and the promise of easy riches to prey on investors,” said Thomas A. Sporkin, Chief of the SEC’s Office of Market Intelligence. “While touting their supposed breakthrough investment technology on two websites, the Hunters were racking up fees as stock promoters through a third.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, the Hunters created websites Doublingstocks.com and Daytradingrobot.com to falsely tout that a former trading algorithm programmer from a large investment bank had designed a stock picking robot that they named “ Marl.” The robot could purportedly analyze the over-the-counter securities markets and identify penny stocks that were set to experience large price increases. The brothers offered investors paid subscriptions to their e-mail newsletter that would contain the robot’s latest stock pick.

The SEC alleges that the brothers separately created the website Equitypromoter.com where they marketed their newsletter subscriber list to penny stock promoters and boasted, “One email to this list of people rockets a stock price.” The Hunters were in turn paid to send selected penny stock ticker symbols to their subscribers, who were misled to believe that the stock “picks” were the product of the robot. The Hunters sent out their newsletters near the beginning of the trading day, and the price and volume of the promoted stocks spiked dramatically as newsletter subscribers rushed to purchase shares. However, the stocks typically fell precipitously shortly thereafter, leaving investors with shares worth less than they had purchased them for earlier in the day.

According to the SEC’s complaint, the Hunters also offered subscribers a downloadable version of the stock picking robot for an additional fee of $97. Rather than performing the analysis advertised, the software was actually designed to just deliver users a stock pick supplied by the brothers. In soliciting bids in 2007 from free-lance coders to create the software, Alexander Hunter wrote that the software should “not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in.” He bluntly explained that the software “is almost a ‘fake’ piece of software and needs to simply appear advanced to the user.” Like the newsletter, the home version of the stock picking robot was no more than a fraudulent delivery vehicle for stock symbols that the Hunters had been compensated to promote.

The SEC’s complaint charges the Hunters with violating the anti-fraud provisions of the U.S. securities laws, namely Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking permanent injunctions, disgorgement of all ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Adam M. Schoeberlein. The SEC’s litigation will be led by Robert I. Dodge.

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SEC Charges Father-and-Son Hedge Fund Managers Who Agree to Pay $4.8 Million to Settle Fraud Case

Fri, 20 Apr 2012 09:30:02 EDT

FOR IMMEDIATE RELEASE
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Washington, D.C., April 20, 2012 – The Securities and Exchange Commission today charged a Boston-based father-son duo of hedge fund managers and their firms with securities fraud for misleading investors about their investment strategy and past performance.

Additional Materials

SEC Order

The SEC’s investigation found that Gabriel and Marco Bitran raised millions of dollars for their hedge funds through GMB Capital Management LLC and GMB Capital Partners LLC by falsely telling investors they had a lengthy track record of success based on actual trades using real money. In truth, the Bitrans knew the track record was based on back-tested hypothetical simulations. The Bitrans also misled investors in certain hedge funds to believe they used quantitative optimal pricing models devised by Gabriel Bitran to invest in exchange-traded funds (ETFs) and other liquid securities. Instead, they merely invested the money almost entirely in other hedge funds. GMB Capital Management later provided false documents to SEC staff examining the firm’s claims in marketing materials of a successful track record.

The Bitrans agreed to be barred from the securities industry and pay a total of $4.8 million to settle the SEC’s charges.

“The Bitrans solicited investors by touting an impressive track record and a unique investment strategy, and they lied about both,” said David P. Bergers, Director of the SEC’s Boston Regional Office.

According to the SEC’s order instituting settled administrative proceedings, Gabriel Bitran founded GMB Capital Management in 2005 for the stated purpose of managing hedge funds using quantitative models he developed based on his academic optimal pricing research to trade primarily ETFs. He and his son Marco Bitran solicited potential investors with three primary selling points:

Very successful performance track records based on actual trades using real money from 1998 to the inception of the hedge funds.
The firm’s use of Gabriel Bitran’s proprietary optimal pricing model to trade ETFs.
Gabriel Bitran’s involvement as founder and portfolio manager of the funds.

The SEC’s order states that over a period of three years, the Bitrans raised more than $500 million for eight hedge funds and various managed accounts while making these misrepresentations to investors. In order to market the hedge funds, GMB Management and the Bitrans created performance track records beginning in January 1998 showing double-digit annualized return without any down years. They distributed these track records to potential investors in marketing materials, and told investors that they were based on actual trading with real money using Gabriel Bitran’s optimal pricing models. In reality, the Bitrans knew their representations were false and the track records were based on hypothetical historical investments. For two of their hedge funds, they created track records showing annualized returns of 16.2 percent and 11.7 percent with no down years, and told investors the returns were based on actual trading when in fact they were based on hypothetical historical allocations to hedge fund managers.

According to the SEC’s order, investors were misled to believe their money was being invested according to Gabriel Bitran’s unique quant strategy when in reality certain GMB hedge funds were merely investing predominantly in other hedge funds without his involvement. For example, investors in two GMB hedge funds were told that Gabriel Bitran spent 80 percent of his time managing the funds and was involved in reviewing trades in the funds on a daily basis. However, he actually had no role in the management of either fund. Both funds experienced a series of losses at the end of 2008, and GMB eventually dissolved them. When a possible financial fraud at the Petters Group Worldwide was reported in late September 2008, the two hedge funds’ investments in a fund that was entirely invested in the Petters Group became illiquid. However, GMB did not disclose to investors that it had been impacted by the Petters fraud, instead sending investors a letter stating that “a swap instrument that the Fund entered into seeking to realize a higher return on a portion of its uninvested cash” had become illiquid because “one of the parties underlying the swap instrument is currently experiencing a credit and liquidity crisis, in conjunction with other alleged factors.” Furthermore, the two GMB funds suffered significant losses in hedge funds that had invested with Bernard Madoff. These investments in funds that ultimately invested with the Petters Group and Madoff were made contrary to what GMB investors were told.

According to the SEC’s order, during an SEC examination of GMB Capital Management, the firm produced a document that the Bitrans claimed was a real-time record of Gabriel Bitran’s trades since 1998. In fact, the document was false and created solely for the purpose of responding to the SEC staff’s request for the books and records that supported GMB’s performance claims.

The GMB entities and the Bitrans neither admitted nor denied the SEC’s findings in settling the charges. They agreed to pay disgorgement of $4.3 million. Gabriel and Marco Bitran also agreed to pay $250,000 each in penalties and be barred from the securities industry, and the GMB entities will be censured. The SEC’s order requires the Bitrans and the GMB entities to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-8 thereunder.

The SEC’s investigation was conducted by Kerry Dakin, Kevin Kelcourse, and Kathleen Shields of the Boston Regional Office. Paul Prata, Elizabeth Ward, and Milton Pepin of the Boston Regional Office worked on the SEC’s examination. Stuart Jackson of the SEC’s Division of Risk, Strategy, and Financial Innovation assisted in the investigation.

# # #

Volcker Rule Conformance Period Clarified

Thu, 19 Apr 2012 14:30:09 EDT

Joint Release

Board of Governors of the Federal Reserve System
Commodity Futures Trading Commission
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
Securities and Exchange Commission

For Immediate Release

April 19, 2012

Volcker Rule Conformance Period Clarified

The Federal Reserve Board on Thursday announced its approval of a statement clarifying that an entity covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the so-called Volcker Rule, has the full two-year period provided by the statute to fully conform its activities and investments, unless the Board extends the conformance period. Section 619 generally requires banking entities to conform their activities and investments to the prohibitions and restrictions included in the statute on proprietary trading activities and on hedge fund and private equity fund activities and investments.

Section 619 required the Board to adopt rules governing the conformance periods for activities and investments restricted by that section, which the Board did on February 9, 2011. Subsequently, the Board received a number of requests for clarification of the manner in which this conformance period would apply and how the prohibitions will be enforced. The Board is issuing this statement to address this question.

The Board’s conformance rule provides entities covered by section 619 of the Dodd-Frank Act a period of two years after the statutory effective date, which would be until July 21, 2014, to fully conform their activities and investments to the requirements of section 619 of the Dodd-Frank Act and any implementing rules adopted in final under that section, unless that period is extended by the Board.

The Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (the agencies) plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and the attached statement. The agencies have invited public comment on a proposal to implement the Volcker rule, but have not adopted a final rule.

SEC Names Diane C. Blizzard as Associate Director for Regulatory Policy and Investment Adviser Regulation

Thu, 19 Apr 2012 13:06:19 EDT

FOR IMMEDIATE RELEASE
2012-69

Washington, D.C., April 19, 2012 — The Securities and Exchange Commission today announced that Diane C. Blizzard has been named Associate Director for Regulatory Policy and Investment Adviser Regulation in the Division of Investment Management. As Associate Director, Ms. Blizzard will supervise two offices that develop recommendations for rulemaking and other policy initiatives under the Investment Company Act and the Investment Advisers Act.

Ms. Blizzard replaces Robert Plaze, who has become Deputy Director of the Division. Ms. Blizzard has been a member of the Division of Investment Management staff for 12 years, most recently serving as Managing Executive. She has previously held several policy roles, including as Senior Adviser to the Director and as head of the Office of Regulatory Policy, one of the Division’s rulemaking offices she will now lead. Earlier in her career, Ms. Blizzard was counsel to an affiliate of the Investment Company Institute.

“Diane is an accomplished lawyer and a skilled manager and I look forward to her continued leadership in her new role,” said Eileen Rominger, Director of the SEC’s Division of Investment Management.

“This is a great opportunity to work with Eileen Rominger and the talented Division staff on advancing Chairman Schapiro’s investor-focused regulatory agenda,” Ms. Blizzard said.

Ms. Blizzard holds a bachelor’s degree from Duke University and received her law degree from Georgetown University.

SEC Charges Ox Trading, optionsXpress, and Former CFO With Registration Violations

Thu, 19 Apr 2012 11:25:02 EDT

FOR IMMEDIATE RELEASE
2012-68

Washington, D.C., April 19, 2012 – The Securities and Exchange Commission today charged a Chicago-based securities dealer affiliated with online brokerage firm optionsXpress with violating the registration provisions of the securities laws when it continued trading operations after delisting from the Chicago Board Options Exchange (CBOE) and deregistering with the SEC, apparently to avoid an audit.

The SEC’s Division of Enforcement instituted administrative proceedings against OX Trading LLC, optionsXpress, and their former CFO Thomas E. Stern, alleging that OX Trading operated as an unregistered dealer from October 2009 to November 2010 and illegally transacted in securities while not a member of a national securities association or national exchange from March 2009 to November 2010.

According to the SEC’s order, Stern terminated OX Trading’s membership with the CBOE and ended the firm’s broker-dealer registration with the SEC. Meanwhile, OX Trading quietly continued to conduct trading through a customer account at optionsXpress. Stern, who also was OX Trading’s chief compliance officer, later fabricated and backdated an allegedly exculpatory letter purporting to demonstrate that he had properly informed CBOE that OX Trading would deregister and become a customer of optionsXpress.

Earlier this week, the SEC charged optionsXpress and Stern for their roles in a naked short selling scheme.

“OptionsXpress, OX Trading, and Stern have displayed a profound disregard for regulators, compliance obligations, and the regulatory requirements that dealers must satisfy for the privilege of operating in our markets,” said Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit. “Registration of brokers and dealers is a fundamental part of the regulatory structure and provides the foundation upon which many other investor protections are built.”

According to the SEC’s order, OX Trading and optionsXpress became wholly-owned subsidiaries of The Charles Schwab Corporation in September 2011. OX Trading, which originally registered with the SEC in 2008, was created to provide price improvement on orders from optionsXpress customers and to profit from those trades. OX Trading received electronic requests for quotes (RFQs) from optionsXpress. These RFQs allowed OX Trading to determine whether it wanted to be the counterparty to an optionsXpress customer’s order. OX Trading allegedly made money when it traded as a counterparty to optionsXpress customer orders and hedged the positions created by those trades.

According to the SEC’s order, a CBOE examiner conveyed to Stern in early 2009 that OX Trading was required to have an annual audit based on its CBOE membership status. Despite CBOE’s request, Stern refused to pay for an audit and subsequently terminated OX Trading’s CBOE membership on March 2, 2009. Nonetheless, OX Trading continued to conduct the same trading through a customer portfolio margin account at optionsXpress. Stern did not inform the CBOE that OX Trading would continue its operations as a customer of optionsXpress. He later attempted to furnish the fabricated and backdated letter to SEC investigators in a phony attempt to prove otherwise.

According to the SEC’s order, after Stern was contacted by the SEC’s Division of Trading and Markets, Stern filed a form with the SEC on Aug. 18, 2009, to deregister OX Trading as a broker-dealer. The deregistration became effective on Oct. 17, 2009. According to an internal e-mail sent by Stern, OX Trading “stalled as long as we could” in deregistering. OX Trading continued to trade through the customer portfolio margin account at optionsXpress.

The SEC’s Division of Enforcement alleges that CBOE identified the OX Trading customer account during an exam of optionsXpress in late 2009. CBOE requested an explanation about why OX Trading was not registered with the SEC as a broker-dealer. In an internal e-mail about CBOE’s request, Stern stated, “I am happy to spin this however it needs to be.” Stern then sent CBOE a letter containing numerous factual inaccuracies and no legal opinion or analysis about OX Trading’s registration status. CBOE sent Stern another letter in June 2010 informing him that it believed OX Trading was functioning as a dealer and needed to either cease operations or obtain a written opinion from the SEC confirming that OX Trading was not required to register. OX Trading did neither.

According to the SEC’s order, OX Trading eventually acquired a CBOE trading permit and registered again with the SEC effective Nov. 16, 2010.

As alleged in the SEC’s order, OX Trading violated Sections 15(a) and 15(b)(8) of the Exchange Act, and Stern and optionsXpress caused and willfully aided and abetted OX Trading’s violations.

The SEC’s investigation was conducted by Deborah Tarasevich, Jill Henderson, and Paul Kim. Market Surveillance Specialist Brian Shute and Market Abuse Trading Specialist Ainsley Fuhr provided assistance with the investigation. The SEC’s litigation will be led by Frederick Block.

# # #

SEC Adopts Rule Defining Swaps-Related Terms for Regulating Derivatives

Wed, 18 Apr 2012 15:19:46 EDT

FOR IMMEDIATE RELEASE
2012-67

Washington, D.C., April 18, 2012 – The Securities and Exchange Commission today unanimously adopted a new rule to define a series of terms related to the over-the-counter swaps market.

The rules, written jointly with the Commodity Futures Trading Commission (CFTC), implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that established a comprehensive framework for regulating derivatives.

“Adopting these entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market,” said SEC Chairman Mary L. Schapiro. “These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months.”

The final rule will become effective 60 days after the date of publication in the Federal Register.

# # #

FACT SHEET

Defining Swaps-Related Terms

Background

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a comprehensive framework for regulating the over-the-counter swaps markets. Under the Dodd-Frank Act, regulatory authority over swaps is divided between the SEC and the Commodity Futures Trading Commission (CFTC).

The law assigns the SEC the authority to regulate “security-based swaps,” which are broadly defined as swaps based on (1) a single security or (2) a loan or (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC, on the other hand, has primary regulatory authority over swaps.

It is anticipated that the vast majority of the security-based swaps that would fall under SEC jurisdiction would be single-name credit default swaps (CDS). A CDS is a financial agreement in which the seller pays the buyer a sum of money if a default should occur. In the case of a single-name CDS, the underlying item or reference upon which the CDS is based could be a single company, a single government, or a single borrower. If that company, government, or borrower defaults, the CDS buyer would receive a payout.

Title VII of the Act authorizes the SEC to regulate security-based swap dealers and major security-based swap participants, and create a system by which they could register with the SEC. Those dealers and major participants also would be subject to several statutory requirements including requirements related to capital, margin, and business conduct.

Title VII of the Act, which defines the relevant terms, directs the SEC and the CFTC jointly to further define those terms in consultation with the Board of Governors of the Federal Reserve System. Those terms include “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and “eligible contract participant.” In December 2010, the SEC and CFTC proposed joint definitions of those terms.

If adopted, the joint rules would establish which entities involved in the swaps market would be subject to the regulatory regime created by the Dodd-Frank Act.

The Final Rules

The joint rules of the SEC and the CFTC define the terms “security-based swap dealer” and “major security-based swap participant” as part of the Securities Exchange Act of 1934.

In developing these definitions, the SEC staff was informed by existing information regarding the single-name CDS market, which will constitute the vast majority of security-based swaps.

The staff also relied on the dealer-trader distinction, which informs determinations regarding dealer status in the traditional securities market and which already is used by participants in that market.

Definition of “Security-Based Swap Dealer”

The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who:

Holds themselves out as a dealer in security-based swaps.
Makes a market in security-based swaps.
Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account.
Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.

Consistent with the statute, the new rule also specifies that the term “security-based swap dealer” does not include a person who enters into security-based swaps for their own account “not as a part of a regular business.”

The new rule interprets this definition in a manner that builds on the dealer-trader distinction that already is used to identify dealing activity involving other types of securities, while taking into account the special attributes of security-based swap markets. Further, the SEC would clarify the distinction between dealing activity and non-dealing activity such as hedging.

In addition, the new rule excludes from the dealer analysis (as well as the major participant analysis) security-based swaps between counterparties that are majority-owned affiliates.

De minimis exception: The Dodd-Frank Act directs the SEC to implement a de minimis exception from the “security-based swap dealer” definition for a person who “engages in a de minimis quantity of security-based swap dealing….” It also directs the SEC to establish factors for determining when someone falls within this exception.

The new Exchange Act rule 3a71-2 implements the exception in a way that is tailored to reflect the different types of security-based swaps and to phase in compliance in a way that would promote the orderly implementation of Title VII.

For instance, the new rule exempts those entities or individuals who engage in dealing activity in security-based swaps above a certain notional dollar amount over a prior one-year period:

For credit default swaps that are security-based swaps, the de minimis exception in general is available to persons who enter into up to $3 billion in notional CDS dealing transactions over the prior 12 months.
For other types of security-based swaps, this threshold is $150 million, reflecting the proportionately smaller size of this part of the market.

The proposed rule had set forth an across-the-board $100 million notional threshold.

In addition, the new rule:

Sets a different de minimis exception for security-based swaps with “special entities” (as defined in Exchange Act Section 15F(h)(2)(C) to include certain governmental and other entities). For those special entities, the threshold is $25 million in notional amount over the prior 12 months. This is consistent with the proposed rule.
Neither limits the number of security-based swaps that a person can enter, nor limits the number of a person’s security-based swap counterparties in a dealing capacity. This is in contrast to the proposal.

Phase in: The new de minimis rule will be phased in over time depending on the level of security-based swap dealing activity in a way that promotes the orderly implementation of Title VII.

For credit default swaps, only those entities and individuals who transact $8 billion or more worth of CDS dealing transactions over the prior 12 months initially have to register as security-based swap dealers.
For other types of security-based swaps, the phase-in level is $400 million.

These phase-in levels will terminate at a future date after SEC staff completes a report on the security-based swap market – unless the SEC establishes new de minimis thresholds or, absent that, after a period of time specified in the rule.

The SEC’s de minimis thresholds were tailored to the specifics of the products and the markets based on analysis of available data. In particular, this analysis highlighted the significant concentration in the single-name CDS market, which is the portion of the CDS market regulated by the SEC. Both the $3 billion de minimis threshold and the $8 billion phase-in level for CDSs should ensure that the vast majority of notional dealing activity in this market is subjected to the SEC’s Title VII dealer regulatory regime, consistent with the statutory de minimis exception.

Similarly, for security-based swaps other than CDSs, the effort was guided in part by data that showed that the size of this market is only a small fraction of the size of the CDS market. Consistent with this difference between these two markets, the new rule sets the de minimis threshold for these security-based swaps at $150 million and the phase-in level at $400 million.

In establishing who is a security-based swap dealer, Congress gave the SEC the task of identifying those entities that specifically engage in dealing activity in this market. In doing so, Congress did not intend for all or even most market participants who merely engage in security-based swap transactions – such as mutual funds and pension funds – to be regulated as security-based swap dealers. Further, in addition to limiting the pool to just dealers, Congress also sought to have the SEC regulate only those market participants who engage in dealing activity above a de minimis amount. By following Congress’s mandate to capture those engaged in dealing activity (even above a certain threshold), the new rule extends the protections of the Title VII dealer regulatory regime not only to regulated dealers but also to their counterparties.

Definition of “Major Security-Based Swap Participant”

The term “major security-based swap participant” is defined by rules 3a67-1 through 3a67-9 of the Securities Exchange Act.

In particular, the Dodd-Frank Act lays out three parts to the definition, and a person who satisfies any one of them is a major security-based swap participant:

A person who maintains a “substantial position” in any of the major security-based swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.
A person whose outstanding security-based swaps create “substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. banking system or financial markets.”
Any “financial entity” that is “highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate federal banking agency” and that maintains a “substantial position” in any of the major security-based swap categories.

The statutory definition excludes security-based swap dealers.

Definition of “Substantial Position”

The Dodd-Frank Act provides that the SEC should define “substantial position” at a threshold it deems to be “prudent for the effective monitoring, management or oversight of entities that are systemically important or can significantly impact the financial system of the United States.”

Under the new rule, “substantial position” is defined by using objective numerical criteria which promote the predictable application and enforcement of the requirements governing major participants. The new rule utilizes tests that would account for both current uncollateralized exposure and potential future exposure. A position that satisfies either test is a “substantial position.” The first “substantial position” test excludes positions hedging commercial risk and employee benefit plan positions from the substantial position analysis.

These tests apply to a person’s security-based swap positions in each of two major security-based swap categories: security-based credit derivatives (any security-based swap based on instruments of indebtedness including loans or on credit events relating to one or more issuers or securities) and other security-based swaps.

First Test of “Substantial Position”

The first substantial position test under the new rules:

Measures a person’s current uncollateralized exposure by marking the security-based swap positions to market using industry standard practices.
Allows the deduction of the value of collateral that is posted with respect to the security-based swap positions.
Calculates exposure on a net basis, according to the terms of any master netting agreement that applies.

The thresholds established under the new rule for the first test are a daily average current uncollateralized exposure of $1 billion in the applicable major category of security-based swaps.

Second Test of “Substantial Position”

The second test under the new rule accounts for both current uncollateralized exposure and the potential future exposure associated with a person’s security-based swap positions. The second substantial position test determines potential future exposure by:

Multiplying the total notional principal amount of the person’s security-based swap positions by specified risk factor percentages (ranging from 6 to 15 percent) based on the type of swap and the duration of the position.
Discounting the amount of positions subject to master netting agreements by a factor ranging between zero and 60 percent, depending on the effects of the agreement.
Further discounting the amount of the positions by 90 percent if the security-based swaps are cleared, or by 80 percent if they are subject to daily mark-to-market margining.
The thresholds established under the new rule for the second test are $2 billion in daily average current uncollateralized exposure plus potential future exposure in the applicable major security-based swap category.

Definition of “Hedging or Mitigating Commercial Risk”

As noted, the first test of the major participant definition excludes positions held for “hedging or mitigating commercial risk” from the substantial position analysis.

The definition in the new rule for “hedging or mitigating commercial risk” encompasses any security-based swap position that is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business from a potential change in the value of:

Assets that a person owns, produces, manufactures, processes, or merchandises.
Liabilities that a person incurs.
Services that a person provides or purchases.

The definition of hedging or mitigating commercial risk does not encompass any security-based swap position that is held for a purpose that is in the nature of speculation or trading. Also, in contrast to the proposed rule, the new rule does not include requirements for assessing the effectiveness of hedging positions or for documenting that assessment.

Definition of “Substantial Counterparty Exposure”

The new rule defines substantial counterparty exposure using a calculation method that is the same as the method used to calculate substantial position. However, the definition of substantial counterparty exposure is not limited to the major categories of security-based swaps, and does not exclude hedging or employee benefit plan positions. Rather it encompasses all of a person’s security-based swap positions.

The thresholds established under the new rule for substantial counterparty exposure are a current uncollateralized exposure of $2 billion or a sum of current uncollateralized exposure and potential future exposure of $4 billion across the entirety of a person’s security-based swap positions.

Definition of “Financial Entity” and “Highly Leveraged”

The third aspect of the statutory definition of major security-based swap participant addresses any “financial entity” – other than one subject to capital requirements established by an appropriate federal banking agency – that is “highly leveraged” relative to the amount of capital it holds, and that maintains a substantial position in a major category of security-based swaps. For this part of the definition, the new rule uses the same definition of substantial position described above without excluding hedging or employee benefit plan positions.

For this aspect of the definition, the new rule uses the definition of “financial entity” that is based on the definition of that term in the Dodd-Frank Act provision for an end-user exception from mandatory clearing in Exchange Act Section 3C(g)(3). The new rule defines the term “highly leveraged” as reflecting a ratio of liabilities to equity in excess of 12-to-1. The proposal had set forth 8-to-1 and 15-to-1 as alternative thresholds.

Additional Aspects of the Definition of Major Security-Based Swap Participant

The new rule contains the following changes from the proposal:

Includes a safe harbor that provides that a person is not be deemed to be a major participant under certain conditions. Those conditions account for, among other things: the notional amount of the person’s security-based swap positions, the maximum possible uncollateralized exposure associated with the person’s security-based swap positions, and monthly calculations of current exposure and potential future exposure. The safe harbor is intended to help persons who are not likely to be major participants avoid the costs of performing the full major participant calculations.
The rulemaking further clarifies that security-based swap positions are attributed to beneficial owners of an account, or to parents or affiliates of a person, only when the counterparty to a security-based swap has recourse to the beneficial owner, parent or affiliate.
The new rule makes additional changes to the major participant tests, many of a technical or clarifying nature.

Report: Under the new rule, the SEC staff has to report to the Commission on whether changes should be made to the rules defining both security-based swap dealers and major security-based swap participants (including the rule implementing the de minimis exception to the dealer definition).

The staff must complete this report no later than three years following the later of:

The last compliance date for the registration and regulatory requirements for security-based swap dealers and major security-based swap participants.
The first date on which compliance with the trade-by-trade reporting rules for credit-related and equity-related security-based swaps to a registered security-based swap data repository is required.

Commodity Exchange Act Amendments: In addition to updating the Securities Exchange Act, the new rules jointly written by the SEC and the CFTC further define “swap dealer” and “major swap participant” in the Commodity Exchange Act (CEA). These rules and interpretations in many respects are parallel to the Exchange Act rules and interpretations addressed above.

The new rule also further defines “eligible contract participant” under the CEA. The term “eligible contract participant” also is used in the Securities Exchange Act and is defined by cross reference to the CEA.

What’s Next?

These new rule becomes effective 60 days after the date of publication in the Federal Register. However, dealers and major participants will not have to register with the SEC until the dates that will be provided in the SEC’s final rules for the registration of dealers and major participants.

When the new rule further defining “eligible contract participant” becomes effective, certain exemptive relief that the SEC provided in connection with section 6(l) of the Exchange Act will expire. At that time, dealers, major participants, and other persons will become subject to section 6(l), which prohibits any person from effecting a security-based swap transaction (other than on a national securities exchange) with a person who is not an eligible contract participant, under the definition as amended by Title VII and as further defined by the new rule.

SEC Charges optionsXpress and Five Individuals Involved in Abusive Naked Short Selling Scheme

Mon, 16 Apr 2012 14:23:28 EDT

FOR IMMEDIATE RELEASE
2012-66

Washington, D.C., April 16, 2012 – The Securities and Exchange Commission today charged an online brokerage and clearing agency specializing in options and futures as well as four officials at the firm and a customer involved in an abusive naked short selling scheme.

The SEC’s Division of Enforcement alleges that Chicago-based optionsXpress failed to satisfy its close-out obligations under Regulation SHO by repeatedly engaging in a series of sham “reset” transactions designed to give the illusion that the firm had purchased securities of like kind and quantity. The firm and customer Jonathan I. Feldman engaged in these sham reset transactions in a number of securities, resulting in continuous failures to deliver. Regulation SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally three days after the trade date (T+3). If no delivery is made by that time, the firm must purchase or borrow the securities to close out the failure-to-deliver position by no later than the beginning of regular trading hours on the next day (T+4).

The former chief financial officer at optionsXpress – Thomas E. Stern of Chicago – was named in the SEC’s administrative proceeding along with optionsXpress and Feldman. Three other optionsXpress officials – head of trading and customer service Peter J. Bottini and compliance officers Phillip J. Hoeh and Kevin E. Strine – were named in a separate administrative proceeding and settled the charges against them for their roles in the scheme.

“OptionsXpress used sham reset transactions to avoid, sometimes for months, its obligation to comply with Reg. SHO’s stock delivery requirements,” said Robert Khuzami, Director of the Division of Enforcement. “Illegally extending its naked short positions put optionsXpress in plain violation of the law and undermined Reg. SHO’s intent to reduce fails to deliver.”

Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit, added, “Reg. SHO compliance continues to be a high enforcement priority. Broker-dealers, their employees, and their customers must ensure that they comply with the close-out requirements of the short sale rules and regulations.”

According to the SEC’s order, the misconduct occurred from at least October 2008 to March 2010. In September 2011, optionsXpress became a wholly-owned subsidiary of The Charles Schwab Corporation.

The SEC’s Enforcement Division alleges that the sham reset transactions impacted the market for the issuers. For example, from Jan. 1, 2010 to Jan. 31, 2010, optionsXpress customers including Feldman accounted for an average of 47.9 percent of the daily trading volume in one of the securities. In 2009 alone, the optionsXpress customer accounts engaging in the activity purchased approximately $5.7 billion worth of securities and sold short approximately $4 billion of options. In 2009, Feldman himself purchased at least $2.9 billion of securities and sold short at least $1.7 billion of options through his account at optionsXpress.

According to the SEC’s order, by engaging in the alleged misconduct, optionsXpress violated Rules 204 and 204T of Regulation SHO; Feldman willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-21 thereunder; optionsXpress and Stern caused and willfully aided and abetted Feldman’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-21 thereunder; and Stern caused and willfully aided and abetted optionsXpress’s violations of Rules 204 and 204T.

In the separate settled administrative proceeding, Bottini, Hoeh, and Strine consented to a cease-and-desist order finding that they caused optionsXpress’s violations of Rules 204 and 204T of Regulation SHO and ordering them to cease-and-desist from committing or causing violations of Rule 204. They neither admitted nor denied the SEC’s findings.

The SEC’s investigation was conducted by Deborah Tarasevich, Jill Henderson, and Paul Kim. Market Surveillance Specialist Brian Shute, Market Abuse Unit Trading Specialist Ainsley Fuhr, and Financial Economist Michael P. Barnes provided assistance with the investigation. The litigation will be led by Frederick Block.

# # #

For more information about this enforcement action, contact:

Daniel M. Hawke
Chief, SEC’s Market Abuse Unit and Regional Director, Philadelphia Regional Office
(215) 597-3191

Deborah A. Tarasevich
Assistant Director, Market Abuse Unit, SEC Division of Enforcement
(202) 551-4726

CPSS and IOSCO Issue Final Report on Principles for Financial Market Infrastructures and Seek Comment on Two Consultative Documents

Mon, 16 Apr 2012 10:09:00 EDT

FOR IMMEDIATE RELEASE
2012-65

Washington, D.C., April 16, 2012 – The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) today published the final report on the Principles for Financial Market Infrastructures. The report updates, harmonizes, and strengthens the risk management and related standards applicable to financial market infrastructures (FMIs), including systemically important payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories. CPSS and IOSCO also released for comment the Disclosure Framework for Financial Market Infrastructures (Disclosure Framework) and the Assessment Methodology for the Principles for FMIs and the Responsibilities of Authorities (Assessment Methodology).

The final report replaces the standards previously published by CPSS and CPSS-IOSCO in the Core Principles for Systemically Important Payment Systems, Recommendations for Securities Settlement Systems, and Recommendations for Central Counterparties. CPSS and IOSCO expect the principles in the final report to play an important role in the regulation of FMIs around the world. The report supports the initiatives of the Group of Twenty Finance Ministers and Central Bank Governors (G-20) and the Financial Stability Board to strengthen core financial infrastructures and markets.

CPSS and IOSCO released for comment the Disclosure Framework and the Assessment Methodology. The Board of Governors of the Federal Reserve System, as a member of CPSS, and the Commodity Futures Trading Commission and the Securities and Exchange Commission, as members of IOSCO, encourage interested persons to review and comment on the consultative documents. The deadline for submitting comments on both documents to CPSS and IOSCO is June 15, 2012.

The Disclosure Framework outlines basic information that FMIs should disclose to increase transparency of their governance, risk management, and operations in order to inform participants, authorities, and the public and to facilitate comparisons across FMIs. Under Principle 23 of the Principles for Financial Market Infrastructures, FMIs would be required to complete the Disclosure Framework and disclose their answers publicly on a regular basis.

The Assessment Methodology provides guidance for assessing and monitoring observance of the principles. It is primarily intended for external assessors at the international level. It also provides a baseline for national authorities to assess FMIs under their oversight or supervision.

The final report on the Principles for Financial Market Infrastructures, the consultative document for the Disclosure Framework, and the consultative document for the Assessment Methodology are available at http://www.bis.org/publ/cpss101.htm and http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf. The CPSS-IOSCO press release on the publication of these documents is available at http://www.bis.org/press/p120416.htm and http://www.iosco.org/news/pdf/IOSCONEWS230.pdf. Comments on the consultative documents should be sent via e-mail to cpss@bis.org and to fmi@iosco.org.

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FACT SHEET

Defining Swaps-Related Terms

Background

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